Total Posts:10|Showing Posts:1-10
Jump to topic:

So what's wrong with inflation

ben2974
Posts: 767
Add as Friend
Challenge to a Debate
Send a Message
4/17/2014 1:28:31 PM
Posted: 2 years ago
prices rise, demand for goods falls. Businesses should respond with reduced prices, right? But then I know there's such a thing as menu costs as well as sticky wages, which makes it harder for firms to respond to inflation in the short run. If inflation continues to hold, and demand has sunk, profits cut back on production, reducing costs by laying off workers. More unemployed leads to less economy-wide disposable income, or less consumption, which means output and therefore demand further decreases.

If this is wrong please let me know what I missed/misunderstood or forgot.
Someone I know said that it blows his mind that people think inflation is a problem. By my logic laid above, inflation is a problem...
AnonCastillo
Posts: 12
Add as Friend
Challenge to a Debate
Send a Message
4/17/2014 2:26:38 PM
Posted: 2 years ago
There's a lot to it. The main problem is that prices adjust more quickly to inflation than wages - gas prices change every day, supermarkets change their prices every week, hospitals don't even list their prices so they can change them whenever they want and you won't even know. In general, the price of goods and services adjust very quickly. Wages do not - most workers get a raise once a year if they get one at all. When you have constant inflation, wages never catch up to prices.

Also, since most businesses know how much they need to adjust their prices to match currency inflation much better than the average worker knows how much of a raise they need to match inflation. So if your boss offers you a raise that doesn't even cover the cost of inflation, most workers will still think "good deal, I got a raise" when really, they're worse off than they were a year ago.

This video explains in a lot more detail (as well as covering a lot of the other factors that have been hurting workers' purchasing power over the past few decades): https://www.youtube.com...

If your friend counters that inflation is good for people with debts and bad for people with large monetary assets/savings, remind them that A: interest rates on savings and debts tend to adjust for expected inflation and minimize that, and B: there's a lot more economic activity in purchases and wages than in savings and debts, so the effect on prices vs wages will be bigger than the effect on savings and debt.
ben2974
Posts: 767
Add as Friend
Challenge to a Debate
Send a Message
4/17/2014 5:17:29 PM
Posted: 2 years ago
At 4/17/2014 2:26:38 PM, AnonCastillo wrote:
There's a lot to it. The main problem is that prices adjust more quickly to inflation than wages - gas prices change every day, supermarkets change their prices every week, hospitals don't even list their prices so they can change them whenever they want and you won't even know. In general, the price of goods and services adjust very quickly. Wages do not - most workers get a raise once a year if they get one at all. When you have constant inflation, wages never catch up to prices.

How can prices continue to rise if demand continues to fall? If wages can't keep up to inflation, disposable income decreases. Gas stations and grocery stores can raise prices all they want but that won't do them any good if consumers can't consume. Wages are sticky, but I know that prices are, too (menu costs). I just don't know how to dissect that....

Also, since most businesses know how much they need to adjust their prices to match currency inflation much better than the average worker knows how much of a raise they need to match inflation. So if your boss offers you a raise that doesn't even cover the cost of inflation, most workers will still think "good deal, I got a raise" when really, they're worse off than they were a year ago.

This video explains in a lot more detail (as well as covering a lot of the other factors that have been hurting workers' purchasing power over the past few decades): https://www.youtube.com...

If your friend counters that inflation is good for people with debts and bad for people with large monetary assets/savings, remind them that A: interest rates on savings and debts tend to adjust for expected inflation and minimize that, and B: there's a lot more economic activity in purchases and wages than in savings and debts, so the effect on prices vs wages will be bigger than the effect on savings and debt.

Are you Professor Jesus? Skimmed through it earlier before posting this thread. Heard a bit about the inflation mentioned. Thanks for this response as well.
AnonCastillo
Posts: 12
Add as Friend
Challenge to a Debate
Send a Message
4/17/2014 5:50:04 PM
Posted: 2 years ago
At 4/17/2014 5:17:29 PM, ben2974 wrote:
How can prices continue to rise if demand continues to fall? If wages can't keep up to inflation, disposable income decreases. Gas stations and grocery stores can raise prices all they want but that won't do them any good if consumers can't consume. Wages are sticky, but I know that prices are, too (menu costs). I just don't know how to dissect that....

Some of it ends up being made up for by debt, and since the new currency being dumped into the market is going to someone (usually to the investor and banker class) and at least some of it will be spent, demand will go down by a small enough amount that it won't fully offset the increase in prices due to there being more currency relative to the availability of goods and services.

Are you Professor Jesus? Skimmed through it earlier before posting this thread. Heard a bit about the inflation mentioned. Thanks for this response as well.

Yep!
Logic_on_rails
Posts: 2,445
Add as Friend
Challenge to a Debate
Send a Message
4/17/2014 6:17:40 PM
Posted: 2 years ago
An economics class or 2 helps on such questions folks...

