[mariodiana]

Full disclosure: My understanding of economics is heavily influenced from what's called the Austrian School. On that understanding, we have two main factors that are contributing to the rise in prices. Only one of them is, properly speaking, inflation.

Putting the subject of inflation aside for the moment, the first cause is the destruction of capital. Capital destruction, which broadly speaking includes our ability to transport goods, has curbed the economy's productive capacity. We produce less, and so what we are able to produce becomes more dear. This is the supply issue, but it's not inflation.

The second cause is inflation. The definition of inflation I'm using is the increase in the money supply. Until very recently, this is what the Fed (and other central banks) have been doing. More money chasing the same amount of goods—all else being equal—causes a rise in prices. This is the demand issue.

I realize that this understanding and use of the term inflation isn't mainstream. But I think it makes it easier to understand what is going on.

[Mizoguchi]

I would also add there may be an speculative factor as well, perhaps exacerbated by the pandemic.

Some price hikes on products and services just don't seem to have any economic rationale behind them.

And not all of them are quite obvious because you may get a full product or service with a reasonable price increase that follows inflation but of lot less value.

Take for example hospitality (hotels and restaurants) and home services (roofing, plumbing, landscaping)

My theory is with the pandemic many businesses realized they can reduce quality and level of service without impacting profits.

It's pretty normal today to pay $200/night for a hotel and not get room service for 4 days or more, or go to a restaurant and get a mediocre food and service and still be automatically charged 20-25% on the final bill, in some places even after tax!

My hope is we will reach a point of BS that businesses will start competing again for quality and service and gradually bring things to pre pandemic levels, but that may take a decade or more.

Meanwhile I am cooking a lot more at home, traveling to places where I can hike and camp and do a lot of small projects at home myself.

[KingOfCoders]

"It's pretty normal today to pay $200/night for a hotel and not get room service for 4 days or more, or go to a restaurant and get a mediocre food and service and still be automatically charged 20-25% on the final bill, in some places even after tax!"

To paraphrase the last psychatrist (Miss you!), if you go there it's for you.

[some_banker_guy]

I know it's upsetting to a lot of people and they don't like it, but if you can charge a higher price and still sell it, it is economically rational to charge that.

PS. Don't roast me, I'm not defending the practice, just the definition of economic rationality.

[Mizoguchi]

You are right, perhaps it is our own expectations that have dropped.

[some_banker_guy]

I think this is slightly misguided, the cost of shipping was what exploded (see link below). It wasn't really a capital destruction as much as logistical issues/spill over from coronavirus.

https://www.freightos.com/freight-resources/coronavirus-upda...

I've seen so much discussion and threads being overly reductive about inflation, essentially the end prices of goods are a function of their inputs and the competition for those goods. It's important to understand that you have many non-linear effects overlapping to create the final goods price. For example, chip shortages meant inspite thousands of physical cars being finished, they couldn't be shipped for lacking a few components. There's nothing more money can do about that. But cars are essential, so the price of used cars exploded in response.

This is just one example of hundreds of different, overlapping issues that coronavirus brought to the supply side picture. At this point in the picture, much of the service side of the economy was physically shut e.g. you couldn't go to bars. Revenge travel, eating out etc. created a crowding out effect and drove prices higher there when they did open.

The billion dollar question is whether or not we continue to see this crowding / revenge effect or in fact people just have more money than you think and are simply spending it. There's mountains of data on both sides of this debate, if you look at consumer credit it seems to be increasing (people can't afford?), but savings rates also remain stubbornly high (but have money?). In spite of price increases, consumer demand remains very high (look at retail sales) and employment makes new record highs and JOLTS continues to be through the roof.

It's not a simple puzzle as many people seem to suggest.

[mariodiana]

I think you're right, and I corrected myself (before I saw your post) in answering a question to my original post:

https://news.ycombinator.com/item?id=35263238

Logistics got screwed up, I agree. And the increase in the costs of transportation impacts everyone else's calculations and ability to produce. Your chips and cars example is excellent, by the way.

