What causes inflation in capitalistic markets.
We now understand better how little we understand about inflation
As industries went back to full regime (or close to it) after the distribution of covid vaccines, it was expected for prices of goods to fall back into place.
Whoever makes this assumption has only read about markets, and never participated into one.
Without profits, there are no markets. This is THE basic assumption, nobody works for free. This might sound obvious, but I am confident that exists someone so detached from reality to think that people might be fine "just surviving". Nope, the "just surviving" part only gets you as far as "no revolts".
If you can make more profits, you do that.
What happens after you have gone into a period of loss? You want to make up for those losses, so you raise prices. After you have raised prices to re-establish profits...why lower them?
inertia + profits == Inflation...But wait...there's more!
Raising prices is not a point in time. Raising prices from one actor in the supply chain causes domino effects, every downstream node has to either bear the costs or push them to the lower node[1], until the final node (the consumer). To not be confounded with pervasive scenarios, like an energy price increase, which affects all the nodes at the same time.
sum(loss(node) for node in source..consumer) == InflationExpectation of inflation begets inflation. If the media talks about "possible" inflation, it will happen, as everyone will try to prepare for it in advance by...raising prices and makre more profits.
loss(t+1) -> Inflation(t)What happens when a group of people increases the price of goods? other participants might do the same by peer effect. Spontaneous cartels are born! Not really created by anyone, just by external forces, are only possible to dismantle by other equally strong external forces.
(profits(b) + 1 -> profits(B - {b}) + 1 for every b in B) -> inflation(B)Competition is not a given.
Emerging markets have (much) higher competition, while all established markets eventually turn into monopolies or duopolies. A stagnant economy (such as the post-covid economy) has fewer emerging markets.
Some markets require too much upfront capital to entice competition.
Competition usually comes from reasonable expectation of profits (e.g. thanks to better tech, logistics, etc), not from arbitrary mis-pricing by the incumbents.
One day I hope to understand how controlling the monetary supply of an economy is supposed to "fix things". To me it looks like either:
A panic button: when you don't know what to do, ruffle[2] the money, it ought to do something!
The hammer: to which every economic problem, is a nail.
Anyway, to tackle inflation, a central bank (afraid of currency devaluation) decides to do QT. This means liquidity is reduced, there is less lending, less capital is raised, and recession follows. With less cash flows, less competition joins the markets, incumbents have no reason to lower prices, inflation remains unaffected. QT, with the objective of defending the currency value, has doubled-down the additional profits made by the perpetrators of inflation.
| [1] | By this point you should be familiar with the markets rules |
| [2] | You might have mis-read it as "raffle", it is also fine by me. |