The Cure For High Prices

One of the many economic principles I learned was one regarding inflation, “The cure for high prices is high prices.”. What happens when demand for a good or service increases? In a functioning economy, price rises or supply increases. If prices rise, a few things can happen.

  • The increase in profit encourages more production, more supply means more competition which may eventually draw down prices.
  • Higher prices may also decrease demand allowing supply to catch up to demand.
  • Increased prices encourage overproduction and result in a glut eventually bringing down price.

We may be seeing this in real-time. Three of the largest retailers Target, Walmart, and Amazon, have been vocal about supply and demand imbalances. The retailers saw sky-high demand and worked to expand their supply and were able to pass on the cost of increasing their supply consumers were willing to pay the higher prices for a while. But that is changing, especially as The Federal Reserve has begun raising rates making borrowing/spending more expensive to cut demand.

Walmart’s CEO:
“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars. We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.” said Doug McMillon, Walmart Inc. president and chief executive officer.

Target’s CFO:
“Retail inventories are elevated,” Michael Fiddelke, Target’s chief financial officer, told The Associated Press in a phone interview Monday. ”And they certainly are for us, in some of the categories that we misforecast. We determined that acting aggressively was the right way to continue to fuel the business.”

What they are both getting at here is the willingness or ability of consumers to pay more for goods and services has declined as consumers are squeezed by inflation and rate hikes. The result is the retailers have excess inventory they must sell, and the only way they can do that is by lowering costs. Retailers increased supply and marked up costs when they could, but the cost got too high cooling demand, and now prices are coming down. Rate hikes were instrumental in this process, The Federal Reserve making borrowing (including you credit card) more expensive cut consumers’ consumption or aggregate demand. Rate hikes are not my favorite method as they disproportionately harm lower-income Americans who spend more of their paychecks but allowing inflation to continue to grow could be worse if we are not willing to address supply shocks slowing demand is our only choice. It is good to see some progress on inflation but hopefully next time we address supply issues instead of causing demand destruction and risking a recession.

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