Really, anything. In an environment of decreasing inflation, or a return to moderate inflation, both stocks and bonds will be expected to do well. Look at how every asset class has collapsed this year, due to inflation expectations and resulting rising interest rates. Now consider the reverse. Just don’t go into TIPs bonds or stay in cash.
Theoretically with broad based deflation everything does poorly. Deflation is super destabilizing as suddenly all the debt in the economy are secured by assets less valuable than expected and producing less cash flow (cannot have stable or growing cash flows in the aggregate in a deflationary environment), so the dominoes of debt start falling as borrowers default. You’d want to be in cash so you can take advantage of cheap buying opportunities.
Realistically, it seems central banks and politicians will die on the hill of deflation and do everything in their power to avoid it, even if it means (as it has in ‘89, ‘01, ‘08, and ‘20) just kicking the can down the road and causing greater, less stable bubbles.
That said, look at the stock market - it has been deflationary this year. So cash is King in this environment. Just not so much at the grocery store or when you get your utility bill.
Eh. If the Fed overstepped, then you could see a stop to inflation and a recession, which could lead to lower stock prices and higher bond prices in the short term, as Fed stops the rate increases.
It’s a strange article. Really focused around gas prices and little about food/home prices.
People can’t eat gas. The impact of a 5% to 10% increase in basic food prices is extreme on most income levels. Especially when you consider families with children.
Isn’t rising gas prices always given as an excuse for increases in almost everything else (food included) because things must be transported yadda yadda?
Inflation numbers tend to exclude gas because unlike most other things which tend to slowly rise in price, fuel costs are highly erratic. They are excluded because they add more noise than data.
From 2009 to 2010, the price of gas went up by 25%. From 2014 to 2015 it went down by 25%. Do you think the true rate of inflation is measured by either of those numbers.
You don't recall correctly. All the standard inflation numbers in the newspapers, economics papers, COL adjustments etc. include gas prices (as well as food prices). You're probably confused with "core inflation", which excludes food and energy prices, or some other special purpose measure. The Bureau of Labor Statistics which computes the official US inflation numbers publishes several of those. Core inflation in the US is pretty much only used by the Federal Reserve, as a crude form of smoothing rapid fluctuations (alternatives could be using trimmed means, or rolling averages).
They do not exclude gas prices. The Consumer Price Index, which is what most people pay attention to and to which this article refers, currently weights gasoline at 3.7% of the basket of goods it tracks.
>The impact of a 5% to 10% increase in basic food prices
Is it that little? The stuff I buy seems to have gone up 20%+
I suspect my local supermarkets are raising prices partly because of inflation and partly to get fatter margins. Shopping for food on Amazon is sometimes cheaper!
I paid 7.20usd for a dozen eggs this morning. Massachusetts has a law regarding cage raised chickens but this was way far beyond what I was paying six months ago. 2 years ago it was 3-4 dollars a dozen. I remember being surprised when the local chicken growers started charging 5 dollars a dozen.
Gas is underneath the price of everything. And anecdotally, it seems to me like grocery prices have dropped a lot compared to 8-10 months ago. Back then, I remember over and over seeing the prices in the store and being dumbfounded. But now a lot more stuff seems back to a “normal” range. Seemed like once the supply chain crunch eased[0], prices dropped.
This reminds me of that old joke "In the fall of 1972 President Nixon announced that the rate of increase of inflation was decreasing. This was the first time a sitting president used the third derivative to advance his case for reelection."
https://www.maa.org/press/periodicals/convergence/quotations...
That would apply also to anyone who made a campaign issue out of some train or car being too jerky. Later examples might include the Toyota unintended acceleration?
To be clear, the article is not discussing the third derivative, but rather arguing that the standard “now versus one year ago” measure is heavily back-weighted due to factors early this past year. The second derivative is down!
Is that like how it was convenient in the 2010’s when discussing “terrorist attacks on US soul” to conveniently leave out 2001 because it was an “outlier?”
