Why is there no inflation?

consciousobservation

From a business and personal perspective (anyone tried to buy anything recently?) you may have noticed that COVID and Brexit has shot supply chains to pieces with a wide range of products out of stock. Coupled with the extra money many people have sloshing around through not being able to go out and spend it and in many many cases having extra disposable income through working from home etc.

Isn't this a classic case of reduced supply and increased demand? Why have prices not started to rise more substantially?

Bravepants

Surely it's the other way around, reduced demand but still plenty of supply. For example, no-one's buying clothes because no-one's going out. If no-one is buying anything then prices will fall (or certainly stagnate) to tempt potential buyers to buy, hence low or close to zero inflation. 

Prism

The money has moved around. People are buying pets, desks and running gear rather than cars, clothes and eating out.

Thrugelmir

consciousobservation said:

 Coupled with the extra money many people have sloshing around through not being able to go out and spend it and in many many cases having extra disposable income through working from home etc.

There'll be concerns over longer term job security. The economic woes are far from over.  As a Nation we are also highly indebted with a historically low savings rate. 

sevenhills

Supermarket stock was low, but not low on the branded items, so we are paying more for the branded items, rather than buying own brand goods.

Bravepants

21% or so increase in spend on computer games too!

Aretnap

Increased demand for what? 

Things people tend to spend quite a bit of money on include:
Holidays (nope! ) 
Eating out/going to the pub (nah!) 
Petrol (you don't need much for the weekly shop) 
Nice clothes for going out in (are you having a laugh?) 
Smart clothes for work (tracksuit bottoms and an old T-shirt are just fine for WFH) 
Food (obviously still buying that, but there's a natural limit on how much of it I want to buy regardless of how much money I have) 

I suppose Covid and lockdown have probably increased demand for certain things - jigsaws perhaps - but by and large a limited number of things which I doubt are a huge part of the inflation figures. Overall, demand is on the floor.

I've been fortunate enough to have a secure-ish job and I've saved money by not buying any if the things above; in theory I have extra disposable income but it will remain sloshing around in my bank account and not generating demand until I have the opportunity to spend it on something I actually want.

I imaging the reason demand isn't outstripping supply across the board is something along those lines... 

Thrugelmir

Certainly a lot more free recycling. In particular jigsaws around here. 

grumiofoundation

Thrugelmir said:

Certainly a lot more free recycling. In particular jigsaws around here. 

Was a big market for our second hand jigsaws online last year.

I was worried that they were in bubble territory. 

Apodemus

Thrugelmir said:

consciousobservation said:

 Coupled with the extra money many people have sloshing around through not being able to go out and spend it and in many many cases having extra disposable income through working from home etc.

There'll be concerns over longer term job security. The economic woes are far from over.  As a Nation we are also highly indebted with a historically low savings rate. 

Thrugelmir, "historically low" is slightly ambiguous. In comparison to other countries our savings rates have indeed been low for a number of years, so - yes, we have a "historically low savings rate".  However, last year savings rates rose to much higher levels than we have seen in the UK for more than 50 years, so it might be equally correct to say that we currently have a "historically high savings rate"!  

Bravepants

The driving force in the economy is the price of goods and services. A measure of the change in prices is "inflation", and inflation also determines the interest rate, which is used by the Bank of England to control inflation - the rate of change of prices.

The interest rate, which is principally set to adjust the rate at which people and companies borrow money, but of course savings rates go hand in hand and correlate because if a bank is making less money on lending then they can afford to pay out less to savers.

Low demand for goods forces prices down (inflation reduces) and interest rates fall (cost of borrowing reduces and savings rates drop) to tempt people and companies to spend in the economy. Demand then increases as people spend more and so companies slowly start to put their prices up to make more money on the goods they sell. At the same time goods and services get scarcer because production and staffing (people want more wages to spend on goods) can't keep up with demand, so prices rise to reduce demand. In order to control the rise of prices (no-one wants to pay £15 for a loaf of bread) the Bank of England increases interest rates, increasing the cost of borrowing and increasing the interest rate in savings - reducing the drive to spend, causing demand to drop, and companies reduce their prices to temp people to spend trying to keep demand up. The whole thing is a feedback control system, with Demand being the feedback variable, inflation being the output of the system. and Interest Rate being the control.