Tuesday, January 7, 2014

Inflation Confusion

Yesterday I read an article on the definition of inflation. It was written by an economist who I respect and with whom I generally agree. I did take exception to a number of ideas in this rather extensive essay. Over the years, I have witnessed a lot of inflation in the market place. I have seen the results but never put much thought into inflation's basic nature. Late yesterday and last night, I spent some time thinking about this and I have some ideas that might be worth examining.

The article that I read equated inflation with the money supply. The premise was that an increase in the money supply is inflationary. This, I cannot accept. There have been many times in economic history that the supply of money has increased, including the present era, and inflation has remained in check. If an increase in available money were to be inflationary, the period in the sixties when banks were indiscriminately sending out credit card should have driven inflation through the roof. It did not.

A good part of our economy today is a dollarless economy. My bank sends your bank an electronic transfer from my account, be it my checking account or a credit card, and your bill to me is paid. No real money actually moves. The reservoir of money is virtually bottomless. So it can't be the money supply that causes inflation. 

Does inflation start with an increase in prices? Competition for business tends to keep prices low. Sometimes artificially low as when we are in a recession. But somehow prices manage to increase anyway. These increases can be brought about by shortages. A few years back the orange crop was damaged. The price for a half gallon carton of orange juice went from two dollars to three dollars within weeks. The orange crop recovered but the price remained at three dollars. So there's a little piece of inflationary pressure right there.

Are wage increases inflationary? Many jobs in private industry are subject to annual review. The employees record is examined in regards to productivity. An increase in productivity means an increase in salary. Many public sector jobs are subject to "cost of living" increases. Both of these examples should be about inflation neutral. 

There are both public and private sector jobs where the pay is negotiated in a collective bargaining process. Management's aim is not necessarily to increase productivity, but to minimize the possibility of labor problems. Here again, we have a little more inflationary pressure.

Then there are the costs of doing business that have little or nothing to do with product or labor costs. We have become a very litigious society. Suppliers of goods and services must spend huge sums of money to protect themselves from lawsuits. More inflationary pressure.

And finally, government regulation. Government agencies are cranking out new regulations every day. These regulations can involve every aspect of running a business from product design to taking out the garbage. The staffs of lawyers and accountants that business requires to make sure that they stay honest, is hugely expensive in itself. The cost of obeying these government mandates is even costlier. And the consumer pays for it. 

So we see that the wage, price, spiral of inflation defies a single definition or cause. The roots of the problem probe into every part of business and labor. But we should all be aware that rampant inflation hurts our domestic consumers and hurts our country on the world market.

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