Is coffee up again?

"Ding Ding". Melody entered the local coffee shops to buy her weekly treat after work. This week was exceptionally stressful for her, and thus, she decided to buy two specialty coffees and a treat to go alongside it.?

As she approaches the counter and chooses hot or cold pumpkin spice lattes, she pulls out her card to pay and notices that the single latte is up from last week. She sighs, "Again?". "Hmm, is there something wrong?" Reply's the bartender. "Oh no! Nothing at all, just thinking out loud about work next week?" but what is actually on her mind is the rising cost of even her favorite seasonal drink. At this rate, Melody will have to stop buying her weekly treats.?

Why are things rising in price again? Haven't the shipping lanes opened? Are the orders and deliveries stabilized? Inflation is a complex problem.?

First, let's assist Melody in defining inflation. According to the Oxford Dictionary, inflation is a general increase in prices and a fall in the purchasing value of money. But what causes the products Melody wants to buy to increase in cost?

The causes of inflation are far more dynamic and more challenging to pinpoint. There are two main theories, cost-push inflation and demand-pull inflation; and two general ideas: Inflation is due to an increase in the money supply or a decrease in the demand for money.

Cost-Push Inflation

Cost-push inflation is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production. But what does that mean? If Melody decided to go to the grocery store to buy her weekly food, the empty shelves would be an example of a lack of supply. A winter storm hit the breadbasket of the US this past winter, ruining the chances of a good harvest and decreasing the food supply on store shelves. Examples of these are what we experienced in 2023 and still affect today. Other examples include:

1. We experienced an increase in the cost of petroleum throughout the year as the supply diminished and the cost of transportation by shipping, truck and rail, and air transportation increased.
2. The inability of companies to be able to ship back the cargo containers from the US ports to the Chinese ports economically made buying new ones cheaper; container transport reached a high point of $15,000 per container when previously it was 300, and currently, above pre-pandemic, but has subsided down to at $500 per container. But as of this year, it has increased once more to a high of $700 and may continue to climb. It is important to note that most countries rely on shipping transportation as the cheapest form of transportation.
3. Canal setbacks, such as the Panama Canal, usually can transport 30 to 40 cargo ships a day (a value of anywhere between 2 million to 200 million per ship) but had to cut it to 12 due to the lack of water in reservoirs used in the cargo channels.
4. War disrupts shipping lanes, forcing them to travel longer routes, such as skipping the Red Sea and instead going around the Cape of Hope or paying higher insurance premiums to continue to go through the Suez Canal.

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Demand-Pull Inflation

Demand-pull inflation is the increase in aggregate demand. This is when Melody wants to buy coffee beans to make their coffee, but so does everyone in the city and all the Starbucks on the West Coast.

1. People request more and can buy more. I only subscribe to this if you live in a service economy, like the US, that can increase productivity and income, requesting more consumable goods while not being a producer of them. This example is usually not isolated from other effects, and an excess increase in the money supply is also present.
2. One significant example is the increased demand for CPU and GPU chips when COVID-19 forced a 2-year shutdown in the developed world. This caused many firms to transition to remote systems and forced an increase in demand for computers, servers, and at-home office supplies. This caused a back of chips by up to 12 month waiting times, as the leading producer of top tier chips, TSMC, could not supply all the requests simultaneously.

Increase or Decrease in Money Supply

The other two ideas are inflation due to an increase in the money supply or a decrease in the demand for money.

1. Increase in the money supply, historical examples: Weimar Republic post WWI, Turkey, with bouts of high inflation in the 20th and today, Argentina, with significant episodes of fiscal deficits and money creation in the 20th and today.

1. In the days of the Weimar Republic, it was said that using suitcases of currency as firewood was cheaper than the wood itself.

1. Decrease in demand for money: a mixture of reasons: less trust in the money, expected future inflation, lack of redemption, or difficulty to redeem. It is harder to pinpoint as it is multifaceted.

As a US millennial, Melody and I have not lived in an era where we do not want the US dollar over other currencies or money. Even with our inflation issues at home, countries such as Turkey, Argentina, Zimbabwe, and many others prefer to receive dollars, gold, or even bitcoin instead of their currency, as they have lost faith in their local currency to be used as a store value for the purchase of goods and services in the future.

Many of these events create death loops or positive feedback loops that are hard to stop. As the US experienced a shortage of toilet paper in mid-2023, people who believed there would be no toilet paper or other goods for an extended period bulk purchased in excess to prevent themselves from going short on paper while using the restroom. Thankfully, that was a misunderstanding of the market, and the supply of toilet paper was replenished in less than a week.

In short, cost-push inflation is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production; demand-pull inflation is the increase in aggregate demand of existing supply, usually independent of the increase or decrease of cost of production.??

This is a partial explanation of inflation dynamics and an introduction to the elements of inflation and their dynamic response to different factors. If you are interested in learning more, many online resources are available. If you are interested, I can share the resources I read or used to study inflation.??

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