Inflation is a term you have likely heard of, but it is a very complex subject because there is so much to learn and so many misconceptions surrounding it. Because of how broad the subject is, many people often overlook some areas. In this article, we will go through some of those areas and hopefully shed some light on them.
What Exactly Is Inflation?
The simplest definition of inflation is that it is a rise in the average price of services and goods in an economy. Consumer inflation is the area often discussed when people talk about inflation, and it is the rise in the average cost of the goods purchased in a household. The household in question is a typical household and the list of the items they purchase is updated regularly to conform with current trends.
Inflation Starts in Places We Cannot See
While an increase in the price of the items you purchase might affect you directly, this rise does not start with you, the consumer; it happens along the manufacturing, distribution, and other business channels when someone increases the price of one item. For example, you might not be in the textile industry, but an increase in the price of cotton will impact the price of a shirt you buy from the store.
Drivers of Inflation
There are several drivers of inflation. These include:
- Demand-pull inflation. This occurs when there is an increase in consumer demand, and when this happens, the price of goods increases and this causes this type of inflation. One driver of demand-pull inflation is consumer confidence. Consumer confidence leads to more spending, which has a direct impact on demand. As demand increases, it affects supply, which leads to people opting to pay a lot more for the goods that are now deemed scarce.
- Company policies. If a company manufactures a popular or important product, it can raise its prices because customers are willing to pay for this product. Companies can also cause inflation if they control goods people need such as food, oil, and gas.
- Cost-push inflation. This occurs when companies increase their prices because of an increase in costs such as production, marketing, and distribution costs. Businesses usually pass these costs on to the consumer, which leads to an increase in the price of commodities. An excellent example is gas and oil. Because both commodities are vital for the manufacture of many of the products we use, if their price increases, so does the cost of other goods.
- Fiscal policy. Fiscal policy is perhaps one of the biggest drivers of inflation. When a government creates policies that increase the incomes of customers and businesses, people are likely to spend more. This also happens when there is a tax cut or when the government increases infrastructure spending. The result of all this is an increase in demand for goods spurred on by increased spending, which directly causes an increase in the cost of goods in a market.
There is a Relationship Between Inflation and Crime
Researchers have examined the relationship between unemployment and crime for a long time, and a majority of researchers conclude that there is a direct relationship between the two. However, this relationship has largely been left unexamined, and so many people do not think about this aspect of inflation.
Here are two ways inflation leads to an increase in crime:
- Inflation leads to an increase in unemployment by making it difficult for businesses to hold on to their employees. When the cost of doing business increases because of inflation, this forces companies to cut costs. When things get too bad, many companies opt to let people go as they can no longer afford to keep them on their payrolls.
- Inflation also reduces an individual’s purchasing power. Because of this, they may feel that their cost of living is now relatively higher than it was before, and they may not be able to afford the life they used to live. This makes this individual likely to commit crimes.
Even though there is a need to bring inflation under control in these specific situations, it would also do some good for states and local governments to hire more people with an online criminal justice bachelor degree. These people can help keep the crime rate down because when crime is up, businesses cannot open, which decreases supply and makes inflation worse. In addition, investors are wary of investing in communities with a high crime rate.
Beneficiaries of Inflation
Even inflation affects different people and companies differently; there are some who derive some benefits from inflation:
- Companies – When the price of goods and services rises, companies and businesses that would otherwise not raise their prices often do. This means they can take advantage of price increases to increase their profits, even though the market often stabilizes and these gains are short-lived
- Investors – Investors can gain from inflation if they hold on to assets that are experiencing a price surge. They might sell these assets when their prices reach a certain threshold or they may sell their stakes in different companies as their stock prices increase because of an increase in prices and profits
- Business owners – Small business owners can also withhold certain commodities whose prices are rising and only release them when the price reaches an acceptable level.
Taking Advantage of Inflation Comes with Some Risks
While companies might enjoy higher profit margins if they sell their goods at a higher price, things are not always that simple. If production costs are the cause of inflation, businesses might have to absorb these costs and raise their prices by lower margins than they thought they would.
The reason for this is that this increase in production cost might not affect foreign competitors. This means they will keep selling their goods at a lower price and this might incentivize your customers to buy from them at a lower price. If companies affected by such costs do not absorb them, they might lose their customers to foreign competitors.
Inflation is a complex subject, and it is one where many people overlook a lot of things to keep the discussion simple. If you are a business owner, you need to find out what these areas are and try to learn about them; you will be better off for it.