Your problem is that you are looking at inflation in isolation. It is stupid to say 'prices rise, demand falls...' without looking at the CAUSE of the inflation. There are 3 types of inflation (though some textbooks add in 'inflationary expectations, I don't) - cost-push, demand pull, and imported inflation. Let's go through the main causes and look at why businesses don't respond with reduced prices...

1. Imported inflation - If imports rise in value due to inflation overseas or changes in the value of a country's dollar, then input costs for domestic producers rises. Businesses rise their prices because their input costs are higher. To maintain the same margins they raise the prices higher. Now, the extent to which businesses change their price does tend to be less than the currency change would warrant due to aspects of consumer psychology, but prices would still rise given inflation.

2. Demand-pull - Aggregated demand already exceeds aggregate supply. In the short-term there's nothing businesses can really do to remedy such a situation. Why drop your prices when you're already selling all of your good at a higher price? AD would have to drop below AS before businesses started 'reducing prices' .

3. Cost-push - Like imported inflation, input costs rise due to increases in the costs of the factors of production (say, materials cost more) . The attempt to pass on increased costs to consumers often leads to wage rises etc...

Which is why 'inflation' occurs - there is a reason prices increase. Now, is inflation a 'problem'? Well, to start with, your friend is probably hinting at the fact that deflation is MUCH bigger problem - its an extremely tough hole to dig oneself out of (Japan has been trying for decades) . And, insofar as inflation necessarily avoids deflation, its very good. The RBA's main goal in managing monetary policy is to achieve an inflation rate of 2-3%.

The reason the RBA does not want a higher rate of inflation (say, 5-6%) is very simple. While inflation stimulates an economy and lowers unemployment, it reduces investment spending, and funnels it into non-productive areas like gold and artworks. Investment spending declines heavily. Obviously, the higher inflation is, the harder it is to fund investment that actually makes a return. When saving is less attractive, the propensity to consume (APC) will rise. And, as APC rises, aggregate demand will increase, leading to... more inflation. It can be a vicious cycle that is also hard to get out of. The LRAC will shift to the right, unemployment will rise, exports will suffer (BOGS deficit) , fixed incomes suffer (driving income inequality, and the problems associated with a high Gini Coefficient) , and international investors will become worried at high inflation. The collapse in investment flows is disastrous.

I would, of course, note that the above is all a brief outline on inflation. Still, nothing that a high-school economics course won't teach.
"Tis not in mortals to command success
But we"ll do more, Sempronius, we"ll deserve it
DanT
Posts: 5,693
Add as Friend
Challenge to a Debate
Send a Message
4/18/2014 10:43:28 AM
Posted: 2 years ago
At 4/17/2014 1:28:31 PM, ben2974 wrote:
prices rise, demand for goods falls. Businesses should respond with reduced prices, right? But then I know there's such a thing as menu costs as well as sticky wages, which makes it harder for firms to respond to inflation in the short run.
Menu cost refers to the cost of changes prices. The most famous example; a restaurant would have to print a new menu every time prices change. So while the equilibrium price may change that does not necessarily mean the price has changed.
Sticky wages is the stickiness of the price of labor, which is usually stickier than the general price. If you think about it, how often does a company adjust the pay rate of their employees? Not often. If they adjusted the pay rate of their employees according to changes in the equilibrium price, or the retail price for that matter, employees would be up in arms.
If inflation continues to hold, and demand has sunk, profits cut back on production, reducing costs by laying off workers. More unemployed leads to less economy-wide disposable income, or less consumption, which means output and therefore demand further decreases.

When the equilibrium price drops below the sticky price it causes a surplus of goods and services, and due to the stickiness of wages it causes unemployment (a labor surplus. When the equilibrium price rises above the sticky price it causes deficits.

If this is wrong please let me know what I missed/misunderstood or forgot.
Someone I know said that it blows his mind that people think inflation is a problem. By my logic laid above, inflation is a problem...

Both inflation and deflation are problems. There are 3 types of people.
1.) those who fear both inflation and deflation
2.) those who fear inflation but not deflation
3.) those who fear deflation but not inflation
"Chemical weapons are no different than any other types of weapons."~Lordknukle
ben2974
Posts: 767
Add as Friend
Challenge to a Debate
Send a Message
4/18/2014 3:06:25 PM
Posted: 2 years ago
At 4/17/2014 6:17:40 PM, Logic_on_rails wrote:
An economics class or 2 helps on such questions folks...

Your problem is that you are looking at inflation in isolation. It is stupid to say 'prices rise, demand falls...' without looking at the CAUSE of the inflation. There are 3 types of inflation (though some textbooks add in 'inflationary expectations, I don't) - cost-push, demand pull, and imported inflation. Let's go through the main causes and look at why businesses don't respond with reduced prices...

