Prices are up and the supply of things we need is in flux. How did we get here?

This is the second article in The Conversation’s series examining Australia’s cost of living crisis. Read the first article in the series here.

Australia is in a cost-of-living crisis. We know that because the prices typical Australians pay for typical products have been climbing much faster than typical wages, as acknowledged in the standard briefing provided to members of parliament by Australia’s Parliamentary Library.

For most of the last century, and certainly for most of the past 20 years, wages have consistently climbed faster than prices, with minor exceptions in 2009 and 2014 when the difference between the two was small – less than 1%.

But since March 2021 prices have been climbing faster than wages.

When inflation peaked in late 2022, the annual consumer price index was climbing 4.4 percentage points faster than wages - a gap that has since shrunk, but remained at 2.4 percentage points in the latest figures for the year to June.

COVID has played an important part. In the beginning, the pandemic brought prices down, and by a lot. Remember paying 80 cents per litre for petrol?

In the first year of COVID, to the June quarter 2020, Australia went through its first year of negative inflation since 1997. That means that, taken together, prices actually fell.

Fast-forward only two years, and the quarterly consumer price index hit 7.8% in December (and the more experimental monthly index hit 8.4%.)

For those born after the 1980s, this was a first. Going from bottom to top at such a speed only increased the pain.

It began with broken supply chains

The acceleration in inflation began with a mismatch between supply and demand.

Before COVID, the world experienced more than three decades of stability and high predictability in supply chains, thanks to an intense move towards globalisation.

Countries became more specialised, industries and agriculture moved away from the United States and Europe, and manufacturing became leaner by using the just-in-time production model which ensured they met demand, but didn’t get stuck with inventories.

This prosperity was based on the assumption that goods and people could move freely across the globe. Until COVID.

Overnight, ports, railroads and trucks saw their operations slashed as people isolated. Air travel came close to a complete shutdown. With insufficient availability, transport prices skyrocketed.

Then governments sprayed us with money

Then there was a huge increase in demand for products as governments splashed around money in an effort to keep their economies afloat.

Being unable to travel, dine out or get a proper haircut, people went online to buy bicycles, air fryers and hair dryers like never before. Online shopping accelerated faster than expected, with big waiting lists for items as diverse as cars, video games, pool chlorine and pet food.

And supply was constrained by workers having to stay home. Factories couldn’t operate at capacity. Because different regions were affected at different times, and most businesses work with low inventories, “just-in-time” struggled.

Parts, components and materials suddenly became scarce. For businesses such as abattoirs, health rules in states like Victoria restricted beef, lamb and pork processing to two-thirds of normal output.

Read more: Floods, pandemics, wars and the market: what's driving the price of milk

Too many people buying, not enough products to sell, and difficulty moving goods created an imbalance between supply and demand, which pushed up prices globally from late 2020 onwards.

Then Russia invaded Ukraine

In early 2022 just as the world was preparing to open up, Russia invaded Ukraine.

The war triggered an energy crisis. Russia, a major global supplier of gas and oil, was driven out of several markets by international sanctions in what is a textbook trigger for inflation.

In the first wave, petrol, gas and electricity skyrocketed. In Australia, petrol stations reflect changes in international markets in a matter of days. We paid $2.50 per litre at the pump.