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Comment by eddtests | Hacker News Reader

Why does it cause such higher margins?

Imagine you buy for X, and sell to some supermarket for Y, and they pay you in T time.

Optimum Y is not related to X, but the price when you replace the stock. ( let's say X2 ) When supply has problems, or economy is unpredictable, it is harder to predict X2, so usually your estimation is a bit off.

So you have to have bigger margin to cover for this estimation error. ( assume the worst )

So they increase margin to cover for uncertainty and incorrect estimations. And in case the original estimations were right, the higher profit is just unintended consequence.

Since it's not market optimal, after they note the extra profit, why don't they lower the prices or hire more workforce or expand? Or at least share the windfall with employees indirectly boosting the economy total, including their own position?

(Yes, equilibrium economics is a joke even when law of big numbers is involved.)

The rather soulless economics answer is that the companies want to make the same profit as before the inflation, so they need higher margins on individual sales to make up for the reduction in volume. Since demand doesn't drop, this is a feasible strategy.

That answer doesn't make sense, because surely, companies want to increase their profits regardless of whether inflation is happening or not.

The real answer is that when inflation is happening, it provides an easy excuse for raising prices far beyond the cost of your inputs. Everyone expects prices to go up, so they don't balk at yours going up faster than inflation.

The idea is that the company normally prices their products at the intersection of supply and demand, where there is maximum profit. When supply is artificially constrained, they raise prices to the corresponding spot on the curve. This is not as profitable as before, but it's the new local maximum.

It's one of those simple macro-econ models that sound good, but never play out in real life because humans aren't calculators. The reality is a mix of both, probably more of your explanation.

Supply drops mean price increases. Goods have multiple inputs but don’t see equal increases across the board. Ie rent isn’t going up in a grain shortage.

Critically higher profit margins doesn’t necessarily translate to higher profits because you’re selling fewer goods.

Because a lot of companies are using "inflation" as an excuse to raise prices.

Remember, prices generally are a function of the cost the market will bear. If the general public will pay more for something, why not rise the price? If everyone is rising their prices at the same time, you have less pressure to compete on prices.

It takes a while for the river of money helicoptered into the economy to spread its inflation out evenly.

That theory only works if people are morons who can't anticipate long expected (price) developments.

Because the middle man typically see there an opportunity to extort more money?

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