- Why do economists/traders/academics plot the demand for a product/service relative to inflation? 2. Regarding those plots, does it matter whether it is cost push inflation or demand pull inflation?
for example, plotting the rise in tuition (or the rise in home prices) against inflation http://flustercucked.blogspot.com/2011/02/college-tuition-insanity-tuition.html
bump
Not sure what you are looking for here, but you have read the chart wrongly. Clicking through to the original website and it is clear that the rise of prices (e.g tuition) IS inflation (inflation meaning rising prices). It’s not the rise of prices against inflation, it is the rise of prices = inflation. There isnt really a mention of demand here either. Maybe you used a bad example or framed the question poorly. http://dshort.com/inflation/CPI-category-overview.html
- Inflation is always and and everywhere a monetary phenomenon. This talk of cost push or demand pull is nonsense. If you don’t agree, google my first sentence and take it up with the original author - his credentials are slightly more impressive than mine. 2) Considering nominal prices in conjunction with inflation gives us real prices (ie: prices adjusted for inflation). Real prices are key to understanding price changes over time because, with inflation accounted for, any price changes should (with the exception of some retarded government fiddling) reflect the interplay of supply and demand.
That’s rubbish. If the supply of oil suddenly drops because half of the world’s oil supply has been nuked and is too radioactive to use, prices everywhere are going up, and that’s not a monetary phenomenon. Sure, you can jack up interest rates and try to restrict the monetary supply to bring the prices of everything back down, but that doesn’t mean that monetary policy caused inflation.
I’m not sure what the question is here. If there is a worldwide drought, food prices will go up due to lack of supply. If China’s GDP per capita doubles suddenly, then food prices will also go up due to higher demand. So supply and demand both affect inflation, in addition to monetary policy and other stuff.
Yes, it does matter if it’s cost-push or demand-pull. Cost-push is a very bad thing. It means prices are rising because the inputs used to manufacture the products has gone up, making everything more expensve. Meanwhile, wages have not kept pace and people struggle to afford stuff. Demand-pull isn’t nearly as bad, though after a while it takes its toll too.
For the original question, academics will plot real prices because if inflation happens, it’s supposed to be a broad increase in prices across the economy. If that happens, then prices are rising as fast as people’s incomes are rising, and those price increases shouldn’t affect the quantity demanded or the quantity supplied. It’s real changes in purchasing power and prices that will change supply in demand. In reality, inflation has distributional effects, but that’s a separate layer of analysis.
bchadwick Wrote: ------------------------------------------------------- > For the original question, academics will plot > real prices because if inflation happens, it’s > supposed to be a broad increase in prices across > the economy. If that happens, then prices are > rising as fast as people’s incomes are rising, and > those price increases shouldn’t affect the > quantity demanded or the quantity supplied. It’s > real changes in purchasing power and prices that > will change supply in demand. > > In reality, inflation has distributional effects, > but that’s a separate layer of analysis. Okay, so does it follow that inflation can be proxied via income levels when doing those plots?
Why can’t it be both cost push and demand pull?
It can be both, and ultimately they both end up in the same spot. The main difference is if wages go up first, or at all.
bchadwick Wrote: ------------------------------------------------------- > That’s rubbish. If the supply of oil suddenly > drops because half of the world’s oil supply has > been nuked and is too radioactive to use, prices > everywhere are going up, and that’s not a monetary > phenomenon. Sure, you can jack up interest rates > and try to restrict the monetary supply to bring > the prices of everything back down, but that > doesn’t mean that monetary policy caused > inflation. What you’re describing isn’t inflation, it’s prices reacting to a supply shock. Oil happens to be an input into many other goods and this is the mechanism through which other price may change. Inflation is not a blanket term for price increases. Inflation is caused by too much money chasing too few goods. This is econ 101 guys.
Sweep the Leg Wrote: ------------------------------------------------------- > Yes, it does matter if it’s cost-push or > demand-pull. Cost-push is a very bad thing. It > means prices are rising because the inputs used to > manufacture the products has gone up, making > everything more expensve. Meanwhile, wages have > not kept pace and people struggle to afford > stuff. > > Demand-pull isn’t nearly as bad, though after a > while it takes its toll too. Your description of cost-push inflation is prices reacting to scarcity.
