Inflationary Question

[Nate K]

I dunno much about economics i'll be honest i just come up with theories in my head and find out weeks later its already been around.

I have a simple question on inflation, if wages were adjusted to meet inflation rates, are savings the only thing that takes a dump?

Not that savings aren't a big deal, just wondering. Because for someone like me who hasn't had time to save any money.. wouldn't it be true that if my job's (if i still had one) wage during more inflation were raised to meet inflation, i wouldn't suffer DIRECTLY. It would only be indirectly because everyone else's savings were destroyed and since they play a large role in the economy it would come around to bite me in the ass eventually.

But is this the gist of it that what makes inflation so destructive is the loss of savings which has a domino effect or is there more?

 

[torchbearer]

I dunno much about economics i'll be honest i just come up with theories in my head and find out weeks later its already been around.

I have a simple question on inflation, if wages were adjusted to meet inflation rates, are savings the only thing that takes a dump?

Not that savings aren't a big deal, just wondering. Because for someone like me who hasn't had time to save any money.. wouldn't it be true that if my job's (if i still had one) wage during more inflation were raised to meet inflation, i wouldn't suffer DIRECTLY. It would only be indirectly because everyone else's savings were destroyed and since they play a large role in the economy it would come around to bite me in the ass eventually.

But is this the gist of it that what makes inflation so destructive is the loss of savings which has a domino effect or is there more?

If Pay went up at the same time as price increases, the only thing that would change is how much taxes you pay.
Problem is, that is not how it works.
Prices go up with inflation. But employers, who now sell fewer units because of the higher prices(see wages haven't gone up for anyone so they can't buy as much as they used to- this is the middle class squeeze), can't afford to pay their employees more.
Eventually, the employees can't afford to work anymore, and/or they lose their home/apartment etc... and have to move into lower standards... even welfare.
Business that try to pay employees more, while at the same time selling fewer units may go out of business.
Terrible mess.

 

[icon124]

the natural rate of profit will still be there for companies regardless...

they wouldn't be around if that natural rate wasn't there...

if your salary increases the same pace as inflation you will never gain or lose...

depending on the type of savings and the inflation rate you may lose...you need more specifics to tell...

but on the average savings account you are losing at least 3-4% a year...easy...probably more

 

[Nate K]

That's the part i forgot to include, i wasn't sure that wages were adjusted i meant to ask that.

Well.. we have ourselves in one silly-fuck of a mess gentlemen!

 

[JordanL]

That's the part i forgot to include, i wasn't sure that wages were adjusted i meant to ask that.

Well.. we have ourselves in one silly-fuck of a mess gentlemen!

Wages are only "adjusted" when you get a raise or when you increase on a payscale or if you have cost-of-living raises built into your employment contract.

But yes, we have quite the mess.

 

[Nate K]

Wages are only "adjusted" when you get a raise or when you increase on a payscale or if you have cost-of-living raises built into your employment contract.

But yes, we have quite the mess.

I know i haven't thought this through yet completely but, wouldn't it make sense for businesses TO give raises according to inflation? It would stop the process completely wouldn't it?

Or does that shrink profits?

 

[JordanL]

I know i haven't thought this through yet completely but, wouldn't it make sense for businesses TO give raises according to inflation? It would stop the process completely wouldn't it?

Or does that shrink profits?

Well Think about it like this:

- A company sells widgets for $50.
- The company, noting that more money seems to be going around now thinks it can get away with charging $65 now and it won't affect demand.
- Said company just instantly increased revenue by 30%.

Now, true, in a philosophical sense if everything raises together then the Parity Purchasing Power of that 30% raise becomes zero. BUT, that's only if their expenses all increase by 30% as well, meaning if they don't give their employees raises, or if they give them, say, 10%, they can pocket a realized increase in Parity Purchasing Power of around 20%.

 

[torchbearer]

I know i haven't thought this through yet completely but, wouldn't it make sense for businesses TO give raises according to inflation? It would stop the process completely wouldn't it?

Or does that shrink profits?

It would diminish profits for a period of time.
If you are the only business raising wages, then it will have no effect, assuming you are selling a product to an entire community and not to just your employees.
Profits shrink because prices increase while other people's pays stay the same.
If you have a budget of $400 a month to buy groceries... and the price of groceries goes up, you can't buy as much as you did before.
Thus the business sells less. They can't afford the pay raises.

 

[Nate K]

Not that i would support any further laws but an idea pops into my head of a law that would ensure every employer adjusted their wages to meet inflation...

what would happen in this case?

 

[Zippyjuan]

Acceleration of inflation. The wages are costing the employer more money so he raises his prices to pay for that. Then because things cost more, the employees want more money. ... vicious cycle. If the consumers do not have their incomes increased they buy less of things and businesses have a harder time raising prices.

If employees can increase their rate of production then the employer can afford to pay his employees more since the cost of producing each good is lower. Or he can keep it as extra profit which has more often been the case. Productivity increases have vastly exceeded wage increases.

 

[Fox McCloud]

Actually, in an inflationary environment, wages and savings take a hit, that's why it sucks so much: http://mises.org/story/3021

if there's a brief inflationary period that eventually ends then wages will be able to eventually match and outpace inflation, but in the USA's case, well...sadly that doesn't happen, especially in these past 10 years, where inflation has really picked up.

Try talking to a lot of Americans; some haven't gotten raises in years; others have only gotten 1-3% raises twice in a long-window time frame....you think they're wage raise is outpacing inflation?

 

[ShannonOBrien]

I think that is why companies give raises. They can't lose. If there is inflation and they give you a raise, you think you're getting more money but you're really not. It keeps the workers happy and they can make more profit.

The problem is during deflation. Then you have to deal with overpaid workers and have to choose between giving them a pay cut (which would upset workers) or lay off some of them.