The generally quoted inflation rate compares now to this time last year – so until next June, it includes the increases that happened before the Fed decided there was a problem.
This is useful in a lot of contexts, but if you want to know whether prices will be higher next month, it doesn’t make a whole lot of sense to use a lagging indicator.
> The consumer price index has been relatively stable since the Fed started raising interest rates.
The PCE, which the Fed uses—not the CPI—as its inflation gauge for policymaking has not been flat (historically, the PCE and CPI have generally been pretty close, but the PCE shot up much more than the CPI in the recent inflation, and did not quickly drop and stay near zero monthly % change like the CPI in response to the Fed intervention [it was low in July and November, but not the intervening months.])
Maybe different in other countries, but in Australia your mortgage payments go up as interest rates rise. So over the life time of the loan you will likely pay more/the same in real terms. And this ignores the lack of wage growth.
Only if you live in a country with “long-term fixed rate pre-payable mortgages” - i.e. only the USA and maybe Denmark[1].
Inflation can also screw the equity value for home owners in the US because in the long term house equity value is very roughly inversely related to mortgageInterestRate -- that occurs because house prices are driven by how much people can loan for a mortgage, and maximum mortgage loan is limited by f(personalIncomeAfterOtherCosts, wholesaleInterestRate + bankMargin, futureIncomeStreamPrediction).
Living in New Zealand which all mortgages are variable rate (approximately), I can say inflation really screws large mortgage holders here.
It’s not inflation that’s the problem, it’s interest rates (or swap rates).
Raising interest rates are a great way to combat demand driven inflation (everyone borrows money to buy a set amount of goods/services so prices increase).
It’s not a good way to deal with supply driven inflation in essential goods (say prices go up because a harvest fails).
But it needs to happen to ensure the currency doesn’t fall relative to other currencies thus making imports more expensive.
In the UK at least, about a quarter of mortgages are on variable rates. Of those on fixed rates, all their other bills have gone up, and will continue to do so. In many cases this means people’s mortgages are no longer affordable even if they haven’t changed. It’s not a good situation, and telling people they’re technically incorrect in their complaints because some day in the future they might be able to heat their house again is standard economist fare.
That's not what this is saying though. Their dollars are still worth less than a month ago, just less so than than previously projects. For their dollar to be worth MORE we'd have to get into deflation territory and we aren't there yet.
Simple example:
You start with a dollar. Every month it's value falls by 5 cents. However this month it only fell by 2 cents.
This is kind of why metaphors are counter productive when the topic is simple enough to discuss correctly. The article states that the rate of inflation is decreasing with the annualized rate falling from greater than 11 to 2.5. It is meaningful to discuss the annual rate but nonsensical to make further decisions based on how much inflation occurred 6 months ago.
If we’re going to make contrived analogies that don’t really match the nuances of the situation then how about being glad that your boat is now taking on water at a rate slower than you can bail?
What bothers me about this space is that interest rates are seemingly not the right hammer to deal with inflation precisely and the Fed itself doesn't understand the relationship between interest rates and inflation (i.e. recall "transitory"). As a programmer, I liken it to seeing a kernel fault, isolating the fault to a certain file via a stack trace, then deleting that file and its upstream/downstream implications and hoping for the best.
The last 2 sentences are why the article was written:
The way inflation is looking these past five months, the Fed should take a break from its interest rate hikes before, rather than after, it causes the next recession. That would be a much better choice than the course it is on.
We all know that something will break, but I guess they have to break before politicians can respond to the will of the voters.
The article is a bit dumb. “The Fed” (the Federal Reserve board, that is) knows what the inflation rate is and how it has been changing over the last five months and, of course, will consider that in it’s interest rate decisions.
I like the off-hand assertion that the fed causes most recessions. As if “they” have strong control the economy but are just too dumb or corrupt to only make the numbersgo up. Kind of embarrassing actually, for a “think tank”.
