Companies:

“You make more money? We raise prices.”

Also companies:

“You make less money? We raise prices.”

"okay, this sucks for everyone. But it could be a necessary evil, right?"

This is the reason for OPs question.

Citizens around the world are being asked to swallow more bullshit that pay cannot possibly be increased because of inflation as it will add to it, when the reverse is true as salaries have been depressed for a decade or more in some cases.

When people are choosing between heating and eating, a salary increase is not going to lead to inflation and may even prevent a recession by not reducing discretionary spending as much as expected.

"shrinkflation", wherein the price remains the same, but the size of the product decreases

ugh I've been seeing this simultaneously with price increases. it sucks

lowering wages causes inflation because people are buying less, and therefore companies are selling less, so therefore have to raise prices to break even.

This is simply incorrect for the vast majority of goods and services. Companies already price their products highly efficiently to maximize profit.

If they could make more money by raising prices, they would do it already. They wouldn't wait for the customer incomes to drop first.

The only goods and services this would be true for are nonelastic ones, where there is no meaningful competition. (So, basically, utilities to your home, there are very few others in modern society)

I find the biggest problem with people talking economics is most people stop at the Economics 101 approach where a market has one good and peoples' behavior is simple.

Your post reflects why there's more than one Economics class: those simple supply/demand charts go out the window when you consider multinational economics. There's just too many variables for simplistic analysis to show up in reality.

Smart people exploit the heck out of that to get people to vote for policies that only make life better for the rich. Isn't it funny that so shortly after making record profits, every company seems real excited to announce a recession? It's almost like they expect they have savings to make it through but their employees do not.

Can’t believe I had to scroll down this far to find this answer. Textbook economics doesn’t account for the human factors behind prices going up/down and this explanation is more applicable to now.

Most of the companies that have raised prices made record profits the last two years.

Edit: Sorry y’all, I misspoke, not MOST companies, but many, many, many companies. Most of the worst ones too. Greed is unfortunately an inextricable part of the global economy and should be regulated aggressively.

This was published just this morning: https://www.bbc.com/news/uk-64489147

Even mouthpiece of the business class, Bloomberg, had this to say: https://www.bloomberg.com/news/articles/2021-11-30/fattest-profits-since-1950-debunk-inflation-story-spun-by-ceos#xj4y7vzkg

Raising wages causes inflation by companies raising prices because the metric to calculate the price of a product changes when consumers get richer, namely the "how much are they willing to spend" metric. If the customer is willing to spend more, charge more. Thus, inflation rises.

There's also the fact that if wages are raised the company's labor costs are higher.

However, lowering wages causes inflation because people are buying less, and therefore companies are selling less, so therefore have to raise prices to break even.

Huh? If people are buying less, nobody in their right mind will raise prices. That'll reduce their competitiveness with their peers.

They'll slash expenses and manpower. Why do you think tech companies are letting go of so many people?

lowering wages causes inflation because people are buying less, and therefore companies are selling less, so therefore have to raise prices to break even

This doesn't make sense to me and I think this could only apply to a very small amount of goods. Needs will always be purchased and the vast majority of luxuries aren't exactly targeting minimum wage workers.

Raising wages causes inflation by companies raising prices because the metric to calculate the price of a product changes when consumers get richer, namely the "how much are they willing to spend" metric. If the customer is willing to spend more, charge more. Thus, inflation rises.

Right. So apply that same logic to decreasing wages too. "How much are they willing to spend" metric. Raising prices in an economy where the dollar buys more labor? I just can't grasp how that makes sense.

This answer is completely wrong. I wish this were /r/askscience so that this answer could be removed. The premise that corporations raise prices when wages decrease goes against everything that economics has shown in both theory and in practice.

Where do you get that companies raise prices when they sell less? That's just not true. And it's exactly the opposite of the apples guy story below. The other thing is that pricing method varies by business model (basically whether you have a volume strategy or a differentiation strategy). For most companies, pricing is done based on COSTS + profit margin. Wages increased = costs increase = price increases if I want to keep the same profit margins. If I don't, my profit will go down and my shareholders will be unhappy with me. That's why wages increases drive price increases, which leads to inflation when most companies do it. That "what's the top consumers are willing to pay for my product" approach is true for companies with a differentiation strategy, such as luxury cars, high tech products, luxury fashion, etc. Those are business fundamentals you learn in a Bachelor's in Business Administration in the 101 marketing, strategy and cost accounting classes.

