High inflation and shoe leather costs

Every now and again you get an article that perfectly encapsulates a little bit of economic theory. This is one.

Please read: Bargain hunters visiting supermarkets four times a week (BBC News)

The BBC article highlights research by Kantar that indicates that in the current high inflation environment, shoppers are making an increased number of trips to shops in search of deals.

It's exactly what economic theory predicts that they will do, illustrating the concept of shoe leather costs; that is, at times of high inflation people will spend more time searching for bargains, going from shop to shop, wearing out their shoes.

Explaining shoe leather costs

Shoe leather costs are the costs that people incur to minimize their cash holdings during times of high inflation. This can be the effort that people expend to get rid of the current currency for a stable foreign currency or asset.

The term "shoe leather costs" was coined by economist Philip Cagan in his 1956 paper "The Monetary Dynamics of Inflation." Cagan argued that inflation causes people to reduce their holdings of cash because cash loses value over time. As a result, people are forced to make more trips to the bank to deposit and withdraw money, which wastes time and energy.

Shoe leather costs are a real economic cost that can have a significant impact on economic growth. A study by the Federal Reserve Bank of St. Louis found that shoe leather costs could account for up to 10% of the decline in economic output during periods of high inflation.

Shoe leather costs are one of the reasons why central banks try to keep inflation low. By keeping inflation low, central banks can help to reduce the amount of time and energy that people waste trying to protect their savings from erosion.