The Impact of the Global Financial Crisis on Inflation

The impact of the Global Financial Crisis on inflation

After the onset of the global economic recession in 2008, inflationary pressures were relieved. Slower economic growth and incomes growth lessened the ability of businesses to increase consumer prices, while also decreasing demand for labour and materials trimmed down inflationary pressures on business costs. By 2009, both headline and underlying inflation fell to the lower end of the Reserve Bank’s inflation target band between 2-3% where the Treasury forecasted inflation (CPI) to be 1.5% in 2008-09.

Economic Recovery package- use of macroeconomic policies

Fiscal policy

Fiscal policy has played an important role in sustaining low inflationary pressures. In response to the Government’s excessive spending in the 2008-09 Budget deficit, the Government had also augmented the size of the forecast Budget surplus to $1.0bn in 2012/13, a $16.9 bn improvement from that forecast in the mid year economic fiscal outlook with the objective of maintaining low inflation in the economy as public demand decreases.

However in 2009-10, the Government’s Budget strategy was altered, with the Government increasing spending to stimulate the economy and inflation being a much lower priority.

Monetary Policy

With the world economy expected to contract in 2009, the first time in six decades, concerns of the impact of the downturn had overtaken concerns for the rise of inflationary pressures. In a short time space of 9 months, the cash rate fell to 3%, lowered by 4.25 percentage points as the Reserve Bank had implemented expansionary monetary policy. However, now with economic conditions within Australia stronger than expected and measures of confidence recovered, the Reserve Bank has shifted policy settings to contractionary, involving domestic