[voldacar]

Can you elaborate on capital destruction? Who is destroying capital and why?

[mariodiana]

Thank you. I don't think I was being careful in my phrasing. By capital, I'm referring to the actual machinery and so forth used for production. Also, I expanded on that idea (as I noted) by including transportation, considering transportation to be, broadly speaking, involved with production and contributing to its cost.

But, as your question points out, I'm not really talking about destruction so much as I am about capital lying fallow for an extended period, and the chain of production—which endeavors to work as a well-oiled machine—being disrupted. My central point is that our ability to produce was greatly curtailed, resulting in less goods and services available.

Finally, I'm not quite sure what you mean by "who" and "why." I'm not pushing some kind of conspiracy theory. I'm just making observations of what has happened.

[voldacar]

So by capital destruction you're referring to shutting down large sectors of the economy due to the coronavirus? Or was this already taking place before 2020?

I didn't think you were referring to a conspiracy. I just didn't know what you meant, since if you have capital, it's not really rational to destroy it

[mariodiana]

Right. But, more than that, I'm talking about the fallout of shutting things down—of breaking the chain of production—and then the difficulty of starting things up again.

I was horrified when things got shut down. Even when I originally bought into "two weeks to slow the spread" and believed it was only going to be for two weeks, I was concerned that a global, advanced division-of-labor economy cannot be switched on and off like a lightbulb.

[thwayunion]

> Who is destroying capital and why?

Capital destruction doesn't have to be intentional. Hurricanes, fires, floods, wars, and pandemics can destroy capital. A bunch of chickens being killed due to bird flu is an example of capital destruction. Your house being destroyed due to a flood is capital destruction. Bananas rotting in a warehouse because the truck driver decided to take a vacation day is capital destruction.

Of course, arson and war can also destroy capital, and those are intentional. Policy can also destroy capital; e.g., a tariff that decreases international trade reduces the value of shipping containers; that destroys capital even if the shipping containers still get used (at a lower rate).

Rant:

No one cares about pushing around definitions of words; what they want to know is why they have to pay more for stuff! For this reason, the Austrian definition of inflation is kind of idiotic and imo often used in bad faith.

Why? Because most people understand inflation to mean "things are getting more expensive". That's the normal definition not only in mainstream economics but also in the lay vernacular.

So then an Austrian tells you that "inflation is monetary" and you infer that "the reason for increasing prices must be money printing". But that's an errant deduction! The Austrian is simply axiomatically defining a term in a non-standard way. In particular: the "inflation is monetary" is literally just choosing a weird way to define inflation, NOT making an actual empirical claim about the reason that e.g. egg prices have increased!

If you accept the definitional slight of hand and don't realize the silly game of axioms you've been recruited into, then you conclude that money printing is always the reason for increasing prices, even though not even the most staunch Austrian has the balls to make such a wildly broad claim ("oh, no, those prices increased because of capital destruction, not inflation!").

So far we just have a silly confusion. The pernicious thing is that the conclusions that you draw due to this stupid definitional game happen to support the often entirely self-interested policy preferences of (usually wealthy, and in a particular way) Austrians.

To your parent post's credit, they explain what they mean when they say that inflation is monetary; ie, that you cannot conclude from their assertion that inflation is the reason that prices are increasing. But generally I find the game that gets played with the definition of inflation (it's always monetary!!1!) extremely aggravating, since literally everyone else in the conversation understands that inflation means a general increase in prices. It's the same sort of pernicious definition game that people play when they say that that US is a republic and not a democracy.

And, in fact, you'll find that most Austrians themselves don't even understand that "inflation is monetary" is just a definitional choice, not an actual empirical claim about why prices increase. Or, when they do, they will freely move between the two definitions in a way that is -- even if not in bad faith -- an actively misleading use of rhetoric.