Education Information

These two ideas matter because in a market for any good or service, we would usually expect the price to be set by firms competing for customers. But how they do that depends on several factors, two of which are crucial for the “cost of living crisis”. The first is what is happening to aggregate supply and demand across the economy. The second is what the property structure of an industry looks like, which enterprises control supply, and how much market power they have. If aggregate demand is boosted, then we can expect people with money to try and buy many types of goods and services. We can also expect firms to meet this demand by increasing supply in their own markets but at the same also trying to raise prices since demand is generally strong and they are chasing after profits. Clearly, much will depend on how strongly firms will be able to increase aggregate supply. If aggregate supply is restricted, prices will rise rapidly and consistently, that is, there will be inflation. Firms will, of course, still be making profits. In important sectors and markets of the economy, where huge enterprises have great power over supply – for instance, in energy – we can expect firms to increase prices in targeted ways to ensure massive profits. Inflation offers endless opportunities for speculative profits by those who own and control the productive resources of society. The price is paid by the rest of us. With these fundamental ideas – inflation, real terms, and demand and supply – we have enough to start to deal with the wrong arguments presented by the mainstream about inflation, and to show what is really happening in the ”cost of living crisis” and how it should be confronted.

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