The left and right have been fighting over the reason for the inflation sense it entered the public conscious earlier this year. Gregg Ip writes over at the Wall Street Journal that, technically, both sides are right…(WSJ)
“..it’s becoming clear that neither demand or supply by itself is to blame. Rather, this inflation was made possible only by strong demand interacting with restricted supply.”
How is supply and demand both at fault?
- Demand is at fault because of the usual suspect, cheap money. Ip writes, “Federal spending and lower interest rates influence inflation indirectly, by bolstering aggregate demand which drives down unemployment. As the labor market tightens and spare capacity diminishes, firms get pricing power and workers win higher wages.”
- Supply’s blame is a little more complicated. When an industry typically has a spike in demand it can be dealt with in two ways. You can raise prices or you can raise output. Usually a company will choose a nice little combination of the two. However, thanks to global supply disruptions, an increase in output is not an option. This means companies can only raise prices to deal with shortages. And thanks to all that cheap money sloshing around the hire prices can be somewhat abosrbed which doesn’t do anything to dent demand which continues to put upward pressure on prices.
Here is where it actually gets worse. Ip doesn’t exactly have good news for those wondering how we get out of this. “higher inflation could become self-perpetuating through price and wage-setting behavior. Then, the solution to this unfamiliar inflation becomes painfully familiar: higher interest rates and perhaps a recession.”
