Supply and demand charts are the first topic of the first chapter in economics textbooks, and they are the building blocks upon which all economic theory is founded. From the demand side of the equation, the law is very simple: As prices go up, buyers are less likely to buy a product.
Central bankers around the world seem to have forgotten Econ 101. Global central banks, for reasons that may have less to do with economics, and more to do with funding budget deficits, have determined that some inflation is “good” and have deemed it optimal to target inflation rates of roughly 2%.
They have gotten away with this strategy for over a decade. Global deflationary forces, led by the internet and a reliance on low-cost production in China, have offset inflationary pressures from central bank money printing. No matter how hard these bankers tried to create inflation, online retailers—backed by millions of low-cost global workers—were standing ready to smash prices lower.
But some things have changed in recent years. For starters, the pandemic has disrupted global supply chains. This is the excuse that many central bankers use to wave inflationary fears away. The problem is merely “transitory,” they say. Soon it will all go away.
Other developments have also been at work. For instance, the United States has taken a much harsher stance toward its perennial trade deficit with China. Wherever possible, tariffs have been put in place. Companies have been forced to look for alternative sources.
Meanwhile, China has changed. China is slowly moving away from its unprofitable state-owned enterprises, leading the supply of some goods to decline. Additionally, the urbanization of China’s workforce has now largely played out. The supply of low-cost rural labor has slowed. In fact, China’s population is aging significantly. As the relative size of the workforce declines, wages must rise to keep workers from finding new jobs. Again, we see the basic forces of supply and demand playing out. Demographic trends were once an argument in favor of deflation, but in China, the contrary may be the case.
But the big change in inflationary dynamics may be that the internet has finally killed off the brick-and-mortar competition. Years ago, the internet was a source of price competition. Now, many of the big box retailers at the local mall are out of business, leaving behind empty buildings, and in some cases, trampoline parks.
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https://www.barrons.com/articles/central-bankers-have-forgotten-econ-101-51644272813