Explore Economics

Maddy Terrell

So I think working as an economist, I don’t know about you, but I was shocked at the amount of impact you can have in your role and by impact I mean influencing people’s decision making or influencing policy outcomes to improve the welfare of the Australian people or broader society as well.

Natasha Cassidy

The people I know that are economists do such a wide range of things. So you might be working and thinking about what the impact of climate change or geopolitical shocks might be on the Australian economy; you might be looking at housing affordability or improving education outcomes for preschoolers. And then I think about friends of mine that are economists that are in the private sector – they’re thinking about the cost benefit analysis of big investments projects for firms.

Emma Chow

So I’m working in the Education team so one of the really big problems we’re trying to address is this declining size and diversity in the economics student population. It’s a really complex issue so I guess you need to look into the data and do some research to really understand what are the drivers behind this.

Chris Schwartz

I guess a big impact that the team that I’m in, the media team, tries to have is how can we explain the decisions the we or the RBA make to as broad of an audience as possible.

So being able to work to explain those in a way that people will be able to understand is probably the most rewarding for sure and impactful thing that I’ve worked on.

Geneve Bullo

Having impact and influence is one of the highlights of a career in economics.

Geneve Bullo

I think as an economist, throughout your career, you’re always going to be answering different questions, the project that you’re working on is probably going to be different to the last and you’re going to be picking up different topics of expertise.

Natasha Cassidy

I think for me I have to think back to the big events that happened internationally during my time as an economist and most recent was obviously the pandemic and at the time my role was leading a team where we trying to think about what would be the outlook for the labour market and inflation over that period.

If you remember sort of in those early days of 2020, you had these pictures of people queuing outside Centrelink because their hours had been drastically cut or so forth at the same time there was really strong demand for health care workers and the models that we normally use well they’re not set up to answer these kinds of questions and so we sort of had to the team had to sort of think about things, throw the playbook out if you like, and think about things about it more intuitively.

Ashwin Clarke

One of the most memorable things for me was analysing how the trade tensions we faced over the past few years have impacted Australia and one of the really unique things that we can bring as an institution that I realised at that time was it’s not just about the models, and we had really good models to kind of think through these problems, but we complemented that with information from people who are feeling it on the ground.

Maddy Terrell

With a career as an economist you can tackle all sorts of problems. It’s not just the obvious things like bringing inflation down or keeping unemployment low, but it also includes a range of things like other big issues facing society. Things like climate change, inequality, the gender pay gap and the impacts of artificial intelligence.

Maddy Terrell

So a typical day as an economist usually starts with a team meeting where we talk about what we’ve got for the day ahead We then often have a data release. And so data is the backbone of the work we do as an economist.

Geneve Bullo

As an economist you’re always constantly working with data but also more importantly how to communicate to that to your audience.

At the Bank we have a lot of data and a lot of questions that we need to answer so essentially what we’re doing is that all our data and evidence are little puzzle pieces in a story about the Australian economy

And so in my role kind of what I have to do is square all those pieces of information and come up with an narrative about how businesses are faring right now after a few years of challenges.

Ashwin Clarke

Some of the great things about a career in economics are that it gives an entry into a really wide range of fields. Just to take my friends that I went to university with as an example: one is a product executive who is responsible for creating new products for a healthcare company, another is an economics adviser at the most senior levels of government; and another is a data scientist who’s able to analyse the vast reams of data produced by transportation companies. So the most interesting job by far is a friend of mine who is a board game designer and he’s used economics to fine tune the mechanics of his games to make them interesting and keep people playing.

Hi, I’m Jess, thanks for joining me!

Today we’re going to take a look at what’s happening in the economy.

Before we get started, we’ve created a new worksheet to go with this video, designed to help you understand the economic concepts behind current trends. Links are in the description below.

Let’s start with inflation.

Remember, inflation measures how quickly prices are rising over time. In Australia, inflation has been increasing strongly since the middle of last year and is currently above the RBA’s target range of 2 to 3 per cent.

So, what’s been driving this increase?

There are two main factors:

• First, demand for goods and services in the Australian economy has been greater than supply
• And second, higher oil prices

Let’s start with the first reason: excess demand in Australia.

Even before recent global events, inflation was already too high and sitting above the RBA’s inflation target of 2−3 per cent.

This was because overall spending by households and businesses grew strongly in the second half of last year. But the economy’s ability to produce goods and services did not grow as quickly.

When demand increases faster than supply, prices tend to rise. Put simply, if the same amount of goods are available for purchase, and these goods are wanted by more people, then businesses can charge higher prices. This is often referred to as demand-pull inflation.

And this is how excess demand has led to higher inflation.

Now let’s focus on the second reason: rising oil prices.

In recent months, oil prices have increased a lot - due to the conflict between the United States and Iran. During this conflict, a key shipping route for oil called the Strait of Hormuz has been blocked. This disruption has reduced the supply of oil to global markets and caused oil prices to rise.

Why does the price of oil matter so much?

