Sunday, February 16, 2014

Inflation Can Effect Supply And Demand!

Prices under the pressure of changes in supply and demand can be a lot like a carnival ride. By this I mean fast and abrupt swings can take place and often we see prices go to unimaginable extremes. It would be better to say changes in "supply or demand" because we should highlight and fully realize the market works best when at least one side of the equation remains somewhat stable.

Supply and demand has proven over time as the best method to control a good or fair balance between prices and supply. Free market systems that rely on supply and demand have a far better record of responding to what people want. It is important government does not distort this process by things like rent controls, subsidies, or other intrusions into the market place. It would be wise to remember this and incorporate the factor of supply and demand into theories concerning inflation.

The best definition I have heard to describe inflation is that it is the price increase that occurs when to much money is chasing to few goods. When thinking about this ponder what might cause a major change in either supply or demand and you will encounter ways that may have slipped by without stronger scrutiny. Some of the more subtle crosscurrents become clear when you view these in relation to inflation or deflationary pressures. This may help to explain some of the more than ample supplies we have enjoyed in recent years as producers have been forced to produce and sell more to make the same amount of money.

Predicting or timing inflation, stagflation, or hyperinflation is very difficult. All tend to take a few years to prepare the ground from which they sprout. Inflation in any of these forms develops a positive feedback loop that is sort of a slow motion panic as the population comes to realize that the currency is going down and losing value. A very important thing to remember is that inflation can have a major effect on both sides of supply and demand at the same time.

When money begins to pursue a product or good and the price begins to rise those holding that item tend to lose the incentive to make a fast sale. In reaction more money may be pulled out of the closet, and the many places it has been put to buy things before the next price jump. This "more money" constitutes an increase in demand. If this happens at the same time items are being held back or removed from retail shelves for better prices which "lessens supplies" things can really get interesting fast. This helps explain why hyperinflation is so drastic.

In our modern fast changing world where messages fly across the country and around the world in seconds this is important to keep in the back of your mind. It also leads credence to the idea that a collapse of any of the four major currencies could result in contagion causing inflation to go global. In a panic it would be best to think many people will be less than fair and the government unable or to slow to react. When this happens  many self-centered people who think the world revolves around them will learn otherwise.

 Footnote; For more about inflation and about the speed that it can be unleashed please read the post below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,


1 comment:

  1. I was always taught tha6 the "law" of supply and demand governed the whole capitalist system, without the interference of government meddling. Unfortunately, the supply side of the equation has been taken over by global conglomerates (monopolies) that have no respect for human labour except as a fuel for their profit machines, and the demand side has been twisted by the psychological warfare of modern advertising, which employs expert, hypnotic messaging to cultivate bizarre and damaging behavior in the marketplace. The only hope of correction is a total global crash and the establishment of a new financial system rooted in small communities, governed by local elected representatives (credit unions).