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Oasis Jnr claims that if inflation is high, consumers do not spend, because the high prices does not attract them:

...if inflation occurs then prices rise which will affect consumer spending habits, Consumers will not spend more of their cash because the high prices doesn't attract them to the products.

Source: http://www.thestudentroom.co.uk/showthread.php?t=1186466

However, the opposite seems equally likely, consumers will spend, because the future higher prices will not attract them.

Could there be any truth in Oasis Jnr's claim?

Is it true that both forces are actually acting and the prevailing one could be either one?

closed as off-topic by keshlam, user32479, Nathan L, mhoran_psprep, JoeTaxpayer Jan 27 '16 at 17:08

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  • "Questions on economics are off-topic unless they relate directly to personal finance." – keshlam, Community, Nathan L, mhoran_psprep, JoeTaxpayer
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    Keep in mind that inflation is relative. Labor prices (wages) are also subject to inflation just like consumer goods. – JohnFx Apr 22 '13 at 14:39
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    For the record, I would take any claims made by a banned secondary school student on an internet forum with a grain of salt. – John Bensin Apr 22 '13 at 22:25
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    This is an empirical question. I don't think that any economics model will have a definite conclusion for this assertion under any circumstances. Any responsible economists will say "On one hand, blah blah and on the other hand, blah blah". – zsljulius Apr 25 '13 at 3:41
  • @zsljulius any responsible economist wil say that that person is wrong. There is no other hand. – serakfalcon Sep 4 '14 at 4:41
  • voting to close as economics – keshlam Jan 27 '16 at 14:43
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Inflation can go up for a number of reasons.

Boom times can cause inflation, as everyone is making and spending a lot of money, so prices and inflation goes up. In times like these central banks usually increase interest rates to curb spending and thus bring down inflation. By raising interest rates the central bank is increasing the cost of borrowing money. So with high prices and a higher cost to borrowing money, most people start reducing their spending. When this happens businesses sell less stock and have increased costs (due to higher interest rates) so have to lay off staff or reduce their hours at work, so people will have even less money to spend. This causes prices to fall and reduces inflation and can result in a recession. At this point in time central banks start reducing interest rates to make the cost of borrowing money cheaper and stimulate people to start spending again. And so the cycle continues. The result in this case is that inflation itself didn't kerb demand, but was helped along by the central bank rising interest rates.

Another reason causing inflation can be a restriction on the supply of certain goods or services. An example we went through about 2 years ago was when floods caused banana crops up in Northern Australia to be devastated. This caused a lack of supply in bananas for almost a year across Australia. The normal price for bananas here is between $1 to $3 per kg. During this period banana prices skyrocketed up to $14 per kg. The result: very few were buying bananas. So the increase in price here caused a reduction in demand directly.

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    +1 for the banana example; I always find examples with tangible goods to be effective. – John Bensin Apr 22 '13 at 22:26
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    I was trained to define inflation as "too much money chasing too few goods." In which case, increases in individual goods due to supply shortages, aren't considered 'inflation.' I don't believe inflation references any individual items but only a general price level, e.g. our rising gas prices, not followed by any other increases, are not called inflation. – JoeTaxpayer May 30 '13 at 17:40
  • @JoeTaxpayer - the actual price increase in fruit and vegetables due to lack of supply from adverse weather can add to higher inflation figures for that period, as inflation is a measure of the change in price for a basket of goods and services over a period in time. If the supply then increases bringing prices down again, then this could have -ve or reduction effect on the next period's inflation figures. Our Reserve Bank ignores volatile goods such as gas out of the nominal inflation figures to base their monetary policy on. – Victor May 30 '13 at 20:17
  • The banana example is particularly bad, firstly it's a supply/demand problem of a single good, not the overall market, secondly it's a food item, which is deliberately excluded from inflation measurement due to price volatility caused by events like your example. It will not show up in inflation unless the price increase is sustained... it's a micro-economic explanation to a macro-economic problem, and the two have opposite effects. – serakfalcon Sep 4 '14 at 4:32
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Not always. You always consider economic factors in conjunction with each other rather than in isolation, which leads to weird assumptions.

People spending isn't what you should look at always. When inflation is high, means government is spending. Government is spending on public projects, creating employment, increasing salaries, doling out loans. So you are putting money into the economy and into people's hands. Everybody will be spending, so it will also drive demand(Demand Pull inflation). But there are differences among economists regarding Cost push inflation, which is a dangerous phenomena.

At the same time the interest rates, which are a monetary tool for central banks to increase(decrease) the money flow in the economy, are low. Under low interest rate conditions, businesses take loans to invest in projects. Because interest rates are low, people find it logical to spend now than spend later. As interest rates are low, there is an expectation that they cannot earn more in savings than investing in products which will generate benefits in the near term.

These all goes on in cycles and after a period of inflation, you will see government taking action to rein in inflation. It will increase interest rates to suck money out of the economy. This is when people will curb spending, because they know they will earn a higher return while saving rather than investing.

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    inflation can also increase when the economy is heating up, unrelated to government spending. – serakfalcon Sep 4 '14 at 4:52
  • -1 BZZZT Wrong! Government spending is not the sole source of inflation. – Jack Swayze Sr Jan 27 '16 at 8:13
  • @JackSwayzeSr BZZZT Presumably, didn't read my answer or comprehend properly and went for the down vote button. – DumbCoder Jan 27 '16 at 9:38
  • " When inflation is high, means government is spending." Your statement leaves no wiggle room. You blame government for all inflation. – Jack Swayze Sr Jan 28 '16 at 12:59
  • @JackSwayzeSr You are assuming things which aren't in what I said. – DumbCoder Jan 28 '16 at 13:28
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We need to be careful what we are talking about here. Inflation on a economy-level scale at an expected rate will not change consumer habits because the price increase is manageable. You have to realize that prices are not increasing in isolation: wages will have to rise along too.

High inflation that is expected will increase consumption of durable goods, as people attempt to 'get rid of their money' before the price changes on them. A good example of this was post-WWI germany, where hyperinflation was so bad that offices began to pay their employees twice daily, so they could adjust their wages, and so that their employees could go out during lunch and after work to buy something with the money before the price changed on them. Unexpected inflation may cause a temporary dip in spending until wages adjust, however consumers still need to buy, so they will likely push for higher wages, leading to consumption to stay about level.

There is another effect to inflation as well: People who have savings will have their savings eroded over time if the economy is inflationary. To preserve their wealth, they will invest it. In a deflationary environment, money will increase in value simply by being hoarded, so they will be less willing to invest it. Deflation also increases the cost of interest on a loan, while inflation decreases it. So the overall effect is for an increase in spending under inflation, and a decrease under deflation.

The person you have quoted is quite wrong. Price increases in a particular sector will cause consumer spending to decrease but this is a bad example, as it is not inflation, but rather a supply/demand problem of a particular consumer good. They are applying a micro-economic model (price increases of a single good) to a macroeconomic problem (price increases in the entire economy) when price increases at a global scale have the opposite effects.

A good theoretical test of this is: what would happen if everyone in the US suddenly had twice as much money? (Ignoring international trade, of course).

The answer: prices will double, and nothing else will change. The reason is, people will have more money to spend, but will require more money for their services, so in the end it all cancels out.

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