The seller has the obligation to sell at the highest price possible. The buyer has the obligation to buy at the lowest price possible. However, the buyer determines the price of the final transaction because no one can force the buyer to buy. The seller determines whether or not the transaction will take place because no one can force the seller to sell.
A negotiation takes place to arrive at a price that is acceptable to both parties. We do not negotiate the price directly at the department store. But that negotiation does happen. The department store puts an item on sale and might continue to reduce to a point where all the buyers are happily buying.
Demand and supply imbalances are usually resolved within a short period of time because that is what the free markets do. Because of the lockdowns in the US, there was a massive disruption of both demand and supply for construction lumber.
Initially, in April 2020, the price for 100,000 board feet was at $300. Nobody wanted any lumber. But by November 2020 the price had increased to $500 as construction started to come back. But there had been also a supply disruption, which pushed prices in March 2021 to $815 and by May to $1,670. As of June 15th, the equilibrium is coming back and the prices have dropped to $1,009. Demand and supply are almost back to normal.
The current US inflation rate is 5 percent and that is the highest since 2008. The US Bureau of Labor Statistics said that wholesale prices rose a record 0.8 percent in May on a monthly basis and a blistering 6.6 percent over the last 12 months. That is the biggest jump on record going all the way back to the 1950s. Yes, supply constraints have affected prices and these will recalibrate to demand later this year.
But what we are seeing in the US is the same thing we are seeing in the Philippines. Companies that were able to survive through the Covid pandemic lockdowns are trying to recover some of their lost revenues and profits. It is understandable. Even as demand increases as economies open up, the increasing revenues will not make up for the losses. Therefore, companies are raising prices to try to get back where they were pre-Covid.
If you own a burger joint and you see your competitor down the street raising prices, you will also. If the bakery that sells you burger buns sees you raising prices, it’s going to raise prices also. If the bakery raises prices, you are going to raise your prices again for fear of “inflation” in the future.
Inflation, therefore, becomes a vicious cycle of price increase, fear of inflation, price increase, more fear of inflation, and finally INFLATION.
Compounding the problem is government fiscal policy, that is, what the government is doing with its own finances. The US government budget deficit has been worse in the past. That was when the US economy collapsed in the mid-1980s and after the global debt crisis beginning in 2008. This time it is different because the US debt to GDP ratio has never been any higher in history, except during World War II.
You have the private sector raising prices to try to recover from the Covid lockdowns. You have the US government both spending and borrowing money like a drunken sailor on shore leave.
Inflation is a psychological event. Businesses and consumers are scared to death that they will not financially recover from the Covid lockdowns. They are also losing confidence about their government having a clue what is actually going on in the economy. This will not pass away any time soon.
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