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Inflation: Only one thing helps against price increases – WORLD

Inflation: Only one thing helps against price increases – WORLD
Written by insideindyhomes

PTravel increases in a market economy when there is more demand than supply. There can be two reasons for this. Either the demand is increasing faster than the supply. This happens when the central bank increases the money supply excessively and also when public and private households increase their spending significantly.

Or the supply is falling faster than the demand. This can be the result of production downtime. The “3 Cs” – wars, crises, catastrophes – are often primarily responsible for this.

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If both happen at the same time – i.e. if both the demand increases and the supply decreases at the same time, it becomes particularly critical. Then an avalanche of inflation can be triggered. Once set in motion, it is difficult to stop. Because it is accelerated all too quickly by its own dynamic forces.

This includes the frequently described wage-cost spirals. They arise because everyone tries to pass rising prices on to others like a hot potato as quickly and completely as possible. Those who can will pass on higher costs to customers.

The dreaded climate of inflation

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Likewise, those who are able to do so will demand more salary so that the wage retains its purchasing power when shopping. After a (already short) while, everyone expects prices to keep going up. And in the attempt to defend oneself against inflation, exactly what one actually wants to avoid is achieved: an inflationary climate develops that endangers economic prosperity, social tranquility and political stability in equal measure.

The macroeconomic textbook describes the current reality in the euro area and Germany more or less accurately. At the same time, it reveals what helps most and most sustainably in the fight against inflation: more growth.

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More growth means that the offer is expanded. In this way, the gap between excessive demand and insufficient supply can be reduced. Instead of complaining about empty shelves, panic buying, queues, shortages and long delivery times or selling scarce goods to the highest bidder, production should be ramped up. Scarcity is then not overcome by rising prices, but by increasing supply.

Now many will cry out and argue that more growth is neither economically possible nor socially desirable or ecologically desirable. The global supply chains are too severely disrupted, the growth successes are distributed too unequally and the environment and climate are burdened too much as a result.

Unleash supply, create growth

Much of this is correct. But nothing changes the fact that none of the enormous future challenges, no major risk that threatens the very existence of humanity, nor the consequences of the “3 K” nor the indeed serious distribution effects of inflation can be better managed with less growth than with more growth .

Anything that unleashes supply, that facilitates production, that enables capacities to be used 24/7 around the clock, ensures more growth and thus helps in the fight against inflation. The fact that many things are not feasible in the short term should not be used as an excuse to at least start with them.

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The Covid-19 emergency laws demonstrated what is possible in terms of reducing bureaucracy, exception rules, easier access and “New Work” if you want it. They must become the yardstick for what extraordinary measures must also be possible for a growing supply and against rising prices.

Not less, but more international division of labor is the order of the day in times of inflation. If global supply chains have become more risky for political reasons, the hour of the European Economic Area is louder than ever. When, if not now, should the immense economies of scale of the European dimension be used?

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From the army, through procurement, services of general interest and public infrastructure to supply networks and suppliers: never before has it paid off better than today to think of the offer from a European perspective to leverage the considerable potential for cost reductions.

More growth is the indispensable prerequisite for generating the economic means with the help of which climate change can be stopped – as far as humanly possible –, environmental destruction prevented, the probability of the “3K” occurring reduced and the distributional effects of systemic risks – such as inflation – compensated for be able.

Create more value with less effort

As a reminder to all growth critics: economic growth has nothing to do with growth in nature. More growth does not mean more environmental destruction or more wasted resources.

Economic growth means reducing waste, lowering costs and thus prices, increasing efficiency and creating more value with less effort. This expands the scope for ambitious ecological requirements and social distribution needs.

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Anyone who is actually concerned with ecology and not just green ideology must demand more growth. More ideas, creativity and knowledge, faster and more effective innovations, new technologies, more effective technology are needed to produce more economic growth with less ecological costs.

Only in this way will the supply become, be and remain large enough to provide affordable everyday goods for a constantly increasing demand from a world population that will continue to increase rapidly for a long time to come. This is the only way that ecological, demographic, social and structural change will not permanently threaten price stability (and thus local prosperity). More growth means less inflation.

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