Inflation has been on our minds lately. Most measures show it rising and we have different opinions about how high it will go and for how long it will last. Some see it as a flash in the pan, rising and then falling. Others worry that the increases will be sustained. It is a legitimate issue with no easy answers.
And then there is the question of what is causing it to rise. At one extreme are the folks who believe corporate greed is causing higher sustained inflation. At the other end are people who believe higher inflation is the result of macroeconomic policies -- the rapid increase in the money supply engineered by the Fed and the waves of increased fiscal stimulus packages.
What I find interesting about this discussion is that one's opinions about the causes of inflation come from very different definitions of inflation. The greed folks look at inflation literally. Who actually changes those prices? Neither Nancy Pelosi nor Jerome Powell have ever set any price. That would be well below their dignity and pay grade. The people who set prices every day are the people who manage companies.
We don't usually see the people changing the price signs, but when we drive down a street with a gas station on the corner, we see that someone at that gas station has changed the price on the sign. In the old days we used to see them climb up on ladders to physically change the price. Whether we see them or not, we understand someone from Shell Oil decided to raise or lower the price that day. We know who did it!
When inflation rises, therefore, it is easy to imagine store managers changing their prices. Often times they increase the price. Usually we are humble enough to know we don't know all of the many things that might cause them to increase price at a given time. Imagine all the things that go into the cost of a gallon of gasoline. Yep, greed or the desire to increase profits is surely one of them. But it could be a lot of other things too.
My point is that, yes, it is easy to imagine a person or a company responsible for price and inflation. It is easy to imagine that the greed of the person on that day promoted the price increase. But it is also easy to imagine that there might have been some other things causing that manager to raise that price. I am always interested to know what might cause a given company to have more greed today than yesterday. But I never had a course about the causes of greed change so I can only guess.
Which leads me to my second point -- while we know that some person actually changes the price -- a legitimate question is why she changed it. Yes, greed could be the answer. But it could be a lot of other things. In economics we have something called price theory and without reviewing all the details here, let's just note that price theory says that changes in demand and supply cause changes in price.
No, I am not going to review price theory today (maybe tomorrow?) But I will make note that the demand for goods and services can be very much affected by macroeconomic policy -- by the Fed's monetary policy and the government's fiscal policy. And those of us awake lately, know that these macroeconomic policies have been off the chart. A policy to keep interest rates at zero and highly stimulative fiscal policies have been designed to get us to spend spend spend. Surely those policies put pressure on demand for goods and services and prices to rise. Today with all sorts of factors preventing supply to respond to demand leaves us with much higher inflation.
Yet, most of us don't want to admit policy is the cause. It seems so theoretical. It involves markets, and demand curves, and supply curves, and theories, and such. That line of thinking seems so fuzzy compared to thinking about a greedy guy sitting in a plush office giggling on the way to the bank as he raises prices.
Friends, greed might be a factor today. But before I buy that line of thinking, I want to know two things. First, why did greed increase so much lately? Second, relative to greed, how much of what we see in prices is coming from monetary and fiscal policy? Let the greedo-maniacs answer those questions please.
Dear LSD. The Tuna’s eyez glazed over read’n yer blog, which compel’d ‘m to stare down-tail to his navel to gaze fer an unnerstand’n of cauzes of today’s ‘flation. Herz wut his navel gaz’n reveal’d.
ReplyDelete11.230% – Covid interrupt’n supply lines ‘n sources of production
44.385% – Fed, too much $$$ production from its free buckz ATM
44.385% – Feckless Biden’s COVID stimmilus checks
00.000% – Greed
Some might question the veracity/accuracy of Tuna’s navel. Not to worry, his Ouija board confirm’d the findings. Glaze on, oh macro-man. ‘appy ‘our jez ‘round de ol korner 😊.
Yeppers. The greedomaniacs ain't 2 smart. Carry on with yer happy hour.
DeleteAround the US for the most part lower level wages increased as did middle level salaries due to no or few qualified employees who want that type of work or none are available.( i.e.the Great Resignation). Prices are changed upward to compensate on the company's EBIT and value to the share holders or partners. The result is the higher wage boost was just enough to cover the higher prices...Catch 22. then there was a massive amount of stimulus funding as well as infrastructure improvement funded by government borrow funding(debt) which included enough " I will scratch your back if you scratch mine" by legislators to get it done (maybe?) Then low interest rates encouraged borrowing which enabled growth in all sectors on borrowed funds.....i.e. houses and cars....and much more. The question is how can inflation go down? Is the cure worse that the causes?
ReplyDeleteGood questions Hoot. Kinda hard to get the Genie back into the bottle. Policymakers don't want to be held responsible when the bottle shatters. So enjoy the inflation.
DeleteI am certainly no macro economist, but I buy Tuna's rationale intuitively. Why? My perspective: Commercial banks have way too many deposits in relation to loan demand. In fact, the banks don't even want more deposits. Why? More deposits mean higher regulatory capital requirements. Banks would rather get free money from the Fed. But where do the depositors get this extra money they're hoarding in banks? Stimulus checks that weren't really needed to get people by during the pandemic like the fed govt professed. So, too many dollars chasing too few goods means price inflation. How long have we supposedly known about this stuff? So why do greedy pols insist on stimulus checks to people who don't need them? They hope it will get them more votes. But then when the inflation comes and greedy voters get pinched at the grocery and pump, their short memories don't associate the stimulus checks they've already received with inflation, the greedy pols who expected to benefit now suffer in the polls, and greedy consumers they want more govt spending to help take care of the higher prices.
ReplyDeleteOk, so what's wrong with my greedy thinking?
Thanks John. Nice of you to spread the blame for greed around a little. Greedy pols versus greedy managers. Mangers don't stand a chance against the pols. :-)
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