One of the principles I said would guide this newsletter is that I would admit when I was wrong. It’s that time again. A while back, when discussing inflation I wrote: Not all of the increase in prices can be chalked up to greedy monopolies, however. The dynamics of supply and demand would lead us to expect some price increases. The pandemic put a hard speed limit on service based markets. Unable to go do stuff, Americans chose to buy more stuff. The shift from spending on services to spending on stuff changes the supply and demand intersection. Given the pandemic, with all its work stoppages and supply chain disruptions, it was difficult for companies to produce more stuff. So, when people who were spending some of their money on services shifted that spending to buying stuff, the amount of demand for stuff increased while the supply couldn’t. More people wanting the same amount of stuff naturally leads to higher prices.
Good read and I appreciate the FRED charts you included, but I think you missed an important one, M2. Both M2 and Corporate Profits After Tax jumped by about 50% from pre-pandemic levels. Wouldn’t one expect higher corporate profits (and inflation) be correlated with money supply? After all the value of a widget or service is not determined by input costs (materials and labor) but by the price a consumer is willing to pay?
Good read and I appreciate the FRED charts you included, but I think you missed an important one, M2. Both M2 and Corporate Profits After Tax jumped by about 50% from pre-pandemic levels. Wouldn’t one expect higher corporate profits (and inflation) be correlated with money supply? After all the value of a widget or service is not determined by input costs (materials and labor) but by the price a consumer is willing to pay?