Is inflation wage or profit driven?

Wow, this question is very class warfare. 😊 Basically, what and who caused inflation? Grassroot people/consumers/workers who earn wages to buy goods/services or big corporations who has the pricing power and is driven to maximize profits/shareholder value?

The definition of inflation is too much money chasing too few goods. Perhaps this is wrong or one-sided? In the news or around us, we hard many people complaining that they don’t have enough money to pay for food or shelter or other necessities for life. There are so many protests here in Canada and around the world by workers fighting for wage increase because it can’t keep up with inflation.

When I learned this definition of inflation in Economics 101 in school, I never imagined that this one definition can have huge impact on monetary policy to fight inflation. We heard so many times in the news that policy makers in the government or central bankers hesitate to give relief money or wage increases to the people because of fear of adding to inflation. This concern is called wage-price spiral.

Recently, Canadian government questions the big 3 grocery chains on their role of food price inflation due to public anger and pressure.  NPR Planet Money just aired an podcast right on topic – Inflation and the Profit-Price Spiral. Very interesting and insightful. It shows the history of this concept – Profit- Price Spiral. It got a lot of push back or scorns from the economists when it was just introduced. Some said blame inflation on business seeking profit is like blaming falling on gravity. LOL! Is this a bit entitled?

Probably due to merger and acquisition, which is the natural cause of competition, the industries got more and more concentrated in developed nations. Each industry is dominated by a few big corporations that have enormous pricing power. This was not evident decades or a few decades ago until now. Perhaps, the Profit-Price Spiral got more buy-in now than before.

Perhaps the definition of inflation should change to simply price increase on the same goods. The causes can two folds – supply and demand. It can be from the demand side, but it can also from the supply side. A good example of the supply side inflation is the 70s Great Inflation partly caused by oil price shock due to middle east conflict. It is not just short of supply caused by supply chain issue during the Covid-19 pandemic. There can be plenty of supply, but the corporations can increase price just because they can due to lack of competition.

Anyhow, it is a very interesting and informative podcast.

Published by Worthfy

Financial literacy and counselling

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