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The term "Inflation" is used in two forms interchangeably by most people, and this leads to miscommunication. Inflation is used for: (a) price inflation: incre
by once_inc 4y ago
The term "Inflation" is used in two forms interchangeably by most people, and this leads to miscommunication. Inflation is used for:
(a) price inflation: increasing prices for individual goods.
(b) monetary inflation: an increase in the amount of money used.
Both types of inflation means you get less goods for the same amount of (in this instance) Dollars. Monetary inflation (b) is mostly created by central banks and commercial banks, who increase the amount of dollars via Quantitative Easing, or fractional reserve banking. Price inflation (a) is the effect of markets reacting to changes in supplies and macro trends.
Price inflation isn't even over all products, and products generally fall into three categories: deflationary goods, stable goods, and inflationary goods. Deflationary goods have traditionally been electronics like televisions. Innovation in these areas drives down prices for products hard. Stable goods are products like lumber, food, or oil. Inflationary goods are often luxury brand items like Gucci bags, or yachts.
What is noticeable now is a marked increase in price inflation for stable goods. The source of this inflation is usually one of the following:
1. Supply-side issues (Chinese harbours closed because of Corona outbreaks, the issue with meat as discussed in the article)
2. ESG goals driving up energy prices (which affect production costs and prices for fertiliser. A good example of this is Sri Lanka)
3. International sanctions against Russia (further increasing the cost for fertiliser and increasing the price of energy for the western European market).
- konschubert 4y agoInflation is when the ratio of <money available>/<goods available> grows. This can happen by the numerator growing (your (a)) or the denominator shrinking (your (b)).
- RC_ITR 4y agoHate to be pedantic, but goods and services.
- Nick87633 4y agoSeems like correlation more than causation. There could be plenty of money available but fearful people do not want to spend it.
- hgomersall 4y agoA moment's consideration would show that's too simplistic. Money available has been growing for years without any notable inflation. It's not like we all rush out to spend every bit of income we have, a fair amount gets saved which effectively neutralises it.
- konschubert 4y ago<Money available> is a simplification, yes: https://en.wikipedia.org/wiki/Money_supply https://en.wikipedia.org/wiki/Money_supply
- seanmcdirmid 4y agoA lot of the extra money was being plowed into real estate or the stock market, preventing inflation from happening elsewhere outside of the real estate or stock markets. Interest in saving accounts was too low for the money to just be saved.
- throwaway9870 4y agoSo has the goods available. I suspect China's ability to manufacture cheaply and in huge quantities has masked a lot of the increase in the numerator.
- konschubert 4y agoLet me add to your list: 4. Russia artificially limiting the Gas supply to freak out the Europeans. 5. Russia preventing wheat and corn feed from being exported out of Ukraine, forcing it to rot.
- leereeves 4y agoI'd also like to add to the list: 6. Many industries have become oligopolies, so companies can increase the prices consumers pay even faster than their own costs increase, leading to record profits. For example, Tyson Foods' profits nearly doubled: https://www.cnbc.com/2022/02/07/tyson-foods-higher-meat-prices-nearly-doubles-profits-.html https://www.cnbc.com/2022/02/07/tyson-foods-higher-meat-pric...
- somewhereoutth 4y agoMy understanding is that economists use the term inflation for the rise in prices - strictly the fall in value or purchasing power of a currency. The increase in money is termed 'expansion of the money supply'. There are a number of measures of money supply, going from narrow, cash only, to broad to include cash like instruments. There is a strong relationship between money supply and inflation, different schools of economic thought understand it differently, but in general when you increase the money supply, its purchasing power falls. Ballooning asset valuations have largely/entirely been caused by QE and ultra low interest rates, other prices are going to be affected by this too. Supply side shocks of course play their part, but current inflation is probably primarily driven by this loose monetary policy.