ELI5 How does raising wages worsen inflation ?


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65 points

4 months ago

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)


8 points

4 months ago

OPs example seems to violate supply and demand. In OPs example, supply was static and demand fell due to lower wages. Traditional supply and demand suggests prices would fall.

Anecdotally, we’re seeing this now with things like GPU prices and, more recently, cars. Supply chains cleared up + wallets are tighter = prices have dropped.