I did a quick google and it said because demand is out stripping supply for goods and services. I would have thought supply and demand was never static at any time. Why is it a massive issue now? Supply and demand of what exactly? I understand food price going up but how does that relate to the value of currency? If a recession hits us will it cause inflation to go down because people aren’t demanding as much? Do more people have more money causing higher demand? Thanks for your expertise
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It’s essentially the same reason as the rest of the world. For the past few years, production of things and services was significantly reduced, due to lockdowns, people being sick and not working, etc. At the same time people were given practically “free” money to cover the loss of income, among other reasons.
So people had the same amount of money to spend, but the world had fewer things to sell because fewer things were made.
A simplistic model could be that previously we might have had 10 laptops in the world and 10 people who can afford laptops.
Now, due to reduced production, you only have 5 laptops in the world but we still have 10 people who can afford laptops. A seller of laptops might realize that if he raises the price of laptops by 20%, there will only be 5 people who can afford a laptop. The result is then that the seller still sells all the laptops, but they also earn 20% more.
> Supply and demand of what exactly?
A lot of things.
> I understand food price going up but how does that relate to the value of currency
If the price of food goes up you can buy less food for the same amount of a currency. Ie the currency is worth less.
>If a recession hits us will it cause inflation to go down because people aren’t demanding as much
Usually yes but not always and it is often delayed a bit. Recession is when the GDP shrinks that first of all only means that less value is created. As a consequence companies that create less have less money to spend so they will “buy” less. Buy can also mean they will buy less workpower or in other words they will fire people who then also have less money to spend. So both will buy less, which is reduced demand.
Supply and demand are usually tied to each other but if suddenly one side increases or decreases very much in a short amount of time it will lead to problems. There have been severall events that have lead to global interuption of supply. Starting with Corona and shut down of factories world wide, the crash of the Evergiven in the Suez Canal and the Russian war against Ukraine (this had a very big impact on worldwide food supply and also energy supplies). Demand didnt decrease in those last years but supply did, so supply would need to make up (most of) the not produced goods to get back to “normal” but this just isnt possible.
For capitalism to work, people have to be SPENDING more money than they save. These expenses are supposed to go into lots of different things such as supply for goods and services but a lot of the cost of living is bills for the private sector.
And wouldn’t you know, the private businesses getting the money from the bills aren’t spending more than they save. A business spends money by purchasing whatever they need to keep the business running. Also paying their employees to match the times. But as that isn’t happening the money gets taken out of the economy’s cycle and the pressure is on everyone else working a job to keep it going.
Everyone is burying their heads in the sand hoping it’ll all get better. That’s why there’s not a big backlash to the housing crisis or the new air bnb problem, because all that money is supposed to go to home owners not private entities.
But a lot of those people aren’t spending money either. A recession is on it’s way and nobody seems to be doing anything about it and everyone is pointing their fingers at someone else. Predictably the government needs to step up but it is tough to sympathize with people whose lives don’t impact you and having an air bnb or three and just seeing that money disappear because people with less money than you complained louder isn’t likely to ease off the blood pressure.
It certainly isn’t easing off the inflation.
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Same reason every country that has inflation has inflation – central banks and governments have expanded the money supply.
Australia’s money supply has expanded 6.7% from March 2022 to March 2023.
Production has increased 2% in the time.
I guess you could call that a “supply chain issue” but to call it that its effectively saying “we didn’t build 7% more mines, farms, and factories and get 7% more workers to work them”. If you call it a monetary issue then it’s “We increased the supply by 7% when we really should have increased it by about 2%”
Look at the M2 for any country struggling with inflation. Look at the M2 for any country not struggling with inflation.
Simply this: **Corporate Greed**.
‘New empirical research reveals the main driver for inflation in Australia is excess corporate profits, not wages, and that inflation would have stayed within the RBA target band if corporates had not squeezed consumers through the pandemic via excess price hikes.
The dramatic expansion of business profits has gone mostly ignored by the RBA and other macroeconomic policy-makers, who have focused instead on a supposed ‘wage-price’ spiral which does not exist. This suggests the focus of the RBA on wage restraint is misplaced and unfair, and that interest rates would be far lower today if companies had not gouged customers at the checkout.
The report Profit-Price Spiral: The Truth Behind Australia’s Inflation (attached) comes in the same week supermarket giants Woolworths and Coles posted soaring profits, with banks, gas and petrol companies posting similarly soaring returns.”
