Originally Posted By: Leo99
Originally Posted By: fdcg27
Originally Posted By: Leo99
It's all relative. If income is increased then folks have more money to spend. That's what you want, right? When people have more money to spend, prices can increase because people have more money to spend and will spend the extra amount. That's inflation in a nutshell and then we're right back to where we started. No extra income. Poor folks are even poorer. What little money they have is worth less.
You haven't gained anything; you've lost unless your income increases faster than the inflation rate/COL. Everyone just makes a little more money and things cost a little bit more. Since currency is fiat money - it's just a piece of paper we all agree is worth what it's worth, inflation just makes it worth a less, therefor we need more of it to purchase things.
Increases in wages are not inflationary. They merely represent a reduction in net income to business owners. The total amount of money involved doesn't change
As Milton Friedman wrote so many years ago, inflation is always and everywhere a monetary phenomenon.
What this means is that rates of inflation are entirely dependent upon the monetary policy followed by a central bank.
Anything else is simply a change in relative price, so labor would become relatively more costly while using capital goods to replace it would become more attractive.
Central banks typically target a low rate of inflation, like around 2%. The targets that the ECB and the Fed seek are in this range while BOJ has been trying to get a little inflation going for decades now. The reason for this is that inflation isn't measurable in real time and the alternative of deflation is so dangerous to any economy that any sane central bank follows policies to avoid it. Just think of how an actual appreciation in the value of a currency in real, not relative, terms would affect markets for goods of all kinds as well as the terrific burden it would place on holders of debt. In a world where goods were growing ever cheaper, purchases other than food and other necessities would be postponed and debt would grow ever more expensive to service.
Central banks therefore aim for a little inflation, since as much as they'd like currency stability instead, the measurement tools available simply aren't good enough to enable this.
Now, everyone can have their cake and eat it too as long as labor productivity growth is reflected in wage growth.
For the past decade or so, it hasn't been. There are various reasons for this, like the massive debt burdens so many companies have incurred in trying to meet the demands of large institutional investors who have flooded into equities in search of the returns that aren't available on debt these days as well as a cyclical wave of acquisitions and LBOs that have left companies with growing debt burdens to service, but at the end of the day, every company depends more upon its line workers than its senior management for its survival and prosperity and the relative wage levels of these two classes of workers should reflect this.
They don't, with mediocre senior management teams richly rewarding themselves while paying peanuts to those who are the productive and public face of their companies.
Causes of Inflation
There is no single theory for the cause of inflation that is universally agreed upon by economists and academics, but there are a few hypotheses that are commonly held.
Demand-Pull Inflation – Inflation is caused by the overall increase in demand for goods and services, which bids up their prices. This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in rapidly growing economies. This theory is often promoted by the Keynesian school of economics.
Cost-Push Inflation – Inflation is caused when companies' costs of production go up. When this happens, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of natural resources or imports.
Monetary Inflation – Inflation is caused by an oversupply of money in the economy. Just like any other commodity, the prices of things are determined by their supply and demand. If there is too much supply, the price of that thing goes down. If that thing is money, and too much supply of money makes its value go down, the result is that the prices of everything else priced in dollars must go up! This theory is often promoted by the “Monetarist” school of economics.
Read more: Inflation: What Is Inflation?
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I didn't read the article, so if this was mentioned there, I apologize.
Any of these can be "A" cause for inflation.
For example, when there is a great demand for petroleum and refined products and not enough supply, the price of those goods are bid up in the commodities exchanges.
Likewise, if the value of the dollar falls, since those contracts are often priced in dollars, the price of a unit of that commodity will rise.
So there are examples where either (and maybe both) Demand-Pull inflation and Monetary-Inflation can be in play.
I can imagine, as oil reserves are harder to extract, Cost-Push inflation can raise its head.
We see the opposite now. With lower demand (even as the dollar is weaker due to QE) energy costs have stayed low. This means the more difficult to get to tar sands oil is not as desirable because of the higher costs to get that oil.
As much as anyone wants to join one economic school, (and I lean Austrian) the reality is there are a number of interrelated factors in play. I think the real trick is to understand which ones are the bigger, most effective levers at any given moment.
