All things are transitory. Amusingly, current inflation being (depending on your industry) most intense for transport gives the label a new significance.
What are we trying to optimize for anyway, low inflation or high growth? If policy manages to have sustained high growth, why do we care about inflation?
The policy changes the more one of those things swings to the extreme. Ultimately growth should be moderated...despite what some believe, high growth all the time is not a good thing.
Indeed, the question is how fast is too fast. Right now, the supply problems seem to be dead weight loss, but those are causing inflation and aren't a symptom of it. We should worry when people start hoarding in warehouses, and then only to the extent that we think it's truly a waste and not a reasonable precaution to avoid, say, a toilet paper panic.
Purchasing power for the bulk of the US population had been falling since the 70's. We called it low inflation, but that's more from the perspective of an employer than an employee. It seems the low employment rate has finally resulted in purchasing power increases. If prices go up a little as well, I don't mind. Reprinting menus isn't hard.
-Optically better revenue and profits for companies (albeit fundamentally similar or worse because of increased supplier prices),
-better fixed income returns (again though, relative; and bond prices themselves decline), and
-(historically) equity appreciation.
On the negative-ish side:
-wage increases tend to lag and underperform inflation, so people who earn their income primarily via wages suffer, at least in the near term.
-capital gets a lot more expensive if the fed raises rates. While equities generally increase during times of inflation, there can be huge downdrafts as valuation models adjust to the increased cost of capital. Given where the market is trading right now on a virtually any valuation basis vs previous fed hike cycles, things could get really ugly for a while.
(*none of above is investment advice. Good chance it’s all proven totally wrong, actually, given how unprecedented market and economic behavior has been over the past decade)
If economic growth were held constant, one would obviously prefer low (but positive) inflation. However, if there's a trade-off between the two, we'd still want to optimize for the goals of long-term growth and low employment, and to some extent equality. Controlled inflation is a means to an end, not an end in itself.
I own a wholesale toy business and the entire cost increase for us is ocean freight. A 40’ container from Asia used to cost 3k, now it’s 12k to 15k (and takes months longer). If a 40’ container can carry 10k units, that’s a unit cost increase of over a dollar just for freight.
Ocean shipping has been a boom/bust business since forever. It is possible "this time is different," and there are articles with exactly that headline, citing moderation in ordering new ships, but I don't see why such restraint will last.
I have read, without a lot of evidence to be fair, that port capacity is a small part of it. Overseas container shipping companies had, pre-pandemic, been competing so heavily that they were often running a loss and hoping to make it up on volume. They used the pandemic to sort of consolidate and lower capacity by decommissioning ships and so dramatically increase per-container price. Not sure if there's a lot of clear evidence for it, but it's one explanation I read.
Central banks try to keep inflation at 2% by controlling local wage inflation. However markets are globalized so price of imported goods are energy price shipping plus foreign wage inflation. Thus local central banks cannot control foreign wage inflation and thus inflation.
Local inflation is also exported through export prices but that currency exchange rate can control to some extent.
The government made the companies start accounting for externalities like not poisoning the rivers and not having the workers fall entirely on the government dole the instant they retire. So companies did what they do and went to countries that didn't care about protecting the environment or populace. Blaming the government for this state of affairs is misguided.
Sadly the TPP was abandoned along with the significant environmental and worker protections it would have imposed, neither of which I can see being a feature of China's replacement for it.
Labor costs would devour shipping costs instantly. The US is approaching full employment again. Even if we had factory capacity, there aren't 10M spare workers to do the jobs. Not without wage inflation.
Because the materials that go into production are located in Asia. It's the second, third, fourth order dependencies that are challenging.
Relocating would mean both building up entire verticals from raw material and all stages of processing, but also everything adjacent - labor force with expertise, transportation and distribution, etc. This is happening in various parts of the world for various industries, but it's slow and capital intensive.
>I don't understand why the US doesn't try to make Central America at least moderately well-off instead of building a wall.
Boy wait till you hear about this new thing called 'NAFTA'. Hey, we gutted our manufacturing sector but those folks in northern mexico sure are happy.
I'm not anti freetrade, but we absolutely destroyed good jobs open to people without a degree, and then had ivory tower economists tell us it was for our own good. It's not hard to understand why such areas would support a horrible person for president if he acted like he was on their side.
Because it's cheaper and easier to build a wall. We can not continue to take in the rest of the world virtually unvetted. Does anyone remember there is a pandemic, housing crunch, and rampant inflation occurring in the US. We should focus on our country at the moment.
It is approaching full employment, yes. You can see this by looking at U6[1] which includes anyone who has been seeking employment within the previous 12 months but have been unable to secure a job and has not searched for work in the past four weeks. It also includes anyone who has gone back to school, become disabled, and people who are underemployed or working part-time hours. It's down to where it was in early 2019. The Labor Force Participation Rate is not a measure of employment unless you think the employment rate was lower in 2019 than it was in 2008[2]. The pandemic prompted more older workers to retire but it's just continuing an existing trend in an aging country.
There is a canonical definition and that's just that there is no more demand-deficient unemployment. Meaning it doesn't even require U3 to hit 0 let alone LFPR to hit 100%. It allows for churn, underemployment as well as unemployables. It's not a metric of achieving utopia, just a situation with almost no slack in the labor market for employers.
Plenty of slack, but those out of the work force need much more incentives to get back in now, which would translate into higher costs as well. Kind of a lose/lose.
Anyone not participating isn't slack. Not unless they come back in and it doesn't seem to be happening. I think a lot of people who were close to retirement were pushed over by both fear of death and a crazy bull market fluffing up their 401Ks
I'm actually making a new toy in the US partially in response to the shipping backlog. The US is the second largest manufacturer in the world behind China (I find lots of people don't know that). As long as you design things that don't require much hand labor prices can be competitive while being made in the US.
China is no longer the cheap place to manufacturer hand labor intensive items. Vietnam is where that happens. If you ever want to know where it's cheapest to have things made by hand look at where clothing is made.
