What is inflation
Inflation is a persistent increase in the overall price level of goods and services over time, reflecting a decrease in the purchasing power of a nation’s currency. This phenomenon is commonly measured using the Consumer Price Index (CPI). In Australia, the measurement of inflation is primarily carried out by the Australian Bureau of Statistics (ABS).
In essence, inflation signifies the erosion of the value of money.
Consider it as the growth in the price level or, conversely, a decline in the purchasing power of currency. To comprehend inflation’s impact, let’s examine the CPI’s role in tracking this economic phenomenon. In Australia, the CPI is meticulously calculated on a monthly basis by the Australian Bureau of Statistics.
To illustrate, imagine a scenario where a litre of skim milk cost $1 in 2015. Fast forward to 2020, and the same product now demands around $1.5. This real-world example showcases the tangible effects of inflation, as consumers find themselves paying more for the same goods over time.
Wage level and inflation
When the prices of goods and services go up (inflation), it’s reasonable to anticipate a parallel increase in wage levels.
Understanding real wages requires a calculation that involves subtracting consumer price inflation from the annual salary. Here’s an example: If someone consistently earns $50,000 per year for five years without any salary increase, but there’s inflation affecting the prices of products and services, the real wage reveals the actual purchasing power.
The outcome of this calculation might show that the standard of living was higher in the initial year. This is because, despite having the same nominal salary, the real purchasing power was greater due to the increased value of the salary at that time.
While most goods and services generally experience a price increase, it’s important to acknowledge the inherent volatility within inflation measurements. Certain components, such as energy prices, can exhibit significant fluctuations from one measurement to another. These fluctuations are influenced by factors beyond the economic landscape, introducing noise when attempting to discern the underlying trend in price development.