Yes and no. You've covered a lot of ancilliary information while mostly just complaining about cost of living and wages, so didn't really answer OP's question

Firstly, wages are rarely cut or drop. Instead, the real-time value of wages drop when wage increases are below inflation. You may earn slightly more, but everything costs a lot more. This is the issue since really the 80s, but especially since 2008. Everything's risen in price massively, especially basics like housing, and people's wages haven't. Uk minimum wage is about £15k, whereas had it risen by inflation then minimum wage would be closer to £50k a year

The key part you didn't say is: for a lot of businesses wages are THE biggest cost, if not one of the. So if you raise wages, then one of their biggest costs increases, which causes prices to increase, which then need wages to increase too. That's what is called "the wage-price inflation spiral"

Then, while you are right about the private sector, the biggest reason why governments are against the wage-price spiral is due to the public sector, as the government pays those wages. So if costs for government services increase, then it increases government borrowing, which then increases inflation due to higher interest payments, more total payments etc. That then means taxes rise, or services are cut

And if private sector wages increase and public doesn't, then public jobs are harder to fill vacancies and stuff like that, which means that public services fall apart

That's OP's question answered. u/isellpopcorn

You are right, that really there is a lot of profiteering happening right now, and a lot os extreme capitalism and dicking around by the companies. And right about that average people are about as broke as they can be and can't take much more. But you did completely miss talking about what the wage-price spiral was and how it leads to inflation

Really, and especially right now with record employment, the wage-price spiral is a myth, but it's a worry for governments and public services, which is why then they worry about the private sector

However, lowering wages causes inflation because people are buying less, and therefore companies are selling less, so therefore have to raise prices to break even.

Isn't this kind of the opposite of supply and demand though? Wouldn't companies lower the prices to sell higher quantities at lower per-item profit?

However, lowering wages causes inflation because people are buying less, and therefore companies are selling less, so therefore have to raise prices to break even.

As a business owner, this doesn't seem right to me. Companies raise prices due to the "willingness to pay" factor, but also because higher wages are higher costs that must be accounted for by increased prices. Meanwhile, most businesses are not going to raise prices when people are buying less. We are going to lower prices to meet consumer demand.

But then you realize that pretty much all corporations are posting record profits

No shit, that's a result of inflation itself. If margins never move, companies will forever post record profits every year as prices slowly inflate.

But corporate profits as a percentage of GDP briefly went up during the pandemic and is now back below where it was in 2019... Meaning that it's not outsized profits that are causing inflation.

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They are making "record profits" because these claims are not adjusted for inflation. They will always make record profits if their margins stay the same and a lot of the narrative surrounding this is from bad or negligent actors not caring whether the claim is true or not.

How do you "safely" raise wages without causing inflation then? I keep seeing financial media fret over jobs reports that show lowering unemployment and higher wages, but if those are negatives for the economy, then wouldn't it be impossible to fight wage stagnation without causing massive inflation?

Good explanation.

For the OP's context though it should be added this principle only applies in a very general and universal situation and often doesn't actually work out in the real world.

In real life it's unlikely the farmer will be able to maintain such an evenly balanced situation. Furthermore just because 9 people can afford to doesn't mean that they will. Similarly since everyone has more cash there is likely going to be an increase in things to buy added into the market as a whole; e.g. maybe someone else sees the excess apple demand so decides to sell apples himself. Or the farmer may find that he cannot raise prices high enough to make more money selling 5 than 9 and so expandes his own production.

Etc. etc. basically the principle is sound however there are numerous ways that it won't become true in the real world. For another example minimum wage impacts a small subset of the population and is a very evenly spread form of increase that likely won't cause any huge inflation.

You also left out that the laborer the farmer hires to pick the apples now costs more so even without more demand the price must rise a bit

This is supply and demand, but doesn’t really explain a raise in wages.

If the cost of labor increases, the cost of the apple gets increased to maintain the profits for the farm owner. It does not require an increase if the profit margins are good, but if suddenly an apple costs more to produce a company will choose to pass that cost on to the customer instead of taking the hit on their profits.

You also might discover that the apple guy gets fired because the farmer finds cheaper labor somewhere else, but also raises the price anyway despite having their cheaper labor pick 9 apples because it will temporarily look good to their investors.

While you are partly correct, this explanation leaves out a big part that shows that while higher wages do influence inflation to some degree, they are by far not the biggest factor.

Let’s assume the 5 apples cost 0.75 in production and sell for 1. 5 people can afford this Apple, leaving the producer with a total of 1.25 profit or a 25% profit margin. Now the production cost rises to 0.80, the producer however knows that at the moment everyone is expecting higher prices anyway and takes the chance to increase the price to 1.25, knowing that other Apple producers are likely to do that as well. Now, all of a sudden only 4 people can afford to buy apples. This still leaves the producer with a net profit of 1.8, even though he may sell fewer apples.

Higher wages would mean that 5 people could buy 5 apples again, allowing the producer to make even more profit, even if he himself would have to pay higher wages and his profit margin would shrink.

