Research Discussion Paper – RDP 9105 Inflation in Australia: Causes, Inertia and Policy


This paper examines the determination of inflation in Australia and its four major trading partners – Japan, the United States, the United Kingdom and New Zealand. Also examined is the degree of inertia in the inflation rate i.e. the extent to which observed inflation deviates from its equilibrium rate. We find that, in each country, nominal wage growth clearly dominates the growth rate of money as the fundamental cause of inflation. We also detect the presence of substantial inflation inertia. For Australia, these findings have two implications for policy. The first is that a policy to reduce the inflation will have the desired effect only after the elapse of a considerable period of time. The second is that such a policy can succeed only if aggregate nominal wage growth is reduced commensurately.

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