Make it make sense: What causes inflation?
All inflationary pressures are equal, but some inflationary pressures are more equal than others.
Four economists get together at their local restaurant, discussing the value of Austrian versus Chicago schools of economic thought, or something equally as brain-numbingly dull.
When the meal was over and they were handed the bill, they were shocked to see that the price was far higher than the previous year.
Immediately, the group launched into a debate over why the bill was so high.
The first economist, a monetarist, argued that this was all because of the damn government printing cash. Obviously, as they add more money into the economy, each individual dollar is worth less. With all this horrendous government spending recently, businesses have had to increase their prices to keep up.
The second economist dismissed the idea. If inflation really was because of government spending, everything would go up in price at the same rate. Everything would be equally more expensive, which hasn’t been the case.
No, the problem is obviously supply shocks. Don’t you know there is a war/crisis/pandemic/notable-event-that-occurred-around-the-time-you-read-this, going on?
The price of wheat is up because of the war in Ukraine, meaning bread costs more and the business had to increase prices to be able to afford supplies.
The third economist stifled a snort of derision. If inflation was because of supply shocks, then why was inflation so low for the last few decades? Why didn’t other crises cause such high inflation? Like the Afghanistan War, or Hurricane Katrina, or that time we all started playing fucking Pokémon Go.
Obviously, this evil capitalist business was jacking up prices to make more profit, at the expense of the poor, albeit over-paid, economists of the world. Corporate greed was the great flaw in the capitalist system. He then reminded everyone about his book on the virtues of 21st century communism, out now on Kindle for only $19.99.
The fourth economist stood up, which was uncalled for since no one else had bothered. If company greed was to blame, then that suggested that companies were less greedy before Covid. You can’t explain a change with a constant, and companies have always been greedy.
Obviously, this is due to the collective irrational mindset of the market, creating an inflationary bubble out of nothing but their own fears.
The other 3 were a little bemused by the answer and wondered where this quack got his degree, so the fourth economist sighed and tried again.
Inflation happened because people thought it would happen. Since everyone thought the restaurant would raise their prices due to inflation, everyone figured this was the last good time to go out to dinner before it got too expensive.
Everyone went out to dinner at the same time, meaning there wasn’t enough tables to go around, and the business increased its prices to match the new demand. Just as they predicted, going out to dinner suddenly got too expensive.
…Little bit Oedipal if you ask me.
Remember toilet paper during Covid?
Even though there was enough paper to go around, people were convinced that toilet paper prices would skyrocket so they went out and bought way more than normal.
Since they bought so much, there was a shortage, causing the prices to shoot up, just like everyone predicted.
Fun fact, this also happens to the price of guns in America whenever a left-wing president is elected, as there is a massive boom in conservatives buying guns, fearing that the president will soon make them harder to purchase. This technically means that the most profitable situation for gun stores and the National Rifle Association is for a left-wing, but ineffectual leader… Things have been rather good for the NRA recently.
The other economists disagreed with this idea. For one thing, it was convoluted and made everyone’s brains hurt. For another, it was a temperamental theory. People often worry that petrol prices will rise, but they very rarely rush to the 7/11 with industrial-sized 10,000 litre water containers, even if that would be the most logical option for petrol.
In the same way, it didn’t explain why things like rental prices became more expensive. Renters weren’t going out and renting second or third homes, fearful of future rent hikes. In fact, this should lower prices of everything else, as people usually save when they are worried about the future.
If people are saving, they aren’t buying extra stuff, so the price of that extra stuff should be going down not up, right?
The economists continued to bicker, convinced that their theory was the most correct.
All except the monetarist, who had snuck out through the bathroom window 10 minutes earlier, leaving everyone else to foot the bill.
… Yeah, a lot of 2008 bankers were monetarists, why do you ask?
Inflation is dead simple. It’s these four ideas wrapped in a trench coat, trying to watch an R-rated movie.
Too much money with not enough goods from money printing, too much money and not enough goods from supply shocks lowering the amount of goods on offer, Price hikes (which usually don’t get counted as inflation and are just a normal, positive part of living in a capitalist economy), and peoples behavioral changes that lead to too few goods.
Thats it… Citation needed…
Look that’s not it, and I’ll go into more depth next article about some of the more esoteric definitions of inflation, but these are the four main ones, and these are what people normally are talking about when you turn on the news in the background so that you don’t feel so alone when you are doing your ironing.
The problem emerges when you try to determine which of the four is most to blame, because that is when people’s politics get involved.
If you believe inflation is government money printing, you advocate cutting government services… You also happen to advocate lowering taxes because you are a cheap hypocritic.
If you believe in supply shocks, you usually advocate for national subsidies and protectionism, like subsidizing rice and cotton farming in Australia, incase all of Asia runs out of rice and cheap t-shirts, I suppose.
We live in the driest continent, and rice/cotton are the most water intensive crops, but you do you.
If you believe that corporate profit-seeking during a crisis is mostly to blame, well the European Central Bank agrees with you, suggesting that it was basically 50% of all inflation over the last few years. They also think the same happened in Australia.
Chances are, you support nationalizing some of the more necessary commodities, like electricity or water companies, putting price limits on supermarket chains and rental prices, or increasing windfall taxes. You also probably wear Birkenstocks.
If you believe it is all behavioral irrationality, you probably read ‘Nudge’ and are insufferable at parties. You want interest rates to be raised by the central banks. You blame the media companies and their incentivization to cause panics to increase viewership. You blame the failings of the stock market, that profits from boom-and-bust cycles and exacerbate fears. You probably have one or two choice things to say about how daddy didn’t raise you right.
If you believe that inflation is due to worker wage increases, the hidden 5th option that I didn’t include on my list… you probably eat paint. I didn’t include it because it is braindead and is just another way of laying blame on workers whilst bruising your knees at the feet of corporations.
Being a fraction more polite, the argument is that, when workers demand a pay rise, corporations have to increase prices, leading to a ‘wage-price’ spiral.
The real problem with inflation is that, since its solution is so heavily politicized, we use it as a cudgel against anyone that doesn’t agree with our preferred party. There is no way to cleanly ‘fix’ our country’s inflation, because every policy solution would require acknowledging that at least one of these inflationary pressures is more equal than the others, and therefore that that political party you don’t like might be making a decent point.
I’m sure most of us would rather just pay $8 for Nutella, than have to admit that…
