Inflation -- Adilbrand Noblesword's Hall of Warriors

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Date Posted: 21:19:41 03/29/04 Mon
Author: Adilbrand
Subject: Inflation
In reply to: mvd 's message, "Re: I (mostly) agree" on 20:55:15 03/29/04 Mon

Forgive my lack of understanding, but isn't higher prices the same thing as inflation?

No, not exactly. It is a sustained raise in the average price level over a period of years as measured by the Consumer Price Index. Price level increases can also result from fluctuations in supply and demand - until it is sustained for a long period over many products, it is not called inflation. The more correct thing for me to have have said is that changing the tax rate can cause disinflation (NOT to be confused with deflation), which is a reduction in the rate of inflation. There is also a difference between anticipated and unanticipated inflation.

Keep in mind that inflation tends to be good for businessowners and bad for creditors - until you start to get into hyper-inflation, of course.

There is demand-pull inflation and cost-push inflation (three types of the latter!).

The thing to avoid is an inflationary spiral, which is actually a bit of a psychological process in and of itself, because expectation is a determinate of both supply AND demand. Raising taxes decreases the money supply of the consumer - lowering demand, but increases the cost of the business - which, in reality, is NOT always passed to the consumer, as they must only meet marginal revenue gains. If cost is raised, then supply will shift to the left. Demand is also being shifted to the left by the decrease in consumer spending power, which actually leaves average prices exactly the same, barring any other determinates being modified.

I could go into more detail, but my economics textbook I teach out of is at IBC.

And if so, how do you combat inflation by causing prices to be raised?

The price raise caused by corporate taxation is actually rather minimal when viewed marginally on a per product basis. Both supply and demand curves shift to the left in this scenario, which leaves prices the same, but lowers overall GDP.

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Replies:

Re: Inflation -- mvd, 21:29:55 03/29/04 Mon