I don’t understand why shortage of product causes inflation across the board. For example, eggs are hard to get, but everything goes up in price due to the shortage. I can understand that low supply of eggs will cause the price of eggs to go up, by why does it affect all the other prices of food too?
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Inflation is calculated as an average of a bunch of different things. The US government has something called a “Consumer Price Index” and they monitor the price of a lot of stuff. Gas, food, mortgage payments, etc. The US calculates inflation based on increases in those prices.
Shortages cause prices to spike, because you don’t have enough stuff to go around anymore. Take eggs for example. Let’s say that in the United States, people eat 100 million eggs per day (I don’t know if that’s correct, so let’s just guess). If eggs normally cost a quarter each, then that’s $25 million spent on eggs each day. So if there’s a shortage, and only 50 million eggs get produced each day, then the price should double, right? 50 cents each, so it’s still $25 million per day, right?
Wrong. There are still 100 million people out there who want their egg today. And now they’re in a bidding war against one another. Only half of them can get their egg. The price will continue to rise as long as people are willing to pay the new price. Me, I don’t like eggs. You can keep them. I don’t even want to pay a quarter for them. But some guy out there will pay $5 an egg if it means he gets his. The price continues to rise until 50 million people say “screw that, I don’t need an egg if it costs that much”. The other 50 million people are willing to fork over the money, so that’s the new price.
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