Just when we thought it was safe to return to the supermarket aisle, it seems inflation has come back to bite us again. Worse, the Reserve Bank of Australia (RBA) predicts it will linger for longer than previously expected, adding to cost-of-living concerns.

So, what is inflation, and what causes it? Do we have to worry about inflation? And if so, what are the options for getting it back under control?

Inflation is a sustained rise in the general level of prices for goods and services purchased by households.

In Australia, inflation is measured by the Consumer Price Index (CPI), which is calculated by the Australian Bureau of Statistics and published every month.

The CPI consists of a basket of goods and services consumed by the typical household. Each month, the Bureau of Statistics calculates the price changes of items in the CPI basket from the previous month, and combines them to work out the inflation rate for the entire basket.

For example, if milk increased during the month by 2% and haircuts by 5%, then the overall inflation rate would include those two price rises based on the item’s weight in the CPI basket.

Each item’s weight in the CPI basket reflects the proportion of a household’s total spending on that item. For example, housing (21%) is the largest category, followed by food and non-alcoholic beverages (17%), recreation and culture (13%, including holiday........

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