My understanding is that a large portion of this "CPI index that excludes food and energy" is housing. Which might explain the seasonality mentioned in this blog post (people tend to move more in the warmer months).
I don't see how raising interest rates will help when the core issue with housing is the lack of supply. If anything higher rates will make it harder to add more supply.
> I don't see how raising interest rates will help when the core issue with housing is the lack of supply.
why did this become a issue last 2-3 years. I don't understand this at all. Re raising interest rates will crush demand via job losses, foreclosures, dissuade flippers and property speculators.
Because of the pandemic which caused people to desire more space. Maybe they were living with their parents or roommates and want their own place, maybe they had kids during the pandemic, maybe they need a home office.
Sure if you raise rates enough to cause a recession and massive job loss that would eventually push home prices down but it seems like building more housing would be a simpler, kinder solution.
That’s the importance of having a unified approach, shared between the government and the Fed. It doesn’t help inflation when the country is running all-time-high (or close to it) deficit levels, especially if that money isn’t being appropriately allocated.
> Re raising interest rates will crush demand via job losses
Raising interest rates doesn't automatically lead to layoffs and businesses closing. It certainly might for faltering or weak companies, but it's not like x% interest rate increase === y% unemployment increase or z% business closure.
> foreclosures
Sure, if you have an adjustable rate mortgage, are massively underwater, and can't afford the new payments. That in and of itself is not a bad thing - if you couldn't afford the house five years ago at 4.5% fixed rate, you couldn't afford it at a 3% ARM either. There's no reason to think an increase in foreclosures would be anywhere close to 2008 levels simply because rates are increased to more historically reasonable levels.
They don't raise mortgage rates, they raise the rates at which banks pay each other for overnight loans. But this tends to affect all other rates indirectly, including mortgages. They've only got one tool and it's a giant sledgehammer. From the looks of it they're trying to crash the economy, but avoid wrecking it so badly they can't start it up again.
The Fed can't do anything about housing supply. Mostly it's zoning regulations preventing it, lower mortgages to bring out the buyers might help a little but even when the market was roaring we hardly built anything.
Who would’ve thunk that almost everything we did during the pandemic would be called into question whether it was really a good idea.
The dumbest take though on the inflation issue was from the Washington Post, with this since-renamed headline: “Inflation is cooling, so why aren’t customers feeling it?” Well, slowing inflation isn’t exactly deflation, is it!
> The gains in wages and employment that the hot labor market is delivering seem very large compared to the modest cost imposed by a temporary period of inflation.
Sentences like that seem crazy to me - where is the hot labor market money going outside of faang? In my circle nobody is getting raises that overcome inflation unless they switch jobs, which is only viable every couple years at a max and has diminishing returns over time.
Separately, is inflation temporary? I had thought price increases don’t return to their prior levels with the exception of gas, and seemingly a dozen eggs.
I think hot labor market is outside of white collar jobs. Thats why i am seeing with my family members who dont' work white collar jobs, demand is unlimited.
Find it hard to believe this (except some regional or personal exceptions), since a lot of the demand for non-white-collar services comes from white collar employees who aren't exactly thriving and spending atm...
Except if there's some thriving export industry with domestic factories on the rise!
Is it inflation adjusted? And even more, purchasing power across a wide range not included in inflation calculations adjusted? Because consumer spending can be at an "all time high" for things that could have been bought much cheaper 5 and 10 years ago, including basics.
Of course it’s inflation adjusted. The term is “real consumer spending”. The data reported is not to make the public feel good, but to inform the policies. Politicians can always find a way to spin any number in their favor for sure.
The spending has consistently remained high throughout the elevated inflation period, but is projected to go down a little bit.
There are giant shortages in a number of job categories that can't be done remotely. Things like nursing, restaurant jobs, the trades (electrician, plumber, etc.)
My theory is that a lot of people who had service jobs pre-pandemic switched to white collar jobs during the pandemic (since they were let go from the hourly service jobs).
Many realized how shitty the service jobs are in comparison so now employers have to pay them a lot more or hope they get fired from the white collar job to fill the service positions.
Some have said there's an undocumented labor shortage after the pandemic. This is, well, undocumented, so it's hard to determine actual numbers for it. Unfilled jobs aside, housing maintenance has become far more expensive.
Inflation, as a rate of change, is dynamic. The Fed aims for it to be about 2%, but 7% is much too high so they are ramping up rates to put a stop to that. Prices rarely go back down (consistent falling prices would be deflation, which tends to be economically disastrous as it rewards doing nothing) but the rate can fall which is what he's referring to.
> deflation, which tends to be economically disastrous as it rewards doing nothing
Why's deflation different from e.g. sitting on treasury bonds? The money was originally printed by the government, the bonds are issued by the government, so sitting on bonds does nothing except pays you for taking money out of the economy temporarily, same as deflation.
If e.g. nobody would ever buy a computer because it'd be 2% cheaper if you wait a year, you could just as well argue that if bonds yield 2% above inflation you could park your money in them and wait a year and have 2% more money so nobody would ever buy anything.
No, when you hold the bond the government uses that money to do things. With deflation people could hold cash which is truly not using it for anything.
