2022-04-19

Why is Inflation Bad?

Everyone focuses on prices during inflation, but prices under inflation are the least valuable. They are distorted by the inflation, but they do not capture the inflation properly. It's not like everything goes up in price by 5 percent. By creating price distortions in the economy, people chase after things rising faster in price. If food prices go up, what do they do? Hoard food. So the price goes up faster. Yet, there is actually no problem with the food supply. The move is a created by price distortions.

Now someone will chime in with fertilizer prices or supply chain disruptions. Those are factors that have to be considered, but the price doesn't reflect these problems. The prices are distorted by the inflation. It's possibhle the situation is far better than it seems. It's possible hoarding behavior is driving the extreme move in prices. It's possible the situation is far worse. Price doesn't tell you this anymore, at least not like it did three years ago, or ten years ago, or twenty years ago.

When the Weimar hyperinflation was getting started, people mistaked the inflation for an economic boom. Germany's economy was coming out of a post-war recession. Similar to how the world is coming out of lockdowns. I do not think hyperinflation is coming, but I constantly hear from bulls about how economic activity is picking up. This lulls people into believing they are seeing a reopening boom. Ask the businesses who finally hike prices to offset rising costs what happened to their business. I don't know if it will start this quarter, but it will show up in conference calls and earnings guidance soon enough.

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