Econs - Inflation – Must prices of everything always go up?

Inflation has been a key theme around the world. Food, energy inflation, the list goes on. Must the prices of everything always go up?

A key objective of governments around the world is to ensure that inflation stays in the low positive (acceptable to majority) region. But why do they even want positive inflation in the first place? Why can’t governments try to create deflation (lower prices) which should make people happier?

A simple example, if you know the iPhone that you have been wanting to purchase is going to increase in price by 2% next year, will you buy it today? Or wait till next year? The choice is obvious, and when every consumer in society makes a similar decision purchases will be made, jobs will be created, GDP improves, and the cycle moves on (upwards), aka an demand pull inflationary spiral.

Conversely, if you foresee that that price of iPhone is going to fall by 2% next year surely you are going to hold off your purchases till next year at least. Non-essential purchases are withheld, and the level of consumption simply falls, the iPhone store will cut staff due to lower sales, jobs are destroyed, GDP regresses, and the cycle move down, aka a deflationary spiral.

So governments around the fall always hope for a healthy level of inflation in society to stoke purchases, and erode the real value of your cash and also make their debts easier to pay off.

However, the inflation that we are facing now is mainly due to cost push forces, due to scarcity and hence harder to handle than demand pull inflation. In demand pull inflation taxes can be imposed to curb the level of demand because it gets red hot but what can policy makers do to ease off cost push pressures? Expansionary fiscal policy is good but that means money off the government coffers but….we are still quite some time away from the next election though.

One thing that has always fascinated me is how IT products are getting cheaper every year though they are getting better at the same time (fast and cheaper laptops), one simply must compare a normal laptop today VS a laptop from a decade ago.

On the other hand, there are always companies that provides the simplest of products and services but raises their charges every year citing “rising cost”, “challenging business environment”, that comes under elasticity, market structure and rent-seeking behaviour which I hope to discuss in a future post.

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