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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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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