There are some explanations for long term inflation that completely baffle me in that they seem so deeply flawed that I wonder how come they are taken seriously.
So take for example the idea of a "wage price spiral". The idea is (very roughly) that workers demand big wage increases so the companies that employ the workers have to put their prices up to maintain profitability but this then induces workers to demand even higher wages - repeat ad infinitum. The problem is that unless there is an accompanying increase in the money supply (and why would there be) then there is no way for this to continue. The rate of flow of money being used to purchase goods would be required to grow continuously. This can only be achieved through an increase in money velocity. This might happen for relatively short periods but decade after decade? This makes no sense.
I could make a similar argument about the idea that inflation expectations drive inflation. Without ever increasing velocity this cannot work.
Am I missing something?
AFAICT The only inflation theory that does not suffer from this flaw is money supply driven inflation. It's relatively easy to see how the money supply can grow indefinitely.
EDIT: I guess my criticism of the wage price spiral and inflation expectations could be invalid on several grounds:
- I have missed something in my logic and the criticism is simply invalid.
- Wage price spiral and inflation expectations only account for short term fluctuations and cannot (or are not intended to) explain long term inflation.... come to think of it, without a permanent rise in the money supply or a permanent increase in money velocity then the temporary rise in inflation must be followed by a fall back to the original price level.
- Wage price spiral and inflation expectations can work in the very long term because both of them are things which actually cause the money supply to grow, thereby avoiding the need for ever increasing velocity.
- Something else I haven't thought of.