> If the demand for milk goes up, I can switch to soy milk. If soy milk goes up, I can switch to Almond. And if all of them go up, I just drink water.
I don't understand how this example describes a situation where inflation is a non-issue. I used to be able to afford to drink milk; now, due to inflation, I can only afford to drink water. That sounds like inflation. What am I missing from this example?
There are 2 issues that I was attempting to demonstrate, but perhaps I conflated them a bit. Here is second attempt:
Inflation requires a persistent and durable increase in the price of a good. The first issue is that a large proportion of individuals in modern economies are barely making enough money to make ends meet. They are very sensitive to price. An increase in the price of milk would likely cause them to switch to alternatives, thus lowering demand for milk which would then bring the price back down. In effect, the constraint on the wages of the lower classes acts as a constraint on prices of goods. And the second factor, is that in these modern global economies, we have plenty of replacements for almost all types of goods. So if a drought in the mid-west causes soy prices to spike, people will just east less soy based products and switch to something cheaper for a while.
COVID-19 could disrupt that of course. But my hunch is that within a few months after the lockdowns are over, most supply chains will be back up and running. At that point we will be back to being demand constrained (perhaps significantly so if the economic impact is severe enough).
1) Real inflationary problems are always about money supply, not regular changes in supply/demand.
When Chavez goes nutty, people don't want his currency, it starts to crash, he prints to pay his bills, it really crashes. This is where all the inflation crisis comes.
2) The 'milk substitute' thing I think illustrates the opposite point you're trying to make. Having to give up Milk to drink water is a severely negative consequence! Projected across all of one's lifestyle and habits, it would be comparable to giving up a car to ride only the bus. Giving up Netflix for 'library books'. This implies a serious degradation in the quality of life.
If anything though, we've been concerned about deflation for a very long time, not inflation.
But we can choose books anytime, and we don't. So when you and I think about 'win' it must be different than what 'everyone else wants' at least in terms of how they actively chose to spend their time.
It’s a commentary about available options meaning that beverage makers can not exploit a market without shrinking their own market. If they want to maintain revenue the suppliers will need to ensure they retain their market.
In addition if it got to the point where someone priced milk so high that customers were abandoning that segment of the beverage market, an aspiring milk empire builder could enter the market with lower prices.
The assumption being made in the allegory is that water and milk fill the same role as “something to drink,” with no qualitative difference in consideration.
I don't understand how this example describes a situation where inflation is a non-issue. I used to be able to afford to drink milk; now, due to inflation, I can only afford to drink water. That sounds like inflation. What am I missing from this example?