According to him, this will result in long-term inflation increases, prompting him to sell his growth stocks and invest in value.
Inflation can be caused by either the supply or demand side of the economy. Economists refer to supply-side inflation as cost-push inflation, and demand-side inflation is referred to as demand-pull inflation.
The former occurs when the cost of bringing products and services to market increases, whereas the latter occurs when demand for goods and services increases faster than supply.
Lockdowns were imposed around the world as a result of the pandemic, resulting in a substantial drop in demand-side inflation as people were unable to make some of their typical purchases.
When economies reopen, those purchases are made, and inflation rises, especially as forced savings from the lockdowns are spent. The shutdown of economies, however, had an effect on supplies.
This is because, for example, semiconductor manufacturers decreased production in expectation of a sustained drop in demand, and manufacturing slowed as the oil price briefly fell into negative territory during the pandemic’s peak.
Lagarias claims to be “I’m not concerned about supply-side inflation on its own,” because supply-side inflation is often easier to control because companies adjust supply to meet increased demand. While this does take time, it is only temporary in nature.
VT De Lisle America fund manager Richard de Lisle says: “The supply-side inflation is not the one to be concerned about. Because of the forced changes in behavior, bottlenecks are larger than usual. Demand-side inflation is the most frightening since it is much more difficult to manage.”
Trying to contain demand-side inflation, according to outgoing BoE chief economist Andy Haldane, is like trying to grasp a tiger by the tail, observing that “this animal has been agitated by the exceptional events and policy actions of the previous 12 months.”
Consumers are expected to squander approximately 10% of their savings quickly, according to the central bank. Retail sales in April were 10% higher than pre-pandemic levels, according to the latest figures from the Bank of England, with apparel sales returning to pre-pandemic levels.
In its most recent inflation report, the Office for National Statistics stated that while overall inflation increased by 1.5 percent in the year to April 30, input costs increased by 9.9%.
In a webinar last week, Philip Lane, the European Central Bank’s top economist, stated that increasing input costs will not contribute to higher inflation in the long run.
The risk of supply-side inflation, according to Gero Jung, chief economist at Mirabaud Asset Management, could stem from labor market concerns. Many people may not be better off without accepting a job at this point, he believes, because of furlough plans and particularly high social security benefits paid as emergency measures during the pandemic.
What is the source of supply-side inflation?
Cost-push or supply-side When the cost of goods and services rises as a result of rising production costs, this is known as inflation. While demand remains constant, aggregate supply, or the total amount of goods and services produced by a country at a given price level, falls, resulting in cost-push inflation. Expenses of labor, raw materials, land, and capital all rise as a result of rising labor, raw material, and land costs.
What does it mean to be supply-side?
Supply-side economics is defined as an economic theory that states that lowering tax rates stimulates more incomes, savings, and investment, hence increasing economic activity and total taxable national income.
What are the four major reasons for inflation?
Inflation is a significant factor in the economy that affects everyone’s finances. Here’s an in-depth look at the five primary reasons of this economic phenomenon so you can comprehend it better.
Growing Economy
Unemployment falls and salaries normally rise in a developing or expanding economy. As a result, more people have more money in their pockets, which they are ready to spend on both luxuries and necessities. This increased demand allows suppliers to raise prices, which leads to more jobs, which leads to more money in circulation, and so on.
In this setting, inflation is viewed as beneficial. The Federal Reserve does, in fact, favor inflation since it is a sign of a healthy economy. The Fed, on the other hand, wants only a small amount of inflation, aiming for a core inflation rate of 2% annually. Many economists concur, estimating yearly inflation to be between 2% and 3%, as measured by the consumer price index. They consider this a good increase as long as it does not significantly surpass the economy’s growth as measured by GDP (GDP).
Demand-pull inflation is defined as a rise in consumer expenditure and demand as a result of an expanding economy.
Expansion of the Money Supply
Demand-pull inflation can also be fueled by a larger money supply. This occurs when the Fed issues money at a faster rate than the economy’s growth rate. Demand rises as more money circulates, and prices rise in response.
Another way to look at it is as follows: Consider a web-based auction. The bigger the number of bids (or the amount of money invested in an object), the higher the price. Remember that money is worth whatever we consider important enough to swap it for.
Government Regulation
The government has the power to enact new regulations or tariffs that make it more expensive for businesses to manufacture or import goods. They pass on the additional costs to customers in the form of higher prices. Cost-push inflation arises as a result of this.
Managing the National Debt
When the national debt becomes unmanageable, the government has two options. One option is to increase taxes in order to make debt payments. If corporation taxes are raised, companies will most likely pass the cost on to consumers in the form of increased pricing. This is a different type of cost-push inflation situation.