One pet peeve of mine in all of this inflation talk is that all of the comparisons are to a year ago, i.e. to a very unusual year. I'd much rather see the annualized increases from two years ago. Better yet, show both numbers so we can understand the both the trend and the covid effect.
>One pet peeve of mine in all of this inflation talk is that all of the comparisons are to a year ago, i.e. to a very unusual year.
you mean the YOY numbers? That might have been a big issue for the march-may numbers (where the dip was the most dramatic), but for the latest inflation data (november) we see that the YOY data it was comparing against (ie. november of last year) has mostly recovered back to the trendline.
The plot you share is exactly the context I am asking for. It looks like "mostly recovered back to the trendline" is technically true, but it's still measurably below that trendline. And my point is that, even if it was fully at the trendline last Nov, I would want the article to say that, because it's not something that I would a priori expect.
To be clear, I am not arguing that the narrative is wrong, just that the article doesn't have the context to convince me that the narrative is right.
Last years huge dip due to COVID has been great for spinning all different kinds of narratives that fall apart when you look beyond last May. There are definitely those with vested interests in pushing the "economy is in tatters and spiralling out of control" angle, I'm sure you can think of some.
I know the common refrain with this inflation is that it's temporary due to COVID, but when I talk to suppliers and customers I'm finding that everyone's costs are skyrocketing this year (and last, as well).
I have no illusions that companies will immediately lower their prices the moment their input costs start dropping, not after weathering decades of pressure from buyers to race to the bottom. They are going to cling to these gains for as long as possible, which is going to influence downstream prices for years to come.
More importantly, the inflation is showing up in gas and highly sensitive related costs like transportation. But businesses are currently in the process of baking those costs into current and future B2B contracts, which are being negotiated now. We are just entering the period where all of those renegotiated higher-cost contracts are going to start showing up in final product values.
In my humble opinion, I expect to see CPI start reflecting cost increases throughout the economy over the next 12-18 months.
Totally agree. Historically, prices only go down during recessions, and only barely. The only way these gains don't stick is if our economy falls off a cliff.
Before 1914, when the US switched to a fiat money system, inflation netted out to zero change for the previous century. Since then, inflation has stayed pretty consistently positive.
Inflation is caused by the government printing money to spend rather than raising the money via taxation. It's a politically cheap way to buy votes, which is why fiat money systems became universal among governments.
not an expert here but this is not entirely accurate -- a USA Federal system of single currency was initiated around that time, but there were multiple other currencies then. Is it accurate to say that every currency in use on the continental North America was gold-backed in the year 1899? doesn't seem right.. info welcome
The US did have a single currency before 1914. But 1914 saw the creation of the Federal Reserve Bank system, which is a fiat money system. It was still backed by gold, but the events of 1929 proved that unworkable (the runs on the banks were the inevitable result), and FDR suspended that.
It’s a tiny datapoint but my B2C company is probably going to put prices up in January. Our costs have risen, we have held off as long as possible but will probably have to make the change.
Please don't perpetuate they myth of energy prices being the source of inflation. To start, the price of WTI (US Crude) was well above $100 in 2008, peak over $140. The period from late 2010 to 2015 was spent between $80 and $110. As recently as 2018 H2 the price was on a $70 handle and 2015-2019 from $35-$75, compared to the $60-85 range of 2021 and $70 today.
The period 2003-2009 for natural gas was $6 to well over $12 per Mcf. The recent peak was on a $6 handle and is now back below $4.
Energy prices have been trading in the same price band for much of the past 25 years with brief runs outside (2008 above and 2020 below).
You are mixing up the price of crude with the price of energy. Crude needs to be refined and transported as gas. That's where the huge spike is coming from.
I'm not mixing up anything. The primary input to the price of gasoline is..crude oil. Link below is gasoline futures back twenty plus years. Please tell me again that we have not previously had significantly higher prices for a significantly longer period of time? I'm not seeing that.
I'm curious how much is also being fueled by the current markets. The US economy had a large amount of rocket fuel dumped into it repeatedly. Asset prices surged, but with the increase in business costs, perhaps businesses found customers more willing to pay because of said asset increases, thus enabling this trend to continue because demand still outstrips supply?
In a climate where interest rates are challenging to increase and the market can't be allowed to decline, it feels to someone uninformed like myself that it would naturally be felt instead through inflation.
The question is how high prices will go, what the warning signs of hyper inflation are, and whether we are at risk of that. Economically, rapidly devaluing the dollar seems like it would be a major strategic win for other nations seeking to unseat the dollar as the global reserve currency.
I'd love for someone more educated in these matters to tell me why all of this is wrong.
It's a mixed picture, as always. Inflation is up across the world, even in countries and regions that didn't see the kinds of stimulus the US used. However inflation in the US is higher than in developed countries that didn't use as much stimulus. So not all the blame can be laid on US policy, but some of it can.
Whether the difference is actually going to cause significant extra pain, or whether the extra stimulus will help the US ride out the pandemic better, is up in the air at the moment IMHO.
Calling it blame implies that inflation is bad. Inflation is not intrinsically bad. It's bad to the extent it creates friction in the economy. Currently, the US economy is growing very well.
One might anticipate that inflation will eventually drag down economic growth, but that's far from certain. Japan proved that low inflation doesn't cause high growth, and many recent periods in the US had both low inflation and low growth.
In contrast, the inflation today appears to be caused by supply trouble. Alleviating supply pressure is great motivation for innovation and efficiency improvements. Much better economic activity than simply cutting costs and trying to capture market share in a low growth market.
I'd expect supply trouble to affect more than just the USA, but the US is experiencing more inflation than other countries also hit by supply constraints.
Inflation is a tax on the middle class for the sin of trying to save money instead of being an indebted consumer.
I would disagree that inflation isn't intrinsically bad. At least the type of inflation modern monetary theory has provided in the past several decades.
