Understanding Economics: What is inflation?
Richard J Murphy
31,784 views
Inflation means that prices are rising, but knowing the inflation rate does not tell us why prices are going up. In this Understanding Economics video, I argue that identifying the cause of inflation is essential if we are going to choose the right policy to tackle it.
Economists traditionally distinguish between demand-pull inflation and cost-push inflation. Demand-pull inflation happens when spending exceeds the economy’s capacity to supply goods and services. Cost-push inflation happens when essential costs such as energy, food and materials rise because of supply shocks.
I also identify a third form: “greedflation”. This happens when companies use their market power to increase prices by more than their costs have risen, increasing their profit margins in the process.
These different causes require different responses. I argue that raising interest rates might suppress demand, but it cannot create more energy, food or other scarce resources. Higher rates also increase mortgages, rents and business costs while discouraging the investment that could increase productive capacity.
Instead, policy should match the cause. Excessive demand can be managed through taxation. Excess profits can be tackled through regulation and taxation. Energy shortages require investment in domestic energy, while other supply shortages require investment in the capacity needed to produce more.
Inflation policy is therefore about much more than changing interest rates. We need to ask what is causing prices to rise, who is gaining, who is losing and which policy actually addresses the underlying problem.
There is no single solution to inflation because there is no single cause. Understanding that is essential if we want economic policy that works. This is what Understanding Economics is all about.
Take a look at the poll below: Post
00:00 What Is Inflation?
01:04 Why the Cause of Inflation Matters
02:08 Demand-Pull Inflation Explained
03:14 What Is Cost-Push Inflation?
04:20 COVID and the Supply Chain Shock
05:25 War, Energy and Rising Prices
06:32 What Is Greedflation?
07:38 Why Interest Rates Are the Wrong Tool
08:45 How Higher Rates Can Increase Costs
09:50 Why Interest Rate Policy Creates Inequality
10:55 How Tax Can Control Inflation
12:02 Match the Solution to the Cause
13:08 How to Tackle Greedflation
14:05 Investment Can Fight Supply-Side Inflation
15:00 There Is No Single Solution to Inflation
TRANSCRIPT
A transcript for this video is available at: https://www.taxresearch.org.uk
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ABOUT RICHARD MURPHY
Richard Murphy is Emeritus Professor of Accounting Practice at Sheffield University Management School. He is director of Tax Research LLP and the author of the Funding the Future blog. His best-known book is ‘The Joy of Tax’.
This video was edited by Thomas Murphy.
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INTRODUCTION: Welcome to my channel - Richard J Murphy -...
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#Inflation #UnderstandingEconomics #Economics #CostPushInflation #DemandPullInflation #Greedflation #InterestRates #BankOfEngland #Taxation
20 Comments
Supply shocks and supply constraints might well be inflationary pressures, but they also become convenient narrative devices for raising prices across all sorts of sectors, even where there's no actual supply issues. And even in supply affected sector, the prices are hiked above what they should be to reach any kind of parity.
What's more, when supply is eventually restored, the prices never drop at the rate they were raised in the first place, or come down to the level they were originally at.
Apparently this maybe called 'stigma dilution' or 'universalist premium' (through the lens of 'benefits').
In a sense it's like a 'fiscal drag' that allows wage growth in a monetary sense, without any real improvements.
It could also be equivalent to a non-zero inflation target (BoE/Govt), such as the 2%pa (doubling over 35 years).
"Quick we better make your mortgage more expensive" !
This means that tax may be in one bracket 30% but when everything is working well instant discounts of say 6% are given for each accounting or pay period for 3 months and notification of a further 3 months in advance. As inflation rises a part of the discount is withdrawn for 3 months and advice on the subsequent 3 months is given. This variation may differ for all three of the categories. Doing it this way removes the inflationary aspects relatively smoothly and also points the finger and solution at the problem more directly. Internal inflation would be controlled from its start and everyone would know that if it persists then discounts will be cut further. This will be particularly helpful in the case of your third category greedflation. I would envisage that the wage earner would be the least effected unless there is a massive inflation. It would also mean that a sort of turnover tax on business would need to be created. Which would be a sensible idea and catch many businesses that hide behind off shore or variably thinking legal accounting.
