-Periods of technological stagnation, societal dysfunction, the need for resiliency over efficiency, war, and scarce natural resources tend to all contribute to the experience of inflation due to their negative affects on the supply of goods and services. On the other hand, periods of technological improvements, labor specialization, the sacrifice of resiliency for efficiency, geopolitical and civic peace, and abundant natural resources tend to all contribute to the experience of disinflation due to their positive affects on the supply of goods and servicesWeird. Wasn’t the technical advancement of the 60s/70s higher than in the last 20 years (2000-2020)? Although back then inflation was much higher than now?
I’m becoming more and more convinced that we (including economists) don’t really understand inflation. It seems to be a product of the zeitgeist. If we believe there is inflation it will be their, if we don’t, it won’t. That is at least the case for the demand side of the equation. The supply side of the equation is affected by scarcity, either man made or natural. I don’t think money supply or interest rates have nearly as much effect as we’ve long believed.
Economists admit they don’t understand the causes of inflation, but they have some understanding why they can’t understand it.
One of the main drivers of inflation is inflation expectations. If people (and investors, and companies, and countries, etc.) expect inflation and rates to go up, they will spend cash now instead of holding it. This itself of course drives inflation! And likewise if they expect inflation and rates to go down they’ll hold cash and and bonds instead of investing in securities which might devalue during an economic slowdown. This makes inflation a very fickle phenomenon which cannot easily be anticipated and planned for like other economic trends.
Inflation… the known unknown.
I find this (bit wordy) quote from “The Pretence of Knowledge” apt:
In the explanation of the working of such structures we can for this reason not replace the information about the individual elements by statistical information, but require full information about each element if from our theory we are to derive specific predictions about individual events. Without such specific information about the individual elements we shall be confined to what on another occasion I have called mere pattern predictions
Interesting read if severely bored someday… he also talks about how everyone has to claim to know something to try be useful. Think inflation falls into that category…
Remember the 70s had oil embargoes. Cost of almost anything is linked to petroleum. Interest rates got very high before it was over. Yes I was there.
So this detail in the article is bullshit?
And what about technological advancement?
Technology. I guess it depends on how competitive the market is. Monopolies are bad for price and most tech is patent protected.
In this last round of inflation we had high oil and other resource prices plus labor shortages and dislocations. Add on a lot of pent up demand and also not a lot of competition. None of this is very good for prices. On the other hand now inflation is under 2% in some locations though the national average is higher.
The article makes the point, that 70s and current high inflation have different causes. In particular US debt is much higher today, so that higher rates could eventually contribute to inflation.
Inflation is to much money chasing to few goods. To bring inflation down you must destroy money. As our system works issuing debt is money creation because that money does not exist. When you pay that debt off that money is destroyed. Where does the 100k to buy your house come from? Grandma, grandpa, and bob down the street putting 10k in the bank. The other 90k is created out of the ether due to fractional reserve banking. You are hoping that you can pay it back and that the economy will grow and keep you in a job to pay it back. Eventually though this shaky house of cards will all collapse. Higher rates slow inflation because companies would rather not borrow and grandma can put her money in “safe” treasury bills instead of lending it to uber who loses money on a yearly basis without fail