I know what relative price is and that it fluctuates more frequently in times of Inflation. But what I don’t understand is why it is called “distortion” when relative price dispersion is caused by inflation.
According to various textbooks such as Mankiw’s, relative price is what enables rational consumer decisions and effective resource allocation, but inflation leads to its “distortion” which results in resource misallocation.
Now “distortion” usually means a phenomenon that misleads people into making wrong decisions. But where does distortion exist in relative price fluctuations? isn’t it natural for people to buy more goods that increase in terms of relative price, and buy less that decrease in relative price?
I don’t understand what bad decisions people are making here, and why it leads to resource “misallocation”.
Even if there isn’t inflation, relative price fluctuation exists all the time, and consumers always make decisions based on that. We don’t really call THAT a distortion - it’s a perfectly normal thing that causes a substitution effect which makes us buy more things that are relatively cheaper. So wouldn’t decisions based on relative price usually actually lead to better resource allocation?
So my question is, what “distortion” is happening when relative price fluctuations happen from inflation, and why does that lead to “resource misallocation”? Is there an excess supply or excess demand that results from people taking action based on relative price fluctuations? If there isn’t, why is it resource misallocation?
I would really appreciate it if someone could give me a good explanation on this. I’ve tried to solve this curiousity for days searching the internet and stuff but I’ve been unable to find satisfying answers. Detailed examples would be extremely helpful :)