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This seems self-contradictory. If inflation is caused by an increase in the money supply, why would lower prices counteract it? It's not like cheap goods reduce

This seems self-contradictory. If inflation is caused by an increase in the money supply, why would lower prices counteract it? It's not like cheap goods reduce the money supply.

AnimalMuppet 3y ago
It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. Globalization didn't just make stuff cheaper. Supply and demand says that the price would not go down (regardless of the cost of manufacturing) if there wasn't more of it than there had been. Globalization increased the "stuff" part of the economy.
- JackFr 3y ago
  > It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. This. Inflation always is too much money chasing too few goods. Secular shortages give you too few goods. Loose monetary policy (or fiscal policy) give you too much money. (A tight monetary policy can immunize effects of a loose fiscal policy - if there is institutional will.)
seadan83 3y ago
A plane provides lift while flying which then counter-acts gravity pushing it down - it stays at the same altitude. Increasing money supply & lower prices can happen at the same time. Though, my understanding is that the post-pandemic inflation was driven by (A) a supply crunch [1], & (B) increased profit taking [2]. For (A), recall that boats were queued up off of LA with a months long backlog - there just wasn't the stuff available for people to buy. For (B), see [2] as a reference which states corporate profit contributed "a lot" to inflation in 2021 Then (C), a war broke out with a major energy producer as one of the participants. This pushes global prices up, particular energy prices which then increase transport and all other costs. As far as (D), money printing; my understanding is that really is yet to be seen what kind of impact that would have and it will take some hindsight to know. It looks to me like this point is overall a subject of active debate (so, we don't really know the impact of money printing just yet). [1] https://www.kansascityfed.org/research/economic-bulletin/corporate-profits-contributed-a-lot-to-inflation-in-2021-but-little-in-2022/ https://www.kansascityfed.org/research/economic-bulletin/cor... [2] https://www.usbank.com/investing/financial-perspectives/market-news/supply-chain-issues-contribution-to-inflation.html https://www.usbank.com/investing/financial-perspectives/mark...
WillPostForFood 3y ago
Inflation is measured by looking at basket of goods. If you increase money supply, but replace expensive goods in the basket with cheap imported goods, inflations stays low. It is not to say there are no effects on the economy. I.e., lower priced goods don't counteract the effects of increased money supply, they counteract the effect of increased money supply on the measurement of inflation.

This seems self-contradictory. If inflation is caused by an increase in the money supply, why would lower prices counteract it? It's not like cheap goods reduce the money supply.

AnimalMuppet 3y ago

It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. Globalization didn't just make stuff cheaper. Supply and demand says that the price would not go down (regardless of the cost of manufacturing) if there wasn't more of it than there had been. Globalization increased the "stuff" part of the economy.

JackFr 3y ago
> It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. This. Inflation always is too much money chasing too few goods. Secular shortages give you too few goods. Loose monetary policy (or fiscal policy) give you too much money. (A tight monetary policy can immunize effects of a loose fiscal policy - if there is institutional will.)

seadan83 3y ago

A plane provides lift while flying which then counter-acts gravity pushing it down - it stays at the same altitude. Increasing money supply & lower prices can happen at the same time. Though, my understanding is that the post-pandemic inflation was driven by (A) a supply crunch [1], & (B) increased profit taking [2]. For (A), recall that boats were queued up off of LA with a months long backlog - there just wasn't the stuff available for people to buy. For (B), see [2] as a reference which states corporate profit contributed "a lot" to inflation in 2021 Then (C), a war broke out with a major energy producer as one of the participants. This pushes global prices up, particular energy prices which then increase transport and all other costs. As far as (D), money printing; my understanding is that really is yet to be seen what kind of impact that would have and it will take some hindsight to know. It looks to me like this point is overall a subject of active debate (so, we don't really know the impact of money printing just yet). [1] https://www.kansascityfed.org/research/economic-bulletin/corporate-profits-contributed-a-lot-to-inflation-in-2021-but-little-in-2022/ https://www.kansascityfed.org/research/economic-bulletin/cor... [2] https://www.usbank.com/investing/financial-perspectives/market-news/supply-chain-issues-contribution-to-inflation.html https://www.usbank.com/investing/financial-perspectives/mark...

WillPostForFood 3y ago

Inflation is measured by looking at basket of goods. If you increase money supply, but replace expensive goods in the basket with cheap imported goods, inflations stays low. It is not to say there are no effects on the economy. I.e., lower priced goods don't counteract the effects of increased money supply, they counteract the effect of increased money supply on the measurement of inflation.