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 'contributed to rising inflation' (Extract A, line 3).
| Date | Inflation Rate (%) |
|---|---|
| Jun 2021 | 1.1 |
| Dec 2021 | 2.1 |
| Jun 2022 | 5.1 |
| Dec 2022 | 7.8 |
| Jun 2023 | 6.0 |
| Dec 2023 | 4.1 |
Rising cost pressures in Australia
After June 2021, Australia's inflation rate, measured by the Consumer Price Index (CPI), accelerated sharply, moving well above the Reserve Bank of Australia's target band of 2-3%. A primary driver of this trend has been the depreciation of the Australian dollar against major trading partners. This fall in the exchange rate has significantly inflated the cost of imported industrial components, refined petroleum, and heavy machinery, which are priced globally. Between June 2021 and December 2022, overall imported industrial input costs surged by 16 percentage points.
This has put immense pressure on domestic manufacturers and logistics firms, who have been forced to pass these higher costs onto consumers. Low-income households have faced the brunt of this transition as electricity and transport fuel costs consume a disproportionately large share of their weekly income, leading to a marked squeeze on discretionary spending. Consequently, the Reserve Bank of Australia raised the cash rate from 0.1% to 4.35% by late 2023 to combat persistent inflationary pressures.
Real wage growth has struggled to keep pace with these rising costs, with average award wages increasing by only around 2.8%, leading to an erosion of purchasing power. The Australian Bureau of Statistics (ABS) updated the CPI basket weighting in 2023 to better reflect changing consumption dynamics, including a rising share of spending on digital services, remote working tools, and domestic recreation post-pandemic.