1. Imported inflation - If imports rise in value due to inflation overseas or changes in the value of a country's dollar, then input costs for domestic producers rises. Businesses rise their prices because their input costs are higher. To maintain the same margins they raise the prices higher. Now, the extent to which businesses change their price does tend to be less than the currency change would warrant due to aspects of consumer psychology, but prices would still rise given inflation.

2. Demand-pull - Aggregated demand already exceeds aggregate supply. In the short-term there's nothing businesses can really do to remedy such a situation. Why drop your prices when you're already selling all of your good at a higher price? AD would have to drop below AS before businesses started 'reducing prices' .

3. Cost-push - Like imported inflation, input costs rise due to increases in the costs of the factors of production (say, materials cost more) . The attempt to pass on increased costs to consumers often leads to wage rises etc...

Which is why 'inflation' occurs - there is a reason prices increase. Now, is inflation a 'problem'? Well, to start with, your friend is probably hinting at the fact that deflation is MUCH bigger problem - its an extremely tough hole to dig oneself out of (Japan has been trying for decades) . And, insofar as inflation necessarily avoids deflation, its very good. The RBA's main goal in managing monetary policy is to achieve an inflation rate of 2-3%.

The reason the RBA does not want a higher rate of inflation (say, 5-6%) is very simple. While inflation stimulates an economy and lowers unemployment, it reduces investment spending, and funnels it into non-productive areas like gold and artworks. Investment spending declines heavily. Obviously, the higher inflation is, the harder it is to fund investment that actually makes a return. When saving is less attractive, the propensity to consume (APC) will rise. And, as APC rises, aggregate demand will increase, leading to... more inflation. It can be a vicious cycle that is also hard to get out of. The LRAC will shift to the right, unemployment will rise, exports will suffer (BOGS deficit) , fixed incomes suffer (driving income inequality, and the problems associated with a high Gini Coefficient) , and international investors will become worried at high inflation. The collapse in investment flows is disastrous.

I would, of course, note that the above is all a brief outline on inflation. Still, nothing that a high-school economics course won't teach.

I'm actually in third year undergrad studying economics. No way in hell would even a student with an associate's degree be able to accurately assess, in-depth, the causes and effects of inflation. By May I will have completed 8 courses in economics, from "Economics 101" (which in my school would translate to 102, lol) to more complex courses like international trade and growth economics (300 and 400 level courses).
To tell you the truth, I don't even remember touching these types of inflation (except for expected inflation) in any of my courses, yet. Maybe we briefly discussed the definitions of some of them, but no more than that.

Something that is really bothering me about how economics is taught (at least in my school) is that we hardly ever apply what we learn. Too much theory. Professors need to engage the students with the information they expose their students to. Only three courses really got me to "train" my understanding of the economic concepts learnt in class through real problem solving. Really pisses me off >.>. Like, with regard to inflation, I've never had to assess how things happened. We were always given a bunch of graphs and curves that dictated how interest rates, or output, or investment, or animal spirits, or this or that affected inflation. "Draw what would happen to curve "x" if curve "y" experienced condition "z." Graphs and shi7 by themselves barely help in solidifying the knowledge taught. At least, it's worthless if we're more focused on getting the curves right than actually figuring out what makes these things happen.
Jifpop09
Posts: 2,243
Add as Friend
Challenge to a Debate
Send a Message
4/18/2014 3:11:09 PM
Posted: 2 years ago
At 4/18/2014 10:43:28 AM, DanT wrote:
At 4/17/2014 1:28:31 PM, ben2974 wrote:
prices rise, demand for goods falls. Businesses should respond with reduced prices, right? But then I know there's such a thing as menu costs as well as sticky wages, which makes it harder for firms to respond to inflation in the short run.
Menu cost refers to the cost of changes prices. The most famous example; a restaurant would have to print a new menu every time prices change. So while the equilibrium price may change that does not necessarily mean the price has changed.
Sticky wages is the stickiness of the price of labor, which is usually stickier than the general price. If you think about it, how often does a company adjust the pay rate of their employees? Not often. If they adjusted the pay rate of their employees according to changes in the equilibrium price, or the retail price for that matter, employees would be up in arms.
If inflation continues to hold, and demand has sunk, profits cut back on production, reducing costs by laying off workers. More unemployed leads to less economy-wide disposable income, or less consumption, which means output and therefore demand further decreases.

When the equilibrium price drops below the sticky price it causes a surplus of goods and services, and due to the stickiness of wages it causes unemployment (a labor surplus. When the equilibrium price rises above the sticky price it causes deficits.

If this is wrong please let me know what I missed/misunderstood or forgot.
Someone I know said that it blows his mind that people think inflation is a problem. By my logic laid above, inflation is a problem...

