Inflation

[watchdog]

Would anyone care to try and explain what the employment rate has to do with inflation?

[z80]

Inflation stimulates high interest rates.
High interest rates attract foreign investors.
Foreign investment drives our dollar higher in relation to other currencies.

A high aussie dollar makes our products more expensive overseas, and we are a commodity based economy.

When commodity sales slow down, there are layoffs in industry due to a downturn in demand.

Then we have unemployment.

And that is JUST ONE scenario in economics.

[watchdog]

OK lets pick a starting point. Why does inflation stimulate high interest rates?

[exited]

If inflation isn't controlled something that costs you $20 tomorrow will cost $50 within a month. This happens when businesses realize they can make a quick buck out of the fact that everyone's spending money regardless of price.
Increasing interest rates takes some spending money away from homeowners on a loan, causing them to shop around for cheaper priced stuff, causing competition between businesses, causing prices to remain lower, and keep inflation lower.

[watchdog]

If inflation isn't controlled something that costs you $20 tomorrow will cost $50 within a month. This happens when businesses realize they can make a quick buck out of the fact that everyone's spending money regardless of price.
Increasing interest rates takes some spending money away from homeowners on a loan, causing them to shop around for cheaper priced stuff, causing competition between businesses, causing prices to remain lower, and keep inflation lower.

So maybe the best action to control inflation would be to control prices rather than interest which affects everyone including those who can least afford it ( pensioners ) but who are the least likely to contribute to inflation.
And your second point only reinforces this because the only people that will shop around for cheaper prices are those who are struggling in the first place , those who are the least likely to contribute to inflation.

[roguefan99]

This is a pretty rough way of doing it, but here is "roguefan99's simple economics of unreality".

Low unemployment means that there is less competition for empolyment resources in the market. Thus to gain the employment of people you have to pay them more. If you start paying people more then the cost of the goods they make goes up. If the costs of goods goes up then this is inflationary. This is how low unemployment figures leads to inflation.

This is PART of the inflation problem at the moment. CREDIT is another part and the part that is being tackled by the rate increase, however with the "cheap" credit that was on the market its not that effective. However with the "sub prime" or locdoc loan market having problems this should allow the rate effect to work (I have a fear that its gonna work in a big booom style and massive recession will hit). There are other factors such as China becoming a developed economy and taking resources from Australia (food is a fine example of this), drought, oil dependance. It make the inflation problem a real bitch to control, and something that I think may be out of the governments hands at the end of the day. The US recession may help with the problem though.

[watchdog]

This is a pretty rough way of doing it, but here is "roguefan99's simple economics of unreality".

Low unemployment means that there is less competition for empolyment resources in the market. Thus to gain the employment of people you have to pay them more. If you start paying people more then the cost of the goods they make goes up. If the costs of goods goes up then this is inflationary. This is how low unemployment figures leads to inflation.

This is PART of the inflation problem at the moment. CREDIT is another part and the part that is being tackled by the rate increase, however with the "cheap" credit that was on the market its not that effective. However with the "sub prime" or locdoc loan market having problems this should allow the rate effect to work (I have a fear that its gonna work in a big booom style and massive recession will hit). There are other factors such as China becoming a developed economy and taking resources from Australia (food is a fine example of this), drought, oil dependance. It make the inflation problem a real bitch to control, and something that I think may be out of the governments hands at the end of the day. The US recession may help with the problem though.

So the old economic law of supply & demand does not count for labour resources? I remember reading a book called " The Two Economic Theory " about 10 years ago where it discussed the effects of decreasing demand for Labour & the increasing demand for Capital. It noted that in the case of manufactured goods , the law of supply & demand was largely invalid in todays manufacturing environment of mechanisation & computerisation.
It seems to me that with about 50% of the population either not working ( children , students , pensioners or unemployed ) or at relatively low wages ( below the average wage ) the focus on controlling inflation is directed to the wrong place. It has to be done via targeted taxation on income and stricter control of credit ( not through interest rates )

[exited]

@ Watchdog. These alternative solutions you have may be viable but are outside the control of the reserve bank. If they had the power to exercise control over pricing, taxing, credit or anything else they would do so.
Unfortunately, all they control is interest rates, and therefore we are stuck with this current system.

