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The problem with inflation is that it can amplify itself. Most people know this, and think of the way people hoard e.g. gasoline if they know a price rise is im
by runeks 5y ago
The problem with inflation is that it can amplify itself. Most people know this, and think of the way people hoard e.g. gasoline if they know a price rise is imminent. This amounts to hoarding a consumer good, ie. the outputs of production. However, that's just one aspect of the problem.
Another issue is producers hoarding inputs to the production of consumer goods: commodities (corn, wheat, cotton, steel, oil etc.). An example of this is the chip shortage that we're experiencing. Before, most companies would have maybe a month worth of chip inventory. Now, they'd prefer to have at least a year's worth of inventory of chips, to secure both the chip price and their ability to even obtain them. That's more than a 10-fold increase in the demand for chips over a very short period of time.
When commodity prices rise, the exact same pattern occurs for companies that use commodities as inputs. With falling or constant commodity prices (as we've experienced for the past 10 years [1]), companies have little incentive to have much of an inventory. With increasing commodity prices, the incentive for producers to hoard them is proportional to the rate of increase in their price†. And the more they hoard the more the prices increase, which causes more hoarding etc.
† This is a simplification. Interest rates play an important role here: if the company's annual expected price increase is greater than the interest rate at which they can borrow, then it's profitable for the company to borrow money to buy commodities.
[1] https://fred.stlouisfed.org/graph/?g=HBTZ https://fred.stlouisfed.org/graph/?g=HBTZ
- deleted 5y ago[deleted]
- Ma8ee 5y agoIt's not so much hoarding as setting prices from future expected prices. If I'm writing a contract where I promise to deliver a product during the next year, and I expect the prices of both components and labour to be 10% higher by the end of the year, I of course factor that in when I set my prices now. When I negotiate my salary for the coming year I of course factor in that I expect my living expenses to be 10% higher by the end of the year, and that I know that my employer already is increasing her prices. Then everyone does the same, and of course everyone's inflation expectations are vindicated. Rinse, repeat. This is a very tricky trap to get out of. Last time it happened the federal reserve increased the interest rate to 20% and forced a recession just to get inflation back to normal.
- pjc50 5y agoYes, inflation has an inertia all its own, and causes a certain amount of strife as all those prices and especially wages are re-negotiated, since wage negotiation often has to be accompanied by strikes. The introduction of the Brazilian Real was a surprisingly effective tactic to derail inflation in the previous currency; changing over the currency and promising "this time it's different" actually worked. > Last time it happened the federal reserve increased the interest rate to 20% This technique has since been refined and central banks have got really good at controlling inflation through rates. The cost is borne through unemployment being kept above the "NAIRU".
- lottin 5y ago> wages are re-negotiated It's common for wages to be contractually indexed to prices, so that they are automatically updated to reflect changes in the cost of living. See here, for some examples: https://www.ecb.europa.eu/pub/pdf/other/mb200805_focus05.en.pdf https://www.ecb.europa.eu/pub/pdf/other/mb200805_focus05.en....
- alisonkisk 5y agoThat doesn't look common to me. I see a few small countries, and France and Spain (which only gets through union negotiations, not law)
- runeks 5y ago> Last time it happened the federal reserve increased the interest rate to 20% and forced a recession just to get inflation back to normal. I'm not at all convinced that this manoeuvre actually hampered inflation. It might as well have exacerbated it. When you push up the rate of interest, you make it profitable for businesses whose return on capital is less than the given rate of interest, to liquidate all its assets and deposit the proceeds in a bank account (where you they will earn a greater return on capital). If the given business was producing consumer goods, it was actually helping to keep prices in check. Shutting down this business through the Fed offering its investors free profits -- as opposed to the market offering it profits for producing consumer goods -- doesn't solve the issue of inflation; it makes it worse.
- andresp 5y agoDon't forget salaries. That is what will make or break this theory of "temporary inflation". If it continues for too long people will start asking for more an then it is certainly no longer temporary.
- SauciestGNU 5y agoReal wages have been stagnant for so long I'm not sure an increase is prima facie evidence of permanent inflation.
- hashimotonomora 5y ago> That's more than a 10-fold increase in the demand for chips over a very short period of time. Only for an initial transient. One is a measure of stock and the other of flow.