Both inflation and deflation are problems. There are 3 types of people.
1.) those who fear both inflation and deflation
2.) those who fear inflation but not deflation
3.) those who fear deflation but not inflation

I think I would fall as three. Inflation can be dangerous, but not nearly on the same scale.
Leader of the DDO Revolution Party
Logic_on_rails
Posts: 2,445
Add as Friend
Challenge to a Debate
Send a Message
4/18/2014 7:40:54 PM
Posted: 2 years ago
Firstly, let me apologise if the 'high-school' stuff was patronising. I was using this thread as a 'fun' way to revise some economics over the holidays...

At 4/18/2014 3:06:25 PM, ben2974 wrote:

I'm actually in third year undergrad studying economics. No way in hell would even a student with an associate's degree be able to accurately assess, in-depth, the causes and effects of inflation. By May I will have completed 8 courses in economics, from "Economics 101" (which in my school would translate to 102, lol) to more complex courses like international trade and growth economics (300 and 400 level courses).
To tell you the truth, I don't even remember touching these types of inflation (except for expected inflation) in any of my courses, yet. Maybe we briefly discussed the definitions of some of them, but no more than that.

Well, I'm a year 12 high school student in Australia, and I wouldn't necessarily say 'in-depth' is the right word, but in economics exams the best answers - and the only way to get full marks on longer responses - is to utilise current trends and figures. On my half-yearly a few weeks back one question was simply 'Analyse current trends and influences on Australia's balance of payments' . An easy question, but to ace it you needed the CAD figures, shifts in mining investment, the $A depreciation, knowledge of the carry trade, Australia's acting as a proxy for the Chinese market, strength in international commodities markets (hence, strong X-M for Aust.) on top of the basic structural factors underlying Australia's persistent CAD. The last point being theory based, but the rest not.

Something that is really bothering me about how economics is taught (at least in my school) is that we hardly ever apply what we learn. Too much theory. Professors need to engage the students with the information they expose their students to. Only three courses really got me to "train" my understanding of the economic concepts learnt in class through real problem solving. Really pisses me off >.>. Like, with regard to inflation, I've never had to assess how things happened. We were always given a bunch of graphs and curves that dictated how interest rates, or output, or investment, or animal spirits, or this or that affected inflation. "Draw what would happen to curve "x" if curve "y" experienced condition "z." Graphs and shi7 by themselves barely help in solidifying the knowledge taught. At least, it's worthless if we're more focused on getting the curves right than actually figuring out what makes these things happen.

I won't say that theory isn't important to economics, but I do appreciate the need for statistics in some of my responses in exams (though, not the majority) . Frankly, students should have the empirical studies in front of them when answering questions. When I answered an extended response on "Examine the impact of trade agreements and reduced protection on the Australian economy" , I made heavy reference to the Centre for International Economics' (CIE) report on the subject of reduced protection. It was really the only way to ace the question. I brought in the Dollar-Kraay World Bank report on globalisation, reports on the benefits of the new KAFTA deal (Korea-Aust. FTA) , brought in a report by the Australian Bureau for Agricultural Economics on the impact of the failure of the Doha Round and multilateral agreements, as well as citing all the changes in current figures I needed, such as the growing two-way trade deficit caused by AUSFTA - a 'dud' (quoting trade expert) FTA with the US.

Now, I put all that within a theoretical framework of course, and I did get 100%, and it was a question I was very prepared to write about and lucky to get, but the answers lie strongly with the research and the facts and current trends. The $A changes often utterly defy economic theory, for instance.

Now, I make no pretensions to having a university level understanding of economics. I don't. But, I'd expect the reports of leading economic institutions to be utilised in whatever was being discussed.
"Tis not in mortals to command success
But we"ll do more, Sempronius, we"ll deserve it
debate_power
Posts: 726
Add as Friend
Challenge to a Debate
Send a Message
11/24/2014 4:21:06 PM
Posted: 2 years ago
At 4/17/2014 1:28:31 PM, ben2974 wrote:
prices rise, demand for goods falls. Businesses should respond with reduced prices, right? But then I know there's such a thing as menu costs as well as sticky wages, which makes it harder for firms to respond to inflation in the short run. If inflation continues to hold, and demand has sunk, profits cut back on production, reducing costs by laying off workers. More unemployed leads to less economy-wide disposable income, or less consumption, which means output and therefore demand further decreases.

If this is wrong please let me know what I missed/misunderstood or forgot.
Someone I know said that it blows his mind that people think inflation is a problem. By my logic laid above, inflation is a problem...

The problem is between income and inflation. Inflation occurs when prices rise, causing the devaluation of currency to match. That's why people speak of "economic strain"- it's the hard nature of capitalism that worker wages remain static, and that the business owners make more than the workers. Inflation puts strain on the lower classes the most.
You can call me Mark if you like.