A recent article: https://www.stuff.co.nz/business/money/301022706/prepare-to-find-another-70-a-week-to-get-by-in-2024-asb
says: ..if households decided the worst was over and started to feel more confident about spending, it could push up inflation
But I thought it was the opposite;
More spending means more demand means more supply, which means production costs go down (due to economies of scale)… so inflation goes down?
But saving means less spending, means less demand, means less income for business, means costs go up… so inflation would rise?
More demand might eventually result in more supply, but that can be a very slow reaction. If more people start flying, the airlines will initially just jack up prices for seats. If that increased demand is projected to be long term or keep growing, the airline might buy more planes to add routes, but that’s a long and expensive process, and they’re likely to do it just enough to keep prices high.
If more people are buying new cars, the dealers are going to tack on fees to increase their profits because they can. Eventually, the auto makers might increase production so that they can make more profit, and that increases supply could lower consumer prices.
If people suddenly decide to save their money and not fly as much or not buy new cars, there will be a glut of seats/cars, and the prices will drop as the sellers compete for the reduced number of buyers.
So that’s the whole reason the Fed is raising interest rates to try and slow inflation. The thought is that if you have to pay more money to finance a house or a car, or to get a home improvement loan, you’re less inclined to do those things, so there will be fewer buyers and more supply than demand, which will increase competition and reduce prices. It’s been working.
So basically, less spending will decrease inflation in the short run. What about the long run?
Prices are sticky but the rate of inflation slows. Hopefully at least. You don’t want to slow spending down so much so as to cause a recession, it’s a fine balance.
Given how long term an issue like inflation is, trying to tame it is a relatively new experience/adventure for humanity.
Mhm, I see. Thank you for your answer 👍.
Maybe if the price per apple goes up, the grocer takes the money. He can’t sell more apples because there aren’t any right now and anyway there’s still the same number of stomachs, so he puts it in the bank. The bank lends it out at too high interest for the farmer to borrow to plant trees on the off chance he can convince the grocer to stock more apples five years from now.
IANAE but I think the idea is high interest rates prevent supply expansion generally.
No, spending makes inflation rise.
I am not familiar with what’s happening in NZ and I don’t completely understand the payment thing. Does everyone in NZ get a basic monthly income?
As for your question about inflation. There are several factors at play so too much demand for goods and a stressed supply can cause price inflation. But I think we have mostly moved passed supply constraints… at least in the industry I work.
Monetary policy like hiking federal fund rates is designed to make the cost to borrow higher, which makes larger purchases less affordable, so you hold off on purchasing a car or a house or other items, tampering demand, so inflation goes down.
Savings? That’s not something they talk about in America too often because we are an economic that thrives on dept, but I think in other parts of the world it is the norm to always be living within your means and putting away savings.
Not sure what “payment” you’re referring to, but no New Zealand definitely does not have a UBI.
It has a monetarist economy with a target inflation of 1-3% and has been running at up to 7% in recent years.
Does everyone in NZ get a basic monthly income?
There are a few countries out there that do statistics and reference their salary on a yearly cycle, the US included. Most cointries express the avarage salary on a monthly basis. We don’t think in terms how much do I make in a year, we think in terms of how much do I make in month cuz… well, we don’t get yearly paychecks, we get monthly paychecks. It’s just easier.
More spending means more demand means more supply, which means production costs go down (due to economies of scale)… so inflation goes down?
Supply may or may not be able to adjust quickly.
A good example is food. There’s only so much that can be grown and distributed. So a high demand for food year after year only pushes up the price. The supply can’t really grow exactly. You can purchase more, import it, but that’s still probably more costly than local production. So importing it may actually make the price higher even while the supply expands.
Also, organizations aren’t required to produce more. In an economic environment where…idk…you once found t-shirts for $5 for three, Hanes can make it $6 for three because what else are you going to do? Buy Fruit of the Loom like a peasant, who is also charging more for their clothes?
So if production can’t or won’t expand and/or supply can’t it won’t expand, you’ll have more and more money chasing the same amount of goods, which leads to inflation.
