The world is facing a really bad situation of inflation. And if people are getting more afraid of inflation, the invisible medium will push inflation even harder.
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| The world is facing pretty bad inflation |
When obsessed, constantly thinking about inflation, both businesses and individuals feel financially unstable. And this is the ideal condition for "inflationary psychology" to develop.
According to economists, psychological inflation occurs when: Consumers speed up their purchases or expect higher wages because they believe prices will continue to rise; Businesses increase prices because they predict that the price level will continue to increase.
For reference, in February 2022, prices across the US increased by 7.9% over the same period previous year. At the time, if Americans want to live like last year, they have to spend about 5,000 more dollars.
According to economists, there are three basic reasons for this inflation: First, the shortage of supply due to the epidemic, because many factories have to close. Second, demand is higher than expected, because of rising wages, pent-up shopping demand in the past, and stimulus waves from the government. Third, the war between Russia and Ukraine causes oil prices to rise, food prices to rise.
When these three causes are identified, the solution proposed is: strengthening the supply chain, controlling procurement demand (for example, through raising interest rates) and negotiating an end to the crisis in Ukraine. However, the solution is easy to define, but difficult to implement. For example, no one knows when the war in Ukraine will end or when COVID-19 will end in China so that the supply chain can be connected again.
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| The solution is easy to define, but difficult to implement |
And when the fear of inflation begins to appear, it will often lead to 3 trends: First, workers demand an increase in wages to compensate for the increase in prices. Second, consumers quickly buy goods to avoid being bought at a higher price in the future. Even one study found that if consumers expect inflation, the percentage of purchases of durable goods (like cars, refrigerators, etc.) increases by more than 8%. Third, businesses increase prices because they anticipate increased costs and increased demand.
In other words, the need to increase wages to increase prices to combat future inflation causes wages and prices to continue to increase, leading to prolonged inflation. These form a continuous loop.
Businesses and individuals know that inflation will eventually come to an end at some point. But they want to make as much profit as possible before the end. So they "follow" that cycle faster, ie constantly demanding higher wages and prices. The more prevalent this mentality, the longer the cycle of inflation and the harder it is to deal with.
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| President Richard Nixon of the United States once said that the inflationary psychology is deeply rooted in the United States |
In his 1971 State of the Union address, President Richard Nixon of the United States once said that the mentality of inflation has been ingrained in the United States for too long. He tried to prevent it by establishing wage and price controls, but the plan failed. His successor also failed to curb inflation successfully.
That inflationary cycle lasted from 1965 and ended only in the early 1980s when Federal Reserve Chairman Paul Volcker raised interest rates from 10% to 20%, sending the economy into recession.
In this round of inflation, economist Richard Curtin pointed out that there are mixed signs of inflationary sentiment in a survey. For example, 10% of people surveyed said that they are buying more goods because they are afraid of increasing prices. This rate in 1970 was 50%.
However, the bad news is that 49% do not appreciate the current US government's economic policies, up 12% compared to the data in February 2021. That is, people fear that the government does not have the right measures to prevent inflation.
This is quite dangerous, because the more people fear inflation, the more people act defensively, and those actions add to inflation. And since the world economy is based on the dollar, inflation in the US will lead to global inflation.
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