Today's Inflation; A Classic Supply and Demand Problem



Economics can be complicated because there are so many moving parts in the global economy. However, the inflation we are now experiencing is pretty easy to explain in the classic supply and demand terms that college students learn in Econ. 101. Because of the pandemic, labor shortages, and supply chain issues, there are too many dollars chasing too few goods and services. When that happens prices naturally rise.


Think of it like this; an extreme case certainly, but how much were Americans willing to pay for toilet paper in the Spring of 2020? A lot! Less obvious is the global semiconductor [chip] shortage that has closed auto assembly lines and driven up the price of consumer electronics.


To a lesser extent, there are thousands of such examples since the spring of 2020 as Covid-19 spread. Factories around the world shut down and it was like pulling the plug on the global economy. But as Congress moved to shore up the economy in 2020 and 2021, Americans started buying again and many turned to online shopping so they could stay out of stores. E-commerce activity grew to levels that never existed before the pandemic and today, demand for products has mushroomed beyond the market’s capacity to produce all the stuff consumers want.

Vox: "At the same time, US demand for goods is skyrocketing: Inflation-adjusted retail spending is up 14 percent over the past two years, the New York Times reported. That’s in part a result of unleashed pent-up demand (and savings) as the country returns to a pre-pandemic normal, buoyed by the infusions of money the federal government sent out in response to the Covid-19 recession."

And, retail sales jumped again last month, showing that Americans don't seem to be deterred by rising prices.

Washington Post: “Retail sales jumped 1.7 percent in October, marking a significant acceleration in spending from September… And despite new data showing that consumer confidence is at a 10-year low, they seem to be shrugging off the higher prices on gas, groceries and other everyday goods.”

Another factor driving prices is rising wages as businesses compete for workers among labor shortages. The labor shortages were somewhat unexpected. Conservatives blamed it on extended payments to laid off workers, but we now know that wasn't much of a factor. But, there are other explanations and some of them aren't easy to address.

Christian Science Monitor: "More important are long-term social and demographic trends, such as the retirement of baby boomers, the ongoing challenges for working mothers searching for child care, the declining labor participation of men, and the fall in fertility and immigration. Most of these trends were exacerbated by the pandemic; all of them predate it."

The good news from the perspective of workers is that competition for their services has upped wages.

Christian Science Monitor: "These trends give those in the labor force added power. With 2 million more job openings than unemployed people, Americans can be choosier about picking a job. They have more leverage to request higher pay and better hours. Wages have begun to rise, starting with the lowest-paid employees and now spreading throughout the economy."

But, rising salaries have also pushed prices higher and contributed to inflation.


How long will this last? Economists are divided on that, but it's a good bet that it will last into the first quarter of 2022, at least.


#news #economics

By: Don Lam & Curated Content


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