I’m new to learning about austrian economics but reading certain passages in this article confused me -
"If you live in Seattle, it might be time to ask for a cost-of-living increase. The city has the highest inflation rate in the country.
“Seattle household income is fairly high, and that helps to maintain a high rate of inflation since higher income areas can afford price increases,”
Normally, Seattle’s 3.7% unemployment rate, well under the national average of 5.5%, would be a good thing. But a growing economy with low unemployment drives up wages and costs."
Looks like the argument is that since businesses know people are making more money- they decide to charge more for their products/services- and this lowers everyone’s standard of living? I’m not sure how exactly this type of logic works or even begins- because wouldn’t that mean that if only there was more unemployment and lower wages- everything would be more affordable?
The logic in that article is ridiculous. This part made me think the dreaded Phillips Curve has raised its ugly head again:
Woeful reporting. The entire article skips around the fact that inflation is always and everywhere a monetary phenomenon. My economics lecturer once tried to explain why price inflation was positive for the past 40 years by claiming it was due to “oil shocks” in the 1970s.
Mind you people do get angry when price inflation occurs so it’s not surprising that people would like to be compensated for it. However Keynesians/classical economists may claim that this will lead to a “wage-price” inflation spiral.
Pure lunacy.
This seems to be related to the “bargaining power of workers”. If unemployment is low there are less workers for employers to choose from. It’s difficult for employers to quickly find new workers if they fire someone. Therefore, this means wages are higher.
That whole article is puff-piece with little real insight into the real causes of inflation. if you’re new to this place I suggest you read Inflation Deflation Red-flation Blue-flation. It’s a cracking recent article that deals with the topic.
IOW, demand for goods is high because demand for labor is high. And if people pay more because they have more, then it’s a wash. Of course, the reasoning here is so simplistic it can come out any way you want. This is just a phrase the Keynesians trot out to justify continuous tinkering with the economy by the wise and good central planners so the economy is not too hot, not too cold, but ju-ust right.
Inflation, properly understood, is simply an increase in the money stock. One of the effects of inflation is rising prices, but the price rises themselves are not inflation.
Price inflation is not uniform. Most of the new money is printed and spent in New York City and Washingon D.C, so inflation usually occurs there first. There’s a time lag inflation effect, the further you are from the source.
Inflation is actually 20%-30% and not the 5.8% stated in that article.
It really depends on the demand. Since Seattle residents are richer, higher prices won’t affect their behavior as much, while Detroit residents would be forced to buy less because they’re poorer. For the record, I live near Detroit and gas prices are low compared to the rest of the nation. Yesterday, I got gas at $3.79 a gallon, which I hear is low compared to other states.
The common myth is that more jobs equals more money being spent but thats not accurate. The amount of money that can be spent is dependent on the supply of money.
A too small labor pool would cause wages to rise but this can not cause a general price increase, it would cause less money to be spent in other areas. Its an example of opportinity cost.
Does this mean the same is true of interest rates? If the CB sets an interest rate thats equal to the natural interest rate (for that region)*, should some regions experience less malinvestment and suffer less from the correction?
Booms can happen in a geographic region or in a specific sector of the economy.
In the late 1990s, the boom was in web businesses and silicon valley. The most recent bubble was the housing market, and the severity of the crash varied in different parts of the country.
Malinvestment is guaranteed by the Federal Reserve. Malinvestment is not uniform. Bubbles are guaranteed to occur. The beneficiaries of inflation are insiders and people who happen to be in the right place at the right time.
You can have a stock market boom while large numbers of people are unemployed.
For example, is the current high price of oil a bubble, or it is merely proper compensation for inflation? People who predict oil below $100/barrel seem out of touch with inflation.