> At least the type of inflation modern monetary theory has provided in the past several decades
I wouldn't characterize the past several decades as modern monetary theory. Rather they were traditional post Bretton Woods monetary policy of monetary creation primarily through the financial industry. I believe that MMT will actually help control overall inflation - the government printing money and injecting it places besides the financial industry will create quicker consumer price inflation, which will stop the Fed from continuing to create asset inflation by lowering rates.
It’s kind of a tax on the middle class, but the middle class also has mortgages (it’s kind of the defining quality of being middle class, without one you’re way more likely to be lower class) and with high inflation + mortgage, your debts are shrinking faster than your assets.
And when you go to sell your house after the price triples, you get taxed on alleged gains. But the gains basically kept up with the ramp in energy prices and other necessary commodities. So you kept pace with the baseline while you get taxed as if you are 3x richer.
Since wages are a component of inflation, it doesn't change middle class purchasing power. It only affects the middle class to the extent they are creditors, and then only if inflation is a surprise. Peer-to-peer lending isn't a big market, yet.
The poorest tend to have loans, car, mortgage, etc. and no significant cash, so inflation helps them by lowering their effective debt.
Fiat has never been a good store of wealth, ever, in any country, in any time. Nothing there has changed, despite your beliefs. And pretty much no one with much long term savings keeps it all in cash, there's too many better places to save.
Inflation should raise interest rates which would then help savers and discourage borrowing due to higher interest costs. Furthermore, it would pressure housing and asset prices lower making them more affordable while also pressuring wages higher. Seems better than the current climate.
Fed raising interest rates before corona was short-lived and symbolic at best. The stock market will not react until investors are convinced that the Fed has changed it’s multi-decade stance of extraordinarily low interest rates. This shift in market sentiment may not occur immediately after the Fed shifts, particularly since many of the younger investors know nothing else but low interest rates and expect them to continue indefinitely.
Inflation, or decline in purchasing power of the currency, is bad for savers and those who rely on fixed incomes.
It is also bad for deeply indebted governments when they try to roll over their debt instead of actually paying it down.
In the sources that I've seen, the difference in interest rates between the US and other developed countries seem to be off by a more-or-less constant difference. This difference seems to hold historically.
This suggests that the differences are largely influenced by differences in measurement between countries, or by other pre-existing policies. (I'm far more partial to the idea of divergent measurements, because I'd have expect prices to become wildly different over time, but that doesn't seem to have happened.)
Inflation is not just prices going up, or "cost of living" increases, those are artifacts of inflation.
Even though price increases can trigger a bit of inflationary pressure, OTOH related or unrelated price increases can become a true result of inflation also.
Inflation is the value of your currency going down (relative to some thing(s) possesing features of universal craving).
>I have no illusions that companies will immediately lower their prices the moment their input costs start dropping, not after weathering decades of pressure from buyers to race to the bottom. They are going to cling to these gains for as long as possible, which is going to influence downstream prices for years to come.
In fact there is evidence of this basically already happening as some industries like meat packers[1] are raising prices well above their increase in costs because "inflation" is a great scapegoat to raise prices and increase profits. Let this serve as a reminder that costs don't dictate prices in our economy, market forces dictate prices. All costs represent is a long term minimum price. The only way decreasing costs will yield decreasing prices is if there is adequate competition giving consumers an alternative to overpriced products.
Tbf some of this is White House fluff to cover themselves politically. I have family in the beef industry and meat packing is backlogged heavily. Wait times are insane unless you're a big player. So it's no wonder profits would jump when the whole industry is log jammed. Some producers are actually running at a loss and waiting on contract renewals. So the idea that this is all about greed is nonsense.
>Wait times are insane unless you're a big player.
And there is the point you are missing from my original comment. As I said, you need competition for prices to stay connected to costs. The big players control something like 80-90% of the market. They have the power to monopolize the supply pushing out the smaller players while simultaneously raising prices. How else would a backlog lead to increased profits if the backlog wasn't used as an excuse to raise prices beyond the increased costs?
I don't understand what you mean. If you are log jammed, you try to raise your prices to both defer non-essential customers and to expand your production capacity. That has nothing to do with monopolization. If you had 2000 companies all competing the price would not be flat, because that "competition" doesn't neccessarily mean there is more capacity. The packing companies are overwhelmed and are having a hard time finding workers. Do you expect them to just run at no profit or not price adjust based on the new demand surge? If you are backlogged that means you already have business that is not processed which feeds into your short term profits anyhow. It's no wonder you have increased profits when you already have a backlog of business and you've had to increase prices for the demand surge.
It depends on the cause of the logjam. For example, you are blaming it here on them "having a hard time finding workers." That is a cost increase not a capacity decrease. Labor is simply more expensive. Costs increasing shouldn't lead to an outsized increase in both prices and profits as it is a voluntary decrease in production because they don't want to pay higher costs. With more competition, there would likely be someone who would accept that increased cost and lower margins as a way to increase market share.
If the cause of the logjam is truly a capacity issue like shortages at suppliers, the market reaction you are expecting would happen upstream. It would be the suppliers that are increasing prices and seeing record profits.
It happens at multiple levels, and there's probably a bit of a delay between the supplier facing bottlenecks and the downstream price increases, but not as much as you might expense.
I have an acquaintance that runs a box factory. Their prices are way, way up this year (> 50%) despite their production and profits also hitting records. Their costs went way up as well, and their price increases are roughly proportional to their cost increases (hence cost, profit, and price all went up by similar amounts). Their cost increases are non-uniform across inputs, but paper, glue, transportation, etc. all went up by roughly similar amounts (30-100% annually).
This is game theory. My acquaintance can look at his input costs and assume that all of his competitors are facing the same input costs. Hence, he raises his prices by a proportionate amount as soon as he sees the new costs, figuring that all of his competitors will run the same mental model. The new input costs serve as a Schelling Point for competitors to collude without any actual communication between them. As long as someone doesn't actively defect, the new price stands, and then it becomes the input for the next tier of suppliers (wholesalers, generally) to set prices.
>The new input costs serve as a Schelling Point for competitors to collude without any actual communication between them. As long as someone doesn't actively defect, the new price stands, and then it becomes the input for the next tier of suppliers (wholesalers, generally) to set prices.
