Thomas Humphrey on the cost push theory of inflation fallacy that will not die
15 May 2018 Leave a comment
in inflation targeting, macroeconomics, monetary economics Tags: cost-push inflation
The mirage of cost-push inflation
17 Jul 2014 Leave a comment
in inflation targeting, macroeconomics Tags: Bill Allen, cost-push inflation, lags on monetary policy
It does appear too many that rising costs push up prices, but this impression is an illusion caused by the way inventories delay the effect of money supply increases on retail prices.
When increased money growth causes total spending to rise more quickly, sales of particular businesses will increase. But sales fluctuate from day to day and week to week, so managers of these businesses cannot immediately know that this sales increase will last.
As sales continue to rise, restaurants will use up their inventories. Larger orders will then be placed with suppliers, and inventories of these suppliers will begin to shrink.
The retail price has not yet changed because inventories have absorbed the initial impact of the increased spending.
But as more orders to replace depleted inventories work their way down the chain of distribution, orders for too wholesalers also will rise faster.
The available inventories are inadequate to meet the rising amounts demanded at existing prices.
As a result, wholesale prices will rise as packers bid more intensely for scarce factory supplies. These higher prices then cause factories and other base suppliers to raise their prices; and higher wholesale prices cause retailers to charge more.
As higher prices work their way up the distribution chain to the consumer, they create an illusion that higher costs are pushing up prices.
But both costs and prices are being pulled up by the increased spending caused by a more rapidly growing money stock. Because the effects of more money and more spending are delayed by inventories, hasty conclusions about the cause of inflation can be deceptive.
HT: Bill Allen
Utopia, you are standing in it! 
Recent Comments