Hang on, help is on its way
Cost-push inflation can self-correct. By recognising this and giving producers a little more time, our response to inflation need not be so painful.
Cost-push inflation, a type of inflation caused by higher input prices and supply problems, is a dragon that can slay itself. This self-defeat is a slow process, but indeed it happens.Β Here's how it works and what has occurred so far in this cycle.
When producers raise their prices, this pushes up their top and bottom lines. They get to sell the same amount of stuff but at a higher price. Hence, they make fatter profit margins and returns on capital.
As their projects now generate loftier returns than they used to, these firms are incentivised, and have the means, to reinvest more. They pour capital into starting new projects and maximising the activity of current ones.
These firms ramp up production as much as possible to make as much money as they can. They pump, dig, and build. But as new wells, mines, and factories are big projects that take a long time to finish, output increases in big jumps.
Soon, all these companies produce too much stuff. And, as there is now more than people neeβ¦