Why is everything so expensive? We look at what causes inflation | ABC News

ABC News In-depth
25 Jul 202211:22
EducationalLearning
32 Likes 10 Comments

TLDRThis video script discusses the current inflation crisis, explaining how the national average cost of everyday items has risen by 45% in two years. It delves into the concept of supply-driven inflation, highlighting the impact of the pandemic, supply chain disruptions, and geopolitical events like Russia's war in Ukraine. The script also covers the role of central banks in managing inflation through interest rates and the importance of distinguishing between headline and core inflation. It emphasizes the balance policymakers must strike to maintain economic growth without causing runaway inflation.

Takeaways
  • 📈 Inflation has significantly increased, with the national average tally rising from $21.40 to $30.90 in two years, marking a 45% jump.
  • 🌐 This surge in prices is attributed to supply-driven inflation, affecting everyday staples and indicating a broader economic issue.
  • 💡 Inflation is typically a sign of economic growth, but when it gets out of control, it can lead to financial strain on consumers and businesses.
  • 🛒 The Consumer Price Index (CPI) measures the cost increase of goods and services, with a focus on everyday essentials like food, housing, utilities, education, and health.
  • 📊 Australia aims for an annual inflation rate of 2-3%, but current rates are much higher, potentially reaching up to 7%.
  • 🔄 The concept of supply and demand plays a crucial role in inflation; imbalances can lead to excess demand and higher prices.
  • 🏠 The pandemic caused disruptions in supply chains and increased demand for goods like electronics and property, contributing to inflation.
  • 💸 Government financial support and low-interest rates during the pandemic led to increased consumer spending and higher demand.
  • 🌍 Global events, such as Russia's war in Ukraine, have impacted energy supplies and caused a rise in essential costs like groceries and fuel.
  • 📉 Central banks use interest rates to influence demand and control inflation, but high sustained inflation can lead to wage declines and economic recession.
  • 🔎 Two measures of inflation are tracked: headline inflation, which includes all items, and trimmed mean inflation, which excludes volatile price changes to provide a more accurate picture.
Q & A

  • What was the price of a kilo of staples in June 2020, and how much has it increased by according to a new study?

    -In June 2020, the price for a kilo of staples was $21.40. The national average tally has now increased to $30.90, marking a 45% jump in just two years.

  • What is the definition of inflation as mentioned in the script?

    -Inflation is a measure of how much the cost of goods or services is increasing by. It is typically associated with everyday spending such as food, housing, utilities, education, and health.

  • What is the consumer price index (CPI) and why is it significant?

    -The Consumer Price Index (CPI) is an economic measure that calculates the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is significant because it reflects the cost of living and is used to understand inflation.

  • What is the ideal annual rate of inflation in Australia, and how does the current situation compare?

    -The ideal annual rate of inflation in Australia is between two and three percent. However, the current situation is far above this target band, with inflation potentially reaching as high as seven percent.

  • What is the concept of supply and demand, and how does it relate to inflation?

    -Supply and demand is an economic model that describes the relationship between the quantity of a good that producers wish to sell and the quantity that consumers wish to buy. Inflation can occur when there is excess demand (demand is higher than supply) or a lack of supply, leading to price increases.

  • How did the COVID-19 pandemic affect supply and demand, and consequently inflation?

    -The COVID-19 pandemic caused supply chain disruptions and increased demand for certain goods like game consoles, TVs, bikes, and caravans. This led to excess demand and higher prices, contributing to inflation.

  • What role did government policies play in the inflation seen during the pandemic?

    -Governments provided direct cash handouts to consumers and cut interest rates to stimulate the economy during the pandemic. This led to increased spending and excess cash, which in turn fueled demand and contributed to inflation.

  • What are some factors causing the current rise in prices, and how do they relate to supply?

    -Factors causing the current rise in prices include the war in Ukraine, which has significantly cut energy supplies, and recent floods that have reduced the supply of fruits and vegetables. These events have led to a lack of supply and increased prices.