Well, oil is used to make fuels like petrol and diesel, and when oil prices go up, the price of fuel at your local service station usually goes up too. This makes transport more expensive for everyone – from parents driving their kids to sport on the weekend, to a local pizza shop delivering pizzas to homes.

But how do higher fuel prices lead to higher inflation?

There are two main channels: a direct channel and some indirect channels.

First up, the direct channel. Inflation is measured using the Consumer Price Index, or CPI, which tracks the prices of a basket of goods and services that are typically purchased by Australian households. Fuel is one of the items in this basket – around 3% of the average household basket. When fuel prices rise, this directly increases the CPI and therefore inflation.

Then, we have the indirect channels. There are two key ones.

The first one is that rising fuel prices will increase the prices of other goods and services – not just petrol and diesel. This is because it increases costs for businesses that use fuel to produce and sell their goods and services.

This is known as cost-push inflation – where higher production costs lead firms to increase prices for consumers.

Fuel is an input into production; it’s used by almost every industry, including to transport goods. Let’s take an example of something seemingly unrelated to fuel; say, strawberries. Farmers use fuel in tractors to prepare their fields, and once the strawberries are picked, they need to be transported from farms to supermarkets. This means that the cost of producing and selling strawberries, is higher due to higher fuel prices. A more obvious example is the cost of flying on holiday. Because planes use jet fuel to fly, it will cost more for airlines to run each flight.

So higher fuel prices raise the costs to produce almost all goods and services, though not all by the same amount.

Let’s show how this affects inflation using Aggregate Demand and Aggregate Supply.

Aggregate demand is the total spending on goods and services in the economy.

Aggregate supply is the total amount of goods and services that can be produced.

With higher production costs, a firm would need to charge more to supply a certain amount of goods. And if we add up the effect on all firms in the economy, it would be represented as a shift upwards in the aggregate supply curve. Assuming demand stays about the same, the new equilibrium price is higher – which means higher prices for consumers (we move from P1 to P2 on the graph).

A second indirect way that higher fuel prices can increase inflation is by increasing inflation expectations. Simply put, what people expect inflation to be in the future can influence actual inflation. And if people think inflation will be higher in the future, that can actually cause it to happen.

It is helpful to think about this using some examples. If households expect prices to be much higher in the future, they might decide to bring forward their future plans to purchase big ticket items to today, because they are worried it will be too expensive in the future. An increase in household spending will increase aggregate demand even further, and push prices up even more.

On the other hand, if businesses expect prices to be much higher in the future, they might decide to set their prices at a higher level today because they expect their costs to increase in the future (and this saves them the effort of having to change their prices more frequently. That can also potentially lock in inflation that’s higher for longer.

How does this relate to fuel prices? Well, people see petrol prices very often. Many people drive by petrol stations on a daily basis, so jumps in fuel prices can strongly influence how high people think inflation will be in the future. If inflation expectations increase and become widespread, it can make the RBA’s job of reducing inflation back to its target range much harder. So far, it seems like people expect inflation to be a bit higher in the short-term, but they don’t expect this it to stay that way in the long-term. But the RBA will keep watching this closely

To summarise so far: Inflation has increased recently and is above the 2-3 per cent target. It is being driven by two key forces:

• The first force is the fact that domestic demand was strong and exceeded supply capacity.
• The second force is that on top of that, higher fuel prices have pushed inflation up further.

Of course, inflation isn’t the only thing that the RBA focuses on. Remember, the RBA has a dual mandate and so we are also focused on the labour market and full employment.

The unemployment rate is currently at low levels and indicators of the labour market suggest that it is somewhat tight – this means that the demand for workers is relatively strong relative to the supply of workers. Overall, conditions in the labour market are healthy.

So, how does the RBA see the economy developing in the future?

1. Growth in the Australian economy is expected to slow this year, which will help bring the economy back into balance. Higher fuel prices and interest rates this year are likely to slow spending by households and businesses. This slowing will be greater if the Middle East conflict lasts longer, but the global environment is uncertain.
2. The unemployment rate is currently at low levels but is expected to increase gradually as economic activity slows. Even so, overall conditions in the labour market are expected to remain healthy.
3. Finally, inflation is expected to be above the 2–3 per cent target range for a while longer. Higher fuel prices are likely to push up the prices of other goods and services. We expect inflation to be significantly higher this year compared to last year, and to take some time to return to the target range.

With these things in mind, the Monetary Policy Board decided to increase the cash rate to 4.35 per cent at the May meeting. The aim is to slow growth in aggregate demand to help rebalance the economy and bring inflation down.

A higher cash rate won’t bring down fuel prices, but it will help to stop higher fuel prices from pushing up other prices in the economy. It will also help to keep inflation expectations anchored around the 2-3 per cent target range.

That wraps up our look at what’s happening in the economy.

If you want to learn more, download the worksheet linked below to check your understanding and apply what you’ve learned.

For other student resources, head to our education page. Thanks for watching!