A friend posted her opinion that inflation was the result of corporate greed. I replied that inflation could be explained by Economics 101 and corporate greed was not part of the equation. In a previous post I presented the Laws of Supply and Demand. The idea is that the more something costs to buy, the less people will buy. The more people pay for something, the more producers will produce.
My friend said that everybody knows the laws of supply and demand. However, when she looked at corporate profits, she still thought that corporate greed was a big part of inflation.
It seems that many people believe that corporations could just lower prices, make less profit and everything would be great. Poor people would be able to afford to fill up their tanks with gas and their refrigerators with food.
Think about this a bit. If people cannot afford to buy food and fuel, there will be an excess supply. What will happen to that excess supply? Prices will come down to sell it. We will see sales.
What if supplies are being held to a low level to make prices high? According to the Laws of Supply and Demand, more producers will come into the market to increase supply, unless there is collusion between producers. That can happen and is illegal in the United States. We want competition between producers to achieve fair market prices.
During the Covid pandemic, our government told producers to stop producing. Workers were told to stay home. Supplies went down. We would expect prices to go up. In addition, the government paid people to stay home. When people have more money to spend, we expect prices to go up. Inflation was the natural result of government interference in the free market.
Many businesses never re-opened. Many people decided to work less or retire. I did both. I closed my chiropractic practice and retired. Those activities reduce supply.
What about the cost of housing? We had an oversupply of houses in 2008 that led to the real estate crash. Many people couldn’t find construction jobs and left the field. People weren’t receiving training. Now contractors are having trouble finding workers. The result is a lower supply of houses.
Some politicians think they will solve the problem by giving people money to buy homes. That will increase demand, and prices will go up even more.