To change the dogma, the only way is using Ai instead human to make decision of central banks and purely data-driven approach without any theory or economic models attached.
The reason is simple: time has only one direction - from today to tomorrow.
Therefore deflation means that businesses buy at a higher price than they are able to sell later. When this happens, they simply shutdown their businesses and fire their employees. When businesses do this, a rising number of people without income increases the pressure on prices to go down. This creates a downward spiral for the economy, where companies go bust.
So don't expect a hyperdeflation. Prices only shrink a bit to reduce the losses before the shutdown of companies.
Understanding Economics: What is inflation?
Richard J Murphy
31,784 views
Inflation means that prices are rising, but knowing the inflation rate does not tell us why prices are going up. In this Understanding Economics video, I argue that identifying the cause of inflation is essential if we are going to choose the right policy to tackle it.
Economists traditionally distinguish between demand-pull inflation and cost-push inflation. Demand-pull inflation happens when spending exceeds the economy’s capacity to supply goods and services. Cost-push inflation happens when essential costs such as energy, food and materials rise because of supply shocks.
I also identify a third form: “greedflation”. This happens when companies use their market power to increase prices by more than their costs have risen, increasing their profit margins in the process.
These different causes require different responses. I argue that raising interest rates might suppress demand, but it cannot create more energy, food or other scarce resources. Higher rates also increase mortgages, rents and business costs while discouraging the investment that could increase productive capacity.
Instead, policy should match the cause. Excessive demand can be managed through taxation. Excess profits can be tackled through regulation and taxation. Energy shortages require investment in domestic energy, while other supply shortages require investment in the capacity needed to produce more.
Inflation policy is therefore about much more than changing interest rates. We need to ask what is causing prices to rise, who is gaining, who is losing and which policy actually addresses the underlying problem.
There is no single solution to inflation because there is no single cause. Understanding that is essential if we want economic policy that works. This is what Understanding Economics is all about.
Take a look at the poll below: Post
00:00 What Is Inflation?
01:04 Why the Cause of Inflation Matters
02:08 Demand-Pull Inflation Explained
03:14 What Is Cost-Push Inflation?
04:20 COVID and the Supply Chain Shock
05:25 War, Energy and Rising Prices
06:32 What Is Greedflation?
07:38 Why Interest Rates Are the Wrong Tool
08:45 How Higher Rates Can Increase Costs
09:50 Why Interest Rate Policy Creates Inequality
10:55 How Tax Can Control Inflation
12:02 Match the Solution to the Cause
13:08 How to Tackle Greedflation
14:05 Investment Can Fight Supply-Side Inflation
15:00 There Is No Single Solution to Inflation
TRANSCRIPT
A transcript for this video is available at: https://www.taxresearch.org.uk
HOW TO SUPPORT US
Please consider donating: https://ko-fi.com/taxresearch
ABOUT RICHARD MURPHY
Richard Murphy is Emeritus Professor of Accounting Practice at Sheffield University Management School. He is director of Tax Research LLP and the author of the Funding the Future blog. His best-known book is ‘The Joy of Tax’.
This video was edited by Thomas Murphy.
RICHARD MURPHY ON BLUESKY:
https://bsky.app/profile/richardjmurp...
OR
ON MY BLOG: http://www.taxresearch.org.uk/Blog/
HIT SUBSCRIBE & GET NOTIFICATIONS
Subscribe and get notified of new videos released.
INTRODUCTION: Welcome to my channel - Richard J Murphy -...
Take a look at our playlist page to view older videos: @richardjmurphy
#Inflation #UnderstandingEconomics #Economics #CostPushInflation #DemandPullInflation #Greedflation #InterestRates #BankOfEngland #Taxation