Just look at the prices go... up

Inflation is starting to grip many countries, the kind we have studied before: demand-pull inflation. With a good economy, we have rising demand, starting from energy. As companies find that profits are coming in, they expand their businesses. China and India are growing, with such a huge population base, its no wonder that there is a sharp increase in demand for energy. As more companies are reaping in profits, we also find that average wages in the economy is also increasing. People are equipped with more spending power, and naturally they are inclined to spend it to indulge themselves with a good economy in the background. Some may take the opportunity to invest, in stocks, in commodity goods (oil for instance). All this is creating alot of demand.

Inflation is a phenomena I find that always tries to pull the economy down. If wages rise faster than prices of goods, we should not be too worried..at least for the moment. But we forget that wages rising faster than prices of goods, means that demand for goods will also correspondingly rise at a faster rate, contributing to more inflation eventually.

For us more average folks, we are lamenting about how inflation is eating a chunk into daily expenses. While average wage rate in the economy may be rising, wage distribution may not be so equal as to make everyone's wages rise. The same may be said about inflation, but the funny thing about inflation is that prices rise more uniformly across the economy as a whole. When there is a clear sign of inflation of setting in, producers will all try to raise their prices a bit, so as not to lose out on the profit side. For goods which are demand inelastic, prices will shoot up more, at the expense of consumers. We are always more ready to raise the prices of our goods, if given the chance to, and always reluctant to rise the wages of our employees, unless he is really a star performer and you want to keep him.

I'm not sure, but if we are to release supply for example to the labour market, we are preventing wages from rising, but prices of goods will continue to rise, since the prices of factors of production are still rising due to scarcity and rising demand. Supply of land is always difficult to increase significantly, while supply of capital is expanding and rising due to rising demand of consumer goods. Basic things like oil, agricultural products. In such a time, the rich will continue to demand their luxury goods, while the rest of us will find ourselves consuming more Giffen goods. Demand continues to rise despite the fact that things are pricier.

In such times, entrepreneurs can find themselves with the opportunity to rise. Since there is a limit to how much supply can increase, but we can definitely make things more efficiently, it suffices for the budding entrepreneur to set about finding a new way to do things, and make a profit from it. If successfully done, it may even spawn a new industry, with other supporting industries. Making energy usage more efficient is on this A-list. Or electricity generation more efficient. Every % efficiency that we can eke out to more closely attain Carnot efficiency, could mean millions of dollars saved for companies in the long run.

On another note, USA should not be too worried about its recession induced by its financial troubles. As other countries are experiencing a higher general price level, they will find US goods becoming cheaper. Last time, Asian demand was too low to pick up the slack. Now, Asian demand is rising. As costs of living rise, and currencies gain strength relative to the US dollar, people may start to look to made-in-USA products for US continues to manufacture many high-end products. For the 2 trade adverse presidential hopefuls, this should be good news, for USA trade deficit is about to reverse. But the reversal is small and slow, as US will continue to consume large quantities of oil, and oil prices are shooting up. US should really look to curb its energy consumption, or least make itself a more efficient consumer, for itself and the globe. If the Fed is to release money supply to the economy, it is paving the way for inflation, screwing up efforts to curb recession. Again, money supply will be spread out through the economy to rich and poor alike through the multiplier effect. With more money people start spending, causing general price level to rise. However, this price level raise is not uniform. First to rise will be raw materials and commodity goods. Then slowly wages would rise in response to profits from companies. For long lag times between the 2 price changes, there would be inflation, which would affect expectations, investors, consumers and producers. There may come a point where inflation starts to hinder the multiplier effect from reaching its intended target, i.e. to lower unemployment levels. Prices of goods may rise significantly, while wages would not rise by as much at all.