  • How does the central bank's interest rate policy influence inflation?

    -Central banks can influence inflation by altering interest rates. Lower interest rates encourage borrowing and spending, increasing demand and potentially causing inflation to rise. Conversely, higher interest rates can discourage spending and reduce demand, helping to control inflation.

  • What is the difference between headline inflation and trimmed mean inflation, and why is it important to consider both?

    -Headline inflation is a measure that takes into account all items in the basket of goods, including one-off spikes in prices. Trimmed mean inflation excludes these spikes to provide a more accurate measure of underlying price changes. Considering both helps to understand the true nature of inflation, distinguishing between temporary price shocks and sustained inflationary trends.

  • What are the potential consequences of sustained high inflation for consumers and businesses?

    -Sustained high inflation can lead to a decrease in purchasing power for consumers and real wage declines. For businesses, it can result in reduced profit margins and potential economic instability if they are unable to adjust prices or costs effectively.

Outlines
00:00
📈 Inflation and Its Impact on Daily Staples

This paragraph discusses the significant increase in the cost of everyday items, highlighting the example of a product that saw a 45% price jump from June 2020 to the present. It attributes this to supply-driven inflation, which is a result of supply chain issues and increased consumer demand during the pandemic. The script explains the concept of inflation as a measure of the cost increase of goods and services, and how it's typically calculated through the Consumer Price Index (CPI). It also touches on the ideal annual rate of inflation in Australia, which is between 2% to 3%, but notes that the current rate is much higher. The paragraph further explores the factors contributing to inflation, such as the pandemic's effect on supply and demand, government financial support, and the impact of the war in Ukraine on energy supplies.

05:02
🌐 Global Inflation Trends and Historical Context

The second paragraph delves into the global nature of the current inflation crisis, comparing the situation in Australia to that in the U.S., the UK, and New Zealand. It provides historical context by referencing the high inflation rates of the 1970s due to oil shocks and the even higher rates in Australia in 1951 caused by the Korean War and a wool boom. The paragraph explains the role of central banks in managing inflation through interest rates and how low-interest rates during the pandemic led to increased borrowing and spending, contributing to inflation. It also discusses the concept of 'trimmed mean inflation' versus 'headline inflation' and why both measures are important for understanding the true state of inflation, especially when there are one-off events that can skew the data.

10:02
🛒 The Role of Fuel Costs and Interest Rates in Inflation

The final paragraph focuses on the specific issue of high fuel costs as a major driver of current inflation, due to the impact of the war in Ukraine on global supply. It discusses how these increased costs affect the price of nearly all goods, leading to a broader rise in inflation. The paragraph also addresses the challenge for central banks in setting interest rates to manage inflation, as too low can lead to excessive spending and too high can stifle economic activity. It concludes by emphasizing the complexity of the situation and the difficulty in finding the right balance to control inflation effectively.