They seem too much more focused on increasing unemployment and slowing wage growth and no longer that interest in the actual inflation numbers. At least that's the impression I got after the last meeting.
And the will of the voters is to have high inflation?
The Fed does not want a recession, but if it has to choose between a recession and high inflation, it's a simple choice. The choice of following the law. Which stipulates that the Fed has 2 jobs (the dual mandate): to keep inflation and unemployment law. Recession is not part of the law.
OK, but my car insurance went up 40% since the last policy update, 6 months ago. That certainly was movement faster than I knew, but not in the direction that this think tank wants me to believe.
Powell already addressed this in December. He said that the Fed knows that price inflation is starting to turn already. It’s the tight labor market that needs to be cracked. He wants unemployment around 4.5% and losing the labor market is the part that will take longer.
Keep in mind that: (1) the war in Ukraine, which could further disrupt multiple commodity markets (energy, grains, minerals), is still ongoing; (2) many global supply-chain issues have not yet been fully resolved; (3) many services that renew annually, including apartment rentals and most information/entertainment services, have not yet raised prices on all customers; and (4) we don't know the extent to which second- and third-order inflationary effects are still propagating, globally.
Also, keep in mind that in the past, central banks like the Fed have typically reacted too slowly and too late to control inflationary forces before things got too out of hand, which ended up being much worse for everyone. This time around, I'd much rather have the Fed and other central banks err on the side of over-tightening and causing a short-lived recession than under-tightening and fighting inflation in fits and starts for a decade, as has been the case in the past.
Well, that and corporations have been pointing the finger at inflation, raising prices without meaningful competition, and we see profits at record levels. [1]
Which is to say, the cost of labor has not been increasing that fast. Though, it's not a single faceted issue. I want to emphasize that. With that said, I do suspect this inflationary era has a slightly different character than previous due to a very different corporate landscape (eg: it wasn't previously the case that there were only 3 main airlines, just a couple companies owning the more than majority of grocers, etc..)
> Well, that and corporations have been pointing the finger at inflation, raising prices without meaningful competition, and we see profits at record levels. [1]
There are a few object lessons in "how to lie with economic data" here. Let's tease them apart.
1. The original chart is in billions of dollars, across long time periods. So the first error is use of long run time series in nominal values. In that case, most of your time series are going to be "at record levels". Care to guess why?
2. If you look at the source of that chart, which is NIPA data, you'll see those magic words "without CCA and Inv adj". What do they mean? What it means is that you are ignoring depreciation of fixed assets and revaluation of inventory. So for example, if you run your business and pay $10 in labor and inputs and obtain $20 in sales, then you have a profit of $10, right? Well, not if you wore down your equipment by $5. Then you only have a profit of $5. So capital consumption must be taken into account if you want a measure of profits that is close to what an actual business would use. For the same reason, if you have a pile of unsold inventory, do you value it at your purchase cost or at the cost you would be able to sell it? It should be the latter, so again you do want the inventory valuation adjustment. The net result is you want to be looking at net operating surplus if you are mining your NIPA data for a measure of profits, not profits before capital consumption or inventory valuation adjustments. Of course NIPA style net operating surplus is not the same as GAAP profits because a number of other adjustments are made, but it's a reasonable proxy when looking at macro data.
3. Mixing non-financial and financial is a big no-no, especially as you are talking about inflation, and this means non-financial goods.
So if we fix all of that, then what do we see? Record profits? Nope.
As a pro-tip, it generally pays to have an awareness of economic history. So, for example, if someone shows you a chart that says there was low inflation in the late 1970s, then you know they are lying somehow, because you understand this was a period of high inflation. This is something you should know without a chart, and use it to check the chart. Similarly, a basic fact of US corporate history is that the corporate profits in the 1950s and 1960s were enormous. Higher than any period since. That was the golden age of corporate power in the U.S., when we were told "What's good for General Motors is good for America". It was also the conglomeration mania. Additionally, Baby Boomers were having kids and buying tons of stuff, borrowing and spending heavily. Credit was loosening. The US was the undisputed king of the world, without foreign competitors of any serious measure, and they were raking in the cash.