Wrong. Inflation is a generalized increase in prices across the economy. Yes, the oil scenario is a supply shock, but that doesn’t mean that the generalized increase in prices across the economy is not inflation. Sounds like Hayek needs to go back and redo Econ 50.5.
Hayek Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > That’s rubbish. If the supply of oil suddenly > > drops because half of the world’s oil supply > has > > been nuked and is too radioactive to use, > prices > > everywhere are going up, and that’s not a > monetary > > phenomenon. Sure, you can jack up interest > rates > > and try to restrict the monetary supply to > bring > > the prices of everything back down, but that > > doesn’t mean that monetary policy caused > > inflation. > > > What you’re describing isn’t inflation, it’s > prices reacting to a supply shock. Oil happens to > be an input into many other goods and this is the > mechanism through which other price may change. > > Inflation is not a blanket term for price > increases. Inflation is caused by too much money > chasing too few goods. > > This is econ 101 guys. Hayek, you’re arguing with a guy that has a PhD in Economics (hope you don’t mind bchad), just stop.
Hayek Wrote: ------------------------------------------------------- > > > What you’re describing isn’t inflation, it’s > prices reacting to a supply shock. Oil happens to > be an input into many other goods and this is the > mechanism through which other price may change. > > Inflation is not a blanket term for price > increases. Inflation is caused by too much money > chasing too few goods. > > This is econ 101 guys. Hayek, are you aware of how CPI and PPI (most common US inflation indexes) are calculated? It simply represents the change of price on a comparable basket of goods over a period of time. That’s how they calculated it. So if there’s a supply shortage, or a demand increase, and money supply remains unchanged, then those factors contribute to inflation as the Fed measures it. Do you not listen to the Fed briefings or economists discussing inflation? When they say energy costs are driving inflation (in either CPI or PPI typically), how would that make any sense whatsoever if it was simply a money supply issue. Money supply would treat all categories equivalently so there’d be no point breaking out sub sections. But they do, and the Fed spends a great deal of time discussing drivers behind CPI increases such as energy run ups. Which tells you that supply and demand are in fact big factors.
Yes, inflation is manifested as increased prices. No, it doesn’t need to be a generalized increase in prices across the economy. An increase in the money supply does not necessarily affect all sectors equally. Therefore, the aggregate price level is a misleading metric for exploring inflation. An expansion in the money supply will cause price increases, of varying degrees, in varying sectors. The causal relationship doesn’t run both ways, simply observing rising prices does not imply an increase in the money supply, and therefore inflation. Price increases can be the result of increased scarcity. In your oil example, the scarcity of one good causes many prices to increase. The money supply hasn’t changed. There isn’t more money in the system causing prices to creep up, there is less oil. Scarcity creates value. No inflation, just price increases.
Hayek Wrote: ------------------------------------------------------- > Sweep the Leg Wrote: > -------------------------------------------------- > ----- > > Yes, it does matter if it’s cost-push or > > demand-pull. Cost-push is a very bad thing. > It > > means prices are rising because the inputs used > to > > manufacture the products has gone up, making > > everything more expensve. Meanwhile, wages > have > > not kept pace and people struggle to afford > > stuff. > > > > Demand-pull isn’t nearly as bad, though after a > > while it takes its toll too. > > Your description of cost-push inflation is prices > reacting to scarcity. Yes, I know. Thanks for pointing that out. Also, while I completely agree with you on your definition of inflation - it is the increase of the supply of money strictly speaking - you’re arguing sematics and coming off like an a-hole. Rising prices is technically a result of inflation, but no one cares, nor does it matter for the purposes of discussion. Saying “inflation” is easier than “rising prices.” /Hayek has nothing on Von Mises or Rothbard btw
Hayek Wrote: ------------------------------------------------------- > Scarcity creates value. No inflation, just > price increases. To 99.99% of the economic community if the same dollar buys less that would constitute inflation. In what if any functional sense is the scenario you described driven by supply differences any different from a rise in price caused by change in money supply? I mean if price levels are ultimately determined by the ratio amount of money over amount of goods and there is no functional difference between from a monetary standpoint whether it was caused by a numerator or denominator change.