Government should have nothing to do with price setting. Price setting is done by the person who knows the costs of producing the product or service. The person doing the price setting factors in competitors pricing, supply of competing products, transportation costs, customer willingness to pay a certain price, shelf space, marketing budget, etc.
What happens when prices rise and many consumers feel the pain of the price rise? The media immediately goes to the government to seek their help in lowering the price. This is the way it worked when I first went to China. In fact, that is the way it works today in China. It is the way it works in all totalitarian countries. It is the way it works in many socialist countries.
How would it work under New Market Economics? Again, the media should play the initial role in making the public aware of the price rise. The media should interview the company raising prices and try to determine the reason and then tell the public. If the price rise is due to a supply chain issue, the media should investigate this cause to see if it justified. And so forth, until the root cause is found. At this point government can get involved to see if they can mitigate the problem.
Changes in the value of a currency can affect prices. I have suggested elsewhere that currency is not stable. To people who work in the currency markets this is no surprise. In fact, the instability of currency is one of the factors that makes dealing in currencies profitable. George Soros owes much of his wealth to currency instability. Taking a short position on the British pound he earned a one billion dollar payday. The government of England resisted devaluing their currency even though other countries insisted the devaluation was necessary. Eventually, the English allowed their currency to float with the consequence of its value dropping precipitously, Soros earned one billion dollars.
Obviously, the value of currency changes. It is not only in the financial markets that the value and effects of currency varies. Currently, the world is going through an inflationary period. People’s wages are diminishing in value, the price of fuel and energy are increasing, prices in the grocery store are increasing and the price of industrial commodities are moving. Nevertheless, the Federal Reserve Bank and other central banks use the nominative value of the Money Supply to regulate markets. This is a bit like observing a roiling sea from the shore as you contemplate taking your sailboat out for an afternoon cruise, and deciding whether to go based on the seas last year at this time. It is ridiculous. You must assess what the conditions will be like in a couple hours. You do this by looking at the speed and direction of the wind, the likelihood that the weather conditions will not change, and all of factors that might change future conditions.
If this is not complicated enough, there are much more subtle factors with much larger consequences that must be considered. The weather beyond the horizon, the condition of the fabric fibers in the sails and the condition of the hull structural members. Likewise, there are such factors in the monetary system. It is these factors that make currency a variable and difficult to slip into mathematical formulas. Most mathematicians would argue that use of higher math can establish ranges and directions for all these factors, I am bringing up, because, I am sure that is true. But the Federal Reserve Bank is filled with officials educated as attorneys, not mathematical wizards. Consequently, their prognostications lack gravitas. Therefore, Fed officials need to stick to carefully established norms and not stray.
Recognition of these norms and the inclusion of these norms into the college curriculum of Economics and other business courses is essential for the future proper operation of the economy. Recently, the Fed chairman, Jerome Powell mentioned among central Bank executives,” there is a general agreement that a 2% rate is the accepted normal rate of inflation.” That makes the debt a nation can carry annually, also 2%. This figure is not subject to inflation since it is not consumed. Likewise, money is not subject to inflation, only the products money purchases are affected by inflation. All of this means the United States should carry not more than 10-12 trillion dollars of debt, off the top of my head.,
How does inflation occur? As Milton Friedman stated it is caused by a large government spending bill or a large printing of government securities beyond generally accepted standards. What inflation is not. It is not a private sector price increase. As I pointed out earlier, private sector companied do not have the market influence to induce a large general price increase in the economy. We have gobs of evidence of private sector price raises that did not lead to inflation. When energy prices crashed in 2002, the price of milk, bread, bananas, and electricity remained stable. When the price of gas and milk rose in 2008, the price of bread, bananas and electricity stabilized. When gas prices rose in 2012, the price of milk, bread, bananas and electricity were nearly flat. The recent rise in the price of gas in 2021 and 2022 are blamed on high spending by the Democrats in Washington DC and that seems to born-out by the way other commodities reacted.
Inflation is always a phenomenon of excessive public spending or money printing. Why is that? Public actions affect everyone. People feel empowered to over-spend since the government is doing it. A similar phenomenon is occurring in the United States. Prosecutors are not trying to reduce criminal activities by legal punishment, so criminals are more active. Humans are far less complicated than the economic world, but both act in predictable ways. For more, see the Inflation blog.