Lecture on Inflation

Introduction

• Inflation has become a global issue, affecting various sectors like diapers in the US, food in Ghana, and home prices in India.
• Common explanation: "Too much money chasing too few goods."
• Example of car dealership: Limited inventory leads to increased prices due to high demand.

Measuring Inflation

• Inflation is measured using the Consumer Price Index (CPI).
  • CPI: Measures the price changes of a 'market basket' of goods and services.
  • Includes items like housing, electricity, apparel, prescription drugs, bakery products, dairy.
  • Calculated monthly by comparing current prices to those of the previous month/year.

Specific Price Changes

• Certain goods have risen sharply: fuel oil, airline fares, gas, baked goods, dairy products.
• Other prices remain steady or have decreased: clothing, prescription drugs, education, used cars and trucks, gasoline, communication services.

Causes of Inflation

• Several theories:
  1. Excess Money Supply: Stimulus checks causing inflation.
  2. Supply Chain Disruptions: Pandemic-related production slowdowns.
  3. Corporate Markups: Companies increasing prices beyond cost increases.

Diapers as a Case Study

• Price Increase: Diapers cost increased from 16.1 cents (2019) to 21 cents per diaper (2023), over a 30% increase.
• Factors influencing diaper prices:
  • Labor cost increased by 17% from 2019-2023.
  • Rising input costs (wood pulp, plastics).
  • Corporate earnings calls reveal intentional price hikes for profit.

Addressing Inflation

• Federal Reserve's Role: Raising interest rates to curb inflation.
  • Risk: Higher unemployment if rates continue to rise.
  • Historical context: 1980s high inflation followed by high unemployment with rate hikes.
• Alternative Measures:
  • Releasing oil reserves has helped lower fuel prices.
  • Potential sector-specific interventions like Roosevelt's 1939 airline industry strategy.

Corporate Influence

• Diaper industry dominated by two companies: Procter & Gamble, Kimberly-Clark.
• Lack of competition leads to higher consumer prices.

Conclusion

• Inflation is complex with multiple contributing factors.
• Various tools and policies can be employed to address inflation without sacrificing employment.