This week, the monthly inflation report showed the problem has not even started to go away. You don't need a doctorate in economics to know that to be true. So, when will prices ever go back down? For example, when will the 20% plus inflation rate go down at the Grocery Store?
Don't Look to The Government for Answers
Yes, the government publishes reports monthly on the state of inflation. I wish those government reports were true. We could all live with those government-reported numbers. The truth is that the government numbers, for the most part, come from an alternative reality. They couldn't even be further from the truth.
Normal Increase in Prices
Prices should never go back below the level they were in 2020. If we didn't have inflation, we still would have an acceptable increase in prices with the normal year-in and year-out cost of living adjustments. Prices tend to go up on small margins each year under normal conditions.
Supply and Demand has the Answer
Prices go up because of limited supply. If there are fewer Big Macs available nationwide at McDonald's and there is demand for Big Macs, then the prices of a Big Mac will go up. After all, why would a McDonald's owner sell a Big Mac for $3 when a consumer is willing to pay up to $5 for a Big Mac due to limited supply? So, the price adjusts upward.
This is the economic state we are currently facing. Consumers in mass have not begun to boycott Big Macs. They are willing to pay higher prices. However, there comes a breaking point where the demand decreases. If that happened, then McDonald's owners would be forced to lower prices to the point that they could create demand once again and still make a profit. The price for a Big Mac would settle in on an acceptable level, forcing overall inflation to go down.
We are assuming that the owners can reduce the prices of Big Macs. There are other factors that create higher prices that could still restrict supply - it is complicated. For example, a food shortage would affect supply, as well as prices, preventing a Mcdonald's owner from reducing prices. Remember, they have costs that they have to cover to run a business
Take restaurants, for example. People are still eating out despite paying over 20% more than they used to pay. When the customers stop lining up at the door, restaurants will lower their prices to create demand.
Unfortunately, it might take an economic recession along with high unemployment to decrease demand and normalize pricing.
Is there any good news?
I think so. Prices (for the most part) appear to have stabilized, which is good, and started to come down a little. That is step one in a return to normalcy. We would have a real problem if prices were still going up.
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