Yes, supply problems can cause inflation

Could supply problems be the cause of inflation? I think so. Some economists do not. They emphasize that inflation, a general increase in prices, can only be caused by financial expansion. At first their argument seems strong. But it forces us to make irrational decisions, so I reject it.

To be clear: I’m not asking if the supply problem is driving current inflation, which is the 40-year high. Although I think there are some chronic epidemic barriers, not to mention the ongoing problems in Eastern Europe, the recent data suggests that demand has increased. At the same time, GDP fell 1.4 percent year-on-year in the first quarter of 2022. There is no doubt that for some time we will be debating the relative importance of overall demand and overall supply. That’s not what I want to focus on here. Instead, I’m asking about theoretical possibilities: it can be difficult General Prices due to productive conditions In general They rise faster than otherwise?

Inflation-economists always start with a good definition. They distinguish inflation from relative price changes. The latter is due to the allocation of resources to specific industries and sectors – in other words, supply and demand. The former has been due to the devaluation of the common dollar. Presumably, we can have inflation without any relative price change. Imagine doubling all prices (including wages, asset value, etc.) in the economy. The purchasing power of the dollar will be cut in half, but the price of any other one will not change. Voila, pure inflation.

The push of supply, inflation-economists can always recognize, affects the relative price. If oil prices suddenly rise, other products (which are more energy-intensive to produce) will also be more expensive. However, this will allow families to spend less on other things, as their budget constraints have not changed. Demand for this specialty has grown significantly as a result of recent corporate scandals. Thus supply shock increases the price of some, but decreases others. When the relative price changes, the general price level should not. If the supply push is seen in inflation, then it is a confusion of how we measure it. Only demand-side issues যেমন such as overly loose monetary policy-deserve inflation labels.

Supply shock denies that anyone can affect the relative price. But it does not follow that they cannot affect the general price level. In the language of economics, this argument holds Real The push is relative but does not affect the general price. It would seem that proposition Nominal Pushing is common but does not affect the relative value. Let’s take this one at a time.

First, if we accept inflation-only crowd values, then anything that changes the relative value must not be inflationary. Yet that is clearly wrong. If economy-wide productivity declines (or increases more slowly), prices (or inflation) rise. This macroeconomic effect is fully compatible with the microeconomics of many relative price changes. While it’s a good idea to distinguish between actual and nominal shocks, there’s no reason to believe that the former Only relative price changes occur whereas the latter causes only general price changes.

I agree that the difference between relative and general price is very important. Milton Friedman centered this distinction on the subdivision of economics in price theory (microeconomics) and financial theory (macroeconomics). The theoretical difference between relative price change (fixed with dollar) and general price change (including relative price fixed) is quite helpful for economics. But if we rely too heavily on the theoretical side of our definition, such as the definition of inflation, we run the risk of obscuring our explanatory power through model-managing.

Second, a nominal push, such as an unexpected change in funding, could distort Relative Prices We are not limited to general price changes because the initial trouble occurred through a dollar-adjusted variable. Economists often assume in our models financial neutrality (money does not affect actual economic activity) or absolute neutrality (growth rate of money does not affect real economic activity) because it helps to focus on parts of our economy. Do not confuse our interests but the model world for the real world. Monetary policy always has some relative-price effect. The obvious examples are changes in interest rates, exchange rates and asset prices. These effects are called the Cantilon effect, which economists first wrote about them in the 17th century, usually smaller. But not small zeros.

Whatever the reason, I think it’s more rewarding to think of inflation as a reduction in the purchasing power of the dollar. Of course, simple money can cause inflation. But so can production problems. If a general price index continues to rise, it is inflation. It is unknown at this time what he will do after leaving the post. The dollar is just as weak.

The purpose of economic theory is to make economic history. This includes contemporary economic history, of which policy analysis is an important part. We use models, mathematically or otherwise, because they help us understand the real world. Let’s not define that world outside of existence. Supply problems, in fact, can cause inflation.

Alexander William Salter

Alexander W. Salter

Alexander William Salter is Georgie G. Snyder is an associate professor of economics at Rolls College of Business and a comparative economics researcher with the Free Market Institute at Texas Tech University. He is its co-author Money and the rule of law: generality and predictability in financial institutionsPublished by Cambridge University Press. In addition to his numerous scholarly articles, he has published nearly 300 opinions in leading national outlets such as The Wall Street Journal, National Review, Fox News OpinionAnd Mountains.

Salter earned his MA and PhD. He holds a BA in Economics from George Mason University and a BA in Economics from Occidental College. She was a participant in the AIER Summer Fellowship Program in 2011.

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