And once again it comes back to the same issue. This shows there is not adequate competition if a few players can collude in this way. Someone would defect, lower their price, and increase their market share in order to increase future profits at the expense of temporarily reduced current profit.
While you could use that as argument in most commodity market. In reality is Tyson / IBP couldn't even full-fill demands from International market, and there are plenty of buyers around the world willing to paid.
And buyers ( traders ) also bet on stocks which only further adds fuel to the current price. Just like toilet paper and chip shortage. From a market and supply chain perspective most commodities aren't that different.
I guess if you are in commodity market trading now it would be fun.
Edit: partiallypro's comment below is correct. And especially in beef industry where they have a long lead time. Poultry price dont fluctuate that much due to the fast turn over.
> I know the common refrain with this inflation is that it's temporary due to COVID
Public figure's also don't want to yell fire in a crowded theater. Because that can directly feed whichever economic bogey-man people are worried about.
> In my humble opinion, I expect to see CPI start reflecting cost increases throughout the economy over the next 12-18 months.
Quoting: "The largest owners of nationwide single family rentals are reporting 17% YoY rent increases."
Yep, that pretty much what you would expect. Governments (everywhere) money into the economy to reduce the impact of COVID. Because of COVID there was literally stuff all to spend it on and interest rates are at record lows, so what followed (at least here in Australia) was relators called a property boom, which to some us looked remarkably like a property bubble.
Record house prices, paid for with money gifted by the government leading to record leveraging of incomes. What could possibly go wrong?
Those record repayments have to be paid for somehow - and governments have pulled the interest rate lever so hard it's maxed out - they can't relieve the pressure this time by lowering them like they have so many times in the recent past. So rents must go up, but maybe not a lot at first. Even so, rents going up will push inflation up, even if it just a little bit. Inflation will start pushing interest rates up, but with interest rates hovering around 1% at one point even one basis point is a near a 1% rise. So that will need a 1% rise in rents to cover it.
Have few multiple basis points rises in a year, and it ain't hard to get to 17% YoY rise in rents. That will of course drive inflation up even further, which of course will drive up repayments and ultimately rents up again. It looks like a positive feed back loop which will end when interest rates get so high massive amounts of money move from property and stocks into cash deposits. But that's a long way off, so we are just at the start of it.
Real estate prices may not actually drop in dollar terms, but inflation will force everything thing else up and so effects of the original COVID spending spree will be unwound. Not a big deal really, and certainly not worth the "western capitalist economy as we know it is dying" click bait headlines it will generate.
My understanding is that when people say the inflation is temporary they don’t necessarily mean prices will go down, just that they won’t continue to go up. This is important because some of the worst and hardest to control bits of inflation comes when actors start pricing in continued inflation
a) prices stay steady after costs go down - inflation goes down close to 0%
b) prices go back down to pre-covid - deflation
I don't think anyone is expecting deflation. The outcome of scenario a is low inflation and skyrocketing profits which then causes the stock market to break new records daily. More of the same of what we saw 2009-2019
Inflation is not "transitory" anymore according to the Fed chairman [0]. It's now just inflation and will be permanently affecting prices (i.e. higher prices today and the future will be staying higher, unless an unlikely deflation event were to push them back down) [1].
Anyone who is or was saying inflation is temporary or transitory is incorrect, as they've always have been.
Stopping inflation != lowering prices, because it's a measure of change, not absolute levels. That's why it's represented as a y/y %.
We were in a very weird time from 1990-2020 where the price of goods actually declines in many categories due to a lot of crazy and undefined factors (like China's currency peg, but also 1000000 other things).
We may return to that period, we may not, but even just slower inflation is fine for the economy, AND (this is the real saving grace) our Y/Y comps go from being 'low inflation COIVD era' comps to being 'high inflation 2021' comps in March 2021.
>They are going to cling to these gains for as long as possible, which is going to influence downstream prices for years to come.
They will get undercut by somebody new who doesn't care about making up for last years profit loss? How does Under Armour come out of somebodies basement to take on Nike? It might take a little time, but if somebody is overcharging just because they can, and they sell a commodity product, competition will arise.
Luxury goods and marketing taxes may last longer.
Shipping costs will go down someday. If inflation flatlines for a decade, then this happens again in a decade. Maybe this years inflation is catch up for the last decade of flatness.
Costs have gone up but there is also too much consolidation in many areas of the US economy. Not enough competition means prices will rise simply because they can.
The problem is, this time they can't pull the interest rates lever like they did with the Volcker Shock, because we have so many zombie companies that would instantly fold if they couldn't keep rolling their debt over.
Another aspect of this is that right now inflation is high in the United States relative to other countries. In the worst case scenario, this is what the beginning of a dollar collapse looks like, or at least, a devaluation of the currency.
The change really should be view on a 2 year basis as 2020 was an aberration in the other direction. However, exactly what part is here for good and what is transitory is next to impossible to guess.
Are food prices up because of increase in cost of production? Drought? Transport costs? Will trucking companies be able to hire new workers to replace the long cycle of retirement? Will ports and other hubs stop being bottlenecks so that companies do not hoard/excessively preorder? How much is from reduced competition as companies finally make use of the scale from the merger frenzy of the past decade? No simple, single explanation.
“The fact is the unemployment rate is about half what it was a year ago. So a year ago, people were in their homes. Ten percent of people were unemployed. Gas prices were low because nobody was driving. People weren’t buying goods because they didn’t have jobs. Now more people have jobs. More people are buying goods. That’s increasing the demand. That’s a good thing.” -Jen Psaki
So, don't worry about it guys Build Back Better will fix it....
"The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years."
"The increases are even larger towards the bottom end of the wage distribution. The average hourly wage for non-supervisory workers in restaurants has risen 12.4 percent over the last year and 13.5 percent over the last two years."
Isn't giving millions of people an additional 10% income boost all at once going to be a disaster from supply chain shock and the environmental impact?
