COVID-19 has created inflationary pressure on countries around the world because printing money is the best way to keep businesses and households afloat.
But it\’s not the money in the system that makes the prices higher. It\’s more complex than that, but thankfully it can still be described in a sequential, story-like manner.
First, companies experience a slowdown of some kind (supply shortage, which we are seeing now). For example, car companies can\’t get microchips.
Then, they begin to run low on inventory. They cannot sustain the same inventory or rate of production of vehicles to sell because they have no choice but to wait on more parts (microchips).
Then, they realize that in order to stay in businesses (by paying workers wages, expenses and debts), they need to sell the inventory they have for an increased price.
Then, other companies that make the same products notice that their competitor has increased their prices, and so they do the same thing, even if they don\’t have to (similar to price fixing but without the collusion).
Then, only the wealthy or more-creditworthy individuals and companies who can obtain loans will purchase those products, parts or services at the new, increased prices. This is where the money supply comes in. Most news outlets point to money supply being the issue, but as demonstrated in this example, the money supply only comes into the equation part-way through the process. For example, wealthy individuals (many new retirees) are playing a significant role in driving up house prices right now because they are willing and able to pay more. Cash purchases of real estate property is making it difficult for millennials to purchase homes.
Then finally, given that the cost of goods has increased, consumers feel that their current income is not sufficient for them to sustain the lifestyle that they want. They check out local (or remote) job listings and determine that they could make more money elsewhere. They discuss this with their employer and they either quit their current position or get an increase in pay. Either way, they increase their amount of income.
The cycle continues until supply shortages resolve and parts become cheap again. In some cases, deflation in companies or industries will prevail, making both products and salaries cost less once again.