The Cobra Effect and Inflation

The Cobra Effect is an unintended consequence where unintended behavior is ignored, making a problem worse than it originally was.

When Delhi India was under British rule in the late 1800s, Delhi was infested with Cobras. As a result, the British incentivized farmers and locals to kill cobras by paying them a bounty when they brought a dead cobra to them. This effort worked in the short-run, reducing the population of cobras in the area, but eventually it became hard to find cobras at all.

Despite this, the people still wanted to make money from the bounty, and since there were no cobras left to kill, they started breeding them to turn them in for a reward. As the word spread, more and more people started breeding cobras as a source of income.

Unfortunately, all good things must come to an end. Eventually the British empire realized what was happening and halted the program. This caused an uproar from the breeders and farmers, who demanded payment for the cobras, only to have their demands rejected. As a revolt by the breeders, they released all of the cobras they’d bred into the wild. Now, Delhi had more cobras than they did before the program started.

Inflation works much the same way. When trillions of dollars are dumped into an economy, unintended consequences arise. Think about the rising price of gasoline, lumber, food, housing, etc. While we don’t have all the answers of what will happen because of these actions, there are a select few places to have your money when inflation is on the rise.

Business owners are feeling pressure on both sides—both prices and wages are increasing. When the prices of goods fall and businesses are making less money, wages don’t fall with the loss of profit. Instead, the business has to make up that cost to pay workers, and that cost is typically passed on to the consumer. In the end, the consumers are the ones who pay for most of the unintended consequences.

Source: https://en.wikipedia.org/wiki/Perverse_incentive