Understanding the Roots of Inflation in the Pandemic Era

In the current landscape, the cause of inflation is primarily attributed to corporate price gouging. These corporations are leveraging the disruptions in supply chains and the labor shortage due to the pandemic as excuses to arbitrarily increase prices. The reality, however, is that once these disruptions subside, companies will resort to other reasons to justify price hikes. This article delves into the drivers of inflation, the impact of consumer demand, and the potential solutions.

The Impact of Consumer Demand on Inflation

Inflation is essentially an increase in producer prices. This rise is a direct consequence of unmet consumer demand. When consumer demand outstrips manufacturers' ability to fulfill orders, it leads to an imbalance in the market, driving up the cost of inputs such as commodities, labor, and transportation (like container ships). The chart below clearly displays this trend, with consumer demand peaking in 2020 and rising unfulfilled orders by 94% as stimulus payments reached U.S. consumers.

Chart showing consumer demand and unfulfilled orders

As the supply of essential resources remains finite, manufacturers were unable to keep up with this demand surge. To address the excess demand, they increased the prices of their finished goods, as shown in the graph below for electrical equipment and appliances. This dynamic creates a cycle where high consumer demand leads to high producer prices.

Graph showing price increases for electrical equipment and appliances

To combat this, consumers might need to reduce their spending or wait for the Federal Reserve to increase the federal funds rate, which could slow down or even halt economic growth, bringing supply and demand closer to equilibrium.

Inflation Measurement and Elastic Labor

In this era, inflation is often misinterpreted as arising from scarcity, whereas in reality, it is driven by financial factors such as elastic labor markets and competition. Historically, elastic labor markets have maintained GDP per capita at zero growth over three-year periods (1800–1913). To combat this, a fundamental change in economic policy is necessary. The article suggests banning usury by insurers, landlords, and lenders through a comprehensive tax reform on production, which would include vertical concurrentable rollovers.

Proposals for Economic Policy and Political Change

To address the current inflationary pressures, the author proposes several measures:

Ban usury by insurers, landlords, and lenders to ensure fair and equitable financial practices.

Implement a production tax at 1/12th the maximum industry royalty and at 11/12th the minimal viable product, ensuring quality and price control while mitigating monopoly and market duress.

Enforce vertically concurrentable bid-only rollovers, allowing industries to bid for resources without coercion or duress.

These proposals aim to restore market balance and address the root causes of inflation, ensuring sustainable growth and equitable distribution of resources.

In conclusion, while the current inflationary pressures are driven by corporate actions and consumer demand, addressing these issues requires a combination of market reforms and changes in economic policy. Only through these measures can we hope to see sustainable and equitable economic growth.

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