Inflation is most certainly a problem for the bottom 90%, affecting each part of the 90% differently. An average hourly increase does not mean real income growth by itself. As you move from high to middle to low class, consumption becomes a bigger piece of the expense pie(rent, food, clothes, etc...) and those goods are also the ones that are increasing in price. Meanwhile someone that bought a house last year basically anywhere has probably seen a large appreciation.
>The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years.
"For all the hype that wage growth has received this year, pay isn’t keeping up with price growth. Real earnings, or wage growth less inflation, turned sharply negative the last two months, after eeking out gains over the summer, consumer price data out Friday show."
The article you linked reeks of gaslighting by the administration to try and portray this in a positive light. They literally came out and said they were going to do this-
Wonder if this continues how long it'll take Amazon and Walmart to construct their own ports so that they don't have to deal with the higher costs and supply chain delays.
I’ve heard an interesting hypothesis that one of the reasons inflation had been so low in the last decade was because of the price discovery and competition that the Internet provided. Big retailers tend to offer price matching with sites like Amazon and Newegg. Not only does this make it difficult to compete on price, it has the effect of leveling the prices across the market and keeping them in sync.
Members of my extended family are small business owners and they frequently have to explain that they simply cannot match online prices. So, profit margins have been going down steadily on sales.
I sense there is a lot of pent up price hike pressure all across the economy. If you’ve been struggling with lower margins and higher costs, the obvious answer is to charge more. What better time to do so than when everyone is expecting it? And, once you have made the decision to raise prices, why not be a little more aggressive because the opportunity to do so doesn’t come along very often?
I don't know how true that is, Amazon often has a higher price than Walmart but still has higher sales online (online sellers use this a lot for arbitrage.) A lot of people don't "shop around" anymore, they go with the most convenient route. Price seekers are generally outliers in the vast consumer market nowadays.
How do you know Amazon is selling more of the same product as Walmart/Costco/Target at a higher price? Does Amazon even show how much it sells separately from 3rd party resellers?
It makes it incredibly difficult to allocate resources when pretty much everything feels overbought. Personally, I have put off buying a car(was going to go electric but those 'affordable' model 3 prices not looking so great anymore), have changed some of my grocery habits, and try to consume less in general.
I-bonds are actually relatively poor inflation hedges because government inflation numbers usually understate actual inflation. This has been constant across multiple countries and multiple hyperinflationary events. It's like entering a contract where the party paying you also gets to set how much they pay you.
Real assets that universally desired usually do better. Things like real estate, stocks of consumer staples, and industries that are critical for conducting business (eg. transportation, or anything that's a channel to the consumer). People will continue to need these regardless of what the government does, and as long as contracts hold, their value will increase.
The issue now is that business believe that price elasticity is less because of the shortages and are therefore raising the prices beyond what the increases caused by the shortages. There was an article recently, and I'll see if I can dig it up saying that some important part of this inflation is actually price gouging and we are likely to see record profits from some of these businesses.
I often wonder how accurate the main inflation number is if numbers like this one are much higher.
I have made mental notes of consumer goods and food items having price increases of 20-100% over the past year with no retraction in sight. I question if the prevailing attitude towards food and energy are correct in there calculation given this exceptional environment.
It's always interesting every time I see an article posted regarding increasing inflation and we get so many responses from people who are probably in the top 5% income bracket claim how it's not a big deal. The food/energy inflation really hurts the lower income brackets.
Inflation hurts bankers, but is very good for anyone who has debt. Mild inflation poses zero damage to poor people as wages and interest on their saving increases linearly with the inflation. I don't know where anyone got the idea that inflation was bad for poor people, but it was probably from people associated with the banks.
On the other hand, one situation that inflation can be very bad is when the government has a lot of debt and doesn't have a balanced budget, which is just about every first world country at the moment.
This is exactly backwards. Inflation helps debtors especially those who use debt to be leveraged into assets, who are by and large are upper middle class (housing) and the upper class by proxy with equities.
Inflation is robbing poor people and transferring their wealth to the upper class.
You're both incorrect. Poor people are affected by the ratio of price inflation to wage inflation, which is for the first time in ~50 years flipped such that wages are growing faster than prices.
Inflation transfers money from creditors to debtors, to the extent it's a surprise. Interest rates and origination fees incorporate risk of inflation. The US government is in debt to US treasury bill holders. You could say inflation is a wealth transfer from T-bill holders to the government, but the buyers of T-bills knew the risks and made their choices.
Maybe they've even hedged. Poor people have credit card debt, payday loan debt, medical debt, etc.
I wouldn't say housing is exclusive to the upper middle class, because 65% of Americans own houses. That seems like a low bar for "upper" class.
> which is for the first time in ~50 years flipped such that wages are growing faster than prices.
> Real average hourly earnings decreased 1.9 percent, seasonally adjusted, from November 2020 to
November 2021. The change in real average hourly earnings combined with no change in the average
workweek resulted in a 1.9-percent decrease in real average weekly earnings over this period.
Who do you think has more debt in absolute terms, the lower class or the upper class? Whose debt is primarily leveraged into income producing assets opposed to simply debt?
It doesn't matter if every single person in the US has debt and inflation makes that cheaper, if it disproportionally wipes out upper class debt you're doing wealth transfer indirectly to the upper class.
Good point. However, we care more about marginal value for an individual. A dollar given to a poor person is more valuable than a dollar given to a wealthy person. Giving $10 to Elon Musk accompanied by $1 to, well, just about anyone else, would increase equity, because we would value the $1 more than ten-fold what Musk would. Those particular numbers might be incorrect for the example, but the principle holds. That's why we have progressive tax brackets.
> Giving $10 to Elon Musk accompanied by $1 to, well, just about anyone else, would increase equity,
It literally would do the opposite, literally. Do you know what the word equity means? You might say it's the right thing to do ethically, that it's a trade off you might make, and we can get into all sorts of pros and cons of it, but it is the opposite of increasing equity.
If something helps debtors, it is clearly to the detriment of creditors. I don't understand how your comment can make sense unless you are claiming that creditors are usually poor and debtors are usually rich, which is a pretty far out claim.
