Supply and Demand Isn’t a Law of Physics

When high inflation creates a death spiral where prices never stabilize.

Photo by Towfiqu barbhuiya on Unsplash

You think you’re living with high inflation? Try living in Argentina.

Last month’s inflation in Buenos Aires was 7.7%. Just one month. We’re beyond Venezuelan levels now.

We’ve had inflation rates between 25 and 50% for over a decade. It’s lasted for such a long time that it’s now a characteristic of the system, not a deviation.

But it’s getting worse all the time, due to external pressures like rising gas prices and the war in Ukraine, as well as the government’s general ineptitude. The last 12 months’ inflation rate in the city of Buenos Aires has been closer to 70%, and people are talking about triple digits by the end of the year.

In my years in Argentina, I’ve sometimes thought inflation will inevitably need to stabilize at some point, because people will simply not have money to eat.

It’s supply and demand, right? The basic model of price setting, probably the first thing you’re taught in Economics 101. (And this is the point where I’d like to remind people I am not an economist, so I may misunderstand things when talking about this topic.)

According to the law of supply and demand, if there’s not much supply of a product and there’s plenty of demand, prices will go up. And if there’s plenty of supply and not enough demand to meet it, prices will tend to go down.

Following this logic, if prices are too high at any given point, demand will drop. Producers will have to lower prices and they will eventually stabilize, reaching a point of equilibrium. It’s the invisible hand of economics that will keep things balanced without external intervention.

Great theory, but not an immutable law.

Dropping Consumption Is Bad News

This theory works for goods and services of all kinds, although not all products are created equal. Some, like kitchen appliances, have a more elastic demand, which means people will stop buying them if the price rises. Other everyday goods and food will have less variation because people will need to buy them, anyway.