The Objectives of Monetary policy are defined by the RBA:

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The RBA is "broader" than most central banks

Most Central Banks focus on Price Stability. The RBA now focuses on ”Inflation-targeting” since previous monetary policy approaches did not deliver acceptable price stability & Macro-economic Outcome. Other countries that have adopted Inflation Targeting include; New Zealand, Canada, the United Kingdom, and Sweden source

Why Target Inflation? §

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• Help maintain a satisfactory rate of economic growth.
• It also helps maintain Full Employment
  • because it promotes Business Confidence and encourages Investment.

#econs-example Since setting inflation targets, inflation has fallen in the countries implementing " Inflation-targeting".

In Australia the RBA credits inflation targeting for keeping inflation low, and in promoting a satisfactory rate of economic growth.

Australia, New Zealand, Canada, the United Kingdom, and Sweden (source)

Thus, keeping Inflation Low helps the RBA achieve;

• Price Stability
• The Maintenance of Full Employment
• Which the RBA believes will lead to ”Economic Prosperity”, meaning;
  • Increases in Real GDP Per Capita
  • Long-term Economic Growth
  • Rising Living Standards

Different Measures of Inflation: §

• The CPI is the ”Headline Rate” of Inflation for household expenditure. this can be adjusted to estimate an ’underlying’ or ’core’ inflation rate by;
  • Removing Goods with Volatile Prices
    • e.g. Fruit and Vegetable prices that exhibit Seasonal Volatility.
  • Removing retail Petrol prices
    • since these reflect movements in world oil prices, as well as changes in the Exchange Rate.

The RBA also calculates;

• Weighted Median
  • Eliminate outlier groups at the top of the CPI.
• Trimmed Mean
  • Eliminate outlier groups at the bottom end of the CPI. The Average of the T.M and W.M can be an estimate of the ”underlying” rate of inflation.

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