Inflation is very rarely linear. When inflation hits, prices don't rise uniformly. Some industries have pricing power; others don't. Some professions have negotiating leverage, others don't. Those with the most negotiating leverage have the biggest ability to raise prices, while those in purely commodity businesses often get stuck with small nominal raises.
Poor people are disproportionately in competitive jobs without a lot of negotiating leverage, because if they were in a differentiated job with a lot of negotiating leverage, they'd be rich.
Yes. Professions where you can walk off the job and find a dozen other ones that have openings (say, software engineer) get much higher wage increases than ones where if you walk off the job you have a very limited set of other employers (say, geologist or elementary school teacher). That's why you have a very bifurcated set of anecdotes, where some people are like "my COLA was still a measly 3% this year" and others are like "I switched jobs for a 20% raise."
Inflation does not have zero damage to poor people. It means despite wage increases they haven’t actually seen meaningful gains in 40 years before the pandemic.
This has nothing to do with inflation. If what is being claimed is true, it would mean that without inflation they would have received no wage increases at all.
The problem is that foodstuff prices (and overall low profit margin consumer goods) inflation outpaces wage increase effectively decreasing purchasing power of lower classes.
Inflation hurts people living on fixed income and people with low income. (If you can't afford to fix your car for $500, you surely can't afford to fix it for $1200.)
People with some money can invest in equities. Corporations can often pass the costs on down the line. So the shareholders keep up, somewhat.
We need some plays from the early 80s playbook. Fast.
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[ 3.0 ms ] story [ 110 ms ] threadGuys—don’t worry about the heat emanating from our sun; it’s only a multi-billion year transitory phase!
Purchasing power for the bulk of the US population had been falling since the 70's. We called it low inflation, but that's more from the perspective of an employer than an employee. It seems the low employment rate has finally resulted in purchasing power increases. If prices go up a little as well, I don't mind. Reprinting menus isn't hard.
On the plus-ish side:
-Optically better revenue and profits for companies (albeit fundamentally similar or worse because of increased supplier prices), -better fixed income returns (again though, relative; and bond prices themselves decline), and
-(historically) equity appreciation.
On the negative-ish side: -wage increases tend to lag and underperform inflation, so people who earn their income primarily via wages suffer, at least in the near term. -capital gets a lot more expensive if the fed raises rates. While equities generally increase during times of inflation, there can be huge downdrafts as valuation models adjust to the increased cost of capital. Given where the market is trading right now on a virtually any valuation basis vs previous fed hike cycles, things could get really ugly for a while.
(*none of above is investment advice. Good chance it’s all proven totally wrong, actually, given how unprecedented market and economic behavior has been over the past decade)
Local inflation is also exported through export prices but that currency exchange rate can control to some extent.
https://www.whitehouse.gov/briefing-room/presidential-action...
Here is another chance: put some of the manufacturing in Central America where costs are much lower and there's not much of a distance to market.
Relocating would mean both building up entire verticals from raw material and all stages of processing, but also everything adjacent - labor force with expertise, transportation and distribution, etc. This is happening in various parts of the world for various industries, but it's slow and capital intensive.
Boy wait till you hear about this new thing called 'NAFTA'. Hey, we gutted our manufacturing sector but those folks in northern mexico sure are happy.
I'm not anti freetrade, but we absolutely destroyed good jobs open to people without a degree, and then had ivory tower economists tell us it was for our own good. It's not hard to understand why such areas would support a horrible person for president if he acted like he was on their side.
[1]https://fred.stlouisfed.org/series/U6RATE
[2]https://www.bls.gov/charts/employment-situation/civilian-lab...
..is VERY different than...
Everyone capable of working is actually working (full employment)
https://en.m.wikipedia.org/wiki/Full_employment
China is no longer the cheap place to manufacturer hand labor intensive items. Vietnam is where that happens. If you ever want to know where it's cheapest to have things made by hand look at where clothing is made.
you mean the YOY numbers? That might have been a big issue for the march-may numbers (where the dip was the most dramatic), but for the latest inflation data (november) we see that the YOY data it was comparing against (ie. november of last year) has mostly recovered back to the trendline.
https://i.imgur.com/0ufS56V.png
To be clear, I am not arguing that the narrative is wrong, just that the article doesn't have the context to convince me that the narrative is right.
I have no illusions that companies will immediately lower their prices the moment their input costs start dropping, not after weathering decades of pressure from buyers to race to the bottom. They are going to cling to these gains for as long as possible, which is going to influence downstream prices for years to come.
More importantly, the inflation is showing up in gas and highly sensitive related costs like transportation. But businesses are currently in the process of baking those costs into current and future B2B contracts, which are being negotiated now. We are just entering the period where all of those renegotiated higher-cost contracts are going to start showing up in final product values.
In my humble opinion, I expect to see CPI start reflecting cost increases throughout the economy over the next 12-18 months.
Inflation is caused by the government printing money to spend rather than raising the money via taxation. It's a politically cheap way to buy votes, which is why fiat money systems became universal among governments.
The period 2003-2009 for natural gas was $6 to well over $12 per Mcf. The recent peak was on a $6 handle and is now back below $4.
Energy prices have been trading in the same price band for much of the past 25 years with brief runs outside (2008 above and 2020 below).
https://www.usinflationcalculator.com/inflation/gasoline-inf...
https://finviz.com/futures_charts.ashx?t=RB&p=m1
Compare that chart to the also availbe WTI, Brent, natural gas and heating oil.
In a climate where interest rates are challenging to increase and the market can't be allowed to decline, it feels to someone uninformed like myself that it would naturally be felt instead through inflation.
The question is how high prices will go, what the warning signs of hyper inflation are, and whether we are at risk of that. Economically, rapidly devaluing the dollar seems like it would be a major strategic win for other nations seeking to unseat the dollar as the global reserve currency.
I'd love for someone more educated in these matters to tell me why all of this is wrong.
