A Question About Inflation

Factual Questions
1

I’m no economist. I can barely remember the Econ 101 course I took many years ago in college. I’ve read a few books in an effort to understand more, and I’ve made a point to read books by economists with different points of view (Krugman and Sowell, for instance).

So here’s my question.

Is this transaction (described below) inherently inflationary?

I need a new pair of prescription eyeglasses. I have vision care insurance, provided as a benefit by my employer, which I can use at participating optometrist/optician businesses. The insurance company has certain allowances for frames, and for lenses, and for the eye examination. If the cost of what I purchase exceeds those allowances, I pay the difference.

I have a local place that I like. They accept my insurance. The optometrist seems to know what he’s doing, and he has prescribed lenses for me that really help my vision. And the prescription is a bit complicated, so I’d rather not go somewhere new.

So, the frames that I prefer (and have been wearing for over twenty years) cost about $90 online. I can buy them online and bring them to my optometrist, and they will fit prescription lenses.

To purchase these frames through my optometrist would cost about $130. In other words, they charge about $40 more than the online seller.

My insurance company will only pay out to one of their participating optometrists. Let’s say that their frame allowance is $110 (I actually can’t remember what it is, but I’m in the ballpark).

So, my choices are (a) pay $90 out of pocket, or (b) purchase the frames through my optometrist and pay the $20 difference between the insurance company’s allowance and the retail price. Obviously this costs me only $20 rather than $90, so that’s the way I’ll go.

But that means that $40 has been put into the economy for no additional value. No more frames were manufactured. I bought a fungible thing (the frames) from one place rather than another. Seems like everyone is happy (except the online retailer). The insurance company is presumably profitable with their fee and allowance setup. The optometrist has made a profit (their markup) on the frames. I’ve paid considerably less for my frames than I would have without the insurance.

But it seems like it’s just a case of the optometrist jacking up their price because they can, because insurance obscures the cost from the end user. More money has been spent. No value has been created.

Is this a (partial) cause of inflation?

2

No. Inflation is a product of the total money supply (including the cost of credit) in relation to total demand within the economy. All that’s happening the the transactions you describe is different amounts of money being shuffled around. They don’t affect the total money supply or total overall demand for goods and services.

3

I see what you’re saying. OK, I get that.

Still, I can’t help thinking that finding ways to charge more money for something without adding value to it, and hiding that cost, can’t be good overall for the economy. Is there a name for that?

4

Inflation is defined as an increase in the general price level, which is to say, the prices of everything and not just one item.

In your case, you believe you have the same item with two different prices. It looks like the price has “gone up” at the optometrist. From a certain perspective, that’s not quite true. Those are, technically, two different goods. One of them is a pair of frames delivered to your house. The other is a pair of frames purchased at the optometrist. The act of distribution is part of what you’re purchasing. It’s part of the good.

A bottle of water in Seattle is not quite the same good as a bottle of water in the middle of the Sahara. It takes a great deal more effort to get the bottle to a specific location in the desert, and that will be reflected in the cost. It also takes effort to keep a retail storefront profitable, staffed by people who are (presumably) knowledgeable about what they’re selling. The price of frames at that location reflects this cost.

There’s no inflation here, no general change of the prices of all goods, nor even a change of prices of a single good. There are, in fact, two different goods that have two different prices. You purchased the more expensive one for insurance reasons. If the cost of the internet frames goes from $90 to $91, that will contribute in its own almost negligible way to an increase in the general price level, and if the optometrist increases their own price from $130 to $132, that will also be an increase in prices. But choosing one or the other is not part of this.

5

Also I should note that inflation is not necessarily bad, despite what we’ve come to assume since the 1970’s. Some people are genuinely ill-paid, and an inflationary increase in their compensation would be useful, and allow them to purchase more goods and services, which is what we call “economic growth.”

6

That optometrist has a specific location, which they rent. They have enough marketing to have made you aware of their location, so that you knew you could go there. They also pay for the interior design, lighting, etc, that makes it a pleasant enough location to go. They pre-paid for their inventory, which allows customers to try on frames before purchasing. They must also staff their store.

This is a rather large investment, all of which was done in order to provide the service of offering two related goods at the same location. Let’s not be so hasty to say that the ability to buy frames right there is not “adding value”. They definitely added some value. It’s up to the customer to decide whether all that potential convenience of one-location shopping was enough value to justify the cost. In this case, the customer – which is mostly the insurance company, really – decided that it was worth it. Easier to do the paperwork for your insurance claim if all costs are recorded at the same place.

Best not be so hasty in assuming there is no value added. Sometimes the value is there and appreciated by other people, even if it’s not appreciated by you. You know exactly what frames you like, which makes your mind pass by the advantage for others of looking at themselves in a mirror. The value is there for them, even if it’s not for you.

7

Do you know for a fact that the optometrist is getting reimbursed for the total amount from the insurance company. I think insurance companies have deals with their preferred providers and get a discount on products and services. I see this all the time in my medical insurance statement. Doctor charges $250 for something and the insurance company pays $100 or less. I never receive a bill for the difference so the doctor is either satisfied with the payment or they have a pre-arranged payment schedule

8

Economic rent.

9

In this case, the optometrist is getting paid his full retail price. He’s getting paid whatever the insurance company allows, and I pay the balance. If the optometrist charges $130 for these frames, $130 is going into his cash register, no matter who is paying what portion of that price.

10

Dynamite combination of username and post … :stuck_out_tongue:
What happens with inflation is that prices go up first, and wages may or may not catch up.

Debtors may benefit from inflation, as they repay with cheaper money, but low-income workers, no.

11

Yes. Insurance drives up costs because people don’t have an incentive to find the best price.

12

That may very often be the case, but it does not have to be (except, maybe, the bit about debtors). There is nothing inherently contradictory about a wages-led inflation, and I dare say there may have been occasions when it has happened.

To the OP: No, not inflationary, just a very inefficient, expensive way of running a health care system. Welcome to America.

13

Inflation is the change in prices over time, and you’re not describing a price change, just a difference in the same month price of the same item from 2 different outlets. So in figuring out the price changes, the prices from your optometrist (full value paid by you and insurance) and the price from the internet outlet and other outlets will be used and averaged in some complicated math. Every month the prices will be collected and the average change indexed and used in the local and aggregate price indexes.

So that there’s a variance in price levels is certainly not inflationary.