Cantillon's Effect on Display in Stores

The price of olive oil has gone up a lot lately. That's a big deal in Portugal because olive oil is the primary cooking fat in Portuguese cuisine. When the price of olive oil goes up, everyone is affected.

On the other hand, the price of wine is going down. There are discounts to be had, especially on the finer wines. However, this isn't of much help to most people. Wine is a luxury also in Portugal. That's especially true for those who find it hard to make ends meet. Olive oil, on the other hand, is an essential ingredient that cannot easily be replaced.

Today, when I was in the local super market, the shelves reserved for the most affordable olive oils were bare. Only the more expensive kinds were still available. This might be a one off occurrence. But it might also be a sign of the times, because this is the sort of things that happen when markets get distorted by a credit bubble.

Monetary inflation progresses through the economy like a wave. The typical pattern is that it first affects financial assets, then luxury items, and finally essential goods. This is because the rich and well connected are typically the first to receive the newly printed money. They invest in financial assets. They buy luxury goods. It's only later that ordinary people get hold of the new money, and that's when more mundane things go up in price.

This was first described by Richard Cantillon some 300 years ago, and this pattern is therefore named after him.

Ludwig von Mises further elaborated on this a hundred years ago by pointing out that a credit bubble can only have two outcomes. It either results in a crash in the prices of everything, or it results in the destruction of the currency itself. If we have a crash of prices, this too will affect some things before other things. It will typically pop the early bubbles before the later ones.

This is probably what we're seeing in the super markets. Essential goods are going up at the same time that luxury goods are going down. The disappearance of reasonable priced olive oil is a result of panic buying in the expectation that prices will continue up.

A few months from now, we might see a glut and price collapse in olive oil. That would be the popping of the olive oil bubble. But we may also see central bankers panic in the face of massive losses in financial markets. If they turn the money printing back on, prices of everything will once again go up. Stuck in the middle of this is the average guy, hit by huge fluctuations in prices that he's ill equipped to handle.

Olive oil

By Poyraz 72 - Own work, CC BY-SA 4.0, Link