Whether the difference is actually going to cause significant extra pain, or whether the extra stimulus will help the US ride out the pandemic better, is up in the air at the moment IMHO.
One might anticipate that inflation will eventually drag down economic growth, but that's far from certain. Japan proved that low inflation doesn't cause high growth, and many recent periods in the US had both low inflation and low growth.
In contrast, the inflation today appears to be caused by supply trouble. Alleviating supply pressure is great motivation for innovation and efficiency improvements. Much better economic activity than simply cutting costs and trying to capture market share in a low growth market.
How much more? I've read the opposite. There's probably some imprecision in "the same rate" so I'm willing to believe both are true.
I would disagree that inflation isn't intrinsically bad. At least the type of inflation modern monetary theory has provided in the past several decades.
I wouldn't characterize the past several decades as modern monetary theory. Rather they were traditional post Bretton Woods monetary policy of monetary creation primarily through the financial industry. I believe that MMT will actually help control overall inflation - the government printing money and injecting it places besides the financial industry will create quicker consumer price inflation, which will stop the Fed from continuing to create asset inflation by lowering rates.
Who holds lifetime savings in cash? That would be a terrible idea.
Employers generally are forced to increase wages, although lagged, else people start to leave.
Inflation isn't a tax on the middle class. It transfers effective wealth from lenders to borrowers.
Everyone is forced to speculate because the fiat currency is no longer a reasonable store of value.
The poorest, who have no investments, typically do the worst through inflationary years.
Fiat has never been a good store of wealth, ever, in any country, in any time. Nothing there has changed, despite your beliefs. And pretty much no one with much long term savings keeps it all in cash, there's too many better places to save.
This suggests that the differences are largely influenced by differences in measurement between countries, or by other pre-existing policies. (I'm far more partial to the idea of divergent measurements, because I'd have expect prices to become wildly different over time, but that doesn't seem to have happened.)
Even though price increases can trigger a bit of inflationary pressure, OTOH related or unrelated price increases can become a true result of inflation also.
Inflation is the value of your currency going down (relative to some thing(s) possesing features of universal craving).
That is literally the definition of inflation.
In fact there is evidence of this basically already happening as some industries like meat packers[1] are raising prices well above their increase in costs because "inflation" is a great scapegoat to raise prices and increase profits. Let this serve as a reminder that costs don't dictate prices in our economy, market forces dictate prices. All costs represent is a long term minimum price. The only way decreasing costs will yield decreasing prices is if there is adequate competition giving consumers an alternative to overpriced products.
[1] - https://www.reuters.com/business/meat-packers-profit-margins...
And there is the point you are missing from my original comment. As I said, you need competition for prices to stay connected to costs. The big players control something like 80-90% of the market. They have the power to monopolize the supply pushing out the smaller players while simultaneously raising prices. How else would a backlog lead to increased profits if the backlog wasn't used as an excuse to raise prices beyond the increased costs?
If the cause of the logjam is truly a capacity issue like shortages at suppliers, the market reaction you are expecting would happen upstream. It would be the suppliers that are increasing prices and seeing record profits.
I have an acquaintance that runs a box factory. Their prices are way, way up this year (> 50%) despite their production and profits also hitting records. Their costs went way up as well, and their price increases are roughly proportional to their cost increases (hence cost, profit, and price all went up by similar amounts). Their cost increases are non-uniform across inputs, but paper, glue, transportation, etc. all went up by roughly similar amounts (30-100% annually).
This is game theory. My acquaintance can look at his input costs and assume that all of his competitors are facing the same input costs. Hence, he raises his prices by a proportionate amount as soon as he sees the new costs, figuring that all of his competitors will run the same mental model. The new input costs serve as a Schelling Point for competitors to collude without any actual communication between them. As long as someone doesn't actively defect, the new price stands, and then it becomes the input for the next tier of suppliers (wholesalers, generally) to set prices.
And once again it comes back to the same issue. This shows there is not adequate competition if a few players can collude in this way. Someone would defect, lower their price, and increase their market share in order to increase future profits at the expense of temporarily reduced current profit.
And buyers ( traders ) also bet on stocks which only further adds fuel to the current price. Just like toilet paper and chip shortage. From a market and supply chain perspective most commodities aren't that different.
I guess if you are in commodity market trading now it would be fun.
Edit: partiallypro's comment below is correct. And especially in beef industry where they have a long lead time. Poultry price dont fluctuate that much due to the fast turn over.
Public figure's also don't want to yell fire in a crowded theater. Because that can directly feed whichever economic bogey-man people are worried about.
> In my humble opinion, I expect to see CPI start reflecting cost increases throughout the economy over the next 12-18 months.
The data is already there if you look.
https://twitter.com/BillAckman/status/1469438747292880898
Yep, that pretty much what you would expect. Governments (everywhere) money into the economy to reduce the impact of COVID. Because of COVID there was literally stuff all to spend it on and interest rates are at record lows, so what followed (at least here in Australia) was relators called a property boom, which to some us looked remarkably like a property bubble.
Record house prices, paid for with money gifted by the government leading to record leveraging of incomes. What could possibly go wrong?
Those record repayments have to be paid for somehow - and governments have pulled the interest rate lever so hard it's maxed out - they can't relieve the pressure this time by lowering them like they have so many times in the recent past. So rents must go up, but maybe not a lot at first. Even so, rents going up will push inflation up, even if it just a little bit. Inflation will start pushing interest rates up, but with interest rates hovering around 1% at one point even one basis point is a near a 1% rise. So that will need a 1% rise in rents to cover it.
Have few multiple basis points rises in a year, and it ain't hard to get to 17% YoY rise in rents. That will of course drive inflation up even further, which of course will drive up repayments and ultimately rents up again. It looks like a positive feed back loop which will end when interest rates get so high massive amounts of money move from property and stocks into cash deposits. But that's a long way off, so we are just at the start of it.
