The myth of hyperinflation series #7- Supply & productionLet's keep it simple.
Increase in raw material & production cost-> Decrease in aggregate supply (Suppliers drop out as profit deteriorates)-> Decrease in total production->. If demand remains the same (most likely going to be the case unless there is another stimulus check coming in), then remaining producers/suppliers who now have more pricing power can and have to pass down the cost to consumers-> Potential supply-induced inflation happens as the same number of buyers chase after the shrinking pool of goods.
However, the chart shows no such risk. As the consumption picks up, supplier/producer starts to hire more people (Manufacturing employment) and ramp up the production lvl (Manufacturing production). The increasing demand is matched by the increasing production (manufacturing production keeps up with the demand of the new order) and declining inventory (Manufacturing inventory). In other words, even though oil price and raw material cost rose (still below the historical standard), we didn't see any decrease in aggregate supply . Of course, I have simplified the matte and left out many details, but I think the only issue we have to worry about that can cause the imbalance between aggregate supply and demand is the potential supplier delivery difficulties being mentioned in the ISM report.
In general, supply is elastic, meaning that the producer/supplier usually rush to increase the production/capacity as the price of good and demand go up because capital has been abundant ever since China joined WTO and the interest rate has been suppressed to such a low lvl ever since sub-prime mortgage crisis. The whole world is on the disinflationary trend as we live in a world of excess savings and insufficient demand because developing countries constantly export their savings to developed countries and because the disposable income doesn't keep up with the inflation.
Such over-capacity/overproduction & over-abundance of capital and good will keep the price lvl low & affordable and the inflation lvl manageable, especially in the disinflationary environment in which there is a moderate amount of consumer demand.
Next, I will talk about some of the external factors and circumstances that could influence the possibility of hyperinflation.
