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What Causes Inflation? (Vol. 3)

Updated: Feb 7, 2023

analyticsbox | Jun 09, 2021


Inflation comes from a lot of sources, and a lot of it relates to government policy. ‘Typical’ inflation is a result of creating money supply faster than increasing the supply of goods and services. For example, if you increase the money supply by 8%, but output is increased only 3%, supply and demand are out of balance and prices rise (watch PowerPoint 5).

Incentives have a lot to do with inflation today. The federal government in its zeal to help workers during the COVID-19 pandemic, started paying extra unemployment benefits of $300/week.

Here is a breakeven analysis for selected states comparing net take home ‘pay’ if employed vs. unemployed:

The ‘current unemployment benefit’ includes state benefits, plus $300 extra from Feds and doesn’t require people to find work. This is not taxable, and nothing is withheld. The ‘net take home pay’ is gross pay, after federal withholding tax, social security/Medicare, and state tax, if any. Most workers are making more money sitting home and collecting unemployment money!

So, why would people take a pay cut and go back to work? There are plenty of jobs available but the governments incentives have caused a mess! No one is incentivized to work! And it’s causing inflation!

Currently, many businesses are unable to fill many production/service jobs, and output is reduced significantly. This affects supply and demand as prices are driven up as supply is reduced. Wood products, for example, are up almost 400% - why? There is wood raw material, but no workers to process it into final product, which means shortages and price increases.

Government officials say they ‘see no evidence’ that the extra unemployment deters people from working. Really? Are they blind? Unfilled jobs abound! President Biden’s next ‘solution’ to this ‘non- problem’ is to pay people even more. Let’s be kind and just say he doesn’t understand how business works!

These are unintended, but foreseeable consequences of poorly thought-out policies. We need good economic policy and some good old common sense from our leaders! Next time, maybe we’ll listen to the non-partisan economists who warned us about this problem!

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