Doesn’t that make inflation worse?
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Honestly it’s confusing because it’s hard to predict. A lot of economics in the real world involves human emotional responses. We try to boil it down to math, and there are definitely some predictable parts. But human emotions are weird.
Yes. Raising prices during inflation makes things worse. But it’s hard to figure out what to do when you’re facing inflation that makes it *better*.
The textbook reason for inflation is “people have too much money”. That means they start buying “too much” stuff. That affects supply: the people who make things can’t make enough to satisfy everyone. In the math of economics, we note that if they raised their prices, they’d still sell out, so they’re losing money if they DON’T raise prices. They’re supposed to find “equilibrium”, a math concept where they make the most money. That doesn’t mean “they sell the most product”, it means the price where they make the most money based on how many people buy it.
You also have to reckon, though, if inflation is wide-scale, the people who make things are having to pay more money to get the things they use to build things. If their costs go up, their profit goes down, so they have to raise prices to keep pace.
But sometimes the motives are nefarious. For example, investigations into egg prices are happening right now. Eggs are getting more expensive, and the blame is falling on both inflation and an avian flu that wiped out a lot of chickens. But now that the companies’ financials are becoming available, things look weird. The amount they *lost* due to these things is not proportional to the amount they’ve raised prices! They’ve been in trouble in the past for “collusion”, which is when companies illegally make agreements to raise prices so they all profit more.
What’s that? It can be illegal to change prices? Yeah. We have laws about how companies can do certain things. If we *really* let them do what pure economic math says, sometimes market conditions get into a kind of bad feedback loop and it can hurt society as a whole. So most of the founders of modern economic theory noted that it’s kind of like a scale, and every now and then the government has to step in and rebalance it with regulation.
So it’s kind of a mess. But the main reason companies raise prices during inflation is the simple economic math leaves them no choice.
The main thing that’s different right now is the “people” who have too much money are the *companies* that are raising prices. That’s a new situation, and our economy isn’t really set up to handle that.
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