The so-called inflation is nothing more than the increase in the prices of goods on the markets. But why is there inflation? Why are the prices rising?
Here are the reasons why prices go up
Market prices are due to interaction between supply and demandthat is, between those who want to buy and those who want to sell.
Basically, there can be two causes of price increases, each in turn due to different causes.
If the price is the result of the interaction between supply and demand in the market, then it is their changes that cause it to vary.
In particular, prices can rise both when supply decreases and when demand increases. Markets are in effect competitions in which generally the one who is willing to spend more wins and among the sellers who is willing to sell for less wins.
Therefore, the more demand increases, the greater the upward competition to buy products on the market. On the other hand, the more competition between the sellers is reduced, the more they are can afford to raise prices.
At this precise historical moment, the rise in prices is partly due to both dynamics, although the one related to demand started earlier.
In fact, one of the most classic causes of the increase in demand on the markets, of those who want to buy, is trivially the increase in available money. The more money buyers have, the more they are willing to spend, therefore, agree to buy at higher prices.
In the spring of 2020, the Central Banks, to cope with the collapse of the financial markets due to the onset of the pandemic, issued an immense amount of new money out of thin air, and in the following months he distributed it to the financial markets. This money, after a while, began to reach even the pockets of consumers, thus making them more likely to spend, therefore, to buy goods on the market even at higher prices than before.
What happened in the United States and Europe
In the United States, for example, the Powered began flooding the markets with money in March 2020, but above-average inflation had not been generated by March 2021. Since then, however, it has started to grow considerably.
Something very similar happened in the Eurozone with the ECB.
In the meantime, too, due to the lockdowns they have reduced industrial production a little around the world, the offer has also started to decline. Downward competition from sellers has been slightly reduced, causing prices to rise.
The two phenomena over the months have added up, causing inflation to rise to unprecedented levels at least 40 years old.
However, starting from March 2022, a second cause has been added in Europe, namely a further decline in supply due to the shortage of raw materials.
To be sure, industrial production in 2022 is slowly returning to pre-pandemic levels, so a reduction in inflation could have been expected due to the resolution of one of the two problems that generated it. Indeed, in the United States after June inflation appears to be in decline, while in Europe it has started to rise again.
The problem for Europe is the reduction of gas supply on the market due to the war in Ukraine. On the one hand, many European countries have decided to reduce purchases from Russia, and on the other hand, Russia itself has decided to reduce supplies.
The problem of the cost of gas and the level of supply from Russia
Thus, while in the United States the decline in supply began to ease at the beginning of the second half of the year, in Europe, on the other hand, the problem worsened. In fact, it should not be forgotten that gas is by far one of the main sources from which electricity is produced, especially in Europe, so its rapid and extraordinary price increase after February 2022 has also sent to the surges in electricity production costs.
The increase in both the cost of gas and electricity has had a strong impact on industrial production in all sectors, including the service sector, so the prices of all goods on the market have risen.
The Central Banks have long started a restrictive monetary policy aimed at reducing the currency in circulation on the markets, while companies have returned to pre-pandemic production levels. Therefore, the only cause of the price increase that remains completely unresolved is that linked to Russian energy products, and in particular natural gas.
However, it should not be forgotten that Russia by far is the world’s largest exporter of natural gas. Therefore, the persistence of the current situation could prevent a significant drop in prices in the coming months, especially in Europe.