In chemistry, and in physics, a positive feedback loop usually yields an explosion. In biology, it is a population explosion. In electronics, it might be an unpleasant screech. In economics, both housing bubbles and inflation are products of a positive feedback loop. In re Global Warming: The melting of permafrost due to Global Warming releases methane a greenhouse gas which increases Global Warming, …, …. The melting of Arctic Ice reduces reflectivity melting more Arctic Ice, …, ….
The Real Estate Agent tells the prospective buyer to buy now before the price goes up even more. We see it in stock markets. Problem is, bubbles burst/markets crash.
Like a runaway team of horses, almost anything, real or imagined, can set off inflation. There may be a shortage that causes the supplier to begin to expect higher prices in the future. A link in the supply chain may fail. One supplier may simply feel that raising prices is worth a try; see what the market will bear. Then, other suppliers in the group will wait and see if he gets by with it. If so, they will quickly follow. Oftentimes, the whole group will act in concert. If it works, a tidy increase in profit. If it doesn’t, nothing much ventured. If one group of suppliers succeeds, others are sure to follow. After being profitable comes whatever the market will bear.
This latest round of inflation was set off by the aftereffects of 2008, the aftermath of the pandemic, the consequences of globalization, and Russia’s invasion of Ukraine; plus perhaps others. The extra government spending to offset the economic downturn due to the pandemic probably played a role. On balance, it was no doubt a very positive step. One shudders to think what might have happened otherwise. In toto, a veritable perfect storm of events.
Putin’s folly involved one of the world’s biggest suppliers of fossil fuels, Russia, and two of the world’s biggest suppliers of grain, Russia and Ukraine,. Nothing marginal nor imaginary about it, we’re talking big chunks; as in 14 percent of the world’s oil and gas, and, together, upwards of 40 percent of the world’s grain. Wham!
As to be expected, the price of oil and natural gas rose immediately, so did their alternatives such as LP gas. Say that the price of gasoline at the pump was $3/gal before the invasion and of that the cost of crude oil accounted for ½ of that $3, or $1.50/gal. When crude oil went up 30%, the cost of producing a gal of gasoline went up $0.45/gal. The price at the should now be $3.45/gal. It went to $6.00/gal. An additional $0.45/gal is inflation due to the increase in the price of crude oil; the additional $2.55/gal is price gouging. Sometimes, price gouging accounts for a lot of the inflation. At this point, with the price very high and demand somewhat lowered, for the suppliers, it is all about profit margins, looking for that sweet spot of price per unit and quantity sold. How much gasoline will they but at what price per gal? Which is more profitable, (X)gal @ $5.00/gal, or (Y)gal @ $4.50/gal? The suppliers have had the wind at their backs.
It’s easy to understand why prices for grain-based products have skyrocketed. That was some supply shock. Early on, the price of grains exceeded what many in countries dependent on Ukraine for grain could afford to pay. They have gone without to the extent of famish. Their demand, a big chunk of the world demand, disappeared. Still, prices for grain-based products have skyrocketed. The supplier all raise prices because of the shock to the market, and because they can. The grain product producers look to the future and decide they had better hedge their bets and buy while they still can. Follows, the price of all grains goes up.
Neither the increase in the price of crude oil, natural gas, wheat, barley, nor corn can account for the price increases we are seeing. Most things at the supermarkets don’t have long supply chains, aren’t grain-based, aren’t energy intensive; yet have doubled in price. Hedging their bets, …, call it what you will; a good part of the prices seen during this current cycle of inflation is due to suppliers taking advantage of the situation.
Per usual, Fed Chairman Powell wants to wring inflation out of the economy. Translated, that means he will lower the demand by making money tighter. In practice, this will make the consumer do with less or without until prices are adjusted downward. Intended to signal to the suppliers that they can no longer sell their products in quantity at inflated prices.
Since suppliers prices are too high, one might think that the place to begin would be with the suppliers. But, that is not the way it has always been done. Making the consumer pay for something that was never their fault is the way it has always been done.
This is blaming, is punishing, the victim. It would make more sense to tax excess profits at a very high rate.
Is this historical preference for ‘wringing out’ inflation because of some inherent bias? If so, why?
Is it because of trepidation? Who is it that they are afraid of?
With Climate Change raging, we will be seeing a lot of these supply issues; especially for food. It would behoove us to come up with a better way to deal with inflation.