Below is a copy of my article as published:

Previously I tried to explain why gas prices were so high, but as you may have noticed, it isn’t just gas that has increased in price. Indeed, most items in the store are costing more.

Inflation is a measure of changes in price. Inflation is how much the price of a set of products has increased compared with the previous period. In Australia inflation is tipped to reach 7%, which is much higher than the ideal of 2–3%, but why is this the case? It all comes down to 2 economic concepts: supply and demand.

Demand reflects how much people want to purchase a product; a product can be in high demand, low demand, or somewhere in the middle. For an example of demand, think of a craze like fidget spinners: when people decided that they suddenly needed a fidget spinner, suddenly it was in high demand.

Supply, on the other hand, is the amount of a product that is available. For example, if there is a large amount of rain, then the supply of various fruits and vegetables may increase. But if the rain causes floods, the produce may be damaged in the fields and the supply is reduced.

When determining the price of a product, businesses attempt to balance supply and demand factors and find an equilibrium price. This price understandably changes, depending on external factors. For instance, if a large number of people suddenly want to purchase fidget spinners, demand will increase and the price will also increase. If the amount of a fruit available increases, then the price will decrease because supply is high.

At the moment we are seeing a reduction in supply in the economy. This is due to a range of factors including:

Floods in the East Coast: they have reduced the ability of farmers to grow some crops, like lettuce. This reduces supply of lettuce and so the price also increases. Coal mines have also flooded, which has reduced the supply of coal and therefore increased the price. (Western Australia has not been as badly affected by these events.)

War in Ukraine: this has led to a reduction in trade out of Ukraine and Russia. Since a lot of gas and grain comes from these two locations, the supply of these items has reduced and the price has risen.

COVID–19 support: In some ways the support provided by the COVID supplements was for a risk greater than turned out to be the case. COVID payments supercharged the economy and meant that the labour market became superheated. This was especially the case when it came to First Home Buyer supplements where money was provided to purchase property and develop them (the other way around the First Home Buyer problem is by purchasing those lots which are already developed and owned for investment or similar reasons).

These factors have led to a situation where almost everything is more expensive. Whilst this has some positives (because grain from other countries was more expensive, farmers could increase their profit margins), for most people the result is a negative situation with booming inflation.

This is not good for the economy, because it means that everyday items become less affordable for most people. Since crushing the economy is not generally popular thing with governments, it means that curbing inflation is left to the Reserve Bank of Australia (RBA), which tries to control it through the very blunt tool of lifting the cash rate (or official interest rate).

Essentially, this allows the RBA to control how much money is worth, and to fix inflation the RBA has to make money more expensive (ironic when you are trying to reduce prices). This reduces the demand for loans which means that there is less money in the system, and so prices need to be pulled down. This is to discourage people from spending money on luxury items so that the price of these goes down. There is some evidence that this is working, but much more is needed to bring inflation to the RBA’s target rate of 2–3%, so prices are not going to go down any time soon.