In the year to December 2022, Australia's consumer price index (CPI) rose by 7.8%, representing the highest rate of inflation the nation had experienced since 1990. This surge significantly exceeded the Reserve Bank of Australia’s (RBA) target inflation band of 2% to 3%.
A major catalyst for this inflationary spike was a series of severe floods in eastern Australia, which decimated crops and agricultural land. Consequently, the retail prices of fresh fruit and vegetables soared by over 20%, dramatically raising domestic grocery bills. Additionally, the country faced acute labour shortages following years of tight international border controls. Businesses in the construction and hospitality sectors were forced to raise wages by an average of 6% to compete for scarce workers, which increased their overall operating costs. At the same time, global energy supply shocks caused domestic electricity and wholesale gas prices to jump by more than 30%, further inflating household and business utility expenses.
In response, the RBA steadily raised its official cash rate from a historic low of 0.1% to 3.1% by the end of the year to curb domestic demand, despite fears of inducing a housing market slowdown.
Question
With reference to Extract C, explain two reasons for the increase in the rate of inflation in Australia.
