When inflation isn't inflation
There has been a lot of talk in the media recently about rising "inflation" due to rising fuel costs and rising food costs. The rising fuel and food costs are attributed in large part, to rising demand from rapidly developing countries like China and India, whose consumers are now starting to eat more like Westerners, and buy and drive cars more like Westerners. Since the rising demand that is causing these price increases is due to legitimate economic growth, and not due to simple expansion of the money supply, is it accurate to call this inflation, and does it make sense to try and fight this "inflation"?
Here is the Merriam Webster definition of inflation:
"2: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services."
This definition of inflation, that links price increases to too much money chasing too few goods, implies that inflation can be fought by bringing the money supply back into balance.
But the present "inflation" is due in part to increased demand from Chinese and Indian consumers finally starting to be able to buy like Westerners. Pulling back the money supply in the USA isn't going to reduce the demand from Chinese and Indian consumers. As far as I can see, there is nothing US authorities like the Fed can do about this "inflation."
Even increasing US wages to "keep up with inflation" can't possibly work since the underlying cause is increased demand from 2nd world nations. Price increases are the market's way of bringing supply and demand back into balance, and this "inflation" is the market's way of saying to US consumers "Chinese and Indians want to drive cars and eat meat too, so now you are going to have to give up some of your driving and meat so they can have some too." If we try to ignore that message by increasing wages to keep up with prices, then the market is going to keep increasing prices until we get the message and start consuming less. In other words, trying to beat this "inflation" with wage increases is a recipe for a hyperinflationary spiral.
Here is the Merriam Webster definition of inflation:
"2: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services."
This definition of inflation, that links price increases to too much money chasing too few goods, implies that inflation can be fought by bringing the money supply back into balance.
But the present "inflation" is due in part to increased demand from Chinese and Indian consumers finally starting to be able to buy like Westerners. Pulling back the money supply in the USA isn't going to reduce the demand from Chinese and Indian consumers. As far as I can see, there is nothing US authorities like the Fed can do about this "inflation."
Even increasing US wages to "keep up with inflation" can't possibly work since the underlying cause is increased demand from 2nd world nations. Price increases are the market's way of bringing supply and demand back into balance, and this "inflation" is the market's way of saying to US consumers "Chinese and Indians want to drive cars and eat meat too, so now you are going to have to give up some of your driving and meat so they can have some too." If we try to ignore that message by increasing wages to keep up with prices, then the market is going to keep increasing prices until we get the message and start consuming less. In other words, trying to beat this "inflation" with wage increases is a recipe for a hyperinflationary spiral.
posted by AndyfromTucson at 6:48 AM
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