Saturday, August 11, 2012

A Shortage Cannot Cause Overall Price Inflation

Re: Will the Crop Crisis Trigger Inflation by Doug Casey

The full article about the impact of a reduced cereal crop is interesting, although the conclusion is misleading. A shortage of some key commodity cannot cause a GENERAL price inflation. Certain products may increase in price, but this need not cause ALL prices to rise. The more we spend of our disposable income on cereal based products the less we have to spend on other products. As a result, we will cut back on the consumption of both. In the short run this will cause non-cereal based products to fall in price, due to their excess supply. In the long run, we will cut back on cereal based products, either substituting other products or simply doing without, causing these prices to fall also. (Think eating less beef and perhaps more fish. Or think of the situation where your landlord raises your rent. In the short run you must cut back on other spending, but in the long run you may find a less expensive apartment.) The only way all prices can increase is for the money supply to increase.

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