[https://australiainstitute.org.au/post/profit-price-spiral-excess-profits-fuelling-inflation-interest-rates-not-wages/](https://australiainstitute.org.au/post/profit-price-spiral-excess-profits-fuelling-inflation-interest-rates-not-wages/)
Inflation is quoted as an aggregate number. Not everything is going at the same inflation rate. Some things might even be deflating. It’s a convenient datapoint to show overall trends but it also hides a lot because there’s only so much that can be communicated with a single number. There is a lot of misinformation/disinformation around the topic because of politics. Always check for yourself by going to primary sources like the [Australian Bureau of Statistics](https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation)
> Supply and demand of what exactly?
You will need to read about how the Australian government calculates the inflation rate. In the US the BLS website states exactly how it calculates inflation and the weight each category is given. It gets very detailed but very few people actually look at it more closely. You can see inflation/deflation for every region/locale in the US, what goes into each of the calculations, and the weighting given to each of the categories both today and in the past.
> Why is it a massive issue now?
Inflation tends to be reactionary. Which means whatever caused it typically happens long before you see the inflation as a consumer. For example, the pandemic didn’t really hit consumers until 2021/2022. But in 2020 and 2021 there were clear signs that inflation was coming because we saw a lot of inflation in the PPI (Producer price index, inflation for businesses/factories). Sometimes it takes months or years for the impact to start showing on store shelves. Right now we’re seeing severe disruptions in both supply and demand. The pandemic caused global spending habits (demand) to completely shift when things got shut down and then shift again when things opened up. Supply was first disrupted by shipping issues (several weeks to get a cargo ship unloaded) and factories getting shut down cutting supply. Then the war in Ukraine saw one of the largest exporters of raw materials and fossil fuels (Russia) getting sanctioned and the constant disruptions in China’s factories until November last year. Australia will have its own factors to take into consideration like how much it relies on trade with China.
> I understand food price going up but how does that relate to the value of currency?
Currency value is a contributor to inflation, but they are not the same thing. Inflation is only looking at the change in price. Currency value can contribute to food inflation if the food is imported or a large portion of the inputs to make the food (like fertilizer or equipment) is imported. Or if energy prices go up (which it has).
> If a recession hits us will it cause inflation to go down because people aren’t demanding as much
That is the theory. It’s not just about consumer spending habits by the way. It’s also business spending habits. This is why the prevailing wisdom is that higher interest rates are needed to curb inflation. It forces both consumers and businesses to slow spending, reducing demand. The thing to keep an eye out is how much it hurts supply as well.
> Do more people have more money causing higher demand?
Generally speaking yes, but not always. It could instead inflate things like assets (stocks/property). It’s a factor, but not the only factor in inflation. For example, inflation can happen even if people still had the same amount of money or less. All that needs to happen is for a country like the US or Russia to stop producing/exporting fossil fuels which would cause energy prices to skyrocket since they are the top 2 fossil fuel producers in the world (sometimes swapping places with Saudi Arabia).
There’s a few causes.
First is that during COVID a lot of production really shut down. That has the effect of reducing the supply of available items for sale. Back then, we had thought that demand would also fall, but it didn’t really. So there’s lots of backlog of people who want stuff, and we just haven’t really produced enough stuff to make up for what we missed during COVID. A reduced supply causes prices to go up.
The second issue is that most governments in the world spent A LOT of money during COVID. Not sure about Australia but in Canada we gave away a lot of money to people who were not working. THat increase in money increases demand. An increased demand causes prices to go up.
The next factor involves something really important. Inflation is, as often as not, a psychological thing more so than a real and concrete thing. So what people expect to happen is even more important than what actually happens when it comes to something like inflation. This is also, in part, why it’s so hard for a government to fight. Once we expect inflation you have to convince the public that the problem is solved and only then will we actually see inflation go down. But convincing the public is really hard before they can see the evidence that it’s going down.
So, that last factor, and every day more and more people get convinced that this is the real and true cause. Companies raised prices because the market allowed them to do so. The 2 above factors happened and were real things, but those situations are mostly over now. Today we are seeing inflation because people expect inflation and therefore companies can raise prices without losing customers because everyone blames inflation and not greedy companies.
When I go to the store and see higher prices, I throw up my hands and curse inflation but I still buy the things I was planning on buying. Companies know this, and as a result they are raising prices even if their costs are not raising at the same rate. Simply put, they are raising prices because we expect them to do so, so they do.
It’s a catch 22. We need prices to come down, prices won’t come down until we really and truly believe that inflation is over. But we won’t believe inflation is over until after prices come down.
And so companies are free to raise prices and we won’t blame them or stop buying their products. And that’s why inflation is so hard to fight, because it’s not “real” in the traditional scenes, it’s more psychological than anything.
For years and years inflation was low because the general public believed it was a solved problem. COVID happened and we saw that inflation was actually real and now no one believes it’s a solved problem anymore and so it’s really hard to fight inflation.
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