The Australia economy is affected by many different economic issues. These issues are economic growth, unemployment, inflation, external stability, distribution of income and wealth, and environmental sustainability. Changes in any of these factors will change the performance of Australia's economy. Inflation is a general increase in the level of prices in an economy. Australia has enjoyed relatively low levels of inflation with the current inflation rate at around 2.9%. Inflation is an economic problem that can cause a negative impact on many economic outcomes if not properly controlled. This is measured by the consumer price index or CPI. The headline rate which takes in most items used by urban households uses the CPI to measure it. The underlying rate which emits the most volatile and least volatile.
Inflation in general is considered a problem for all economy as it can lead to major economic and social problems within an economy, but there is a need to have a contained and stable rate of inflation as it will help the RBA tackle deflation if it ever occurs. Deflation is the decrease in prices of goods and services leading to consumers delaying purchases further push prices down. There are four types of inflation demand pull inflation, cost push inflation, inflationary expectation and imported inflation. Since 1996 the official use of monetary targeting has helped to contain inflation within the target's range of 2-3%, except for the introduction of the GST in 2000.
If inflation was not contained then it will lead to consumers suffer a loss of purchasing power and real income, if consumer income does not keep up with inflation thus decreasing Australia's living standard as goods and services will be more expensive. Another problem is that consumers can also be dragged into higher tax bracket as nominal wages increase if tax bracket not adjusted for inflation. Workers will also suffer a fall in real wages if nominal wage increases does not keep up with inflation.