Inflation is a concept we use to measure the annual change in price of all goods. It is also an indicator of economic conditions including growth rate, aggregate demand and supply. Many factors in the private and public sector contribute to inflation or deflation such as an increase in demand for a certain good, rising incomes, technological advancements and of course interest rates: a mechanism that greatly influences inflation, often a misused tool in modern day. Unfortunately, inflation is too frequently attached to interest rates diminishing other factors that greatly contribute as well.  Even in the 21st Century, our central banks fail to apply changes in interest rates to effectively curb inflation. Ultimately, inflation is a combination of many factors we often times fail to see.

By addressing real world scenarios, inflation is more closely tied to the business and economic environment rather than the modification of interest rates. Recently, the oil markets tumbled leading to drastic price changes in gasoline and petrol products. OPEC and other oil producing nations will be negatively impacted as profits dwindle and further drilling minimalized. Employees will lose their jobs and incomes will fall. Falling incomes will hamper these economies and contribute to falling prices in the region as lower income levels shift the aggregate demand in a negative direction. Meanwhile, in “What Oil at $50 a Barrel Means for the World Economy” by Enda Curran suggests non-petroleum producing countries such as India and South Africa will greatly benefit from lower oil prices. These countries will see deflation or lower prices not due to a change in demand, but supply. Income levels in these regions will not be impacted, but their money will have more value as the price of goods fall.

Domestically, companies such as Amazon and in the past Walmart have stabilized inflation. These companies are best known as cost leaders: companies that deliver the lowest cost goods in their industry. Amazon has competitively sought after the margins of other companies including Target, Sears, Barnes & Noble, and many other firms. They adhere to the principal that another companies’ margin is their opportunity. This effectively means that Amazon will go out of their way to obtain a price below that of many brick-and-mortar retailers. They also offer new services such as free 2-day shipping and Cyber Monday specials, something I took advantage of recently. These unusual and innovative business practices curbed inflation in unforeseen ways. Unfortunately, measures taken by industry leaders are deafened by the chairman of the federal reserve as they resort to outdated principles “reigning in” on inflation.

In the smartphone industry, we have dealt with inflating prices from leading smartphone manufactures such as Apple, Samsung, and LG. It is noticeable that consumers are keeping their smartphones longer and companies are keeping watch. As consumers cling to their smartphones for additional years and slowing sales abroad, companies are resorting to higher prices to maintain revenue and profit targets. This negatively impacts new buyers and consumers replacing old smartphones. Customers may seek alternative options by shopping around online or buying previously released models. But these smartphone giants are delivering higher quality phones based off new technological refinements. This trend will continue to intensify unless manufacturers deliver a low-cost option or if consumers change their behaviors of clinging to older smartphone models. This inflation ultimately is the cause of consumer behavior–a self-fulfilling prophecy in the making.

These previously presented private sector patterns are only a few of many drivers of inflation, but it is highly crucial the impact of interest rates is shared as well. Mistakenly, most perceive interest rates as the driving force of inflation. This is not the reality, but a legitimate relationship occurs between inflation and interest rates. According to Jean Folger, in her article “What is the relationship between inflation and interest rates?” states the quantity theory of money: “if the money supply grows, prices tend to rise, because each individual piece of paper becomes less valuable.” When interest rates are low the money supply increases leading to higher prices as each individual bill is less valuable. When interest rates are high the money supply decreases because the cost to lend money drastically increases overtime. Sadly, the federal reserve is blessed with crucial tools to change the interest rates, but other factors demonstrate that inflation is not totally in their control. Since we are humans, we do not always make the best choices or change our behaviors towards rational decisions. If the housing market is hot in a certain region, an increase in interest rates will not for certain stop or cool off the demand in the region. For example, rising interest rates are not curbing the behavior of the construction of 45,000 sq. ft. and greater mansions in the neighborhood Bel-Air, California. The demand for these properties is driven by a paradigm shift in personal decisions by billionaire households. In rational scenarios, a change in interest rates will lead to an inverse change in inflation, but factoring the reality of private sector situations and irrational consumer behavior, the power of interest rates are greatly diminished.

Thankfully, more targeted approaches to finding the causes of inflation everyday are being adopted by financial experts and central banks around the world. Inflation should be closely monitored as it helps define where we are headed in the future and what economic hurdles exist in present day. By further studying the universal impacts on inflation including consumer behavior, industry developments, and interest rates we can wholesomely grasp why prices are changing.