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Structural Inflation, or Why Do US Petrol Prices Get Higher

Here we go again with our tale on why fiat money is evil and the reason for all of the world economy’s troubles. Money defects are imprinted in any field of economy, and we see the ugly marks in many examples from history. But there is no need to look into the past to understand why fiat currencies are so unreliable. We are now a part of the living history and can become witnesses of the crash of the old money system and the birth of the new, better one.

The RESERVEUM Analytical Group is working on creating the protocol of a fair non-inflationary currency. In these articles, we are looking into the drawbacks of fiat money and telling you how to make the financial system healthier.

One of the main characteristics of an unhealthy economy comes up as a shift in its structure that goes along with a very dangerous symptom – structural inflation.

What is Structural Inflation?

Structural inflation is money depreciation caused by faults in the structure of the economy when there are two processes developing simultaneously: demand-pull inflation and cost-push inflation. Generally, it is a demand shift: the prices on high-demand products grow, while the prices on low-demand products either don’t lower or lower just a little.

An important condition of inflation and its growth is the growing amount of money in the economy. As the money supply grows due to emission, inflation is monetary and is called demand-pull inflation. Other factors that increase the money supply and inflation are the rising production costs or the structural shifts in demand. Such non-monetary inflation is called cost-push inflation.

Reasons Behind Structural Inflation

  1. A significant gap between the industry productivity and the services industry. In other words, if there is a big gap between the end price of all products produced by these sectors, then there is a trend for structural inflation.
  2. Similar paycheck increase levels in industry and services. Country-economy-wise, it creates a risk that the earnings level can outrun the economic level.
  3. Price elasticity gap between different economy sectors. When the economy develops naturally, the prices of the services react to the changes in demand and supply in the same way as in the industry.
  4. Lack of price elasticity is when prices are too high, it gets very difficult to lower or balance them.

Now let’s switch to the US inflation…

The inflation nature in the USA is primarily monetary. We have already written about the FED printing machine, and there is no wonder the money supply is blowing up like popcorn from more and more dollar emissions.

To get a better understanding of how powerful FED is and how harmful its activity is for the economy, you can read our article “FED – the Structure of the World’s Biggest Central Bank”.

But the market is a living organism, so it changes over time, and there are more and more problems adding up to the first ones. Now, the US economy shows both rising production costs and the demand structure disruption – mostly due to oil.

The thing is, over the past year, the US economy has been one step away from an energy crisis. Coincidentally, oil imports from Russia, Venezuela and OPEC countries have lowered significantly, as well as the oil production in the USA, while the demand for petrol has gone up since the pandemic is nearly over and the Americans are going back to their normal lifestyle, with lots of commuting and travelling. It all looks like a fatal set of circumstances, but for an energy-dependant economy with an unbacked currency, such a scenario is just a matter of time.

By the way, there is a good option for the modern economy – a currency backed by electricity. You can read more about it in our article called “Energy Currency – Money Powered by Electricity”.

The clash of such different levels of demand and supply led to inevitable consequences:

  • lack of oil causes lack of petrol with people lining up for petrol stations;
  • high demand makes the petrol prices grow.

Due to all that, over the past year, the price for one gallon of petrol nearly doubled as you can see in the table below.

Changes in average petrol prices in the USA per gallon (3,79 litres).

https://gasprices.aaa.com/

Of course, prices differ in different states. It is most expensive to load a car in California, while the southerners kind of won from the situation.

https://gasprices.aaa.com/

But it is worth noting that the consumer market is just the tip of an iceberg followed by growing expenses in industry and services, growing expenses on the production end price, another coil of the structural inflation when all the burden is on the consumers’ shoulders.

How do the States solve this problem?

The data published by the US Ministry of Labour state that the inflation reached its 40-year maximum – 7,9%. https://www.bls.gov/news.release/pdf/cpi.pdf

Growing prices on commodities and goods inevitably lead to the same solution – rising FED interest rates. With the inflation almost 4 times higher than the US Central Bank target of 2%, the economists forecast that the rate might be increased up to seven times over this year.

Naturally, it will lead to growing loan interest rates, and in mortgage-tied America, it means that the households’ expenses will lower, while some of the owners will not manage to pay out the loans and lose their houses. Yes, the money supply and the inflation rate will lower, but the living standards will fall as well.

But is it possible to solve the problem of structural inflation with zero pain?

In the current fiat money system, it is impossible. When money is not tied to real valuables, they fill up the economy with no control and melt down the very basics of it. Withdrawing “extra” money may be compared to recovering after a flood – the excess water should be pumped out, but it is impossible to restore what dissolved in the stream.

The only way to make a healthy economy is to reject the fiat currency model. Modern technologies make it possible with switching to a decentralised digital currency that would be regulated with a smart contract and would always keep the balance between the production volumes and the money supply.

Such a currency may exist as an equivalent of the national total industry product or be backed with electricity, farmland, anything of value. In any case, such a money system would be more fair and effective and can help the economy develop instead of putting it into crisis.

According to the analysis group findings: reserveum.org

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