Doesn’t that make inflation worse?
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I thinknsome of these answers miss the point a bit:
There are two types of price raising during a period of inflation: cost reaction and opportunistic pricing.
Cost reaction is straightforward – A company has or is oredicting higher costs, and therefore raises prices to be back where it was in terms of profit/revenue goals.
So if I’m charging $4/gallon for milk, then gas prices go up, my delivery drivers who drive the milk to nearby stores have increased costs. My workers all have increased costs to get to the farm, and want that offset.
So I pay my workers more and pay for higher transport costs, and say that comes oht to $0.50/gallon. now I have to charge $4.50 per gallon to make the same profit I was before at $4/gallon.
Now though, as people on the chicken farm are paying more for milk, they want that cost offset so they can live the same lifestyle, they demand increased wages, and the cycle can continue. Thats inflation.
Oversimplified as there are other factors, such as the potential loss in sales for raising the price, but this is ELI5.
That process is simple enough, but then you also have opportunistic pricing, meaning a company raising the price above and beyons their cost increase, hoping to make an increased profit. They would have done this before inflation, but customers would be upset at paying a higher cost for the same product, and they would lose customers.
During periods of inflation, however, companies can do this and blame inflation, claiming their costs have gone up, which will be true to an extent but wont account for all of the increase. Customers will grumble, but pay the cost assuming its “just the way it is”. Some examples:
So using the above example, I increase my price to $5.00, covering the $0.50 of cost and pocket $0.50/gallon extra. Whats even more, as inflation eases, I could even lower my price to $4.75, claim I’m the good guy, get good press… and still pocket increased profits above my costs.
Now, wouldn’t the market punish these firms? Well, it would… if everyone wasnt doing the same thing to some degree. The increased size and scope of having fewer and fewer competitors due to corporate merger and acquisitions means that if everyone is followi g the same business playbook, no one suffers the ill effects
This of course has inflationary pressure, creating cost increases or demands for higher wages. So you can even have the two interact: Real cost adjustments are used to hide opportunistic pricing, the overall increase drives costs higher, and the cycle starts over.
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