Thank you for the response. The data I presented was not well researched on my part, it getting perspective and frankly torn apart was illuminating.
Though, is the overall thesis (that corporate profits are a significant factor to recent inflation) still incorrect? I'm really curious what your take is to this marketplace.org segment and Rep Katie Porter's presentation on the subject. Links here: https://www.marketplace.org/shows/make-me-smart/corporate-pr...
> Gasoline prices have been an even bigger issue in California than in most of the country, because they are substantially higher in the state, where they have recently fallen from a record $6.49 per gallon in October to $4.61 this week.
Holy cow. I'm in Austin. There a some lagging gas stations, but it is easy to get regular 87 gas for $2.45/gallon. The lowest price I've seen (cash price, not needing a membership card) is $2.37/gallon. It has been below $4 for a long time.
There are systemic issues which cause gas prices in some places to be higher than others. Mostly due to infrastructure around refineries and, to a lesser extent, local taxes.
Gasoline sold in California is “different” than gas sold elsewhere in the country. I don’t remember the details exactly, but I think it has to do with carbon content.
There’s also the issue of high gas taxes there as sibling mentioned, but I remember that something in the refining process is also a major contributor.
The problem is, most people don’t sit around and look at numbers to make decisions. They directly look at what impacts them and what’s happening around them and change their habits. These habits make the recession almost self fulfilling.
Even if inflation is falling faster than most people know, the way fed has played is hand is going to be devastating. Stock market has been destroyed. Stock market != economy is not true in this case. Most people’s savings are tied in the market one way or the other (401k, pensions, actual investments etc.). People who don’t have savings or have any form of debt have their debt have its interest go through the roof. People are losing jobs at the highest level of the economy, which will trickle down as the rich and the upper middle class downsizes its spending. Housing prices won’t go down because the supply/demand dynamics are still terrible in most places where people want to live. And people who bought at inflated rates are not selling anytime soon unless they absolutely have to.
"Destroyed" seems a bit hyperbolic. SPY is at ~$380. It was last at ~$380 in early 2021. Effectively net zero for 1.5 years is hardly "destroyed", unless you assume everyone simultaneously bought at the $470 peak of the markets.
Many people I know assume that when inflation falls - prices will all go back down. We may see pockets of this but I also think they will all be fairly sad with the outcome.
90 comments
[ 4.3 ms ] story [ 156 ms ] threadLong bonds?
I am intrigued by Kalshi but very few people are interested in betting on stuff for stuff sake.
Most money is exchanged on markets where people bet on the world’s reaction to such events and the impact on asset prices or yields
Prediction markets are expected to have negative return on average once the house takes a cut.
Realistically, it seems central banks and politicians will die on the hill of deflation and do everything in their power to avoid it, even if it means (as it has in ‘89, ‘01, ‘08, and ‘20) just kicking the can down the road and causing greater, less stable bubbles.
That said, look at the stock market - it has been deflationary this year. So cash is King in this environment. Just not so much at the grocery store or when you get your utility bill.
People can’t eat gas. The impact of a 5% to 10% increase in basic food prices is extreme on most income levels. Especially when you consider families with children.
But the world runs on fuel, so if fuel prices rise, prices rise in all other items. Food has to get to the cities from the farm somehow.
From 2009 to 2010, the price of gas went up by 25%. From 2014 to 2015 it went down by 25%. Do you think the true rate of inflation is measured by either of those numbers.
Technically the inflation numbers are posted both ways, including with and without “core energy” so everyone can see the effects either way.
Krugman explains it all fairly accessibly: https://archive.nytimes.com/krugman.blogs.nytimes.com/2010/0...
https://www.bls.gov/cpi/tables/relative-importance/2021.htm
Is it that little? The stuff I buy seems to have gone up 20%+
I suspect my local supermarkets are raising prices partly because of inflation and partly to get fatter margins. Shopping for food on Amazon is sometimes cheaper!
