Understanding Economics

Currently Playing: Understanding Economics: What is inflation?

Inflation means that prices are rising, but knowing the inflation rate does not tell us why prices are going up. In this Understanding Economics video, I argue that identifying the cause of inflation is essential if we are going to choose the right policy to tackle it. Economists traditionally distinguish between demand-pull inflation and cost-push inflation. Demand-pull inflation happens when spending exceeds the economy’s capacity to supply goods and services. Cost-push inflation happens when essential costs such as energy, food and materials rise because of supply shocks. I also identify a third form: “greedflation”. This happens when companies use their market power to increase prices by more than their costs have risen, increasing their profit margins in the process. These different causes require different responses. I argue that raising interest rates might suppress demand, but it cannot create more energy, food or other scarce resources. Higher rates also increase mortgages, rents and business costs while discouraging the investment that could increase productive capacity. Instead, policy should match the cause. Excessive demand can be managed through taxation. Excess profits can be tackled through regulation and taxation. Energy shortages require investment in domestic energy, while other supply shortages require investment in the capacity needed to produce more. Inflation policy is therefore about much more than changing interest rates. We need to ask what is causing prices to rise, who is gaining, who is losing and which policy actually addresses the underlying problem. There is no single solution to inflation because there is no single cause. Understanding that is essential if we want economic policy that works. This is what Understanding Economics is all about. You can watch the rest of this series here: https://www.youtube.com/playlist?list=PLaSguNBvHIto Take a look at the poll below: https://www.youtube.com/post/UgkxC3OrjP89kiyFeI8uLKwZ1OIX7hcOvTSc 00:00 What Is Inflation? 01:04 Why the Cause of Inflation Matters 02:08 Demand-Pull Inflation Explained 03:14 What Is Cost-Push Inflation? 04:20 COVID and the Supply Chain Shock 05:25 War, Energy and Rising Prices 06:32 What Is Greedflation? 07:38 Why Interest Rates Are the Wrong Tool 08:45 How Higher Rates Can Increase Costs 09:50 Why Interest Rate Policy Creates Inequality 10:55 How Tax Can Control Inflation 12:02 Match the Solution to the Cause 13:08 How to Tackle Greedflation 14:05 Investment Can Fight Supply-Side Inflation 15:00 There Is No Single Solution to Inflation TRANSCRIPT A transcript for this video is available at: https://www.taxresearch.org.uk HOW TO SUPPORT US Please consider donating: https://ko-fi.com/taxresearch ABOUT RICHARD MURPHY Richard Murphy is Emeritus Professor of Accounting Practice at Sheffield University Management School. He is director of Tax Research LLP and the author of the Funding the Future blog. His best-known book is ‘The Joy of Tax’. This video was edited by Thomas Murphy. RICHARD MURPHY ON BLUESKY: https://bsky.app/profile/richardjmurphy.bsky.social OR ON MY BLOG: http://www.taxresearch.org.uk/Blog/ HIT SUBSCRIBE & GET NOTIFICATIONS Subscribe and get notified of new videos released. INTRODUCTION: https://www.youtube.com/watch?v=HdHsRPy3060 Take a look at our playlist page to view older videos: https://www.youtube.com/@RichardJMurphy/playlists #Inflation #UnderstandingEconomics #Economics #CostPushInflation #DemandPullInflation #Greedflation #InterestRates #BankOfEngland #Taxation