>Do you really believe that businesses priced their products low until the business press started reporting on inflation and then realized “oh man, I should raise my prices!”?
Absolutely yes. They had an excuse they thought their customers would swallow, and saw other companies doing it.
Man, the business press really screwed people over then. If they’d just have kept their traps shut, that inflation wave could have been avoided./s
My view is: A. Injecting as much money into the economy as we did was bound to reduce the value of an individual dollar. B. Sellers would naturally demand more of those less valuable dollars for their goods and services. C. The press then reports on the first signs of that wave landing. D. The rest of the wave then lands.
Starting at step C, it looks like the reporting caused inflation. I think that’s a “wet streets cause rain” analysis of the situation.
It’s quite possible that the injection was the least bad thing given the real and perceived constraints of the day. But the inevitable consequence was the devaluing of the dollar.
If your money is devalued through inflation and your groceries get more expensive, but you can still produce and sell a widget for the same price as before, do you (have to) increase the price of that widget?
Yes, inflation matters a lot, but the psychological part is significant as well (and is conveniently overlooked in basic classical undergrad economics).
A similar thing happened when the Euro was introduced in Europe in 2002: The act of changing the price tags, the confusion of consumers when showing different numbers was an opportunity to hike prices.
> If your money is devalued through inflation and your groceries get more expensive, but you can still produce and sell a widget for the same price as before, do you (have to) increase the price of that widget?
To the extent that you use the profits from selling widgets as the means to buy groceries to feed your family, yes, you have to, unless your family wants to go on a diet.
Well - if the dollar being devalued is the whole story everything should go up by more or less the same %. This was clearly not the case.
Perhaps one could argue that the dollar being devalued triggered inflation but the quantum of it is a combination of mutliple factors - one (and probably the biggest) of which is supplier concentration and their pricing power.
I can see the press playing a role in many situations, take for example a business with long-term/subscription based customers: the meetings to discuss raising prices will necessarily include assessments of the impact on existing customers. Will they be upset? Churn? Strategies to soften the blow or grandfather them into lower rates will be proposed.
But…what if they’ve been reading in the news about how inflation is through the roof and the price of everything is going up? Now they’re psychologically primed for an increase and we can raise prices higher with less concern about the blowback. Make hay while the sun shines.
I think the cash got devalued by super low interest rates floated to the privileged class. Almost everything is financed. It's dumb to not take 2% loans and buy back stock or expand your business...and by expand I mean purchasing a competitor. It seems like small/medium businesses are the only ones who organically expand by purchasing equipment, finding new customers, and hiring anymore.
Agreed. It's pretty wild to see the Fed start pointing fingers at businesses when they've been expanding the money supply for over a decade.
That said, inflation does create an environment where businesses can "reset prices" for reasons other than inflation driving up costs. But that's inflation in general - it creates an environment of rising wages, rising costs and a vicious circle where price increases in one place, drive price in other places. It's one reason why inflation is so hard to break. When expectations are that "prices are going up faster" then people's behavior changes.
Your first paragraph argues against itself. If the Fed expanded the money supply for over a decade with little to no inflation as a result until the world saw an unprecedented global pandemic that implies maybe what the fed was doing wasn't the root cause.
Absolutely yes. They had an excuse they thought their customers would swallow, and saw other companies doing it.