Dirty digits: What does 6.1% inflation mean?

This week, we were all met with headlines alerting us to an “inflation hike” of 6.1% since the start of the year, up from 5.1% in March.

In fact when Treasurer Jim Chalmers issued his ministerial statement on the economy his first priority was inflation: “Left untreated, inflation which is too high for too long undermines living standards and jobs, and wrecks economies. But the medicine is also very tough to take – and millions of Australians with a mortgage are feeling that pain right now.”

On Wednesday Chalmers said that Australia is set to see inflation rise by 7.75% come the December quarter with headline inflation at 5.5% by the middle of next year, 3.5% by the end of 2023, and 2.75% by the middle of 2024.

Words like “inflation” are getting thrown around by media organisations and politicians alike to make points. What point they are making – and in whose interests – is not always immediately clear. But these economic “things” have real impact on real people’s lives.

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Inflation is the term given to the decreased purchasing power of money. In effect, inflation means an increase in the price of goods and services.

Meanwhile, wages continue to stagnate or fall, meaning real income for households continue to fall. Chalmers said that, not only would inflation continue to “get higher”, but that “the idea that we would be forecasting wages growth that keeps up with that, I think, would not be credible in the near term.”

So, 6.1% inflation means that, for instance, a family’s weekly $200 grocery shop in December 2021 would now cost a little over $212. Over the course of 12 months, that’s an extra $600 on groceries for the household.

The market forces behind inflation hikes seem all powerful and immutable. But would we accept 6% rises in other areas of life?

According to official figures, 6.39 million people have died worldwide to COVID-19 since the beginning of the pandemic. A a 6% increase on this already horrific number of lives lost would have seen more than 380,000 extra deaths – an additional 440 COVID-19 deaths every day since the pandemic was announced by the World Health Organisation on 11 March 11 2020.

And what about the Earth’s orbit? What if we moved the Earth just 6% further away from the Sun? Or 6% closer?

Earth’s orbit is part of a fine equilibrium between all the objects in the solar system including the Sun, so moving it would probably break that equilibrium and lead planets to crash into our central star and/or each other.

But putting that to one side, the inverse square law says that moving 6% further from the Sun (around nine million kilometres), would mean the Earth gets 88% of the solar radiation it currently does. That would mean a temperature drop of a couple of degrees. By comparison, at the height of the last Ice Age, the global average temperature was around 6°C less than today.

Conversely, 6% closer and we would have a temperature increase of a couple of degrees. Climate modelling based on human-induced climate change has already shown what a disaster that would be for life on Earth.

Australia’s inflation figures are the highest they’ve been in decades. They increased by 10% overnight in 2001 with the introduction of the Gross Sales Tax. But you have to go back to the 8.7% increase in the 1990 March quarter to find a faster consumer price index rise than the expected 7.75% this year.

Chalmers’ economic statement yesterday morning noted the fact that real wages growth over the past decade has averaged just 0.1% per year. True enough, but let’s not ignore the fact that real wages have largely stagnated or fallen for decades.

The Treasurer also mentioned that inflation is not just an Australian problem. “The global picture is complex, and the outlook is confronting. The world economy is treading a precarious and perilous path.

“The IMF is expecting global inflation to reach 8.3 per cent by the end of this year – driven by higher food and energy prices, and strained supply chains. In the United States overnight, the Federal Reserve has again raised interest rates by 75 basis points in response to the highest inflation figure recorded in more than 40 years.”

Meanwhile, poorer countries have seen inflation skyrocket even further. Sri Lanka is expected to see a peak of 70% inflation over the next two months.

Food for thought. But less food because it costs more.