Posts Tagged ‘Price Increases’
Sunday, January 8th, 2012
A more recent, but very serious problem for government policy-makers is the strong “inflation psychology” which has developed since the mid-1970′s, which causes people to seek large wage and salary increases in attempts to protect themselves against inflation. By adding substantially to cost-push inflationary pressures, “inflation psychology” creates special problems for monetary and fiscal policy.
First, by steadily increasing the cost of the GNP, these cost-push pressures force the Bank of Canada to continue to increase the money supply at inflationary rates in order to avoid an economic downturn due to inadequate demand, thus maintaining inflation at high rates. Furthermore, “inflation psychology” is strong risks touching off an explosion of wage demands and price increases, while strong cost-push pressures on prices make inflation very resistant to policies that depress aggregate demand.
Thus, “inflation psychology” tends to significantly reduce the effectiveness of monetary and fiscal policies in dealing with both inflation and recession. It is ironic that this problem resulted from excessive use of these policies in the late 1960′s and early 1970′s, when excessive monetary and fiscal stimulation in many nations generated the strong “inflation psychology” that has undermined the effectiveness of monetary and fiscal policies themselves.
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Tags: Aggregate Demand, Bank Of Canada, Crowns, Dentist, Early 1970, Economic Downturn, Explosion, Fiscal Policies, Gnp, Government Policy Makers, Inflation Rates, Inflationary Pressures, Monetary And Fiscal Policy, Money Supply, Price Increases, Psychology, Puerto Morelos, Recession, Salary Increases, Wage Demands
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Sunday, July 17th, 2011
We have seen that, in its capacity as “a bank for banks,” the Bank of Canada can make loans to chartered banks suffering a temporary shortage of cash reserves. The rate of interest paid by the banks for these loans is known as the “Bank Rate.” In theory, a higher Bank Rate would make the banks keep more excess cash reserves in order to avoid the need to borrow from the Bank of Canada, and would thus restrict the banks’ ability to make loans and increase the money supply. In fact, this is not of any real significance, since the chartered banks only very rarely borrow from the Bank of Canada.
Rather, the importance of the Bank Rate to monetary policy has arisen from the use of Bank Rate changes by the Bank of Canada as signals to the nation of the direction of the central bank’s policies. An announcement of an increase in the Bank Rate is a signal of “tighter money,” with loans less available and more costly, whereas an announcement by the central bank of a reduction in the Bank is interpreted as signalling a movement yet the underlying economics of the situation are often quite different. If, for example, consumer demand for lumber is very high, lumber stores will find their inventories depleting rapidly and will be anxious to replenish their stocks of lumber. With the purchases for all the various lumber stores bidding actively against each other for a limited supply of lumber from the sawmills, the price will be bid up.
When the lumber reaches the retail stores, it will have a higher price – which store managers describe as “an increase in our costs.” However, the real origin of the price increases lies in high consumer demand; it is really demand-pull in nature rather than cost-push, as it appears.
In a similar way, people tend to blame inflation generally on what they can see – increases in union wages and business profits. Yet these wage and profit increases are more the symptoms of inflation, the basic cause being excess demand. Early in a period of inflation caused by excess demand, prices tend to rise faster than wages, many of which are tied to union contracts that have not yet expired; as a result, profits increase rapidly (the catch-up phase), people blame unions for the inflation. In both cases, attention is focused not on the basic cause of inflation, but rather on the more visible symptoms.
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Tags: Bank Of Canada, Banks Canada, Business Profits, Cash Reserves, Chartered Banks, Excess Cash, Excess Demand, Limited Supply, Lumber Price, Lumber Retail, Lumber Stores, Monetary Policy, Money Supply, Price Increases, Profit Increases, Rate Changes, Rate Of Interest, Sawmills, Store Managers, Union Wages
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Wednesday, July 6th, 2011
Myth #2: Wages rising faster than productivity means cost-pushing inflation is occuring
Does Figure 12-6 prove that cost-push pressures are causing inflation? Most people would say “yes,’ but in fact it does not. It shows that wages are rising quickly enough to generate inflation, but it does not tell us why wages are rising that rapidly. Perhaps a strong labor union is pushing up wage rates, making this indeed a case of cost-push inflation. Or, perhaps the graph shows non-union wages (such as computer programmers) being pulled up by heavy demand for their skills in the face of a shortage of computer programmers.
Myth #3: All wage and price increases have negative economic effects because they generate inflation
This is a commonly held belief, but is not always true. In a market economy, wages and prices are constantly changing in response to changes in supply and demand. For example, in myth #2 above, if businesses need more computer programmers than are currently available, the resultant wage increase will serve a positive purpose: it will increase the supply of programmers by encouraging more people to become programmers. Similarly, if consumers want to buy more steak than is presently on the market, the price of steak will rise, encouraging producers to increase the supply of steak. Thus, changes in prices (including price increases) also play an important role in making the economic system operate effectively, by adjusting supply to demand. If prices could not change, the economic system would be unable to adjust to changes in demand.
