If your income now is still the same as last year, the 5.2 percent inflation rate in June announced yesterday by the government means that you are now 5.2 percent poorer if you belong to the fifth of our population considered to be in poverty. If your income is high, then you are 5.2 percent less well-off but not much if you consume only a small part of your income compared to the poor whose total income is not even enough for their basic needs.
Who gets the 5.2 percent increase in price? Before answering, consider that the actual cost to the seller of the product sold includes the cost of all the inputs and labor, taxes included, plus rent of building and land, even if the seller owns them, plus interest of borrowed capital, including his own investment, plus minimum profit necessary for him to stay in business.
Why must one pay for rent of land and building and interest of capital one used in his own business? Consider again that everything on earth is scarce in relation to our needs. When one uses his own resources in his own business, he foregoes the income of these resources that could have been earned when used somewhere else. Called opportunity cost, the higher is the foregone income of a particular resource, the higher one must pay for it when used in one’s own business.
What about business profits? Profit is the payment for one’s effort as an entrepreneur or in organizing things to put up a business. It is different from his pay as manager, president, or chief operating officer of the company he owns. If one does not pay for his own resources used in his own business, then the profit he makes is not really all profit because part of it should have gone for rent and interest payments.
Going back to inflation, if the cost of the product sold by the seller goes up by 5.2 percent, then it is but right that he also charges 5.2 percent more. But whatever the increase amounts to, it must be apportioned to the actual increase in the cost of inputs and wages of labor, higher rent of land and building, higher interest of capital, and including the part for the fair increase in profit of the entrepreneur.
In increasing the price, therefore, the seller merely transfers the burden of the increase in the cost of production to the buyer. But the increase should not be higher than the actual increase in the cost of production being sold or the seller will now realize profit above normal or beyond what is necessary for him to stay in business.
Who are the buyers that pay for inflation? They include you and me or all of us. If you are one of the workers whose pay is not increased, you lost. If you are one of the sellers who raised the price but did not bother to raise the salary of your workers, then it’s you who gained from inflation at the expense of labor.
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