inflation (1 Viewer)

[me]

hey guys, the rba's 2-3% target range for inflation is for the underlying/core rate of inflation not the headline rate right?

i didn't think that was the case but i just saw it in Tim Riley's textbook (pg 227)...

 

[timmii]

Originally posted by me
hey guys, the rba's 2-3% target range for inflation is for the underlying/core rate of inflation not the headline rate right?

i didn't think that was the case but i just saw it in Tim Riley's textbook (pg 227)...

I thought it was still the core despite the switch to acquisitions...i.e current inflation is 3.2% but core is 2.7% so they're content.....or something like that. But I may be wrong, anyone else know???

 

[terminator]

headline, i don't have Tim Riley but if it says underlying it's wrong.

 

[kaseita]

It was previously underlying inflation, but it changed to headline inflation, after the some parts of the CPI calculation were taken out (notably mortgages, and other things that had a perverse effect on CPI movement after interest rate movement)

 

[spice girl]

My teacher's notes say RBA now targets "on-going" inflation as opposed to "headline" inflation. On-going inflation refers to CPI changes minus effects from the tax reform, as well as other factors such as seasonal variation, govt-controlled things, etc.

 

[Minai]

yes thats what I thought,

It also allows monetary policy, in particular, changes in the cash rate of interest, to be applied more flexibly, if inflation was targeted "over the course of the business cycle"
so im sure the RBA's target is a 2-3% rate, over the course of the business cycle, not jus during, say, one quarter

 

[kaseita]

Originally posted by spice girl
My teacher's notes say RBA now targets "on-going" inflation as opposed to "headline" inflation. On-going inflation refers to CPI changes minus effects from the tax reform, as well as other factors such as seasonal variation, govt-controlled things, etc.

from that definition, on-going is the same as underlying inflation.

so do I believe the book, or ruse's notes?

bambul, help here

 

[Bambul]

I wasn't going to touch this thread with a 10 foot pole, but since you asked I'll take a shot. I'm just going to go in many different directions and hope that I cover somthing that helps, but if I don't (which is likely), then you guys should try the HSC advise line or your teacher.

I'm a bit hazy with my memory of inflation but I do know that it has been changed quite a bit over the past decade, with headline, underlying and core (possibly also on-going though I don't recall hearing it before) inflation being introduced and used over time. I think (so don't quote me) core is the most stable, headline is most volatile and underlying somewhere between. This is because of what goods are inculded in each basket (jeez I hate that terminology), with items whose price frequently moves up and down relatively rapidly like interest payments and petrol expenses not included in core inlfation, but included in the headline rate.

The RBA wants inflation at 2-3% over the business cycle, as mentioned previously. So it doesn't matter if inflation drops below this (as happened in the mid to late 90's) or above it (as happened when the GST came in or at the moment) as las the two even each other out, which has happened. Thats why many economists believe that just because inflation is above 3% the RBA may not be increasing interest rates and that the next move in interest rates could potentially be a downward one.

Now presumably the headline rate goes up much faster during inflationary periods, but on the same note goes down much faster during disinflationary periods and the net effect in the long run should be approximately about the same or maybe a bit higher as the underlying or core rate.

A high headline rate may induced inflationary expectations which increases aggregate demand (as consumers try to buy goods now before their price goes up) and pushes AS to the left (as workers demand higher wages to maintain their purchasing power). The result is higher inflation. So a high headline rate may influence the RBA to increase interest rates (such as the introduction of the GST) to keep the higher inflation as a temporary event only. Other than that I don't think the RBA watches the headline rate much.

And if you understood any of that could you please exaplin it to me?

 

[kaseita]

lol, that sounds like everything I know

I think what I'll do is not mention whether they target headline, or underlying, but that they just generally like having it between 2-3%, especially if its ongoing (or underlying) inflation..

that's some kind of compromise hopefully

that had so better not be a multiple choice question....

 

[kaseita]

aha!

Alright, here's something from BT Funds Management, on this (dated 28 June 2002)

Up until October 1998, the RBA's inflation target was defined in underlying terms. That is, the RBA's goal was to keep "underlying inflation" between 2 and 3% in the medium term - generally taken to mean over the course of an economic cycle. In the past, the headline rate of inflation was affected by a number of factors, not all of them related to inflationary effects in the economy. Reflecting such concerns, the Treasury some years ago developed an underlying CPI measure. This measure excluded from the headline measure prices of items that were affected by interest rates, of goods such as fruit and vegetables, and imported oil, whose price fluctuations have little to do with the state of the Australian economy, of publicly-owned items (such as public rents), and of tobacco and alcohol.

In September 1998, however, the RBA redefined the target in terms of simply maintaining an "average rate of inflation, as measured by the CPI (headline rate of inflation), of 2-3 per cent over the medium term." As part of its periodic review of the CPI, the Australian Bureau of Statistics had made a number of changes to the CPI, the major one of which was taking out mortgage interest charges. These changes reduced the problems in using the headline CPI to evaluate monetary policy. As such, the RBA's target is now considered in terms of the headline rate of inflation. This is not to say that the RBA will discontinue analysing underlying inflation. Rather, the RBA will still make an assessment of whether the CPI has been affected by temporary fluctuations in prices, or changes in taxes and administrative charges, and consider the way monetary should, or shouldn't react to such changes

me thinks I'll stay with headline inflation