Petrol prices are high. Supermarket shelves are being stripped.

And inflation is on the rise.

But even after the pandemic ends, some economists think we may be entering a new era in which higher inflation becomes more common.

What do they mean?

The inflation cycle can take decades to play out

In the past 60 years, Australia's economy has had two distinct eras.

The first era, covering the 1960s and 1970s, was when inflationary pressures were building.

The second, from the 1980s onwards, was when inflation was leaking out of the system.

See the graph below.

Over that time, thousands of stories were written about monthly movements in inflation.

But from our vantage point in history, we can see that 60-year cycle for what it was.

Two distinct periods.

And the majority of Australians living today were born after 1980, so they've grown up in the second era, when inflation has been weakening.

Are we entering a new era?

But what's happening now?

In the back half of last year inflation suddenly picked up.

Since 1993, when the Reserve Bank adopted its official inflation "target," officials have been trying to keep underlying inflation averaging in the range of two to three per cent.

And prior to the pandemic, underlying inflation had become so weak that it had fallen below the RBA's target range in 2016, where it languished for five years.

See below.

It occurred at the same time as wages growth became non-existent, and productivity growth slowed to a crawl.

But suddenly, the global policy response to the virus, and the economic damage caused by the virus, have combined to make inflation roar back to life.

And the pace with which it's rising has concerned economists globally.

So far, they say the majority of the price increases can be blamed on issues related to the pandemic — supply chains breaking down, labour shortages, and record-high fuel.

But they also say there's a chance other factors could be feeding inflation too, and that we may be entering a new era in which inflationary pressures will become more common.

What will that mean?

At the moment, Australia's underlying inflation is suddenly back near the middle of the RBA's target range, so it's not a major concern for Australian officials.

But where it goes from here will be important.

For the past two years, the RBA has been saying its priority is to get as many people as possible into work, and for wages growth to pick up above three per cent.

As you can see below, the last time wages were growing faster than three per cent was at the start of 2013.

For eight long years, wages growth has been abysmal.

The RBA has been saying it's willing to let inflation run higher than its two to three per cent target range for a while, to help wages pick up above three per cent.

But the pace with which inflation has picked up in the past six months in Australia is putting pressure on the RBA.

Why?

Because some economists fear if inflation keeps rising at the current pace and it overshoots the RBA's target range, it will be hard to rein back in, causing new problems.

That's because inflation can be self-reinforcing.

For example, if prices for goods and services ratchet higher, workers need decent wage increases to ensure their spending power doesn't slip backwards.

But higher wages can make the cost of production higher for employers, so employers will want to lift the price of their goods to cover the extra costs too.

It becomes a negative feedback loop.

It can be economically damaging to have prices and wages rising too quickly, so the RBA can't afford to let inflation run too high in coming years.

And an increasing number of economists think the RBA will now have to start lifting interest rates this year to keep inflation under control.

Until recently, the RBA was insisting it wasn't going to raise rates until 2024.

All eyes on the RBA this year

So, the RBA could face a predicament this year.

It wants employment to keep growing and wages to pick up noticeably, but it doesn't want to lose control of inflation.

But if it lifts interest rates prematurely, it could stymie the jobs recovery.

So it will be a balancing act.

For the rest of this year, economists will be watching the RBA closely.

It will be one of the stories of 2022.

What about the new era?

But finally, regarding the question of whether or not we're entering a new era in which inflationary pressures will become more common.

Shane Oliver, the chief economist of AMP Capital, wrote a note explaining that thesis recently.

It's a topic economists are debating at the moment, so the question hasn't been settled.

But Mr Oliver said there were reasons to think the 40-year cycle of weakening inflation we've been living in could be ending anyway — despite the economic fallout from the pandemic.

Here's why.

Firstly, he said a number of central banks (including the RBA) had, in recent years, taken a far more aggressive approach to pushing up inflation.

He said it has constituted a "regime shift."

He said instead of relying on forecasts of inflation to guide their interest rate decisions, some central banks had shifted to focusing on actual inflation to guide their decisions, so they've been letting inflation rise higher than they normally would and they've been slower to raise rates.

That's part of the reason why inflation has risen quite quickly recently, he said.

Secondly, he said as populations age, the ratio of workers to consumers is declining in many countries.

That could start driving higher wages growth (because fewer workers are competing for jobs) and lower productivity growth.

Thirdly, he said globalisation appeared to be in decline.

For the last few decades, China has been exporting cheaper prices around the world, but that dynamic has reversed a little with countries bringing manufacturing back onshore, and it's leading to higher prices for consumer goods.

So there were big dynamics at play.

"The bottom line is that many of the factors that drove the declining trend in inflation since the early 1980s are now fading," Mr Oliver said.

"In this context, the current spike in inflation is likely part of a longer-term bottoming process.

"However, it’s not all one way (technological innovation is still bearing down on prices, and the pandemic may work to drive more productivity) and the 1960s showed us the bottoming of inflation may take years to play out.

"But it all likely suggests that the long-term decline in inflation since the early 1980s and the downtrend in interest rates and bond yields that it largely drove are over," he said.