Doesn’t that make inflation worse?
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1) a shop raises prices because their supplier just raised their price 10%
2) and, if inflation continues, or is expected, the shop raises their price because they know, or at least believe, the next shipment will be higher
Suppose you were a family owned gas station, buying gas for $0.90/gallon and selling at $1.00. If your supplier goes up to $1.00, you have to go to $1.10 on the next load. Also, it will take all of this months proceeds to buy the next load, and you will have made nothing for the month.
But if you know the next month it will cost $1.10 to replace it, do you go ahead and raise prices now, so that you will have made something for the month?
1) a shop raises prices because their supplier just raised their price 10%
2) and, if inflation continues, or is expected, the shop raises their price because they know, or at least believe, the next shipment will be higher
Suppose you were a family owned gas station, buying gas for $0.90/gallon and selling at $1.00. If your supplier goes up to $1.00, you have to go to $1.10 on the next load. Also, it will take all of this months proceeds to buy the next load, and you will have made nothing for the month.
But if you know the next month it will cost $1.10 to replace it, do you go ahead and raise prices now, so that you will have made something for the month?
Why would I, a business that is a drop in the bucket compared to the size of the entire US or global economy, not raise prices in an inflationary environment? Even if I were willing to bite the bullet out of the goodness of my heart, whether I do so or not will have absolutely no impact on inflation throughout the economy, because inflation is a general rise in the price level, and I am meaninglessly small.
The only thing that prevents me from raising prices is the fear that doing so will reduce my overall profit because people will go to competitors. But in an inflationary environment, if the cost to me of coffee goes up by 20% in a year, that gives me information about the prices other people are probably paying for their coffee. They, too, are probably paying more for their own coffee. So I make a calculation that those people will also not be making an acceptable profit without raising their prices, leaving me free to raise my own prices. That’s what I do. And it works.
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.
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.
[Economic Update: Inflation & Labor Shortage](https://youtu.be/ERxbkHYWgMY)
This gave me a better understanding.
If prices are going up, you’re also going to ask for a raise in order to continue to afford the life you’re used to. This gets built into the price of whatever you’re working on.
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.
[Economic Update: Inflation & Labor Shortage](https://youtu.be/ERxbkHYWgMY)
This gave me a better understanding.
If prices are going up, you’re also going to ask for a raise in order to continue to afford the life you’re used to. This gets built into the price of whatever you’re working on.
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