The government’s second alternative is to print more money, of course. As previously stated, this can lead to demand-pull inflation. As a result, if the government applies both techniques to address the national debt, demand-pull and cost-push inflation may be affected.
Exchange Rate Changes
When the US dollar’s value falls in relation to other currencies, it loses purchasing power. In other words, imported goods which account for the vast bulk of consumer goods purchased in the United States become more expensive to purchase. Their price rises. The resulting inflation is known as cost-push inflation.
What does it mean when there are too many dollars chasing too few goods?
The rising pressure on prices that accompanies a supply shortage, which economists define as “too many dollars chasing too few things,” is known as demand-pull inflation.
What role does supply-side economics play in lowering inflation?
Government initiatives aimed at increasing productivity and efficiency in the economy are known as supply-side policies. If successful, they will move aggregate supply (AS) to the right, allowing for stronger long-term economic growth.
- Free-market supply-side policies aim to boost competitiveness and efficiency in the market. Privatization, deregulation, lower income tax rates, and trade union influence are only a few examples.
- Government intervention is used in interventionist supply-side programs to counteract market failure. Increased government spending on transportation, education, and communication, for example.
Benefits of Supply-Side Policies
Supply-side measures, in theory, should boost productivity and move long-run aggregate supply to the right.
1. Decreased Inflation
A lower price level will result by shifting AS to the right. Supply-side reforms will help to reduce cost-push inflation by making the economy more efficient. Privatization, for example, may result in cheaper prices as a result of increased efficiency.
2. A Lower Rate of Unemployment
Supply-side measures can help to lower the natural rate of unemployment by reducing structural, frictional, and real wage unemployment. See also: Unemployment-reduction programs on the supply side.
3. An increase in economic growth
Supply-side policies will raise the long-run rate of economic growth by increasing LRAS, allowing for faster growth without producing inflation.
4. Trade and the Balance of Payments have improved.
Firms will be able to export more if they become more productive and competitive. This is critical in view of the heightened competition posed by a globalized marketplace. Also see: The Importance of Supply-Side Policies in the Economy.
Examples of supply-side policies
Privatization is number one.
Selling state-owned assets to the private sector is one example. The private sector, it is believed, is more effective in running enterprises because it has a profit motive to cut costs and improve services. More information on privatization can be found here.
2. Liberalization
This entails lowering entry barriers to allow new businesses to enter the market. The market will become more competitive as a result of this. In telecommunications, for example, BT used to be a monopoly, but now multiple companies fight for our business. Competition usually results in reduced prices and higher quality goods/services.
- The problem is that not every industry is open to competition. Power generating and water supply, for example, are natural monopolies. Privatization and deregulation of these industries often results in the formation of a private monopoly with the ability to charge greater prices.
3. Lowering personal income tax rates
Lower income tax rates, it is said, boost the incentives for people to work harder, resulting in increased labor supply and productivity. Similarly, lowering corporate taxes allows businesses to keep more profit and invest it.
- However, this isn’t always the case; lower taxes don’t always mean more work incentives (e.g. if income effect outweighs substitution effect). Firms may choose to give or save their higher profits rather than invest them. See also: Corporation Tax Cuts.
5. Liberalize the labor market
- Employers should find it easy to hire and terminate employees. Redundancy pay or the right to appeal should be abolished.
- Allow for zero-hour contracts, which allow businesses to hire people when demand is higher.
If it is less expensive to hire and fire employees, the theory goes, it will incentivize businesses to hire people in the first place, resulting in more job opportunities.
- More flexible labor markets, on the other hand, might lead to more uncertainty and reduced productivity. Also see: Labor Market Flexibility
5. Trade union power is being weakened.
This could include legislation that restricts trade unions’ power to strike. This should include the following:
Reducing unemployment benefits is number six on the list.
Lower unemployment payments may encourage unemployed people to work. Working-age people may be more motivated to work longer hours if their benefits are not means-tested.
7. Financial markets should be deregulated.
Building societies, for example, were allowed to become profit-making banks. More competition should result from deregulation, which should, in principle, cut borrowing rates for consumers and businesses.
7. Expand the free-trade zone
Lower tariff barriers will boost commerce and encourage export companies to invest. Non-tariff barriers are becoming increasingly relevant. The EU Single Market, for example, has harmonised laws, allowing for more seamless trade. Negotiating frictionless trade agreements can cut business costs and increase efficiency.
9. Eliminating needless bureaucracy
Firms may find it difficult to develop and invest in new capacity due to planning constraints. Reduced red tape and bureaucracy lowers expenses for businesses and fosters an atmosphere that encourages investment.
ten. Promote immigration
Whether it’s professional jobs like construction and engineering or low-skilled employment like fruit picking, free-movement of labor can help businesses fill labor shortages. Liberal immigration rules help businesses keep up with rising demand by making labor markets more flexible. This can help enterprises avoid wage inflation while also allowing them to expand their productive capacity.
