You know I’ve been laid up for the last three weeks. I’m relying on Tracie’s love, kindness and expertise as a nurse to do the things I’m not strong enough to do for myself. She’s the best!
Up until the last few months I did all my own grocery shopping. I watched the sales and stocked up on the good buys. At the point where I could only walk a few feet at a time, Tracie had to take over.
In a way I’ve been in a time capsule since New Years. Here are some prices I remember from last December, compared to today:
Looks like I’ll be eating a lot of chicken!
So, while I got a big shock all at once you’ve been getting price shocked every week when you shop.
That’s all we hear about today: inflation. Intuitively we know it’s when the price of something goes up over time. (There is also deflation, when prices go down over time. But that’s best discussed another day.)
So, maybe if the term “inflation” is one that you’d hear but never fully understood, I thought I’d try to do what you don’t hear on TV or read online - explain a few common ways that inflation can be triggered. BTW, if you think you already know it well enough, then skip to the next story item - I won’t be offended!
Imagine a small coal mining town in the back woods of West Virginia. Besides the coal mine there’s a diner, a gas station, a dollar store, a pharmacy, a grocery store and a few mom and pop stores.
The nearest town like this one is 40 miles away. That town has a movie theater.
Basically, everyone in town works for the mine. Even the other businesses rely on the miners’ business to stay open. If the mine closed the town would dry up and blow away. We’ll use “Coal Town” to represent the US economy and demonstrate some of the causes of inflation.
1. Too much money chasing too many goods.
One day the mine operator gives everyone a $1 per hour pay raise. Suddenly everyone has some extra cash in their pocket. Betty, down at Betty’s Diner decides to raise her menu prices by $0.50 to $0.75 and her famous HumongoBurger by $1 all because she figures her customers can now afford it. Oh, and she has her eye on a cruise to Bermuda.
NOTE: In the US the trillions of cash injected into the economy since 2008, and especially since 2020, has had a major impact on inflation today. This money was created out of thin air with no economic basis.
And, all this cash that’s been injected into the US economy is a major contributor to the real estate and stock market surges over the last 2-3 years.
2. New Regulations and Taxes Increase Costs.
Coal Town’s city council needs to raise revenues to fund pension costs. They vote to add an annual $1,000 fee to the businesses mercantile tax. Every business in town raises its prices to cover this new fee. Customers get no benefit for the higher prices.
NOTE: Politicians talk about raising corporate taxes so companies will pay their “fair share” (a tax rate that they never define). The fact is that taxes are just another expense that businesses pay and those taxes get factored into the price of products just the same as electricity, salaries, etc. Therefore, corporate taxes are just a pass through from the consumer to the government.
3. The Cost of Basic Materials Increases.
There have been major rainstorms in Brazil over the last several weeks. Torrential storms have dumped over a foot of rain in the Rio de Janeiro state causing major mudslides and killing hundreds of people.
Being the largest producer of sugar in the world, Brazil’s sugar crop is severely damaged, thereby causing a shortage of sugar and an increase in raw sugar prices.
In Coal Town, Marcy, the owner of the Holy Cannoli Bakery, is faced with a major increase in the cost of the sugar she puts in everything she bakes. Marcy is forced to raise her prices in order to stay in business.
NOTE: We see this in many areas of the economy today. In addition to the obvious impact to transportation, the price of oil also impacts nearly every product that uses plastic (which comes from oil). The price of raw lithium increases the cost of batteries which make your Tesla or iPhone more expensive. Raw material prices can have wide-ranging impacts of many areas of the economy.
4. Consumer Demand Increases.
Down at Betty’s Diner, Betty can’t stop making her famous HumongoBurgers. She’s already raised the price by $1 and thinks she can raise it by another $0.50. That vacation in Bermuda is looking better and better!
NOTE: The law of supply and demand has not been repealed. For example, remember Pet Rocks? Beanie Babies? Cabbage Patch Kids? Each of these became fad items that, similar to the Kardashians, were exclusive and desirable by being exclusive and desirable. Their demand exploded and so did their prices.
5. The Government Implements Expansionary Fiscal Policies.
The West Virginia state government wants to “help” small coal towns and provides grants to be used improve the incomes of residents. The city’s city council votes to give every homeowner a $1,000 tax rebate.
This is really the same as #1 - Too much money chasing too many goods.
NOTE: When the US government “stimulates” the economy by sending cash to citizens, it provides a short-term boost to the economy with the possibility of the long-term negative impact of inflation.
The US economy is the largest in the world and is incredibly complex. We’re experiencing significant inflation now and the reasons for the inflation are as complex as the economy.
Finally, when an economist, politician or journalist says “this time is different”, RUN! This, from CNBC on 7/23/2020:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
"If the success of your political movement, your national ambitions, or your wars, depends upon the need to censor dissent and silence your adversaries, that's a pretty strong indication that you have zero confidence in the beliefs you want to propagate, probably for good reason."
- Glenn Greenwald
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Shrinkage!
We also hear a lot about “shrinkflation” where the price of a product stays the same but the size of the package gets smaller.
Here are some examples:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
All Your Pain in One Video (hat tip to Ginny & Tony!)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~