A recent article: https://www.stuff.co.nz/business/money/301022706/prepare-to-find-another-70-a-week-to-get-by-in-2024-asb
says: ..if households decided the worst was over and started to feel more confident about spending, it could push up inflation
But I thought it was the opposite;
More spending means more demand means more supply, which means production costs go down (due to economies of scale)… so inflation goes down?
But saving means less spending, means less demand, means less income for business, means costs go up… so inflation would rise?
More spending means more demand means more supply, which means production costs go down (due to economies of scale)… so inflation goes down?
Supply may or may not be able to adjust quickly.
A good example is food. There’s only so much that can be grown and distributed. So a high demand for food year after year only pushes up the price. The supply can’t really grow exactly. You can purchase more, import it, but that’s still probably more costly than local production. So importing it may actually make the price higher even while the supply expands.
Also, organizations aren’t required to produce more. In an economic environment where…idk…you once found t-shirts for $5 for three, Hanes can make it $6 for three because what else are you going to do? Buy Fruit of the Loom like a peasant, who is also charging more for their clothes?
So if production can’t or won’t expand and/or supply can’t it won’t expand, you’ll have more and more money chasing the same amount of goods, which leads to inflation.
Maybe if the price per apple goes up, the grocer takes the money. He can’t sell more apples because there aren’t any right now and anyway there’s still the same number of stomachs, so he puts it in the bank. The bank lends it out at too high interest for the farmer to borrow to plant trees on the off chance he can convince the grocer to stock more apples five years from now.
IANAE but I think the idea is high interest rates prevent supply expansion generally.
