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How Money Works

Why Everything Keeps Getting More Expensive

Ages 10–14 25 min read Intermediate

Your grandparents bought their house for $30,000. A movie ticket used to cost 50 cents. A loaf of bread was 20 cents. Why does everything keep getting more expensive?

The answer is inflation — and understanding it is essential to understanding why your money buys less every year.

What Is Inflation?

Inflation means the general level of prices is rising. If inflation is 5%, something that costs $100 today will cost $105 next year. Your money buys less.

The Australian Bureau of Statistics measures inflation using the Consumer Price Index (CPI) — a basket of goods and services that typical households buy.

What Causes Inflation?

1. Too Much Money Chasing Too Few Goods

If the government creates money (or the central bank does through QE), but the amount of goods doesn't increase, prices rise. Remember from the Debt Machine: the RBA created $281 billion during COVID. More money chased the same houses — prices surged.

2. Cost-Push Inflation

When the cost of producing things rises (wages, materials, energy), businesses pass those costs to consumers. The 2022 fuel price spike (after Russia invaded Ukraine) pushed up the cost of everything that needs to be transported — which is essentially everything.

3. Supply Shocks

Natural disasters, wars, pandemics — anything that suddenly reduces supply. Australian floods in 2022 destroyed crops, sending fruit and vegetable prices up by 16% in a single quarter (ABS).

The Inflation Tax

Here's what most people don't understand: inflation is essentially a hidden tax. If you have $10,000 in savings and inflation is 5%, your money loses $500 in purchasing power — even though the number in your account hasn't changed.

Over 20 years at 3% inflation, $100 loses nearly half its purchasing power. That $100 bill will only buy $54 worth of today's goods.

This is why keeping cash "under the mattress" actually makes you poorer over time.

Who Wins and Who Loses?

  • Winners: People with debt (they repay with cheaper dollars), asset owners (property and shares tend to rise with inflation), and governments (tax revenue rises with prices).
  • Losers: Savers, people on fixed incomes (pensions), workers whose wages don't keep up, and anyone holding cash.

Tonight's Question

"Ask a grandparent or older family friend: how much did things cost when they were young? Make a list and compare to today."

A house, a car, a loaf of bread, weekly rent — the differences are staggering.

The Inflation Time Machine

  1. Look up the RBA inflation calculator (rba.gov.au).
  2. Enter $100 and the year a parent or grandparent was born.
  3. See what $100 then is worth in today's dollars.
  4. Now reverse it: what would $100 today have been worth back then?
  5. Calculate: if your family income stayed the same as it was 20 years ago, could you still afford your current lifestyle?

Go Further

  • History: Research hyperinflation in Zimbabwe (2008) or Weimar Germany (1923). What happens when inflation goes to millions of percent?
  • Tool: RBA Inflation Calculator at rba.gov.au.
  • Question: If central banks aim for 2-3% inflation by design, does that mean they want your savings to lose value?
  • Book: When Money Dies by Adam Fergusson (1975) — the Weimar hyperinflation story.

What We Simplified

  • Moderate inflation isn't all bad. It encourages spending and investment rather than hoarding cash, which keeps the economy moving.
  • Deflation can be worse. Falling prices sound great but lead to people delaying purchases, businesses cutting costs, and economic spirals (Japan experienced this for decades).
  • CPI isn't perfect. Different people experience different inflation rates depending on what they buy.

Sources

  • ABS (2023). "Consumer Price Index, Australia." Cat. 6401.0. ABS
  • RBA. "Inflation Calculator." RBA
  • Fergusson, A. (1975). When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. William Kimber.
  • Blanchard, O. (2021). Macroeconomics. 8th ed. Pearson. (Standard textbook reference on inflation.)

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