The first article on this topic discusses one type of inflation—prices rise when more money chases the same number of goods. That’s the general theory, but it fails when we run the t-shirt machine a few extra hours to make all the fashion you want. Yes, more money causes inflation when it comes to something that’s limited in supply, but it doesn’t when you can flip a switch to generate more. So if everyone needs the only lawyer in town and wads of cash is available, the price of legal services will rise. That doesn’t need to happen when goods are easily made. For example, more money doesn’t make the price of sweaters go up. More money makes people buy more sweaters. So instead of having three, we buy five. But they’ll all be at the same price.
The second cause of inflation comes with rising costs within nature. We already know the price of oranges gets affected by an early frost. If nature ruins the growing season, the yield will be less. As a result, the price of oranges rises and only those who really want them, buy them. Same goes when farmers have a bumper crop. Lots of asparagus means cheap asparagus. That’s why you always buy fruits and vegetables in season.
The biggest source of cost-caused inflation is wages. For instance, when we raise the minimum wage or export jobs to China, it’s easy to see a direct causation. But what about when staff come calling due to the cost of living? Sometimes employers can negate this increase by way of productivity, sometimes they can’t. When not, here’s another reason for inflation.
So there are four primary causes:
- Too much money chasing the same number of goods and we can’t flip a switch to make more (e.g., legal services in a town with only one lawyer)
- Cost increases due to nature (e.g., early frost on oranges, forest fires on lumber)
- General cost of living affecting wage demands (with no accompanying productivity gain)
- Increases or decreases in productivity (e.g., new machinery, government regulations, corporate tax)
Prices have a number of methods to go up (or down). So just to be safe, maybe buy everything today.