Zeev's Turnips Patch-No Politics (ZEEV)

[Lane Hall-Witt]

sarai--

My sense is that the ultra-low inflation rates have allowed a lot of marginal companies to survive, thus creating a highly competitive supply environment that has eliminated pricing power. On this understanding, inflation would be more likely to result from higher interest rates, which would drive marginal players out of business and ease competition, thus giving survivors greater pricing power. (Of course, we would also see a dropoff in demand, as unemployment would rise in an environment of business failures, so this would make "pricing power" into a somewhat bittersweet prize.)

Generally speaking, our understanding of inflation is quite muddled by the fact that we understand inflation in terms of money supply, but measure it in terms of price. Money supply and price correlate in simplistic economic models, but really have far more complex relationships than economists like to believe.