‘Markets were right to be spooked by the threat of rising inflation’ was the headline of an article by Philip Aldrick, Economics Editor of the Times on 15 May. Nowadays the word has come to mean simply ‘an increase in the general level of prices’ (David Smith, Times, 2 June).
Originally, as the word suggests, inflation referred to an over-issue of a paper currency in the sense of printing more than the economy needed for its transactions; in which case the currency depreciated, resulting in a rise in the general price level.
The price of individual products can go up for various reasons such as an increase in paying demand compared to supply or to a fall in productivity. In fact, for most products, the tendency is for their real price to fall due to increasing productivity, though this is masked by the depreciation of the currency causing the money price to rise.
A rise in the general price level is something different. It is a rise that affects all products. The most common cause of this is a depreciation of the currency due to too much being issued. Currently the policy of monetary authorities nearly everywhere is to bring about a rise in the general price level of about 2 percent a year. This is why prices rise continuously from year to year. Inflation already exists; what is worrying some economic commentators is that it might rise above this level.
Over-issuing the currency is not the only reason why the general price level can go up. It can also go up when, as in a boom, the demand for all goods runs ahead of supply as capitalist enterprises seek to make hay while the sun shines, producing more to sell, so increasing the demand for raw materials and labour (it always ends in overproduction and so a fall – a slump –in production),
Something similar is what some economists are expecting to occur when the Covid restrictions are finally removed. Andy Haldane, the Bank of England’s Chief Economist, has written of a ‘move from bounce-back to boom without passing “go”’ (Times, 10 June). Unused consumer purchasing power has built-up because shops have not been fully open and because many people have been working from home, so saving travel and lunch costs. It’s going to be a sellers’ market, where businesses can put up their prices without risking losing customers. As Smith put it with reference to restaurants:
‘Businesses are responding logically to the release of pent-up demand. If they can raise prices and restrict the special offers they used to need to attract customers, they will do so.’
Aldrick adds that businesses will also be in a position to pass on increased transport and materials costs:
‘In the short term, business will want to raise prices. They could absorb higher costs by squeezing margins, but with more debt to service and many cash-rich households able to pay up, why would they?’
The implicit assumption behind both these comments is that businesses don’t have a free hand but can only increase prices when ‘the market can bear it’. They can’t raise prices above this level (at least not without losing customers) even if taxes, wages or other costs go up. If the market won’t bear it, then they have to let their profit margins be squeezed. On the other hand, if the market will bear it they can increase their price even if their costs haven’t gone up.
What the economists are saying is that, due to the demand built up during the Covid restrictions, the market will be able to bear it and the general price level will rise as a result.
No comments:
Post a Comment