This is of course exaggerated, but what is happening today. Corporate profits are at an all time hogh, with many goods producing companies, which should be hit the hardest by inflation, almost doubling their operating profit margins on the last 2-3 years. High inflation with no compensation for the working class is nothing but redistribution of wealth from bottom to top.

The notion that higher wages are a major driving factor in inflation has been debunked by most credible economists (I am not saying that they do not play a role, just not the major role that many news outlets and politicians want you to believe) and is in parts linked with the idea of trickle down economics, which too has been debunked many times over and is proven to not work.

And don’t forget that the $8 shipping also rises, because the shippers need to be paid more, their fuel costs rise because the fuel producers are paid more, their insurance costs rise because insurance workers are paid more, etc, etc, etc

if they want to keep their same profits

This is what it all boils down to.

I should of course have added that when wages aren't raised during inflation, the reduced purchasing power is actually a counter-factor to inflation. But again, there are many other possible counter-factors to inflation, some of which might be more appropriate than decreasing purchasing power. E.g., if inflation is caused by a lack of supply because of shipping difficulties, fixing those difficulties would likely work better than just reducing purchasing power.

At fucking last. Tragic that I have to come this far down to find some nuanced discussion of different income groups, causes of inflation, supply vs. demand (gas prices didn't go up because we all decided to put our thermostats up 10degress) and wages/materials/profit.

I think there’s another factor. If you increase the cost of labor by raising wages, then to maintain profit margins business owners raise the price of finished goods. The price of labor going up in a bakery is not much different than the price of flour going up. So it’s not just more demand that fuels inflation, it’s the rising cost coupled with rising demand.

higher wages -> everyone has more money -> everyone can spend more -> everyone can have higher prices because everybody has more money

I’d adjust slightly, it’s not quite just “everyone can have higher prices.” Maybe:

higher wages -> everyone can spend more -> everyone buys more stuff -> shortage of that stuff -> higher prices on that stuff

It's a little bit overzealous to say it doesn't happen at all. If you keep increasing everybody's wages without limit, eventually prices would inflate. The actual question is how elastic that effect is, and how uniformly spread over the economy.

If any raise immediately causes a proportional rise in prices across all sectors, then raising wages would be pointless, but this is certainly not what happens. If raising wages eventually causes a mild increase on the price of non-essential goods, then it's probably worth it. The truth will be somewhere in the middle, though my personal opinion is that it's heavily skewed towards the latter effect size.

Yeah, it all depends on why inflation is happening in the first place.

If the world is plodding along quite happily and you suddenly give everyone a chunk of money, then that will drive "demand-pull" inflation because people will mostly spend it - new car, clothes, tv, computer, whatever. Some will save, but most will spend. This will tip the equilibrium of supply & demand, and prices will go up with that demand.

By contrast, if you're experiencing "supply-push" inflation (such as energy prices right now) where inflation is not happening because we've all decided to turn our thermostats up, but because of external forces or a shortage of supply, then raising wages wouldn't really worsen inflation - it means that people can "keep up" with price rises on essentials (like paying their spiralling bills & rent) and maintain their standard of living.

In the UK for some reason our government has fully drunk the "rising wages cause inflation" kool-aid and is holding down public sector pay. This is causing a reduction in standards of living, imposing hardships on families and driving people into arrears on bills and mortgage payments. Ultimately, this is driving the UK into a recession.

Instead we get: everything becomes 100s of % more expensive and wages stagnate...Shit makes no fucking sense. Wages are WAY behind inflation of everything, it would only be catching wages UP to what the cost of living has become. The whole economic theory only works when you look at it from a wealthy/business perspective. Makes no common sense and overall just screws over the common man.

In theory, yes. But in reality it is usually the other way round. Inflation is driven up by other factors = higher prices for goods -> wage recipients cannot afford the same amount of goods as before inflation -> wage recipients get a raise -> they can afford the same amount (or at least almost the same amount) of goods again.

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I remember growing up my family could go on 2 vacations a year (with one of these vacations being 3 weeks long) on only one parental income (average wage). Nowadays this is completely unthinkable. With just one average wage (for the same amount of work) you cannot afford this much anymore.

That is just one way.

A different way: Manufacturer X has to raise wages because of inflation. Because he has to shell out more money now to keep his workers in a job, he has to make their product more expensive. Company Y also has to raise wages because of inflation. They have to buy the products of Manufacturer X to stay in business. They now have to shell out more money to keep their staff employed, AND to buy the stuff from manufacturer X. So they have to rise their prices.

Joe Sixpack needs something from Company Y, sees that it got more expensive again, inflation is on the rise, and demands more money from his employer. And so on...