Thursday, November 4, 2010

Inflation? Inflation? We dont have no stinkin' inflation!"...except on the things we actually buy everyday...

Maybe not inflation as officially defined: A general rise in prices. This is a fancy way of saying that all or most prices are increasing in tandem.  The inflation suggested by these articles points to a combination of "demand-pull" and "cost-push" inflation.  Demand-pull inflation occurs because, well, quantity demanded is greater than quantity supplied which tends to increases prices.  The demand-side is pulling prices up with increased incomes and/or a change in consumer preferences.  Much of it is attributed to demand from China and other emerging economies to satisfy consumers from increasing middle classes in those respective economy's.  The "cost-push" inflation refers to the production side.  Raw materials, such as cotton, sugar, beef, cocoa, oil, etc, serve as inputs into making food, clothing and gasoline are increasing in price. This in turn increases the cost of producing. The higher input costs are "pushing" up food, clothing and gas prices.  So, it is essentially is the source of the inertia as to which type of inflation occurs ---demand-side (demand-pull) or the supply-side (cost-push).  Extra credit: Which type of inflation is the EASIEST to solve and why? Which is the more difficult and why?  Use your knowledge of the Aggregate Demand/Aggregate Supply Model to help you.

Headlines in  TODAY's Wall Street Journal:

Food Sellers Grit Teeth, Raise Prices
Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald's Corp., Kellogg Co. and Kroger Co. have begun to signal that they'll try to make consumers shoulder more of the higher costs for ingredients.
Unable to Stretch Further, Apparel Makers Raise Prices
Shoppers will have to pay more for clothing next year as skyrocketing cotton prices force companies to take their chances with price increases even as consumer demand remains sluggish.
Sugar Prices Hit 30 Year High
Raw-sugar futures have pushed above their February highs as weather problems in producing regions, including the world's number-one exporter Brazil, have sparked fears that the previously forecast world surplus this year won't materialize.
Oil Hits 6 Month High (which in turn will likely make gasoline more expensive)
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