PHOTO: Australian property prices surged more than 20 per cent in the last 12 months. FILE

We’ll be talking about inflation a lot this year.

So let’s make sure we know what we’re talking about.

What is inflation?

What does it have to do with the cost of living?

And how come soaring property prices aren’t included in the official inflation figure?

What is inflation?

At its most basic level, “inflation” refers to a general increase in the level of prices in an economy over time.

It’s also the phenomenon that explains why a unit of currency loses its purchasing power as the decades roll past.

What does that mean?

Watch the video below.

Listen to Kurt Cobain and his Nirvana band mates talking about ticket prices for their concerts in the early 1990s.

At the time, they charged about $US17 ($24) a ticket, and they were dumbfounded to hear Madonna was charging $US50 or more.

To their ears, $50 was exorbitant.

But, to our ears, it sounds comically cheap.

And part of the reason why it sounds so cheap is because the nominal value of the currency we use has deteriorated so much in the past 30 years, thanks to inflation.

As the saying goes, a dollar ain’t what it used to be.

And here’s how that process works.

 

Inflation is built into the system

Inflation comes from many sources.

I’ve described some of them in a previous article.

But let’s consider an obvious one.

Imagine a town full of all kinds of people — shopkeepers, workers, consumers, manufacturers, farmers — you name it.

Everyday, they’re jostling to try to make a bit more money.

 

Now, let’s say the prices of some really important goods in the town, such as petrol and electricity, suddenly go up.

We see that happen to petrol prices in Australia quite regularly.

Since petrol and electricity are major “inputs” in the production process, their higher prices will flow through the system to make other goods in the town more expensive.

For example, when petrol prices jump higher, it makes it dearer to transport goods around the country, so freight costs increase.

When freight costs increase, retailers might try to pass the higher costs onto consumers by lifting the prices of the goods they’re selling.

READ MORE VIA ABC