[0] https://www.newyorkfed.org/research/policy/gscpi#/interactiv...
> As a vector, jerk j can be expressed as the .. third time derivative of position
https://en.m.wikipedia.org/wiki/Jerk_(physics)
‘Dick: “jerk off”’
Is that like how it was convenient in the 2010’s when discussing “terrorist attacks on US soul” to conveniently leave out 2001 because it was an “outlier?”
The consumer price index has been relatively flat since the Fed started raising interest rates.
https://tradingeconomics.com/united-states/consumer-price-in...
The generally quoted inflation rate compares now to this time last year – so until next June, it includes the increases that happened before the Fed decided there was a problem.
This is useful in a lot of contexts, but if you want to know whether prices will be higher next month, it doesn’t make a whole lot of sense to use a lagging indicator.
The PCE, which the Fed uses—not the CPI—as its inflation gauge for policymaking has not been flat (historically, the PCE and CPI have generally been pretty close, but the PCE shot up much more than the CPI in the recent inflation, and did not quickly drop and stay near zero monthly % change like the CPI in response to the Fed intervention [it was low in July and November, but not the intervening months.])
If you are earning and have debt that’s great news. Sure the cost of your weekly shops increased 1%, but your debt has dropped 7%.
- William Jennings Bryan
Inflation can also screw the equity value for home owners in the US because in the long term house equity value is very roughly inversely related to mortgageInterestRate -- that occurs because house prices are driven by how much people can loan for a mortgage, and maximum mortgage loan is limited by f(personalIncomeAfterOtherCosts, wholesaleInterestRate + bankMargin, futureIncomeStreamPrediction).
Living in New Zealand which all mortgages are variable rate (approximately), I can say inflation really screws large mortgage holders here.
[1] 2010 https://business.sdsu.edu/_resources/files/real-estate/resea...
Raising interest rates are a great way to combat demand driven inflation (everyone borrows money to buy a set amount of goods/services so prices increase).
It’s not a good way to deal with supply driven inflation in essential goods (say prices go up because a harvest fails).
But it needs to happen to ensure the currency doesn’t fall relative to other currencies thus making imports more expensive.
Simple example:
You start with a dollar. Every month it's value falls by 5 cents. However this month it only fell by 2 cents.
Over the last few months inflation has been about 2.5%
The way inflation is looking these past five months, the Fed should take a break from its interest rate hikes before, rather than after, it causes the next recession. That would be a much better choice than the course it is on.
We all know that something will break, but I guess they have to break before politicians can respond to the will of the voters.
I like the off-hand assertion that the fed causes most recessions. As if “they” have strong control the economy but are just too dumb or corrupt to only make the numbersgo up. Kind of embarrassing actually, for a “think tank”.
The purpose of a think tank is (often) to promote values of whoever funds it. So, while it may look embarrassing, they're doing exactly their job.
The Fed does not want a recession, but if it has to choose between a recession and high inflation, it's a simple choice. The choice of following the law. Which stipulates that the Fed has 2 jobs (the dual mandate): to keep inflation and unemployment law. Recession is not part of the law.
Keep in mind that: (1) the war in Ukraine, which could further disrupt multiple commodity markets (energy, grains, minerals), is still ongoing; (2) many global supply-chain issues have not yet been fully resolved; (3) many services that renew annually, including apartment rentals and most information/entertainment services, have not yet raised prices on all customers; and (4) we don't know the extent to which second- and third-order inflationary effects are still propagating, globally.
Also, keep in mind that in the past, central banks like the Fed have typically reacted too slowly and too late to control inflationary forces before things got too out of hand, which ended up being much worse for everyone. This time around, I'd much rather have the Fed and other central banks err on the side of over-tightening and causing a short-lived recession than under-tightening and fighting inflation in fits and starts for a decade, as has been the case in the past.
Not to say that this isn't a one-off example of this!
