In early September, Reserve Bank governor Philip Lowe began his annual address to the Anika Foundation discussing the country's inflation and its future outlook.
It was two days after the RBA governor had confirmed the fifth consecutive hike to the country's cash rate.
"After a number of years in which inflation was below target, it is now considerably above target and is expected to go higher still in the short term," Mr Lowe said.
"The extent of this turnaround in inflation has come as a surprise to many, including us [at the RBA]."
His speech pointed to causes like the impact of Russia's invasion of Ukraine on supply chains, the rising cost of fuel and the overall uncertainty of the world's economic state.
However, Mr Lowe also touched on the potential ramifications of another, less familiar concept: inflation psychology.
"There is something here, though, that is worth watching that is not easily captured in our standard models – and that is the general inflation psychology in the community," he said.
"If workers and businesses come to expect higher inflation, and wages growth and price-setting behaviour adjusts accordingly, the task of navigating that narrow path will be very difficult, if not impossible," he later added.
Meg Elkins, a behavioural economist with RMIT's school of economics, finance and marketing, agrees this consumer mindset can have a significant impact on inflation.
"The idea with inflationary psychology is that we respond to high prices by buying now rather than delaying our purchases, because we think prices are going to go up in future," Dr Elkins told ABC RN's The Money.
Mr Lowe also said that if inflation expectations were to shift upwards, higher interest rates would be required to address this, resulting in a "sharper slowing of the economy".
"It is in our national interest that we avoid this."
This foreboding reference came less than three months after Mr Lowe raised similar worries of inflation psychology. A fear that itself was echoed by the Bank of International Settlements – the bank for the world's central banks – five days later.
The recent rise in US inflation has also worried some analysts.
Yet these recent concerns from Mr Lowe and others suggest that our interpretation of inflation could be just as impactful on the extent and length of inflation itself.
What exactly is inflation?
In short, inflation is when the price of goods and services begins to increase.
In a healthy economy, the output of production grows and contracts over time, with this rise and fall dependent on employment rates, wage growth and consumer spending.
When an economy is on the up, it typically means more people will be buying goods and services.
This can place excess demand on certain items. If this demand begins to exceed the available supply, the cost for that item can increase, otherwise known as inflation. Another cause of inflation is when the supply of an item drops below demand.
But while inflation is a normal phenomenon, in some cases, it can lift at concerning rates. According to the latest statistics, Australia's inflation is growing at its fastest in over two decades.
During the 1970s, when the infamous "stagflation" period occurred, the CPI surged from 2.1 per cent to 17.7 per cent over a period of five years.
Wait, what's the CPI?
The CPI is the Consumer Price Index, which is effectively a quantification of inflation.
Every three months, the Australian Bureau of Statistics releases its figures for how inflation has progressed, including an annual CPI.
According to ABS figures at the end of June, the annual CPI was recorded at 6.1 per cent, with the high cost of fuel and a glut of unfinished homes key contributors to this figure.
For context, in June 2021, this figure was 3.8 per cent.
This increase is why the cash rate – the rate at which banks lend to one another – has been lifted in recent months.
Effectively, the RBA is hiking the cash rate as a means to cool the economy by disincentivising spending, with the target band being between 2 and 3 per cent.
The RBA thinks the earliest Australia will reach 3 per cent is during 2024.
But the time we reach that figure is, according to economists, also dependent on our perceptions of inflation.
So how does inflation psychology work?
Dr Elkins said the basic mechanism of inflation psychology is that it's a self-fulfilling prophecy.
"What happens is that by prices rising, we feel like they're going to continue to rise. So we've got to get in now, rather than wait for them to rise in future. And by doing that you're artificially pushing up prices," she said.
Currently, Australia isn't expecting inflation to lift significantly – with the expected inflation rate dropping from 6.3 per cent in July to 5.4 per cent in September, according to the Melbourne Institute's latest figures.
But under this pretence, if people were to assume inflation was going to lift exponentially higher, then that could result in a higher than anticipated CPI.
So why are people talking about this now?
One suggestion is that the RBA is acutely aware that markets monitor and react to its actions closely.
Dr Elkins said the reason that Mr Lowe is referencing inflation psychology is likely related to raising awareness in the general public.
"It's used sparingly, so that [it can] have the greatest impact. So if you know that Philip Lowe is talking about this stuff, [the RBA is] particularly concerned, and it's full warning," she says.
But couldn't talking about it increase the likelihood of it happening?
Dr Elkins does not think no, instead putting it down to "availability bias". This phenomenon means something is brought to the front of your mind because of how often it's talked about.
She offers the example of the high cost of iceberg lettuce.
"The interesting thing about that is you might not be thinking about an iceberg lettuce in your everyday life, but all this media around an iceberg lettuce and it's in the front of your mind."
It's one explanation why crispy green leaves have, all of a sudden, become a conversation starter.
Is there anything I should do?
Dr Elkins suggests keeping an eye on real rates, rather than interest rates.
"The [figures] that we really should be paying attention to are, in fact, the real wages and the real interest rates because they tell us the truth of what's happening in the economy right now," she says.
"If we can take notice of those real [inflation rates] and those real interest rates, then we know actually what's happening in the economy around us."
RN in your inbox
Get more stories that go beyond the news cycle with our weekly newsletter.
