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?

Question

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

Answer 1

Let’s take as given that increasing the money supply increases the demand for goods. People have more money and want to buy more stuff with it (and if prices never changed – they would be able to!)

So then we’re talking any old supply and demand story. Demand for something rises (doesn’t matter why). More people are going to the store looking to buy that thing. Maybe retailers are having more trouble keeping it in stock. They realize that they can raise the price and still sell as much as they did before, so they do that. This keeps the price at a level where the number of people showing up to buy it is about equal to the number of products available for them to buy.