Which is to say, the cost of labor has not been increasing that fast. Though, it's not a single faceted issue. I want to emphasize that. With that said, I do suspect this inflationary era has a slightly different character than previous due to a very different corporate landscape (eg: it wasn't previously the case that there were only 3 main airlines, just a couple companies owning the more than majority of grocers, etc..)
[1] https://www.statista.com/statistics/222127/quarterly-corpora....
U.S. corporate profits 2012-2022, by quarter - Statista
There are a few object lessons in "how to lie with economic data" here. Let's tease them apart.
1. The original chart is in billions of dollars, across long time periods. So the first error is use of long run time series in nominal values. In that case, most of your time series are going to be "at record levels". Care to guess why?
2. If you look at the source of that chart, which is NIPA data, you'll see those magic words "without CCA and Inv adj". What do they mean? What it means is that you are ignoring depreciation of fixed assets and revaluation of inventory. So for example, if you run your business and pay $10 in labor and inputs and obtain $20 in sales, then you have a profit of $10, right? Well, not if you wore down your equipment by $5. Then you only have a profit of $5. So capital consumption must be taken into account if you want a measure of profits that is close to what an actual business would use. For the same reason, if you have a pile of unsold inventory, do you value it at your purchase cost or at the cost you would be able to sell it? It should be the latter, so again you do want the inventory valuation adjustment. The net result is you want to be looking at net operating surplus if you are mining your NIPA data for a measure of profits, not profits before capital consumption or inventory valuation adjustments. Of course NIPA style net operating surplus is not the same as GAAP profits because a number of other adjustments are made, but it's a reasonable proxy when looking at macro data.
3. Mixing non-financial and financial is a big no-no, especially as you are talking about inflation, and this means non-financial goods.
So if we fix all of that, then what do we see? Record profits? Nope.
Here you go:
https://fred.stlouisfed.org/graph/?g=Y4h3
As a pro-tip, it generally pays to have an awareness of economic history. So, for example, if someone shows you a chart that says there was low inflation in the late 1970s, then you know they are lying somehow, because you understand this was a period of high inflation. This is something you should know without a chart, and use it to check the chart. Similarly, a basic fact of US corporate history is that the corporate profits in the 1950s and 1960s were enormous. Higher than any period since. That was the golden age of corporate power in the U.S., when we were told "What's good for General Motors is good for America". It was also the conglomeration mania. Additionally, Baby Boomers were having kids and buying tons of stuff, borrowing and spending heavily. Credit was loosening. The US was the undisputed king of the world, without foreign competitors of any serious measure, and they were raking in the cash.
Though, is the overall thesis (that corporate profits are a significant factor to recent inflation) still incorrect? I'm really curious what your take is to this marketplace.org segment and Rep Katie Porter's presentation on the subject. Links here: https://www.marketplace.org/shows/make-me-smart/corporate-pr...
Holy cow. I'm in Austin. There a some lagging gas stations, but it is easy to get regular 87 gas for $2.45/gallon. The lowest price I've seen (cash price, not needing a membership card) is $2.37/gallon. It has been below $4 for a long time.
There’s also the issue of high gas taxes there as sibling mentioned, but I remember that something in the refining process is also a major contributor.
Even if inflation is falling faster than most people know, the way fed has played is hand is going to be devastating. Stock market has been destroyed. Stock market != economy is not true in this case. Most people’s savings are tied in the market one way or the other (401k, pensions, actual investments etc.). People who don’t have savings or have any form of debt have their debt have its interest go through the roof. People are losing jobs at the highest level of the economy, which will trickle down as the rich and the upper middle class downsizes its spending. Housing prices won’t go down because the supply/demand dynamics are still terrible in most places where people want to live. And people who bought at inflated rates are not selling anytime soon unless they absolutely have to.
Seattle, Los Angeles, Las Vegas, and most of the boom towns outside of Florida are only a few months behind The Bay.
A ~20% decline is going to more than wipe out all inflation adjusted (real) gains in almost all markets.