Here are the real causes of inflation

In Europe, the increase in demand after the pandemic has been accompanied by setbacks on the supply side. The point of Euthymius Tiliacos

Looking at the effects that demand and supply of goods and services have on inflation, it is thought that they act in a similar way to oscillations of a two-pan balance.

Demand weighs on one plate, supply weighs on the other; if one pan of the balance goes down, the other goes up and vice versa until a perfect balance is found spontaneously after a certain period of time.

But things aren't always like this. Or rather, the times for rebalancing are not instantaneous and in any case require often painful monetary and fiscal interventions.

In fact, a growing demand for goods and services increases inflation and production, making them move in the same direction at the same time; on the other hand, when supply increases, under normal conditions it acts in two opposite directions: it brings down inflation and increases production. The mix and the speed with which the two phenomena occur is not the same and therefore does not necessarily lead to an automatic rebalancing.

In extreme conditions – such as the current ones – the offer, if strongly conditioned by the increase in the prices of production inputs, itself generates inflationary pressures even with the same volumes of finished products offered to the market. During the Covid period, supply and demand both suffered a decline. Instead, in the post-Covid period, starting from the second half of 2021, at least in the USA, the very rapid growth in demand (the index of which reached its highest level in the last 50 years in the third quarter of 2022) caused a surge in inflation.

In Europe, on the other hand, lack of cheap energy sources due to the war or attributable to other geopolitical factors (de-globalization) has meant that the sudden increase in demand after Covid was also accompanied by a series of supply bottlenecks which are affecting on delivery times and prices of finished products.

A recent study by the Bank for International Settlements attributes greater weight to factors connected with the dynamics of demand than supply in determining the sign and extent of inflation; while he believes the supply of goods and services to be much more affected by global or continental financial crises such as the one that exploded in the acute phase between August 2007 and 2010.

The phenomenon of financial crises would have more persistent characteristics, suggesting two different timings for containing inflation and relaunching the economy between the USA and Europe following the interest rate measures implemented by both: more accelerated in the USA, slower in Europe.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/inflazione-domanda-offerta/ on Sun, 20 Nov 2022 06:20:30 +0000.