Read it and offer a refutation if you disagree.
What Actually Causes Inflation (and who gains from it)
I'm pretty sure everybody knows what inflation is, but just incase:
Continued:
Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.
A strong conclusion:
What Actually Causes Inflation (and who gains from it)
Read this first before you continue: Money Growth Does Not Cause Inflation!I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world.
I'm pretty sure everybody knows what inflation is, but just incase:
Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. Consumer price inflation is the one usually in the news, and it takes a weighted average of various items purchased by the typical household (the list being determined by survey and then updated periodically). The average can rise while some prices have actually fallen, and how much it reflects your personal situation is a function of how closely the basket of goods and services in the index matches your buying patterns. But, the bottom line is that we say that inflation has occurred when the average price of those goods and services has increased.
Continued:
This does not happen by magic. It takes someone, somewhere making a conscious choice to charge more for the good or service they sell. The initial increase does not have to be in something that is being directly measured by the consumer price index. No household in my neighborhood, for example, buys barrels of oil; and yet when they become more expensive that sends a ripple throughout all related products. In the end, consumer prices jump as well.
Of course, that someone, somewhere who raises their price must also be in a position to make it stick. I could march into the Chancellor’s office here at TCU and demand that my salary be doubled, but that probably won’t accomplish a whole lot (other than to give me a chance to update my vita while I am cleaning out my office). Other factors must come into play. Many circumstances can cause inflation. I will focus on four.
Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.
A strong conclusion:
Conclusions
This is not an all inclusive list, but I would think that it covers the vast majority of what we have experienced since the end of WWII (today, we are most threatened by the link between financial markets and commodities). The bottom line is that there are a number of processes that can create inflation, none of which starts with, “the money supply increases.” Someone make a conscious decision to raise a price or wage, and they must be able to make this stick. Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate–and rightfully so, for refusing to do so almost always serves to punish those already in the weakest position.
I’m afraid this more realistic perspective does not offer a nice, simple rule as in the money growth ==> inflation camp. That said, neither do they since that’s not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it. What it does do is very strongly and directly affect interest rates. But prices are determined elsewhere in the system.