You could get the govt to control interest rates and other things like we had in the late 1970's but things like buying a house on a cocktail loan was a much bigger nightmare than in todays' market.

[watchdog]

@ Watchdog. These alternative solutions you have may be viable but are outside the control of the reserve bank. If they had the power to exercise control over pricing, taxing, credit or anything else they would do so.
Unfortunately, all they control is interest rates, and therefore we are stuck with this current system.

You could get the govt to control interest rates and other things like we had in the late 1970's but things like buying a house on a cocktail loan was a much bigger nightmare than in todays' market.

And there lies the problem. It used to be that you scrimped & saved , then got a loan for your "first" home. Now evrybody wants a palace as the first home & spend the rest of their life paying it off. Of course with no job security any more that proves to be a very risky exercise.

[exited]

And there lies the problem. It used to be that you scrimped & saved , then got a loan for your "first" home. Now evrybody wants a palace as the first home & spend the rest of their life paying it off. Of course with no job security any more that proves to be a very risky exercise.

agree 100%. It's the gimme gimme generation, although somewhat spurred on by govt officials who said to make hay while the sun was shining. They even threw money at first home buyers to make it happen.

[jglnb]

Personally I find the "NAIRU" economic theory is a good way to explain the link. NAIRU stands for "Non Accelerating Inflation Rate of Unemployment".

What this means is that if unemployment is above a certain % then the inflation rate stops or goes negative because there is less money around to spend.

Following on from our current record lows of unemployment (not to argue about the basis for this figure changing), it follows that there is more money around.

It appears that the NAIRU for Australia is around the 5-6% mark although economists do not really know the exact figure.

So while there is money around (ie low unemployment) there will be increasing inflation. When the bank increases the interest rates, the money starts to dry up, people start to earn less ( less overtime or job numbers decrease )

There is no doubt that the interest rate rises are "Accelerating" inflation at the moment.

I also firmly believe that if you put 20 economists in a room, you have a very real chance of getting 21 different answers !!!

Hope this helps - it has been a while since I properly studied this stuff.....something appears to have sunk in many years ago !

[watchdog]

Personally I find the "NAIRU" economic theory is a good way to explain the link. NAIRU stands for "Non Accelerating Inflation Rate of Unemployment".

What this means is that if unemployment is above a certain % then the inflation rate stops or goes negative because there is less money around to spend.

Following on from our current record lows of unemployment (not to argue about the basis for this figure changing), it follows that there is more money around.

It appears that the NAIRU for Australia is around the 5-6% mark although economists do not really know the exact figure.

So while there is money around (ie low unemployment) there will be increasing inflation. When the bank increases the interest rates, the money starts to dry up, people start to earn less ( less overtime or job numbers decrease )

There is no doubt that the interest rate rises are "Accelerating" inflation at the moment.

I also firmly believe that if you put 20 economists in a room, you have a very real chance of getting 21 different answers !!!

Hope this helps - it has been a while since I properly studied this stuff.....something appears to have sunk in many years ago !

Well that sounds OK but money doesn't just dissapear when the unemployment level is high, it is still in the system but not in the hands of the bottom of the food chain. I just cant see the fairness in hitting people on struggle street with interest rate rises when the REALLY monied people are left largely uneffected. There ARE other ways of doing it if the desire is there.
During the course of my work I often see people who are struggling to pay for medications or have there teeth fixed , these are not luxuries you know. At the same time I see people who have holiday houses / farms worth millions & they are used maybe a couple of times a year. So you have to wonder who is really the cause of this overheated consumer demand that causes inflation ?

[poudo]

my two cents...

Low unemployment doesn't necessarily mean higher inflation if productivity is high - and opposite to this is also the case.

So, unemployment is NOT inversely proportional to the Inflation rate - there are other factors (productivity/investment, government spending, demand/supply, etc).

For example under the hawke/keating years there was both double digit inflation and unemployment.
And, under much of the howard years there was low unemployment and low inflation - although pressure has definitely increased in the past year and looks like it will continue to do so for rudds first year.

I think it was productivity that played a part in both these situations - ie, low under under hawke/keating, high under howard - but im no economist. IMO I'd blame the unionists for low productivity but I hate unions so im biased.


/edit: forgot to mention that what jglnb said is absolute crap unless your at a constant rate of efficiency/productivity which is unrealistic.