Real estate prices may not actually drop in dollar terms, but inflation will force everything thing else up and so effects of the original COVID spending spree will be unwound. Not a big deal really, and certainly not worth the "western capitalist economy as we know it is dying" click bait headlines it will generate.
a) prices stay steady after costs go down - inflation goes down close to 0%
b) prices go back down to pre-covid - deflation
I don't think anyone is expecting deflation. The outcome of scenario a is low inflation and skyrocketing profits which then causes the stock market to break new records daily. More of the same of what we saw 2009-2019
Anyone who is or was saying inflation is temporary or transitory is incorrect, as they've always have been.
0. https://finance.yahoo.com/news/fed-chairman-jerome-powell-re...
1. https://www.lynalden.com/inflation/#transitory
We were in a very weird time from 1990-2020 where the price of goods actually declines in many categories due to a lot of crazy and undefined factors (like China's currency peg, but also 1000000 other things).
We may return to that period, we may not, but even just slower inflation is fine for the economy, AND (this is the real saving grace) our Y/Y comps go from being 'low inflation COIVD era' comps to being 'high inflation 2021' comps in March 2021.
They will get undercut by somebody new who doesn't care about making up for last years profit loss? How does Under Armour come out of somebodies basement to take on Nike? It might take a little time, but if somebody is overcharging just because they can, and they sell a commodity product, competition will arise.
Luxury goods and marketing taxes may last longer.
Shipping costs will go down someday. If inflation flatlines for a decade, then this happens again in a decade. Maybe this years inflation is catch up for the last decade of flatness.
In addition to very favorable net income/interest expense ratios, most large companies have increased the duration of their debt.
So, pretty low interest expense relative to income plus longer dated, low interest debt.
Will refinancing some of this debt be more expensive if rates increase? Maybe a little, but this definitely does not look to be a systemic risk.
Go to an online loan calculator and try this: If you have a loan for 100k dollars, and the interest rate is 4%, your payment is 477 dollars a month.
If the interest rate is 18%, the payment is 1507 dollars a month. The difference is not minor.
Are food prices up because of increase in cost of production? Drought? Transport costs? Will trucking companies be able to hire new workers to replace the long cycle of retirement? Will ports and other hubs stop being bottlenecks so that companies do not hoard/excessively preorder? How much is from reduced competition as companies finally make use of the scale from the merger frenzy of the past decade? No simple, single explanation.
So, don't worry about it guys Build Back Better will fix it....
"The increases are even larger towards the bottom end of the wage distribution. The average hourly wage for non-supervisory workers in restaurants has risen 12.4 percent over the last year and 13.5 percent over the last two years."
https://cepr.net/the-medias-war-against-biden-over-inflation...
Inflation is mostly a problem for people who are holding debt, not the bottom 90%.
https://nypost.com/2021/12/10/prices-spike-6-8-percent-most-...
>The average hourly wage for production and non-supervisory workers is up 5.8 percent over the last year. It’s up 10.3 percent if we want to go back two years.
Hmmm...
https://www.axios.com/wages-inflation-economic-data-c912afdb...
"For all the hype that wage growth has received this year, pay isn’t keeping up with price growth. Real earnings, or wage growth less inflation, turned sharply negative the last two months, after eeking out gains over the summer, consumer price data out Friday show."
The article you linked reeks of gaslighting by the administration to try and portray this in a positive light. They literally came out and said they were going to do this-
https://nypost.com/2021/12/08/white-house-working-with-media...
Members of my extended family are small business owners and they frequently have to explain that they simply cannot match online prices. So, profit margins have been going down steadily on sales.
I sense there is a lot of pent up price hike pressure all across the economy. If you’ve been struggling with lower margins and higher costs, the obvious answer is to charge more. What better time to do so than when everyone is expecting it? And, once you have made the decision to raise prices, why not be a little more aggressive because the opportunity to do so doesn’t come along very often?
Just my two cents.
Real assets that universally desired usually do better. Things like real estate, stocks of consumer staples, and industries that are critical for conducting business (eg. transportation, or anything that's a channel to the consumer). People will continue to need these regardless of what the government does, and as long as contracts hold, their value will increase.
I have made mental notes of consumer goods and food items having price increases of 20-100% over the past year with no retraction in sight. I question if the prevailing attitude towards food and energy are correct in there calculation given this exceptional environment.
On the other hand, one situation that inflation can be very bad is when the government has a lot of debt and doesn't have a balanced budget, which is just about every first world country at the moment.
Inflation is robbing poor people and transferring their wealth to the upper class.
Inflation transfers money from creditors to debtors, to the extent it's a surprise. Interest rates and origination fees incorporate risk of inflation. The US government is in debt to US treasury bill holders. You could say inflation is a wealth transfer from T-bill holders to the government, but the buyers of T-bills knew the risks and made their choices. Maybe they've even hedged. Poor people have credit card debt, payday loan debt, medical debt, etc.
I wouldn't say housing is exclusive to the upper middle class, because 65% of Americans own houses. That seems like a low bar for "upper" class.
> Real average hourly earnings decreased 1.9 percent, seasonally adjusted, from November 2020 to November 2021. The change in real average hourly earnings combined with no change in the average workweek resulted in a 1.9-percent decrease in real average weekly earnings over this period.
Good try, but incorrect.
It doesn't matter if every single person in the US has debt and inflation makes that cheaper, if it disproportionally wipes out upper class debt you're doing wealth transfer indirectly to the upper class.
It literally would do the opposite, literally. Do you know what the word equity means? You might say it's the right thing to do ethically, that it's a trade off you might make, and we can get into all sorts of pros and cons of it, but it is the opposite of increasing equity.
Poor people are disproportionately in competitive jobs without a lot of negotiating leverage, because if they were in a differentiated job with a lot of negotiating leverage, they'd be rich.
Isn't the big news of the day that there's a labor "shortage" and wages are rising?
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
Inflation hurts people living on fixed income and people with low income. (If you can't afford to fix your car for $500, you surely can't afford to fix it for $1200.)
People with some money can invest in equities. Corporations can often pass the costs on down the line. So the shareholders keep up, somewhat.
We need some plays from the early 80s playbook. Fast.