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Inflation can allow corporations to be less price-competitive, because it gets harder for consumers to judge price competitiveness. For example, you sit down at

Inflation can allow corporations to be less price-competitive, because it gets harder for consumers to judge price competitiveness. For example, you sit down at your favourite burger restaurant and see on the menu the price is now $12 instead of $8. Are they just passing on increased costs? Or are they taking the opportunity to pad their profits? I can't really tell, not without seeing if prices have gone up comparably at similar restaurants, but I'm here now and I'm hungry. The price used to be $8 because they were in a tight battle with other burger joints, and that was as low as they could get it. Now they have to fight their suppliers, but not so much with their competition. This is one of the reasons why high inflation creates unstable inflation, and why central banks like to keep inflation low.

WalterBright 3y ago
That is called the "cost-push" theory of inflation, and its giant problem is it doesn't explain where the extra money comes from that is necessary for sustained price increases across the economy. It's sibling is "demand-pull" where customer demand causes inflation, but it equally does not explain where the extra money comes from. A theory that does explain it is the government dumping cash into the economy - inflation consistently picks up about a year after this is done.
- mitthrowaway2 3y ago
  (I'm sure you're aware of this, but price increases only require increased spending from customers if transaction volume is held constant. It's entirely possible for prices to rise to arbitrary heights even as the economy contracts and customers become poorer, either because supplies dry up, or because high-volume demand dries up and companies are forced to shift to a smaller but wealthier customer base with high spending power.) More importantly, this is why I said that inflation becomes more unstable when it is higher. Dramatic price increases can happen as companies become less competitive, and then price collapses can happen as well as consumers tap out and companies are forced to compete for a shrinking pie. Economists generally prefer low inflation rather than high inflation, even if all else is equal in real terms, because higher inflation brings higher volatility. Lastly, this isn't necessarily the driver that initiates inflation, but it is a feedback loop that can propel it to overshoot an increase in the volume of money.
  - WalterBright 3y ago
    > I'm sure you're aware of this, but price increases only require increased spending from customers if transaction volume is held constant Reduced demand reduces prices. It's the Law of Supply & Demand at work. The Law is always at work, even money is subjected to it. Increase the supply of money, and the value of a dollar drops accordingly. We see this effect as inflation. In physics, we know that momentum is conserved. Any theory that deviates from that is wrong, even if we can't figure out why it is wrong. Analogously, any economic theory that results in a "free lunch" is wrong. Any economic theory that denies the Law of Supply & Demand is also wrong. Bad government economic policies are nearly always the result of denying the existence of the Law of Supply & Demand, which is as doomed as denying the Law of Gravity. Nothing stops the government from pretending that deficit spending is a free lunch, and they sell that notion at every opportunity. But the Law of S+D still applies. The elephant in the room is the sheer size of the several trillions in deficit spending. There's just no way to ignore it and explain inflation away by suddenly every business is price gouging. It's not a compelling explanation at all.
    - mitthrowaway2 3y ago
      > Reduced demand reduces prices. It's the Law of Supply & Demand at work. You have to be careful when asserting this though, because demand does not mean what most people think it means. In particular, it does not refer to the number of people demanding a good, nor does it refer to a volume of goods purchased. A declining sales volume occurring together with rising prices does not violate the law of supply and demand.
      - WalterBright 3y ago
        Rising prices reduce demand. But there are competitors. That's why a company cannot just raise prices.
        mitthrowaway2 3y ago
        Yes, rising prices reduce demand. But rising volumes also create economies of scale and allow low prices. There's a delicate balance and sometimes an equilibrium of large volume, low price can transition to a new equilibrium of low volume, high price, or vise-versa. For example, if you are a software company and you sell software to a small group of professionals, like a CAD program, your price is probably around $1000 ~ $5000 per seat, per year. And competition will not lower it, because your competitors face the same economic situation you do: it's a niche product, you have to amortize a high development cost over a small number of customers, and those customers have money and are willing to pay. However, there is also a stable equilibrium for a company to turn a similar profit shipping software of equal quality to a very large number of people for a very low price. Something like a spreadsheet or word-processing software. Now your software is cheap, or supported by ad revenue, and yet you can still remain highly profitable. If, however, your userbase started to shrink for whatever reason, you might have to charge the remaining users a large amount. Most will leave, but a few of those users may derive a lot of value from your software and are willing to pay, and you end up with the same economics as the CAD developer. Software is of course an extreme example, where the marginal cost of production is approximately zero, but most industries outside of resource extraction have declining marginal costs with scale. That's why you can end up with high-quality cheap components (like cameras, etc) that are used in smartphones, where they have high-volume production, and very expensive specialty cameras for eg. microscopes, even though the specialty camera required much less investment of R&D to produce. It can only be sold at a high price because there is not enough demand to reach economies of scale that would allow a lower price. So if for whatever reason, money was sucked out of the economy and the average person suddenly became very poor and could not afford a smartphone, it's possible that smartphone companies would compete hard to keep those customers and drop their prices. But if that doesn't make for a sustainable business, the smartphone makers have to drop production to sell only to a few wealthy buyers, the remaining phones will get much more expensive, because their components will be made in expensive fabs at smaller volumes. The total revenue will be lower, the GDP would be lower, but the average price of goods can still be higher. Especially when there's a large wealth disparity to make that high-price low-volume equilibrium stable.