Isn't a treasury bond still "doing something" though? Since they are effectively loans to the government it is in theory being used to fund gov services ("doing something") so that they don't print more new money, versus sitting in a bank account where it's really doing nothing, but still increasing it's purchasing power?
It's 20x more dilutive to print $100 than to sell $105 for $100, sure. I wouldn't describe that as "funding government services" in the common sense, though you could argue that with a fixed dilution target it does counterfactually cause more spending and thus services.
And similarly, somebody stuffing money under their mattress would be removing 20x the amount from circulation as they gain, with 5% deflation. So while one can easily imagine the 5% is financially equivalent to interest, the effect on the circulation isn't.
"Remove money from circulation" seems different than simple funding of services, though. It's not even obvious there should be any difference there, if the money were infinitely subdivisible. I don't think using personal finance equivalents like funding goods and services is sufficient to explain the effect.
An economist has probably written something in excruciating detail, making sure there's no shell games being played with the terms. So it's probably on me for not reading that instead of commenting here.
I am similarly skeptical of the economist dogma that "deflation is economically disastrous". Feels like a spherical cows argument deeply rooted in theory, but not necessarily true in practice.
I think it's bad for greedy corporations who would see their their profit margin shrink, but periods of temporary deflation every once and a while feels like it could be healthy for society.
I think you might be confusing depreciation with deflation?
A $25,000 car becomes a $20,000 car the moment you drive it off the lot due to depreciation.
But the purchasing power of $25,000 cash becomes $26,500 after a year of 5% deflation, which means you _gained_ purchasing power by doing nothing (aka not spending money) as the result of deflation.
I get that cars, phones and computers are verticals, whereas deflation is a general decrease in price levels.
But no, I don't mean depreciation.
A 2019 vehicle that sits on a dealer lot slowly loses value over time. That has nothing to do with depreciation and everything to do with newer, better vehicles coming out over time. The same thing applies to computers and phones.
And how many people have mortgages or other sources of debt?
> Deflation is terrible for debtors. Prices and wages fall, but the value of your debt does not. So you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher wrote decades ago, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. (The experience of Japan, though, proves that an economy can have a prolonged period of moderate deflation without falling into that downward spiral.)
The Great Depression is an extreme example of high deflation:
> Interest rates dropped to low levels by mid-1930, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment remained low.[13] By May 1930, automobile sales declined to below the levels of 1928. Prices, in general, began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931. Farmers faced a worse outlook; declining crop prices and a Great Plains drought crippled their economic outlook. At its peak, the Great Depression saw nearly 10% of all Great Plains farms change hands despite federal assistance.[14]
1. I didn't say that there are no ill effects from deflation, just that they're overblown. There are also bad effects from inflation.
2. Most/all of the benefit of inflation to consumers is captured by lenders in the form of higher interest rates - there's a reason why so many rates are quoted as "prime + x".
3. Addressing your japan/great depression examples:
I get that the transition from an inflationary economy to a deflationary one can be horrendous for consumers. Sure. But that doesn't say anything about how consumers would fare under a steady state deflationary economy.
Here, the "doing nothing" is referring to investments, not consumption.
People consume cars, computers, and phones; the primary intent is to use the product. You might sell it used at some point, but that's not the primary intent, and you're almost certainly going to take a loss on resale.
People invest in companies, governments, and individuals; the primary intent is to provide a loan that will be repaid with interest.
A physical object could be considered an investment, but only if that object is rare or somehow naturally limited (e.g. real estate).
So with inflation, you're rewarded for making investments, because otherwise your money will lose value sitting in fat stacks under your mattress. With deflation, you're rewarded for keeping those stacks hidden away, because it's a risk-free way for it to gain value.
The profit incentive still functions to drive investment under deflation, because you can make more money from investment than letting money sit there.
US economy experienced massive growth through periods of deflation 1815 and 1860, and 1865 to 1900, as a result of industrialization and increased international trade.
I think people greatly overestimate the impact of monetary policy. Consumer demand and technological improvement drive growth more than anything. Climate change and rising oil prices drive investment in renewables for example. Consumer demand for computing drove technological improvements, which drove investment and falling prices. In my view, this would happen regardless of monetary policy.
> I hear this all the time, and I see little evidence that it's as strong an effect as everyone says.
You forget that in a deflationary economy prices would go down. Most of Wall Street, of course, is not their own money. It's borrowed money. Borrowed from pensioners, from central banks, from every bank in existence.
Deflation would not only make it in the banks interest never to loan a cent again, it would suck something like 95% of the money out of the stock market (so no, it definitely wouldn't be in your interest to still own profitable firms).
Wall Street is mostly smoke and mirrors, to convince people to work to pay pensioners and banks, and siphon off a healthy percentage for themselves. It just wouldn't work in a deflationary economy and it's the source of most of the money in the US economy. Without it we'd have to do something crazy like have the government run ~50 moonlanding-sized projects at the same time to make up for it.
This is the conventional wisdom, but it's rooted in propaganda put out by the government. Deflation isn't any worse (or better) for the economy than inflation. It's the yin vs the yang, so to speak.
