Supply and Demand and effect of inflation March 29, 2023, | By Christian Brown | In #THEPLACARD
#THEPLACARD
Opinion:
Supply and Demand/Cause and effect of inflation
March 29, 2023, | By Christian Brown | In #THEPLACARD
The Reserve Bank of Australia has a plan to address rising inflation, bewildered Australians face cost-of-living pressures driven by spiralling inflation, and increased interest rates on bank loans and mortgages are left shaking their heads and are falling behind on their financial commitments.
I am a fan of British economist John Maynard Keynes the founder of Keynesian economics, and father of macroeconomics. I recently read an article praising Labor for using Keynesian economics to tackle the cost of living pressures Australians are experiencing.
Before I get begin delving into Keynes’s theory, I need to make readers aware conservatives are not interested in reading English Economist John Maynard Keynes's theory of inflation. Instead, they believe when an oversupply of money (surplus) in the economy is at odds with the growth of national income, inflation occurs.
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”.
Friedman (1970) The Counter-Revolution in Monetary Theory.
There have been noticeable food supply issues in supermarket chains during the pandemic. Blame has been laid on lockdowns and the loss of workers sick with covid. However, I only have to cross the street and visit my local fruit and vegetable shop to find fresh, yes fresh fruit and vegetables. It is a similar story when I visited my local butcher, who told me he has never been busier, with customers desperately looking for chicken, pork, lamb, and steak, because the major supermarket chains' meat departments are empty.
I believe the majors are holding back on supplies increasing the demand for foodstuff and when supply does not meet demand, the excess demand factor piles pressure on the general prices in the economy. factor to increase prices. My reasoning stems from Keynes's view on inflation, that demand-pull inflation is a situation where aggregate demand persistently exceeds aggregate supply when the economy is near or at full employment.
Some describe Keynes’s view of inflation as the real theory of inflation and suggest that economic policy is key to settling the economy.
Australia has experienced a drop in unemployment numbers, with around 65,000 people gaining employment and the number of unemployed decreasing by 17,000. The Australian Bureau of statistics' unemployment rate for February 2023 is 3.5%
Australian employment numbers do not support the notion the economy is nearing full employment.
Reserve Bank of Australia Governor Phillip Lowe believes the current 3.5 per cent jobless rate is chipping in and pushing up inflation pressures, even though Australia is not experiencing a wage-price spiral. The wage price index sits at 3.3 per cent the jobless figure needs to be less than fall 3.5 per cent, or businesses may face a period of high wage inflation.
The International Monetary Fund website article Back to Basics, What Is Keynesian Economics, implies decreased spending on government infrastructure projects involving high labour output to wages, theorizes taxes need to be raised to take the heat out of the economy and in turn encourage a reduction in interest rates to lure investors.
A significant increase in the level of indirect taxes (taxes on goods and services) will raise domestic prices independently of the state of demand and could be a causal factor in creating wage-push pressure on the economy.
Keynes’ demand and cost-push theories pointed out that the closer the economy is to full employment, the greater the inflationary pressure.
Australia’s economy is a way off anywhere near full employment and does not correlate with Keynes's Theory and is at odds with the Reserve Bank of Australia's position on inflation. The latest jobless figures indicate Labor policies are working to address the cost-of-living crisis in the face of rising interest rates and inflation.
In the long run, the effect of the money supply will not be dramatic and any growth in the money supply higher than the full employment level will mean a steady output of growth and a price increase relative to money supply growth.
A drop in interest rates may spur more investment, with consumers spending their disposable income. Although governments taking advantage of low-interest loans from lenders, while the economy is nearing full employment, it will risk spiking inflation.
When an economy reaches full employment, the accepted view is that full employment causes inflation as high demand for goods and services and in turn businesses hike their prices up, with inflation becoming problematic.
Full employment conditions may lead to fatter pay packets for workers, due to increasing demand for goods and services and employers needing to attract and recruit staff with favourable employment conditions.
Businesses will argue the familiar talking point, an increase in wage costs will exceed overall production costs.
The economy becomes a vicious circle because high production costs generally see businesses offset the increased production costs, by reducing the work hours of payroll staff and may inevitably terminate some.
Australians will be heartened by consecutive falls in inflation figures out today 29 March 2023, with inflation down from 7.4% in January to 6.8% in February beating expectations the inflation figure would be 7.2%.
It remains to be seen if the Reserve Bank of Australia cuts interest rates or holds steady until the jobless figure drops below 5%. Australians will be crossing their fingers.