WalterBright 3y ago

That is called the "cost-push" theory of inflation, and its giant problem is it doesn't explain where the extra money comes from that is necessary for sustained price increases across the economy. It's sibling is "demand-pull" where customer demand causes inflation, but it equally does not explain where the extra money comes from. A theory that does explain it is the government dumping cash into the economy - inflation consistently picks up about a year after this is done.

mitthrowaway2 3y ago
(I'm sure you're aware of this, but price increases only require increased spending from customers if transaction volume is held constant. It's entirely possible for prices to rise to arbitrary heights even as the economy contracts and customers become poorer, either because supplies dry up, or because high-volume demand dries up and companies are forced to shift to a smaller but wealthier customer base with high spending power.) More importantly, this is why I said that inflation becomes more unstable when it is higher. Dramatic price increases can happen as companies become less competitive, and then price collapses can happen as well as consumers tap out and companies are forced to compete for a shrinking pie. Economists generally prefer low inflation rather than high inflation, even if all else is equal in real terms, because higher inflation brings higher volatility. Lastly, this isn't necessarily the driver that initiates inflation, but it is a feedback loop that can propel it to overshoot an increase in the volume of money.
- WalterBright 3y ago
  > I'm sure you're aware of this, but price increases only require increased spending from customers if transaction volume is held constant Reduced demand reduces prices. It's the Law of Supply & Demand at work. The Law is always at work, even money is subjected to it. Increase the supply of money, and the value of a dollar drops accordingly. We see this effect as inflation. In physics, we know that momentum is conserved. Any theory that deviates from that is wrong, even if we can't figure out why it is wrong. Analogously, any economic theory that results in a "free lunch" is wrong. Any economic theory that denies the Law of Supply & Demand is also wrong. Bad government economic policies are nearly always the result of denying the existence of the Law of Supply & Demand, which is as doomed as denying the Law of Gravity. Nothing stops the government from pretending that deficit spending is a free lunch, and they sell that notion at every opportunity. But the Law of S+D still applies. The elephant in the room is the sheer size of the several trillions in deficit spending. There's just no way to ignore it and explain inflation away by suddenly every business is price gouging. It's not a compelling explanation at all.
  - mitthrowaway2 3y ago
    > Reduced demand reduces prices. It's the Law of Supply & Demand at work. You have to be careful when asserting this though, because demand does not mean what most people think it means. In particular, it does not refer to the number of people demanding a good, nor does it refer to a volume of goods purchased. A declining sales volume occurring together with rising prices does not violate the law of supply and demand.
    - WalterBright 3y ago
      Rising prices reduce demand. But there are competitors. That's why a company cannot just raise prices.
      - mitthrowaway2 3y ago
        Yes, rising prices reduce demand. But rising volumes also create economies of scale and allow low prices. There's a delicate balance and sometimes an equilibrium of large volume, low price can transition to a new equilibrium of low volume, high price, or vise-versa. For example, if you are a software company and you sell software to a small group of professionals, like a CAD program, your price is probably around $1000 ~ $5000 per seat, per year. And competition will not lower it, because your competitors face the same economic situation you do: it's a niche product, you have to amortize a high development cost over a small number of customers, and those customers have money and are willing to pay. However, there is also a stable equilibrium for a company to turn a similar profit shipping software of equal quality to a very large number of people for a very low price. Something like a spreadsheet or word-processing software. Now your software is cheap, or supported by ad revenue, and yet you can still remain highly profitable. If, however, your userbase started to shrink for whatever reason, you might have to charge the remaining users a large amount. Most will leave, but a few of those users may derive a lot of value from your software and are willing to pay, and you end up with the same economics as the CAD developer. Software is of course an extreme example, where the marginal cost of production is approximately zero, but most industries outside of resource extraction have declining marginal costs with scale. That's why you can end up with high-quality cheap components (like cameras, etc) that are used in smartphones, where they have high-volume production, and very expensive specialty cameras for eg. microscopes, even though the specialty camera required much less investment of R&D to produce. It can only be sold at a high price because there is not enough demand to reach economies of scale that would allow a lower price. So if for whatever reason, money was sucked out of the economy and the average person suddenly became very poor and could not afford a smartphone, it's possible that smartphone companies would compete hard to keep those customers and drop their prices. But if that doesn't make for a sustainable business, the smartphone makers have to drop production to sell only to a few wealthy buyers, the remaining phones will get much more expensive, because their components will be made in expensive fabs at smaller volumes. The total revenue will be lower, the GDP would be lower, but the average price of goods can still be higher. Especially when there's a large wealth disparity to make that high-price low-volume equilibrium stable.