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Historically, inflation was usually a function of higher labor costs, therefore wages and prices often rose together. Our current inflation is a result of exter

Historically, inflation was usually a function of higher labor costs, therefore wages and prices often rose together. Our current inflation is a result of external factors, so prices are skyrocketing but wages are rising much less quickly.

WalterBright 4y ago
> Historically, inflation was usually a function of higher labor costs That's the wage-price spiral theory of inflation, and is faulty. Inflation is always a monetary phenomenon, where the money supply increases faster than the value in the economy. Increasing wages (without increasing productivity) does not increase the supply of money, and so the increased pay means there is less money for other purposes, which depresses prices. As always, the Law of Supply & Demand is at work here.
- gruez 4y ago
  >Inflation is always a monetary phenomenon, where the money supply increases faster than the value in the economy. This feels trivial to disprove. For instance: 1973 oil shocks causes prices of oil to go to the moon. Inflation occurs, because prices are driven up by the price of oil. No money printing has occurred.
  - WalterBright 4y ago
    There was a lot of deficit spending (money printing) going on then. The proof that oil shocks don't cause inflation is simple - when the oil prices come back down, there is no corresponding deflation.
    - DSMan195276 4y ago
      How are you defining inflation such that it's not dependent on the price of goods? If it is dependent on the price of goods then obviously the price of oil going up produces inflation, since the price goes up without any change to the fuel itself.
      - WalterBright 4y ago
        Inflation is a general price increase. Increasing the price of one commodity does not increase the money supply which is necessary for a general price increase.
        DSMan195276 4y ago
        Why would that be necessary? Increases in the price of fuel (or a variety of other things) impact the price of just about everything else, so why would that not qualify as a general price increase? Beyond that, the price of one commodity going up _does_ change the general price of things if you're using an average. I mean if you want to redefine inflation to simply be "how much the money supply has increased" then be my guest, but if that doesn't actually translate to how much more things cost then I don't see how useful that measure is. For the past year the money supply has been trending downward, so are you suggesting we didn't have any inflation last year?
        WalterBright 4y ago
        > so why would that not qualify as a general price increase? Because, unless there is a corresponding increase in the supply of money, the money spent on the oil isn't available to spend on other things. So those other things will experience a decline in prices, due to the inevitable Law of Supply & Demand.
        Georgelemental 4y ago
        Ah, but perhaps oil is a necessary component to manufacture many different things, so those other products will be forced to increase in lroce as well despite reduced demand.
        DSMan195276 4y ago
        I'm confused why you're ignoring the whole "supply" part of supply and demand. If companies can't afford to ship as much product, what happens to the supply? If businesses go bankrupt and disappear, what happens to the supply? I think there's a lot of caveats to the money supply argument, but even just from a pure supply/demand application you can have inflation if there's less goods to go around, without any change in money supply. That's also exactly what happens when you have situations such as increases in shipping costs and it becomes more expensive for businesses to operate. Again, did we inflation last year despite the money supply decreasing?
- listenallyall 4y ago
  > That's the wage-price spiral theory No, it's not. Wage-price spiral assumes two-way causation: that higher wages cause higher prices, AND that higher prices lead to higher wages.
  - WalterBright 4y ago
    What do you think higher labor costs will result in?
    - listenallyall 4y ago
      I already said, higher wages or labor costs result in higher prices. But the other half of that spiral -- that higher prices are the cause of increased labor costs -- is not something I claimed.

WalterBright 4y ago

> Historically, inflation was usually a function of higher labor costs That's the wage-price spiral theory of inflation, and is faulty. Inflation is always a monetary phenomenon, where the money supply increases faster than the value in the economy. Increasing wages (without increasing productivity) does not increase the supply of money, and so the increased pay means there is less money for other purposes, which depresses prices. As always, the Law of Supply & Demand is at work here.

gruez 4y ago
>Inflation is always a monetary phenomenon, where the money supply increases faster than the value in the economy. This feels trivial to disprove. For instance: 1973 oil shocks causes prices of oil to go to the moon. Inflation occurs, because prices are driven up by the price of oil. No money printing has occurred.
- WalterBright 4y ago
  There was a lot of deficit spending (money printing) going on then. The proof that oil shocks don't cause inflation is simple - when the oil prices come back down, there is no corresponding deflation.
  - DSMan195276 4y ago
    How are you defining inflation such that it's not dependent on the price of goods? If it is dependent on the price of goods then obviously the price of oil going up produces inflation, since the price goes up without any change to the fuel itself.
    - WalterBright 4y ago
      Inflation is a general price increase. Increasing the price of one commodity does not increase the money supply which is necessary for a general price increase.
      - DSMan195276 4y ago
        Why would that be necessary? Increases in the price of fuel (or a variety of other things) impact the price of just about everything else, so why would that not qualify as a general price increase? Beyond that, the price of one commodity going up _does_ change the general price of things if you're using an average. I mean if you want to redefine inflation to simply be "how much the money supply has increased" then be my guest, but if that doesn't actually translate to how much more things cost then I don't see how useful that measure is. For the past year the money supply has been trending downward, so are you suggesting we didn't have any inflation last year?
        WalterBright 4y ago
        > so why would that not qualify as a general price increase? Because, unless there is a corresponding increase in the supply of money, the money spent on the oil isn't available to spend on other things. So those other things will experience a decline in prices, due to the inevitable Law of Supply & Demand.
        Georgelemental 4y ago
        Ah, but perhaps oil is a necessary component to manufacture many different things, so those other products will be forced to increase in lroce as well despite reduced demand.
        DSMan195276 4y ago
        I'm confused why you're ignoring the whole "supply" part of supply and demand. If companies can't afford to ship as much product, what happens to the supply? If businesses go bankrupt and disappear, what happens to the supply? I think there's a lot of caveats to the money supply argument, but even just from a pure supply/demand application you can have inflation if there's less goods to go around, without any change in money supply. That's also exactly what happens when you have situations such as increases in shipping costs and it becomes more expensive for businesses to operate. Again, did we inflation last year despite the money supply decreasing?
listenallyall 4y ago
> That's the wage-price spiral theory No, it's not. Wage-price spiral assumes two-way causation: that higher wages cause higher prices, AND that higher prices lead to higher wages.
- WalterBright 4y ago
  What do you think higher labor costs will result in?
  - listenallyall 4y ago
    I already said, higher wages or labor costs result in higher prices. But the other half of that spiral -- that higher prices are the cause of increased labor costs -- is not something I claimed.