Doesn’t that make inflation worse?
In: 0
Inflation is the process of currency losing value. Same thing why you can not just print more money: if you have 100 bucks in you country budget that are backed by various economic means, if you print 100 more, you would have 200 bucks, but each dollar would be half as valuable, and when this change propagates through the economy, prices would double too. Unfortunately, salaries do not change as quickly, so for a normal person, this looks like prices went up, when in reality, prices still represent the same amount of goods, its that currency that is used lost its value, so you need more of it to get same amount of goods. And salary still pays same amount of currency, but now it has less value, so you can buy less with it.
For example, as before: country had 100 bucks of economic value (in industries, resources, and other things), but then printed 100 more dollars. Now same amount of worth (those industries, resources and other things) are spread not among 100 dollars, but among 200 dollars, so each dollar has only half of value of the pre-inflation dollar. Now lets image someone is paid 5 bucks each month. After inflation, salary is still 5 dollars, but these dollars are half as valuable as before. Prices are able to react quicker, so they double and now you can buy half as many things as before
Inflation is the process of currency losing value. Same thing why you can not just print more money: if you have 100 bucks in you country budget that are backed by various economic means, if you print 100 more, you would have 200 bucks, but each dollar would be half as valuable, and when this change propagates through the economy, prices would double too. Unfortunately, salaries do not change as quickly, so for a normal person, this looks like prices went up, when in reality, prices still represent the same amount of goods, its that currency that is used lost its value, so you need more of it to get same amount of goods. And salary still pays same amount of currency, but now it has less value, so you can buy less with it.
For example, as before: country had 100 bucks of economic value (in industries, resources, and other things), but then printed 100 more dollars. Now same amount of worth (those industries, resources and other things) are spread not among 100 dollars, but among 200 dollars, so each dollar has only half of value of the pre-inflation dollar. Now lets image someone is paid 5 bucks each month. After inflation, salary is still 5 dollars, but these dollars are half as valuable as before. Prices are able to react quicker, so they double and now you can buy half as many things as before
It starts with too much money, then a shortage of supply.
If you’re selling apples for 1$ each and you have 200 apples, you might be selling 15 apples a day for 1$ each and you can get more. But then I come along with 200$ and just buy all your apples. Now no one else can buy them, but the next person who comes along REALLY needs the apples, he’ll pay 2$ for each one, so you raise the price.
The other half of this is maybe the price of your fertilizer doubles, and you double the amount you have to pay people to work for you. Now the apples cost 1.20 to grow each, up from 80 cents each. Are you going to keep charging 1$? You have to raise your price and hope people buy them at the new one, otherwise you’re losing money.
So theres MANY reasons prices go up during inflation, but most of it is that the costs go up to begin with.
It starts with too much money, then a shortage of supply.
If you’re selling apples for 1$ each and you have 200 apples, you might be selling 15 apples a day for 1$ each and you can get more. But then I come along with 200$ and just buy all your apples. Now no one else can buy them, but the next person who comes along REALLY needs the apples, he’ll pay 2$ for each one, so you raise the price.
The other half of this is maybe the price of your fertilizer doubles, and you double the amount you have to pay people to work for you. Now the apples cost 1.20 to grow each, up from 80 cents each. Are you going to keep charging 1$? You have to raise your price and hope people buy them at the new one, otherwise you’re losing money.
So theres MANY reasons prices go up during inflation, but most of it is that the costs go up to begin with.
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.
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.
Cherry picked some data, but it really looks to me like corporations are just passing the cost of inflation onto consumers.
McDonald’s annual gross profit for 2022 was $13.207B, a 4.98% increase from 2021. McDonald’s annual gross profit for 2021 was $12.58B, a 29% increase from 2020.
Walmart gross profit for the twelve months ending October 31, 2022 was $146.292B, a 2.14% increase year-over-year. Walmart annual gross profit for 2022 was $143.754B, a 3.54% increase from 2021. Walmart annual gross profit for 2021 was $138.836B, a 7.33% increase from 2020.
Kroger gross profit for the twelve months ending October 31, 2022 was $31.531B, a 4.87% increase year-over-year. Kroger annual gross profit for 2022 was $30.349B, a 1.79% decline from 2021. Kroger annual gross profit for 2021 was $30.901B, a 14.48% increase from 2020.
Cherry picked some data, but it really looks to me like corporations are just passing the cost of inflation onto consumers.
McDonald’s annual gross profit for 2022 was $13.207B, a 4.98% increase from 2021. McDonald’s annual gross profit for 2021 was $12.58B, a 29% increase from 2020.
Walmart gross profit for the twelve months ending October 31, 2022 was $146.292B, a 2.14% increase year-over-year. Walmart annual gross profit for 2022 was $143.754B, a 3.54% increase from 2021. Walmart annual gross profit for 2021 was $138.836B, a 7.33% increase from 2020.
Kroger gross profit for the twelve months ending October 31, 2022 was $31.531B, a 4.87% increase year-over-year. Kroger annual gross profit for 2022 was $30.349B, a 1.79% decline from 2021. Kroger annual gross profit for 2021 was $30.901B, a 14.48% increase from 2020.
I’ve got $20000 dollars and want to buy a car.
There are 5000 of the car I want to buy in existence. It’s a reasonably popular car and a lot of other people want it as well.
The government suddenly decides to give everyone and extra $20000.
There are still only 5000 desirable cars.
I offer the $20000 they wanted for the car, but the seller says no. Someone else having just made a windfall of an extra $20000 is willing to use that gifted money and the $20000 he originally had to offer $40k for the car. Is the dealer going to give you the car for $20000 or give it to the guy offering $40000? I think you know the answer.
Inflation is too much money chasing too few goods.
We have a double whammy here. The government gave out loads of “free” money during the pandemic since they made the awful decision to shut down economy instead of removing the people at risk. Shutting down the economy also reduced the supply of goods since they shut down production. So we have too much money chasing even fewer goods which makes the inflation even worse. The supply chain is still fixing itself somewhat, but we still have a huge excess of money floating around. The Fed is trying to cripple the economy enough to bleed out the excess cash without killing the economy. The government still spends like drunken sailors and keeps printing more money.
I’ve got $20000 dollars and want to buy a car.
There are 5000 of the car I want to buy in existence. It’s a reasonably popular car and a lot of other people want it as well.
The government suddenly decides to give everyone and extra $20000.
There are still only 5000 desirable cars.
I offer the $20000 they wanted for the car, but the seller says no. Someone else having just made a windfall of an extra $20000 is willing to use that gifted money and the $20000 he originally had to offer $40k for the car. Is the dealer going to give you the car for $20000 or give it to the guy offering $40000? I think you know the answer.
Inflation is too much money chasing too few goods.
We have a double whammy here. The government gave out loads of “free” money during the pandemic since they made the awful decision to shut down economy instead of removing the people at risk. Shutting down the economy also reduced the supply of goods since they shut down production. So we have too much money chasing even fewer goods which makes the inflation even worse. The supply chain is still fixing itself somewhat, but we still have a huge excess of money floating around. The Fed is trying to cripple the economy enough to bleed out the excess cash without killing the economy. The government still spends like drunken sailors and keeps printing more money.
Latest Answers