An occasional review of technology, markets, and ideas.

Inflation Relief and Aggregate Demand

California and Aggregate Demand.

Gavin Newsom made news with a new $17 billion "inflation relief package" meant to help Californians deal with the rising cost of everything from gas to groceries.

“The centerpiece of the agreement, a $17 billion inflation relief package, will offer tax refunds to millions of working Californians. Twenty-three million Californians will benefit from direct payments of up to $1,050. The package will also include a suspension of the state sales tax on diesel, and additional funds to help people pay their rent and utility bills. – Newsom Press Release

Here, for example, is what's going on with gas:

What is the likely impact of this policy to inflation?

  • The classic definition of inflation is "too much money chasing too few goods"
  • Assuming this definition, you have two means of bringing down the rate of inflation: 1) reducing the amount of money chasing goods or 2) increasing the supply of the goods/services people are demanding.
  • Putting more money in people's pockets will likely increase aggregate demand for services in California and goods nationwide while doing little (if anything) to change the supply side of the equation.

More money chasing the same number of goods...Maybe there will be a post on price controls within the year.

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Jamie Larson