When there is high inflation, it indicates that prices of goods are rising, which in turn indicates that people have additional money to spend and hence money supply is far beyond the levels expected by the central bank. In such a case, central bank can use monetary measures to control inflation. These are usually in terms of interest rate increases which can curtail lending and borrowing and drains excessive money out of the economy. This can help in bringing down the prices and hence the rate of inflation.
However when inflation is low, the opposite of these measures is adopted to allow more lending by the banks and people can borrow more easily hence accelerating economic activity in the country.
If Australia's inflation rate rises, it is not a cause of concern if it is still close to the target but can turn into a serious issue if inflation is much beyond the target. This is because Australia depends on low inflation for its prosperity. In the last few years, the robust growth in economy has been due to low interest rates. In a high inflation scenario, these rates can no longer be offered to the public which can cause problems as economic activity would slow down. This is what had happened in 1970s and 1980s when inflation was much higher than what RBA had expected. These two decades of high inflation forced RBA to actively target inflation rate to keep it around 2-3%. Australia's consistent drive to bring down the inflation rate is grounded in the fear that high inflation would result in economic slow down.
Meredith and Dyster add: "High inflation rates persisted in Australia from the early 1970s to the beginning of the 1990s. During that period, economic growth was on average below the levels of the previous two decades and there were recurrent bouts...
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