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How Lack Of Inflation Can Hurt The Economy

This is going to be a micro-economic argument based on the behavior of a food outlets near my home.

The example is a restaurant named Por Kee (Singaporeans will know the place*). Por Kee is a small Chinese restaurant with an excellent reputation. They are nearly always full and have a line at dinner time. They have room to add more tables... but they don't. They don't add more tables because they can't hire more service staff. But why not? Surely they could put out some more flyers for staff and raise wages if needed. They could surely steal away one more staff from the area if they paid enough. But they don't.

Here is where the inflation comes in. The restaurant could raise wages, hire more, increase revenues and maintain profits... if they raise prices a little. Could they raise prices a little? I think they could (there is a line for dinner after all). But what if management believes they can't - even if wrongly. Management is deciding that customers won't stand for inflation. Management ensures lack of inflation by not raising prices (sort of the definition of no-inflation). Management also ensures: 1) fewer meals served and hence less output - lower economy than we could have - and 2) less employment and at lower wages than we could have. The second also means all the other stores in the area have fewer and less wealthy customers.

Merely the *belief* that customers can't accept inflation is self-fulfilling and produces a smaller economy.

*I recommend the yam paste dessert.