4 ms·
We can answer this intuitively. Inflation is a mismatch of [desire/ability to purchase goods * purchasing power] and [volume of goods produced * cost to produc
by medvezhenok 3y ago
We can answer this intuitively.
Inflation is a mismatch of [desire/ability to purchase goods * purchasing power] and [volume of goods produced * cost to produce goods] that forces an adjustment in the price level. The options to fix high inflation, therefore, involve messing with one of those four variables.
High Interest rates can fix things to the extent that they are able to influence one of the above variables - usually by making things more expensive without changing the nominal price (via embedded interest expense). Taxes are another way to fix high inflation by reducing purchasing power / desire to buy things (without affecting nominal price level).
Technically, price controls can also "fix" measured inflation, with the unfortunate side effect of a goods shortage.
You have to always be careful and think about what you are measuring and what units of measure you are using when you talk about inflation.
- pohl 3y agoI'm surprised that desire/ability to raise prices doesn't get a representation in that formula. The consumer isn't the only party with agency, after all.
- AnimalMuppet 3y agoNo, but that just puts you on a normal supply/demand curve. If suppliers discover that they can raise prices and make more money that way, then they will, with or without inflation. What normally stops this from happening is that 1) higher prices from supplier X shift business to supplier Y (presuming a functioning competitive market) and 2) higher prices decrease demand. But suppliers have been free to increase prices, as much as they want, forever. That's why I have a hard time blaming profiteering for most of the price increases.
- bugglebeetle 3y ago> But suppliers have been free to increase prices, as much as they want, forever. This is not at all true and is the direct product of a lack of anti-trust enforcement in the US. We have monopolies and near monopolies in many industries and open collusion between firms on pricing. Most of this would be impossible in a more competitive landscape or one where the Feds did anything other than attempt (and often fail) to squash the most egregious consolidations.
- mucle6 3y agoNot saying monopolies aren't a problem, but I'm not able to connect the dots on how monopolies are responsible for the inflation since 2021 unless monopolies have gained power since then. Otherwise shouldn't we expect the inflation to have started before covid?
- bugglebeetle 3y agoMeans plus opportunity. During COVID, there were legitimate shortages and supply chain disruptions that caused price spikes and (in some cases) additional profits. When these subsided, firms now had the opportunity to test whether holding prices at this newly elevated level would be tolerated. When the state failed to act to stop them, instead colluding with firms and the media to blame the price increases on thing like spent-and-gone stimulus and labor shortages, they saw they had a free hand to keep prices (and profits) as is. There was no guarantee that this would play out this way until it did, which these monopolies then took advantage of to keep prices artificially high.
- somenameforme 3y agoThere's one key mistake you're making in your assessment. That stimulus is not "spent-and-gone." That money continues to stay in circulation. You can see a graph of the monetary supply here [1]. And you can observe that inflation only started to get reigned in once the monetary supply started to decline. This is why many individuals tend to be against 'printing' money. It's not like people get a boost and things then go back to what they were before, but rather you now have trillions of more dollars floating about in the economy which will tend to drive prices up. I'd also encourage you to look at the financials reports from most companies. If your profits increase by 5% at the same time inflation increases by 8% then you're both (1) getting absolutely economically wrecked, and (2) reporting 'record profits.' As companies are motivated to frame their earnings as positively as possible, this can be misleading to people who take those reports at face value. [1] - https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/M2SL
- zeroonetwothree 3y ago
- deleted 3y ago[deleted]
- throwawaymaths 3y agoThere are two things in tension though. One high interest rate puts the brakes on lending, which contracts the money supply. On the other hand, interest rates in general necessitate creation of money to satisfy interest rates-proportional to the rate. in order to "save the economy", because bank failures and defaults are "bad". If you increase rates, the existing system might not have the money to pay off the interest because we've increased rates. Whether inflation is stopped or not depends on the interplay between loans winding down and the systems' needs for interest payments.
- xupybd 3y agoWe must let banks fail.
- mdorazio 3y agoAs the article points out, in this case the bank is the central bank and letting it fail means collapsing the US economy (eventually).
- throwawaymaths 3y agoIt wouldn't be the central bank: the central banks (are the only banks that) cannot fail due to the inability to pay out interest.
- sokoloff 3y agoThis is a very strong premise, but not an absolute truth. All of the discussions around the US debt ceiling are largely about maintaining confidence that interest will be paid.
- throwawaymaths 3y agoThe fed can always QE to pay the debt. Debt ceiling is mostly about other contractual payment obligations by the government. Remember, the government != the fed
- danybittel 3y agoSo wouldn't increasing VAT (even temporarily) be a better way to combat high inflation? Prices would rise directly, lowering purchasing power.