Interventionist supply-side policies
1. Increased educational and training opportunities
Better education can raise AS while also increasing labor productivity. In a free market, education is frequently under-provided, resulting in market failure. As a result, the government may need to subsidize appropriate education and training programs in order to fill job openings.
- Government action, on the other hand, will cost money and will need increased taxes. It will take time to take effect, and the government may subsidize the incorrect types of training.
2. Improving infrastructure and transportation
When it comes to transportation, there is almost always some level of market failure – congestion and pollution. Government funding on better transportation linkages can assist alleviate traffic congestion and address this market failing. Improved transportation infrastructure lowers transportation costs and encourages businesses to invest. Bottlenecks in transportation on the road, rail, and air are frequently highlighted as a major stumbling block for the UK economy.
- However, increasing transportation capacity in a congested country like the UK, particularly in London, can be difficult.
3. Increase the number of inexpensive housing units
Building cheap council homes in pricey locations can help employees move and find jobs in those areas, minimizing geographic immobility. Firms may face labor shortages in places where housing has grown too expensive.
4. Better healthcare
Time lost due to illness can cost a company a lot of money. Spending on health care that improves a country’s health can boost labor productivity. Discouragement of bad habits might also improve one’s health. Taxes on cigarettes, alcohol, and sugar, for example, can help to minimize the expenditures of health care related with intoxication, obesity, and polluted environments.
Limitations of supply-side policies
- Productivity growth is mostly dependent on private enterprise and technical innovation trends. The government’s ability to hasten technological development and improvements in working procedures has a limit.
- Supply-side measures can have the opposite effect. Flexible labor markets, for example, may lower corporate expenses, but if they lead to job insecurity, workers may become demotivated, and labor productivity may stagnate. Because of more flexible labor markets, the UK has witnessed a decrease in structural unemployment since 2009, although productivity growth has been nearly static.
- In a recession, supply-side strategies are unable to address the underlying issue of a lack of aggregate demand.
- Time. The effects of all supply-side measures take a long time to manifest. Some policies, such as education spending, may not have a long-term impact on the economy.
What is a supply-side economics example?
When affluent individuals or huge firms obtain tax breaks, this is referred to as supply-side economics. It is hoped that these individuals will take advantage of the tax cuts to make investments, hire more staff, and complete other business projects that will assist to invigorate the economy. There is a prioritization of the manufacturing volume of items for consumers to purchase in supply-side economics. Three policies make up supply side economics:
In a nutshell, what is supply-side economics?
supply-side economics, supply-side economics, supply-side economics, supply Theory that focuses on leveraging tax cuts and benefit cuts as incentives to work and produce things to influence the supply of labor and goods. It was developed by Arthur Laffer (b. 1940), a US economist, and used by President Ronald Reagan in the 1980s.
What are the most significant causes of inflation?
Demand-pull When the demand for particular goods and services exceeds the economy’s ability to supply those wants, inflation occurs. When demand exceeds supply, prices are forced upwards, resulting in inflation.
Tickets to watch Hamilton live on Broadway are a good illustration of this. Because there were only a limited number of seats available and demand for the live concert was significantly greater than supply, ticket prices soared to nearly $2,000 on third-party websites, greatly above the ordinary ticket price of $139 and premium ticket price of $549 at the time.
Which definition of inflation is the most accurate?
Inflation is defined as the rate at which prices rise over time. Inflation is usually defined as a wide measure of price increases or increases in the cost of living in a country.
Who is the most affected by inflation?
Inflation is defined as a steady increase in the price level. Inflation means that money loses its purchasing power and can buy fewer products than before.
- Inflation will assist people with huge debts, making it simpler to repay their debts as prices rise.
Losers from inflation
Savers. Historically, savers have lost money due to inflation. When prices rise, money loses its worth, and savings lose their true value. People who had saved their entire lives, for example, could have the value of their savings wiped out during periods of hyperinflation since their savings became effectively useless at higher prices.
Inflation and Savings
This graph depicts a US Dollar’s purchasing power. The worth of a dollar decreases during periods of increased inflation, such as 1945-46 and the mid-1970s. Between 1940 and 1982, the value of one dollar plummeted by 85 percent, from 700 to 100.
- If a saver can earn an interest rate higher than the rate of inflation, they will be protected against inflation. If, for example, inflation is 5% and banks offer a 7% interest rate, those who save in a bank will nevertheless see a real increase in the value of their funds.
If we have both high inflation and low interest rates, savers are far more likely to lose money. In the aftermath of the 2008 credit crisis, for example, inflation soared to 5% (owing to cost-push reasons), while interest rates were slashed to 0.5 percent. As a result, savers lost money at this time.
