By reducing inflation risk premia, price stability results in lower levels of real interest rates, thereby making more investment projects profitable. By supporting investment, lower interest rates contribute to higher levels of employment and economic growth. Third, it is well known that inflation acts like a tax on holdings of cash. Inflation increases the price of the transaction services of money.
In the earlier boom, higher commodity prices led to a surge in investment in the resources sector. This substantially added to Australia’s capital stock and thus our ability to supply resources to the market. In contrast, the investment response this time has been negligible and there are few signs that firms are planning to increase supply in response to the higher prices.