Eli5, Why do people raise prices during inflation?

Question

Doesn’t that make inflation worse?

In: 0

Answer 1

The raising of prices *is* the inflation. Your coffee shop may be doing it simply because one of their ingredient suppliers (for example) raised its prices too.

But ultimately, the problem started when some industries or economic sectors started getting more demand for goods (or services) than they could fulfill.

Think of inflation like this: imagine you have a bakery in an isolated town. Some rich guy travels through town, and along the way he showers everyone with money, $100,000 for every citizen. Now every morning they show up at your bakery wanting ten loaves of bread.

But you only have enough flour each day to make 100 loaves. You have to turn some customers away – but they start competing with each other, bidding for first place in line, like an auction. This naturally raises the price they’ll pay for bread. Hoping to fix the problem, you go to the miller to ask for more flour.

Of course, all the other bakeries in town want more flour too. And the miller has a limited supply of grain. So he raises his prices – effectively, his *customers* do this, with their bidding war – and he goes to the farmer to ask for more wheat.

But all the millers around are asking for more wheat! The farmer has a limited amount of land; and worse, she can’t rush wheat production. Nature limits how fast the plant can grow. So she has to buy more land, *and* that won’t result in more wheat for at least a year. In the meantime she raises her prices.

But everyone in town has an extra $100,000 this week, and of course they all have reasons to want land. And the supply of land is limited – with no way to increase it. There’s no factory for making land…

So the price of land skyrockets. You get the idea.

TLDR – it’s easy to put more “money” in an economy, because money is just paper, or numbers in a banking computer. But it’s not that easy for an economy to actually produce more goods and services. As people with lots of “money” bid to be first in line to buy limited goods, they naturally cause prices to rise.