Changes in the Determinants of Inflation in Australia

In the past decade, inflation in Australia and most other industrialised countries has been extremely well behaved. An important question is whether this reflects a series of favourable shocks to prices or a more fundamental change in the inflation process. In this paper, we explore developments in each of the key explanators of inflation. We find that some of the determinants of inflation in Australia have exhibited unusual or structural change in recent years. Using a mark-up model of inflation, we attempt to identify whether there has been a change in the relationship between inflation and its determinants. We find some tentative evidence of change. Although this change is not statistically significant, it may be economically significant. It leaves open the possibility that some forces may be emerging that could help reduce the variability of inflation in response to shocks.