We have inflation because we expect inflation and we expect inflation because we have inflation
Government has announced price of wheat to have higher cap price tomorrow in order to recover the money to import more wheat, I was going to buy some wheat just as usual. It was when the shop keeper informed that there is not much wheat left, we will bring more tomorrow but that will have higher price, I thought about saving money and buy twice the amount that I am supposed to buy. Similarly the shop keeper knew if this wheat does not get sold today it will be sold at higher price tomorrow, so he kept some in the stock room.
Individually this action of mine and the shop keeper is not enough to cause any thing, but consider if major chunk if not the whole population is thinking same way, we can imagine how quickly the wheat with lower price will run out if every one buys more than usual amount and every shop keeper tries to keep some in stock.
Now looking at the two behaviors that I listed above, One is the Fear of higher price in future that led me to buy more today that will consequently deplete the present stock, second is the Greed of the seller to hold the sale for one day and sell it at higher price causing the stock to evaporate.
These Greed and Fear in aggregate are causing the increase in the price that was supposed to happen sometime in future to occur earlier than it was intended, hence causing Inflation to occur faster. Similarly it works in opposite direction when there is expectation of future price to fall. In real market of goods and services these forces of Greed and Fear are different as compared to the capital / shares market where both behaviors are practiced by same individual.
The purpose of this blog to open a discussion to try to construct the Micro-Fundamentals based mathematical model of how humans Greed and Fear responses trigger Prices to rise or fall, please enlighten the followers with your experience and thoughts, they are welcomed.
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