With reference to the first paragraph of Extract A and Figure 1, explain how the change in the exchange rate of the Australian dollar has 'exacerbated' rising inflation in Australia.
| Date | Inflation Rate (%) |
|---|---|
| Jun 2021 | 1.8 |
| Dec 2021 | 3.5 |
| Jun 2022 | 6.1 |
| Dec 2022 | 7.8 |
| Jun 2023 | 6.0 |
| Dec 2023 | 4.1 |
| Jun 2024 | 3.8 |
Rising cost pressures in Australia
Following mid-2021, the CPI inflation rate in Australia surged, moving well above the Reserve Bank of Australia’s (RBA) target range of 2–3%. This acceleration in inflation was exacerbated by a significant depreciation in the exchange rate of the Australian dollar (AUD). A weaker dollar substantially increased the domestic cost of imported intermediate inputs, such as industrial machinery and refined petroleum products. Between June 2021 and December 2022, import price indices for capital goods rose by over 16%.
These rising import costs rapidly fed into domestic supply chains. Businesses faced higher utility and freight expenses, which were passed on to consumers in the form of higher retail prices for essential food and transport. The Australian Bureau of Statistics (ABS) reported that low-income households, which allocate a disproportionate share of their weekly expenditure to non-discretionary items like fuel and groceries, suffered the steepest decline in real purchasing power. To sustain consumption, many households resorted to drawdown of pandemic-era savings and high-interest personal loans.
To curb escalating demand-pull and cost-push pressures, the RBA raised the Cash Rate Target from a historic low of 0.1% to 4.35% by late 2023. Despite this tightening, nominal wage adjustments of around 3.6% in key service industries lagged behind the headline inflation rate, which peaked at 7.8% in late 2022, causing a severe squeeze on living standards.