Mindmap
Keywords
💡Inflation
Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. In the video's context, it is the central theme, illustrating how the cost of everyday items has increased significantly over time, with a 45% jump in two years as an example. The video discusses inflation in terms of its causes, such as supply-driven factors, and its effects on the economy and consumers.
💡Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as food, housing, utilities, education, and health. The video explains that changes in the CPI reflect the changes in the cost of living and are a key indicator of inflation. In Australia, the Australian Bureau of Statistics calculates the CPI to determine the annual rate of inflation.
💡Supply and Demand
Supply and demand are fundamental economic concepts that explain the balance between the quantity of a good or service that producers are willing to supply and the quantity that consumers are willing to purchase. The video uses the example of panic shopping in March 2020 to illustrate how an excess demand (high demand, low supply) can lead to price increases, which is a form of supply-driven inflation.
💡Supply Chain
A supply chain refers to the network of organizations, people, activities, information, and resources involved in producing and delivering a product or service. The video discusses how global supply chain problems have led to blockages, causing a lack of supply that contributes to inflation as companies increase prices for goods that are in short supply.
💡Excess Demand
Excess demand occurs when the quantity demanded of a good or service exceeds the quantity supplied at the current price level. In the video, it is exemplified by the panic buying during the early pandemic when demand for staples was high, and supply was low, leading to higher prices and a form of inflation.
💡Interest Rates
Interest rates are the cost of borrowing money and are set by central banks. The video explains that during the pandemic, interest rates were kept low to encourage spending and prevent economic collapse. However, as inflation has risen, central banks have begun to increase interest rates to cool down the economy and control inflation.
💡Headline Inflation
Headline inflation is the percentage increase in a broad price index, such as the CPI, over a year. The video mentions that headline inflation reached four percent due to a spike in banana prices after a cyclone, illustrating how one-off events can cause temporary increases in headline inflation.
💡Trimmed Mean Inflation
Trimmed mean inflation is a measure of inflation that excludes the most extreme price movements to provide a more accurate reflection of underlying inflation trends. The video explains that the Australian Bureau of Statistics uses this measure to target inflation, as it excludes one-off spikes like natural disasters or wars.
💡Real Wage Declines
Real wage declines occur when the increase in the cost of living outpaces the growth in wages, effectively reducing the purchasing power of workers' earnings. The video suggests that sustained high inflation can lead to real wage declines, as the cost of goods and services increases faster than what people are earning.
💡Recession
A recession is a period of negative economic growth that lasts for at least two consecutive quarters (six months). The video implies that if there is a significant reduction in spending due to high interest rates, it could lead to a decrease in economic activity and potentially a recession.
💡Wages Growth
Wages growth refers to the increase in the average wage or salary over time. The video notes that in Australia, there has been little wages growth in recent years, which is problematic when inflation is high because it means people's purchasing power is not increasing at the same rate as the cost of living.
Highlights

Inflation has risen significantly, with the national average tally increasing from $21.40 to $30.90 in two years, a 45% jump.

The increase in inflation is an example of supply-driven inflation affecting everyday staples.

The biggest jump in consumer prices has been observed in two decades.

Inflation is typically a sign of economic growth, but when it gets out of control, it can be problematic.

The consumer price index (CPI) measures the cost increase of goods and services.

In Australia, the ideal annual rate of inflation is between 2% to 3%, but it has far exceeded this target.

Supply and demand dynamics play a crucial role in inflation, with the pandemic causing initial excess demand.

Supply chain issues worldwide have led to blockages, allowing companies to increase prices.

Government financial support and low interest rates have contributed to increased consumer spending and demand.

The war in Ukraine and recent floods have significantly impacted energy and food supplies, causing inflation.

Inflation is not only local but global, with the U.S. experiencing a 40-year high of 9.1% inflation.

High inflation in the past was also driven by global events such as oil shocks and wars.

Central banks use interest rates to manipulate demand and control inflation.

Rising interest rates aim to reduce spending and lower demand to control inflation.

Headline inflation vs. trimmed mean inflation measures, with the latter excluding one-off price spikes.

The current inflation is driven by high fuel costs due to the war in Ukraine, affecting the cost of nearly everything.

Interest rates are a tool to manage inflation, but they may not solve all inflation-related issues.

The Reserve Bank faces a challenge in balancing interest rates to manage both spending and inflation.

Transcripts

Browse More Related Video

How The U.S. Tries To Control Inflation

How inflation works | CNBC Explains

How The U.S. Made Inflation Worse

Introduction to inflation | Inflation - measuring the cost of living | Macroeconomics | Khan Academy

Causes of Inflation

INFLATION, Explained in 6 Minutes

Rate This

5.0 / 5 (0 votes)

Thanks for rating:

Related Tags
InflationSupply ChainConsumer PricesEconomic GrowthPanic ShoppingDemandInterest RatesProperty BoomEnergy CrisisCentral Banks