ECO511 Economics for Business

Calculate the rate of inflation based on the CPI and the rate of average weekly earnings growth and plot the inflation rate and weekly earnings growth on a single diagram using time on the horizontal axis. Provide an economic interpretation of these time series plots.

Set1 : this uses CPI data given in catalogus series no A2325846C for all goods. These goods cover 11 groups- Food and non-alcoholic beverages, Alcohol and tobacco, Clothing and footwear, Housing Furnishings, household equipment and services, Health, Transport, Communication, Recreation and culture, Education and Insurance and financial services.

‘A price index is a weighted average of the prices of a selected basket of goods and services relative to their prices in some base-year’.( econport.org. Price Index).  For comparison over time we choose a year as base year (2012 in this case). It is clear that the CPI values before 2012 are less than 100, while they are more than 100 after 2012.  

Changes in CPI number are important, as they are used as ‘ a measure of changes, over time, in retail prices of a constant basket of goods and services representative of consumption expenditure by resident households in Australian metropolitan areas’. ( Abs.gov,au. Consumer Price Index).

Changes in CPI are used alternatively with inflation, which  ‘is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling’. ( Investopedia,com, Inflation).
For earnings, we have multiple series, but we chose catalogue no A85002148L.

This is because Average Weekly Ordinary Time Earnings (AWOTE), ‘ is the most stable series from this publication over time, as it excludes overtime, part time and junior rates of pay’.(meteor.aihw.gov.au . Australian Institute of Health and Welfare). The series label is A85002148L

Both datasets are presented in annual form, after converting them from quarterly and bi annual basis using simple average formula.

• Changes in CPI or Inflation swing up and down, with a maximum of 3.56% and minimum value of 1.56%
• The changes in AWOTE have fallen after 2009, after rising till 2009.
• The gap between the series has been declining, and ot was almost nil in 2014.

References

Price Index, n.d. retrieved from http://www.econport.org/content/handbook/Inflation/Price-Index.html

Consumer Price Index, n.d. retreived from http://www.abs.gov.au/AUSSTATS/abs@.nsf/0/1E564CACF4CBEC32CA256ED8007EF06E?opendocument

Inflation Retrieved from http://www.investopedia.com/terms/i/inflation.asp

Australian Institute of Health and Welfare, n.d. retrieved from  http://meteor.aihw.gov.au/content/index.phtml/itemId/270319.