the concept of inflation. When central banks increase money supply, prices rise..ok. But please explain the underlying mechanics, how do retailers know to increase prices?
In: Economics
People selling stuff are constantly trying to raise prices. They stop when nobody buys the stuff they’re selling because its too expensive. If there’s more money in the economy overall, then everybody has a little bit more money to spend so stores can get away with charging a little bit more. Because stuff now costs more, people will demand higher wages to keep up with “cost of living” increases. In the end this usually evens out so that stuff costs more, but people have more money to buy it with, so there isn’t a problem. Inflation becomes a problem when it starts happening too fast for wages to keep up.
Alternatively, you can have a situation where stuff *actually* becomes more expensive, without an increase in the money supply. This happened in the 70s with the Oil Crisis. The lack of oil for fuel meant that less stuff was getting made, *no matter how much you were willing to pay*. This meant that the remaining stuff got more and more expensive as it got rarer and people competed for limited resources. However, there wasn’t any new money coming into the economy so there was no way for people to pay the increased prices. So it wasn’t typical inflation.
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