Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Inflation: from supply-side to demand-side?

Usually, inflation is driven by the demand-side in economics. An increase in demand and a stable supply will cause (consumer) price increases – a.k.a. inflation. Alternatively, a decreasing supply and a stable demand will also cause inflation. Latter happened after the Russian invasion of Ukraine (2022).

In 2023, consumer prices were getting back to “normal”. Since 2024, that trend appears to have stopped and some prices are increasing again. Hence, the long-wait by Central Banks (eg, Fed, ECB) to decrease interest rates. Recently, the Swiss Central Bank did lower its rates (eg, SWI).

In my view, the demand-side and the supply-side in economics are wrestling with each other. It’s not clear yet which side will win.

The impact of the supply-side is increasing due to demographics: less children and more retirees. Hence, employers need to increase salaries and wages in order to fulfil their vacant jobs. It may take some 10 years before employers will benefit from AI economics; see my 2024 blog.

The demand-side in economics is struggling because higher incomes are offsetted by higher costs (eg, housing, energy, interest). Ultimately, it’s all about our discretionary (free) cash; defined by total income minus essential cost (eg, housing, energy & heating, food, insurance, transport).

In my view, interest levels are more likely to increase rather than to decrease. Hence, the long-wait by FED and ECB. Supply-side inflation is slowly increasing and that kind of inflation is almost impossible to fight. Also see my April 2023 blog: Inflation: demand versus supply-side.

To reiterate my 2023 conclusion: I suppose we are stuck with supply-side inflation.

“Inflation is always and everywhere a monetary phenomenon.” Monetary economist Milton Friedman made this line famous after stating it in a talk he gave in India in 1963. In a trivial sense, of course, the statement is true. Inflation, by definition, means that money loses its purchasing power and, therefore, is a monetary phenomenon. But Friedman meant much more. After having defined inflation, in that same talk, as a “steady and sustained rise in prices,” Friedman argued that one could not find inflation anywhere in the world that was not caused by a prior increase in the supply of money or in the growth rate of the supply of money. His statement was an empirical one, not a logically necessary one, and most professional economists, still in the thrall of John Maynard Keynes, did not agree with Friedman. But within a decade, the evidence from the United States and other countries had convinced most economists that Friedman was right.”

Source. Hoover Institution article; see paragraph Inflation is Always and Everywhere a Monetary Phenomenon

Money$ Too Tight (to Mention) – 1982 – by Simply Red (1985)
band, lyrics, video, Wiki-band, Wiki-song

Note: all markings (bolditalicunderlining) by LO unless in quotes or stated otherwise.

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