13 June 2022
There are two prime causes of inflation. The first is an excess of demand over supply – that is, where there is too much money chasing too few goods. This is called ‘demand-pull’ inflation. The second cause is when there is a change in the costs of materials or other resources that are used to make goods and services. This is ‘cost-push’ inflation.
Over recent months we have seen evidence of both these causes. When COVID-19 struck, the Reserve Bank’s response was, in simple terms, to increase the amount of money in circulation and lower interest rates to encourage consumers to buy and businesses to invest, thereby preventing a recession. Consumers certainly made the most of it – spending money on new cars, new kitchens, landscaping, new furniture, and so on.