Money Conversations: Why Do Prices Go Up?
The last couple of years have been a rough ride for everyone, and those of us who have made it to this point feel lucky and grateful. Too many families have lost loved ones. Some are still fighting health issues. Some have lost means of earning money and are even forced to relocate to be able to provide for their families. Together we have grieved these losses and withstood changes. Yet on top of this, we are now faced with a new conundrum: the inflation surge.
In the recent few months I have witnessed so much anger, people passing blame right and left, with some of the most creative theories behind why the prices are spiking and WHO IS RESPONSIBLE. Some blame the president, political parties, the government as a whole, a “rotten system,” “outsiders who come here to rob us,” social groups who “leech on the country’s resources,” the “lazy unemployed” or whatever else tickles their fancy. One might even score a few points with a neighbor in a heated political debate. Yet, at the end of the day, all that is achieved by it is elevated blood pressure and complete unawareness that our British peers, for instance, are also cursing the royals for the same reason over a cup of tea some 6 time zones away.
So why do the prices really go up? Let’s start with some principles of economics. The prices in the free market are regulated by the laws of supply and demand. In other words, suppliers are willing to provide more goods at higher prices while buyers demand more goods at lower prices. You can imagine the two as functions on the graph with the supply curve steadily rising upward and the demand curve declining (provided the product price is measured on the vertical axis and the quantity of product supplied – on the horizontal). The point where the two meet or agree is called an equilibrium; and this is what determines the final price. Basically, the prices of goods on the market are regulated by these two laws.
Another thing to keep in mind is that the prices always go up over time. This is a sign of economic growth. Low inflation rates, however, are anticipated and feel normal to most of the public. Now let’s add a drastic scenario we all had to face and see how it created a perfect cocktail for inflation. Because of the global pandemic, the workforce around the world has drastically decreased. The production of many goods has been halted and the logistics have been steadily delayed due to lack of workers. This has created shortages in supply which, in turn, have driven the prices up. At the same time, the governments and employers have been trying to motivate more people to take risks and work during the pandemic by raising wages. The fact that most companies are now paying their employees higher wages resulted in a trickled down effect further pushing the consumer prices upward.
Could the government just fix the prices and make sure they do not go up? Sure they could. This phenomenon is called command economy. In that case, the government would also have to regulate many other things such as production and distribution methods affecting many aspects of our daily life. This type of economy is mostly used by authoritarian and totalitarian governments. But wait a minute: nobody in their right mind would want to agree to that. I guess you can say that freedom comes with a slightly higher price tag, literally.
Even though understanding these principles will not be of any use in the grocery store or at the pump, I hope it will cut down the amount of negativity and blame-shifting that has been going on in the communities around the country lately. At the end of the day, if you do have to blame someone, blame it on the pandemic. One thing we can learn from the virus, nevertheless, is that you have to be flexible to evolve and survive. Yet hopefully, unlike the virus, we shall overcome and prevail despite anything, including higher prices.