Workers with fixed-wage contracts are another group that could be harmed by inflation. Assume that workers’ wages are frozen and that inflation is 5%. It means their salaries will buy 5% less at the end of the year than they did at the beginning.
CPI inflation was higher than nominal wage increases from 2008 to 2014, resulting in a real wage drop.
Despite the fact that inflation was modest (by UK historical norms), many workers saw their real pay decline.
- Workers in non-unionized jobs may be particularly harmed by inflation since they have less negotiating leverage to seek higher nominal salaries to keep up with growing inflation.
- Those who are close to poverty will be harmed the most during this era of negative real wages. Higher-income people will be able to absorb a drop in real wages. Even a small increase in pricing might make purchasing products and services more challenging. Food banks were used more frequently in the UK from 2009 to 2017.
- Inflation in the UK was over 20% in the 1970s, yet salaries climbed to keep up with growing inflation, thus workers continued to see real wage increases. In fact, in the 1970s, growing salaries were a source of inflation.
Inflationary pressures may prompt the government or central bank to raise interest rates. A higher borrowing rate will result as a result of this. As a result, homeowners with variable mortgage rates may notice considerable increases in their monthly payments.
The UK underwent an economic boom in the late 1980s, with high growth but close to 10% inflation; as a result of the overheating economy, the government hiked interest rates. This resulted in a sharp increase in mortgage rates, which was generally unanticipated. Many homeowners were unable to afford increasing mortgage payments and hence defaulted on their obligations.
Indirectly, rising inflation in the 1980s increased mortgage payments, causing many people to lose their homes.
- Higher inflation, on the other hand, does not always imply higher interest rates. There was cost-push inflation following the 2008 recession, but the Bank of England did not raise interest rates (they felt inflation would be temporary). As a result, mortgage holders witnessed lower variable rates and lower mortgage payments as a percentage of income.
Inflation that is both high and fluctuating generates anxiety for consumers, banks, and businesses. There is a reluctance to invest, which could result in poorer economic growth and fewer job opportunities. As a result, increased inflation is linked to a decline in economic prospects over time.
If UK inflation is higher than that of our competitors, UK goods would become less competitive, and exporters will see a drop in demand and find it difficult to sell their products.
Winners from inflation
Inflationary pressures might make it easier to repay outstanding debt. Businesses will be able to raise consumer prices and utilize the additional cash to pay off debts.
- However, if a bank borrowed money from a bank at a variable mortgage rate. If inflation rises and the bank raises interest rates, the cost of debt repayments will climb.
Inflation can make it easier for the government to pay off its debt in real terms (public debt as a percent of GDP)
This is especially true if inflation exceeds expectations. Because markets predicted low inflation in the 1960s, the government was able to sell government bonds at cheap interest rates. Inflation was higher than projected in the 1970s and higher than the yield on a government bond. As a result, bondholders experienced a decrease in the real value of their bonds, while the government saw a reduction in the real value of its debt.
In the 1970s, unexpected inflation (due to an oil price shock) aided in the reduction of government debt burdens in a number of countries, including the United States.
The nominal value of government debt increased between 1945 and 1991, although inflation and economic growth caused the national debt to shrink as a percentage of GDP.
Those with savings may notice a quick drop in the real worth of their savings during a period of hyperinflation. Those who own actual assets, on the other hand, are usually safe. Land, factories, and machines, for example, will keep their value.
During instances of hyperinflation, demand for assets such as gold and silver often increases. Because gold cannot be printed, it cannot be subjected to the same inflationary forces as paper money.
However, it is important to remember that purchasing gold during a period of inflation does not ensure an increase in real value. This is due to the fact that the price of gold is susceptible to speculative pressures. The price of gold, for example, peaked in 1980 and then plummeted.
Holding gold, on the other hand, is a method to secure genuine wealth in a way that money cannot.
Bank profit margins tend to expand during periods of negative real interest rates. Lending rates are greater than saving rates, with base rates near zero and very low savings rates.
Anecdotal evidence
Germany’s inflation rate reached astronomical levels between 1922 and 1924, making it a good illustration of high inflation.
Middle-class workers who had put a lifetime’s earnings into their pension fund discovered that it was useless in 1924. One middle-class clerk cashed his retirement fund and used money to buy a cup of coffee after working for 40 years.
Fear, uncertainty, and bewilderment arose as a result of the hyperinflation. People reacted by attempting to purchase anything physical such as buttons or cloth that might carry more worth than money.
However, not everyone was affected in the same way. Farmers fared handsomely as food prices continued to increase. Due to inflation, which reduced the real worth of debt, businesses that had borrowed huge sums realized that their debts had practically vanished. These companies could take over companies that had gone out of business due to inflationary costs.
Inflation this high can cause enormous resentment since it appears to be an unfair means to allocate wealth from savers to borrowers.