[bfung]

> it is a self-correcting problem because as prices go up people will no longer have as much money.

It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this:

    1. People have more money, so the majority spend it (instead of saving it).

    2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices.

    3. People are feeling good cause their companies are doing well, but wait… we should get a raise and get some of that profit!

    4. see #1.

At some point, this cycle gets out of control and we finally realize “inflation is too high”.

For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand.

You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations.

The US Fed only has 1 tool out of the 3, as congress is the ones with power to raise taxes or add regulation.

[saghm]

> For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand.

> You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations.

I know your explanation is simplified, but as you describe it, it seems like the obvious solution is to just stop raising the prices? I feel like there must be something more complicated at play, because "we need more unemployment so that the companies don't have to stop raising their prices due to incorrect predictions" is ridiculous.

[rembicilious]

It seems like capping prices would cap inflation, but I can’t think of any great mechanism to accomplish such a cap. Central bank interest rates and taxes are controlled by relatively few people. Prices are controlled by hundreds of thousands of people.

[rogersnm]

If you cap prices for a given company or product, you prevent that company (or producers of that product) from competing effectively for the inputs to that product in the broader market place (bear in mind things like labour and energy are relatively interchangeable between companies), that can ultimately mean that the company can no longer produce anything at all (if the cost of their inputs rise above their sale price cap).

The only way to make a price cap work is to set all prices in the economy, which as you observe, is not possible. The much more practical solution to maintaining a stable general price level is to adequately control the quantity of money that exists.

[jimnotgym]

There is also a government role in making sure an efficient and fair market exists for goods, by working against cartels and monopolies for instance.

The gas price shock is partly caused by a massive supply shock, but also an unwillingness of the cartel to increase supply, since they are doing just fine with the high prices.

I think we are seeing something similar with (for instance) Amazon. A gross simplification is that Amazon has achieved market dominance in many goods. This has reduced competition from smaller businesses, who can't compete in price. However those local stockholders would have been more resilient in the supply chain crisis than the Amazon ecosystem, because they bulk shipped stock to their warehouse (where they held stock), vs drop shipping it on demand from some distant place. This was costlier at the time, but arguably better for the environment and the resilience of the economy.

Right now Amazon is not the cheapest on anything and doesn't have everything in stock for 24 hour delivery any more. It doesn't fulfil its promise of being cheaper or faster. Government could put various controls on Amazon, but instead let us traditional businesses fight to stay alive against it (or be forced to sell through it!). Personally I think Amazon marketplace should be split from Amazon the store for this reason. You can't be the marketplace and a participant.

[rogersnm]

> There is also a government role in making sure an efficient and fair market exists for goods, by working against cartels and monopolies for instance.

> The gas price shock is partly caused by a massive supply shock, but also an unwillingness of the cartel to increase supply, since they are doing just fine with the high prices.

I certainly agree with these points.

> I think we are seeing something similar with (for instance) Amazon. A gross simplification is that Amazon has achieved market dominance in many goods. This has reduced competition from smaller businesses, who can't compete in price. However those local stockholders would have been more resilient in the supply chain crisis than the Amazon ecosystem, because they bulk shipped stock to their warehouse (where they held stock), vs drop shipping it on demand from some distant place. This was costlier at the time, but arguably better for the environment and the resilience of the economy.

Retail shopping remains one of the most competitive sectors in the economy. It is true Amazon has raised the bar for service, choice and price, and benefits from economies of scale, which has made it difficult for other businesses to compete, however we’re very far from Amazon having a monopoly on retail shopping (you can also see this in their very slim margin on their retail business - if they were dominating, they’d have a substantially bigger margin.).

> Right now Amazon is not the cheapest on anything ... It doesn't fulfil its promise of being cheaper or faster.

It is somewhat unfair to say that Amazon is bad because smaller businesses cannot compete on price, and also say that Amazon is expensive and other providers are cheaper - both of these statements cannot be true.

[makomk]

There are some other obvious reasons for that unwillingness to increase supply that I think you're missing. Any substantial increase in supply would require investing money in new infrastructure, since it's currently at close to capacity. For the last few years environmental activists have campaigned against any investment in fossil fuel production with some success and this makes it a lot harder to get funding. Also, you may recall that there were a bunch of articles claiming fossil fuel assets would become stranded and literally worthless due to the global push for net zero, and how fossil fuel companies were basically scamming investors by ignoring this risk. The companies are acutely aware of this risk and have been quite cautious about expanding capacity as a result.

[medvezhenok]

It would cap reported inflation, but capping prices just turns inflation into shortages (since demand > supply either way), and potentially slows down the supply response (high prices incentivize more supply).

If supply is actually restricted (and can't be increased), then capping prices makes sense in certain scenarios, and indeed price caps have been used historically in the U.S., from the 1940s through the 1970s.

[raydiatian]

I haven’t studied Econ too much, but I know differential equations. Is there any economic theory suggesting a stable curve that doesn’t oscillate around the mean (but rather tightens up right onto the “mean” whatever that is) is desirable? I get we’re also talking planet scale complexity, and it’s not like that can just be baked in overnight.

[barry-cotter]

The costs of inflation are mostly in surprise, adjustment, monitoring or uncertainty. A stable rate puts all of those at or near zero. High, stable, predictable inflation would be better than usually low but unstable inflation. For a perfectly fine introduction to why inflation is bad see the link below.

https://quickonomics.com/the-costs-of-inflation/#:~:text=The...

[BizyDev]

Certainly what you point out is probably part of the problem but it is, in my opinion, certainly not the biggest part.

For me, current inflation is caused by the fact that people have too much money the do not need and they invest it instead of buying goods.

This leads too more speculation on everything, stocks, cryptos, energy, real estate and even staple foods.

In the last 10 years every of those indexes has gone massively up. This has resulted in companies having share prices increasing faster than their performance would have suggested. If there's more demand for company X stocks then the price will go up even if company's performance is not so great.

And here starts the loop for me, company X employees want a slice of this cake. Their are recompensed for the higher stock price (bonuses, wage increases) and not for their "real life" performance. And now those employees have even much more money they didn't need, so what they do? They invest and speculate => loop.

While the upper middle class (and above) has became richer thanks to this (more salary, stellar investment performance, low interest rates to invest even more etc) the bottom class has lost everything, they have pretty much the same salary than 10 years ago but everything is more expensive.

Nevertheless, almost everywhere in the world, we have also seen wealth tax cuts. So those who had money to invest have now even more and those who need to be helped are helped even less because less taxes means a state less able to help them.

All of this have brought us to where we are today. Unfortunately.

[galaxyLogic]

You make a great point if I understand it correctly:

Problem is not that people have too much money. Problem is that (some) people have more money than they need.