Inflation? or Government GREED?

[GeoffH]

I'm getting a double hit from this, the peso is buying less and the Aussie dollar is down from about 78 cents US to about 71 cents US.

 

[Mike J]

I found this article to be helpful.

source URL: https://www.economicshelp.org/macroeconomics/inflation/causes-inflation/

 

Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply-side factors).

Summary of Main causes of inflation

1. Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid)
2. Cost-push inflation – higher oil prices feeding through into higher costs
3. Devaluation – increasing cost of imported goods, also boost to domestic demand
4. Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more.
5. Expectations of inflation – causes workers to demand wage increases and firms to push up prices.

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1. Demand-pull inflation

If the economy is at or close to full employment, then an increase in AD leads to an increase in the price level. As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labour shortages, workers can get higher wages which increase their spending power.

AD can increase due to an increase in any of its components C+I+G+X-M

We tend to get demand-pull inflation if economic growth is above the long-run trend rate of growth. The long-run trend rate of economic growth is the average sustainable rate of growth and is determined by the growth in productivity.

Example of demand-pull inflation in the UK

 

 

In the 1980s, the UK experienced rapid economic growth. The government cut interest rates and also cut taxes. House prices rose by up to 30% -fuelling a positive wealth effect and a rise in consumer confidence. This increased confidence led to higher spending, lower saving and an increase in borrowing. However, the rate of economic growth reached 5% a year – well above the UK’s long-run trend rate of 2.5 %. The result was a rise in inflation as firms could not meet demand. It also led to a current account deficit. You can read more about demand-pull inflation at the Lawson Boom of the 1980s.

2. Cost-push inflation

If there is an increase in the costs of firms, then businesses will pass this on to consumers. There will be a shift to the left in the AS.

Cost-push inflation can be caused by many factors

1. Rising wages

If trades unions can present a united front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (higher wages may also contribute to rising demand)

2. Import prices

One-third of all goods are imported in the UK. If there is a devaluation, then import prices will become more expensive leading to an increase in inflation. A devaluation / depreciation means the Pound is worth less. Therefore we have to pay more to buy the same imported goods.

In 2011/12, the UK experienced a rise in cost-push inflation, partly due to the depreciation of the Pound against the Euro. (also due to higher taxes)

3. Raw material prices

The best example is the price of oil. If the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost-push inflation. E.g., in 1974 there was a spike in the price of oil causing a period of high inflation around the world.

Source: World Bank. In 2008, we had a smaller spike in oil prices causing a rise in inflation – just before the great recession of 2008/09

 

4.    Profit push inflation

When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth.

5.   Declining productivity

If firms become less productive and allow costs to rise, this invariably leads to higher prices.

6. Higher taxes

If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and therefore CPI will increase. However, these tax rises are likely to be one-off increases. There is even a measure of inflation (CPI-CT) which ignores the effect of temporary tax rises/decreases.

CPI-CT is less volatile because it ignores the effect of taxes. In 2010, some of the UK CPI inflation was due to rising taxes.

What else could cause inflation?

1. Rising house prices

Rising house prices do not directly cause inflation, but they can cause a positive wealth effect and encourage consumer-led economic growth. This can indirectly cause demand-pull inflation.

2. Printing more money

If the Central Bank prints more money, you would expect to see a rise in inflation. This is because the money supply plays an important role in determining prices. If there is more money chasing the same amount of goods, then prices will rise. Hyperinflation is usually caused by an extreme increase in the money supply.

However, in exceptional circumstances – such as liquidity trap/recession, it is possible to increase the money supply without causing inflation. This is because, in recession, an increase in the money supply may just be saved, e.g. banks don’t increase lending but just keep more bank reserves.

See: The link between money supply and inflation

Inflation expectations

Once inflation sets in it is difficult to reduce inflation. For example, higher prices will cause workers to demand higher wages causing a wage-price spiral. Therefore, expectations of inflation are important. If people expect high inflation, it tends to be self-serving.

The attitude of the monetary authorities is important; for example, if there was an increase in AD and the monetary authorities accommodated this by increasing the money supply then there would be a rise in the price level.

[Jack Peterson]

13 hours ago, Jollygoodfellow said:

How does a goverment gain from inflation ? 

 answered elsewhere

10 hours ago, Foreigner said:

I never said (asked) this.  I was quoting JGF.

 my apologies but hope all is back to norm 

[hk blues]

I think the way government's gain from inflation is as easy or as complicated as you want it to be - i take the easy way so as inflation bites, everything rises (salary/basic goods/luxury goods etc etc) thus tax revenues (personal/income/GST or sales or VAT) rise.  Is it any more complicated than that?

[Jollygoodfellow]

18 hours ago, Jack Peterson said:

Something that was mentioned by my Wife and Colleagues not long ago   and Governments gain on this 

But with inflation comes unemployment so less tax paid and less spending on taxable goods so not gaining there. Then the high cost of fuel causes less travel which means less tax gained. Beats me :)

[Jack Peterson]

1 minute ago, Jollygoodfellow said:

Beats me :)

Such is life, it is just a merry go round (and the pic will not load so just imagen for a MO)  

[Jack Peterson]

On 10/9/2018 at 11:50 AM, hk blues said:

At least we can trust the shopowners etc not to jump on the bandwagon and needlessly increase prices above what is needed

 I have to agree to an extent BUT Yesterday at our Monthly meeting the venue, Put up menu prices x 10 peso per Item BUT we noticed that only on Foods that are likely to be ordered by a Foreigner, All local type Dishes remain at the same price, now read into this what you like but for me, We are again being singled out. The Restaurant is a busy one and attended by many Locals and is quite a favorite among Foreigners as it is really the only "Chinese style" eatery in Dumaguete.   Having said that, it is still Good value and I for one, will continue to give my/our Patronage 

[hk blues]

40 minutes ago, Jack Peterson said:

 I have to agree to an extent BUT Yesterday at our Monthly meeting the venue, Put up menu prices x 10 peso per Item BUT we noticed that only on Foods that are likely to be ordered by a Foreigner, All local type Dishes remain at the same price, now read into this what you like but for me, We are again being singled out. The Restaurant is a busy one and attended by many Locals and is quite a favorite among Foreigners as it is really the only "Chinese style" eatery in Dumaguete.   Having said that, it is still Good value and I for one, will continue to give my/our Patronage 

I suppose they can come up with any number of reasons to justify this "coincidence" i.e. imported products costing more due to Peso weakness and fuel price increase etc etc - regardless, it does raise some flags.  I still think back to last New Year where it was almost impossible to get hold of San Mig Light in my area - amazingly the supply issue resolved itself at the same time as the price increase came through - pure coincidence of course! 

[fillipino_wannabe]

It's hardly surprising, taxes were cut so people have more spending power, obviously not good for the 50%+ of the population who were paying no tax anyway. Add that to the value of the peso decreasing so the price of imports has gone up and the additional taxes put on sugar, gas, cigs etc and you have 7% inflation.

[Dave Hounddriver]

They said 7% inflation and I thought that was per year, but then I filled my small car with gas.  It cost me 2,100 pesos.  Just about exactly one year ago it was 1,200 pesos to fill it.  So either the gas station attendant is dyslexic or this inflation number is 7% per MONTH.  They do that with interest rates too.  ONLY 3% interest (per month)