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Tags: Belief, Competitions, Computer Programmers, Consumers, Economic Effects, Economic System, Graph, Honda, Honda Accord, Honda Accord Coupe, Hotels, Inflation, Market Economy, Myth 2, Myth 3, Portage Ave, Price Increases, Producers, Productivity, Supply And Demand, Union Wages, Wage Rates, Winnipeg
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Tuesday, May 10th, 2011
When they believe controls are likely to be introduced, some businesses increase the list prices of their products, while leaving their actual selling prices unchanged. After the controls are imposed, the selling price (the actual price) can be increased as economic conditions permit, while the list price (the official price being watched by the government) remains unchanged. Another technique for evading price controls is to reduce the quality of the product while holding its price constant, thus implementing in effect a “hidden” price increase. Regarding wage controls, employers who have high sales may wish to raise wages in violation of the controls, in order to attract and retain workers. One way to achieve this is to reclassify employees, or create new job classifications. For example, a group of Grade C widget workers could be upgraded to Grade B ( even though they were still really Grade C), and thus given a pay raise in excess of that allowed under the controls.
The result of these evasions of the wage-price controls will be that there will exist, in effect, a black market for goods, services and labor – official (legal) prices, and the considerably higher prices that are actually paid. As long as there is excess demand in the economy, people will find a way to charge (and pay) more than the controls allow. Not even the death penalty has prevented the development of such black markets in many instances, because of the difficulties that authorities have in detecting violations of the law.
The examples described above represent only a few of the types of evasion of controls that are possible. These and other evasion techniques present any wage-price control agency with an impossible task of policing not only wage and price increases, but also whether new products are really “new,” whether “options” were standard features last year, whether product quality has been altered in any way, whether re-classifications of workers were really justified and so on. These problems illustrate another dilemma of wage and price controls: what starts out as an attempt to restrain inflation can broaden into attempts by government to control business decisions concerning new products, product design, product quality, classification of employees, and to police countless violations of the controls in black markets. Whether the government should involve itself n such matters is strongly disputed by many people.
- In 301 A.D., the Roman Emperor Diocletian imposed controls on all important wages and prices. To enforce his controls program, Diocletian used about half the population of Rome. The controls program failed.
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Tags: Authorities, Black Markets, Death Penalty, Economic Conditions, Economy, Evasion Techniques, Excess Demand, Grade C, Impossible Task, Instances, Job Classifications, New Job, Pay Raise, Price Increases, Product Quality, Wages, Widget
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Thursday, April 14th, 2011
Some people like to blame big business for inflation; others like to blame labor unions. Both of these views, referred to earlier as “villain theories,” are overly simplistic. It seems to be more correct to say that, rather than one or the other, it is most often the combination of big business and labor unions that generates large wage and price increases. It is often in industries where there are only a few large corporations and strong labor unions (such as steel, automobiles, steel products, machinery, rubber, petroleum, pulp and paper, electrical apparatus, tobacco, beverages and so on – a major portion of the economy) that bargaining between union and employers results in above-average wage increases. In turn, these cause upward pressures on costs and prices – the wage-price spiral – where wages and prices chase each other upward.
Often, when labor unions press for higher wages, large corporations may decide to yield in large part to the union demands and raise prices, with all major firms in the industry acting together, to cover the additional labor costs. This approach is especially likely when the economy is booming, so that a strike would be particularly costly in terms of lost business. Also, during a boom, it is easier for businesses to raise prices, as consumers are less resistant to price increases. Thus, the wage increase is the reason given by the industry for the price increase. But, with many prices rising in this way, these price increases cause labor unions to demand more wage increases – as a result, wages and prices chase each other upward, in a spiral. As stated earlier, the wage-price spiral tends to be particularly rapid during periods of economic prosperity, when large corporations are less resistant to union wage demands and consumers are less resistant to price boosts. On the other hand, the spiral usually tends to slow down during recessions, when sluggish demand makes major price increases more difficult, forcing employers in turn to resist union wage demands more strongly. Recessions, however, are far from a complete cure for this cost-push inflation, because some businesses possess enough power over their prices to continue to raise them despite sluggish demand, to meet certain profit targets. Thus, the wage-price spiral not only aggravates inflation during boom periods, but also helps to keep inflation going (although at slower rates) during economic slowdowns.
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Tags: Automobiles, Average Wage Increases, Beverages, Boosts, Economic Prosperity, Electrical Apparatus, Inflation, Labor Unions, Large Corporations, Petroleum, Price Increases, Pulp And Paper, Recessions, Sluggish Demand, Spiral, Steel Products, Union Demands, Villain, Wage Demands, Wages
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Thursday, March 24th, 2011
Developments, profits and wages both rise greatly, with the consumer paying the tab through much higher prices of $0.60 per kilogram. While sales of bejuniaberries will be somewhat lower at this higher price, the monopoly producer is in a position to hold down the output of berries, thus keeping the price at $0.60. When price increases originate in this way in the monopoly power of producers (either workers or businesses or both), the result is called cost-push inflation.
Obviously, there are two quite different problems here – demand-pull forces in one case, and cost-push forces in the other. Yet, they both can cause the same problem – rising prices and wages. Our examples have applied to increases in the price of a single product – bejuniaberries. Now, we will apply these two basic concepts – demand-pull and cost-push - to the more complex problem of inflation, in which the prices of goods and services in general are rising.
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- Why is Moderate Inflation Desirable? Today's guest post is from OneMint. OneMint is a website dedicated to providing information on personal finance. In his speech on - Deflation - in 2002, Ben Bernanke made the reference to Milton Friedman's - "helicopter drop" of money to...
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- CPI reveals that except for everything going up in price, there is no inflation Here's a great post from The Big Picture on the Consumer Price Index.Its so funny, I'm reproducing the whole post.CPI reveals that except for everything going up in price, there is no inflationOriginal: "Consumer prices surged last month on higher...
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