No Kamala, rising prices are not the cause of inflation

The views and opinions expressed are solely those of the author.

Recent Democratic presidential candidate Kamala Harris said she recognizes that consumers are suffering because of high grocery prices. She says that if elected she will pass legislation to limit the amount of price increases. He says this is necessary because corporations are raising prices.

Since January 2021, when the Biden-Harris administration was sworn into office, the prices of all goods and services have increased by nearly 20%. Many grocery items have fared much worse. Eggs and margarine, for example, have increased by 54%. She will stop these huge price increases by making them illegal.

She uses the term price gouging. The common definition of price gouging is raising prices to an unfair level. The actual definition says that price gouging occurs when the market price of a product is higher than someone thinks it should be.

Corporations set prices based on their cost of production and demand for the product. As long as the resulting price yields a high enough profit to justify the investment, the product is made. When their costs go up, they have to raise prices to maintain profit margins. Without adequate profits, corporations simply will not produce.

The inflation experienced since 2021 is mainly due to three things: rising energy costs, rising labor costs, and excess demand. Inflation, in total, is not due to a shortage of supply. Why?

The economy completely shut down in March 2020 due to the pandemic. By July 2021, the economy as a whole was producing at the same level as before the pandemic. While specific markets, such as computer chips, may have experienced shortages, we had no supply issues overall.

Kamala does not want to reduce inflation by examining the causes. Rather, it wants to reduce inflation through legislation. Not only will this not work. The problem will get worse. History proves it.

In 1971 the oil producing nations that had formed a cartel in 1960 decided to restrict the supply of oil. In doing so, oil prices soared. That meant consumers were paying more for gas. Prices rose rapidly and there was no end in sight.

On August 15, 1971, President Nixon said, “Today I am ordering a freeze on all prices and wages.” This meant that gas prices could not rise.

Keeping the price low discouraged producers from supplying more gasoline. At the same time, the below-market price meant consumers would buy more gasoline. The result of less supply and more demand was the gasoline shortage. To help the government ration gasoline by restricting the days a consumer could buy gas.

When the price freeze ended, gas prices experienced a large increase, but the shortage lightened. This should serve as an example to Kamala of why price controls are a bad idea. They will always lead to shortages, and once controls are lifted, prices will skyrocket.

It will probably try to address the problem of reducing inflation. This happens when production costs have increased, but consumers are reluctant to pay higher prices. To maintain profit margins, companies are forced to offer lower quantities at the same price.

This has happened with ice cream. Ice cream, traditionally sold as a half-gallon (64 ounces) for say $6, is now sold in a 52-ounce package for $6. This is not because corporations are greedy, but because corporations need to maintain profit margins.

Instead of attacking corporations and polluting markets, Kamala should propose policies that reduce inflation. This means that energy costs must go down. Instead, he proposes actions that will limit the supply of energy that will drive up prices.

It offers programs to help households pay for child care, health care and home purchases. These programs may seem to help some people, but they will make the problem of inflation worse. These programs will increase demand without doing anything to increase supply.

Also, these programs are taking money away from people who have earned it and giving it to people who for whatever reason have not earned it. This can't be a good idea.

Dr. Michael Busler, Ph.D. is a public policy analyst and professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics.

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