We cop them. Higher prices, that is.

Inflation is soaring and, at last check, was hovering just below 8 per cent.

We know the pandemic and the choking of supply chains sent business costs skyrocketing in late 2021 and 2022.

We also know the war in Ukraine put upwards pressure on gas, petrol and food prices, as did natural disasters here in Australia.

But it's us too — we're causing inflation.

Economists call that consumer "demand". The more we demand goods and services, the more their prices rise.

The Reserve Bank summed this up in this week's Monetary Policy Decision:

"Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy."

But what if I told you companies pushing up their prices over and above their costs, price gouging and profiteering were also driving inflation?

That'd be hard to swallow — especially when families on tight budgets are now paying for these essentially unnecessary price hikes from corporations with higher mortgage and rent payments.

Let's get to the bottom line (pun intended) of this.

Price pressures

Higher consumer prices, broadly speaking, come from two sources: demand-pull inflation and cost-push inflation.

Strong demand in the economy gives companies the confidence to raise their prices without suffering any loss in sales.

Alternatively, businesses also pass on increased costs of supplies and inventory to their customers in the form of higher prices.

The Reserve Bank monitors the sources of price pressures in the economy.

In its latest Statement on Monetary Policy, it reported: "That supply shocks account for around three-quarters of the pick-up in inflation."

If growing business costs make up the majority of current prices in the economy, we need to understand more about how this mechanism works.

The obvious point to make is that businesses are passing on increases in costs to their customers.

That's perfectly legitimate.

Supply-side price pressures

But there's now evidence companies are raising their prices over and above the increase in those costs.

"There's no doubt that corporations have taken advantage of the supply chain problems and the desperation of consumers to jack up prices far more than required to cover their own costs, and their record profits have made this inflation far worse," economist Jim Stanford, from the Centre for Future Work, told The Drum.

According to the Australian Bureau of Statistics (ABS), the record profits are concentrated within the mining and resources sectors.

"The energy companies and the mining sector are far and away the worst culprits and we see that in the soaring price for petrol, for electricity, for gas," Dr Stanford says. 

"But there's plenty of blame to go around. Supermarkets have made great profits, the banks are raking it in, all the more so now with interest rates going up."

Australian Council of Trade Unions (ACTU) secretary Sally McManus has also jumped on the price gouging bandwagon, tweeting: "They've jacked up prices much faster than costs for record profits."

And now, according to NAB — which surveyed 700 firms across the economy from November 21 to December 9 — costs are starting to come down for companies, but prices remain "elevated".

"Supply chain issues and labour shortages remained a pressing concern for [small to medium enterprises] in [the three months to December]," NAB chief economist Alan Oster wrote.

"Like larger firms, there was some evidence that cost pressures were easing late in the year but price growth remained very elevated."

This evidence suggests fatter corporate profits are contributing to inflation. So how significant is that contribution?

The ABC asked the Reserve Bank: How much, over and above the increase in costs, are businesses raising their prices?

It said it didn't have any data on that it could share and referred us to February's Statement on Monetary Policy.

The big picture

It's worth taking a look at the wider picture of Australia's inflation story. The pandemic led to an economy-wide shutdown, which brought demand-pull inflation to a standstill.

Australia briefly experienced deflation, where prices fell.

The Reserve Bank said it wanted to see higher wages growth before lifting interest rates, should inflation take off.

While wages growth remains stubbornly low, inflation is now soaring, thanks to higher business costs and increased demand in the economy.

Interestingly, demand-pull inflation seems to be falling.

According to the ABS, we bought less stuff late last year. Retail sales volumes fell 0.2 per cent in the December quarter. And demand is expected to slow further.

"The effects of higher interest rates, the rapidly increasing cost of living and declining real wealth are all expected to weigh on demand in the period ahead," the RBA noted this week.

It means supply-side inflation is now contributing to the bulk of price growth throughout the economy.

What does price gouging say about monetary policy?

The Reserve Bank forecasts inflation to peak at 7.8 per cent based on its latest research — but that's just a forecast.

No one actually knows when cost of living pressures will begin to ease.

The government has made policy changes where it can, especially with regard to energy prices, but if AGL's latest report card is anything to go by, those changes may only go so far.