According to the government, inflation comes from profiteers, speculators, greedy capitalists, Putin, and any number of boogeymen. In reality, it comes from the government printing and spending excess cash. The government then tries to sell the idea that 2% inflation is good for you.
Now, government does need to raise money to fund its operations in one way or another. Inflation is arguably a reasonable (and fair) way to do it. But let's be honest about it.
Deflation is bad if you have debt. With inflation, the value of your debt is chipped away which makes taking on debt more attractive. In a deflationary environment, your debt burden grows over time all else being equal.
And inflation is equally bad if you have cash or any assets denoted in cash. It's also bad because taxes don't necessarily index with inflation. For example, much of capital gains are illusory because of inflation, yet you get taxed on that inflated value, not the real value.
Based on preliminary BLS data, average hourly earnings are up 6.1% Y/Y in leisure and hospitality, 5.5% in utilities, 5.5% in information, 5.4% in construction, and 4.7% in mining and logging. https://www.bls.gov/news.release/empsit.t19.htm
Your anecdotal evidence aside, unemployment is low and the labor market is hot. It’s mainly tech doing layoffs and that’s merely because they made so much money and grew so massive after covid they need to return to more sustainable spend levels
Tech is deflating because of the crazy hiring during COVID and the VC/exit driven “business models” suffering most from the end of free money. Most employees in the US are in a stronger position than in years. Most people also haven’t been able to switch jobs - much less for a 50-100k raise.. ever. It’s easy to get lost in your bubble
Even that's tricky, as moving from $7/hour to $15/hour means you lose things like SNAP/Food Stamp benefits, jump from a 10% to a 12% tax bracket, etc.
Edit: Perhaps the ~$13k standard deduction is a better example line than the tax bracket. Just stating the wage growth isn't outpacing inflation as much as it might appear at first glance.
The snap qualification might be significant. The jump in tax brackets, probably not. Only the money above the 10% bracket gets an additional 2% (12%) tax.
I wasn't suggesting upping the wage was a bad idea, just that saying wage growth at the bottom outpacing inflation isn't as good as it's portrayed. The $~13k standard deduction is another example line that gets crossed. Medicaid and CHIP maximum income is another. Meaning we could use more wage growth, not less.
I think that's an important point that too many people gloss over, and I want to emphasize it with an example. Let's say the cutoff between 10 and 12 percent brackets is at 10k. If you make 10k one year, you pay $1000 in taxes. If you make $10,001 the next year, you don't pay $1,200.12; you pay $1,000.12. 10% on the first 10k, and 12% on the single dollar that you earned in that bracket.
For low wage people with children, they really are often better off in a low wage job than a middle wage job. In the example given, going from 25K a year to 50K would mean a lower standard of living.
Throwing US centric facts. 10,000 boomers retire every day. 1.8 million people 55+ die every year. A healthy economy makes anywhere between 150,000 and 250,000 jobs per month. There is no labor shortage, only a shortage of people willing to work jobs below a living wage, due to millions of people who left the labor force, either through retirement or death, during the pandemic.
Incredible. An actual realistic livable minimum wage!
Some advice I saw on a video a couple of months ago, targetting employers:
"Take a look on Zillow (or wherever) and get a good feel for the median rental cost of a 1 bedroom apartment where you are based. If you can't afford to pay your employers at least 3x that, maybe you either shouldn't be in business at all, or should plan on doing it all yourself"
Excellent advice, that perhaps In-and-Out Burger has taken.
To be fair, that's In-and-Out's whole thing. They pay a living wage, so you as the customer don't feel like you're actively exploiting the person behind the counter by stepping foot in the place, and they use better ingredients so you don't feel like you're poisoning yourself. It helps the whole mood of the place. It used to be you were paying extra for that relative to, say McDonalds, but somehow they've also kept costs down relative to other fast food companies.
That is how raises happen. The economy doesn't grow uniformly - new industries take off and cannibalize old industries, and the people in the old industries eventually lose their jobs while all of the gains in growth go to people in the new industries.
Folks who expect better-than-inflation raises without switching into a hotter industry or moving into a new role remind me of the Parable of the Drowning Man [1]. You have to help yourself and go move into the areas that are making money. Assume that about 20% of your actual job should consist of hunting for a better job (and that > 50% should be setting you up for a better job - ideally you are learning new skills in your current job that will be useful in higher-paying positions).
Well I mean there’s a valid argument to be made that giving an employee a raise instead of finding/training a new employee is not only cheaper in the short term, but can provide exceptional ROI in the long-term (depending on industry of course).
As long as the employee is producing X amount of value for the company and the value is greater than the total cost of that employee the math is simple, reasonable, and healthy.
There are pretty heavy countervailing forces in favor of standardized salary bands for everyone. Employees compare notes; it can be demoralizing to hear that the company thinks your teammate is worth 20% more than you, and it instantly leads to politicking as everybody else asks for raises. While in the eyes of the business owner there may be clearly some employees that generate more value than others, good luck convincing all the employees that some of their teammates' work is more valuable.
This tendency is more pronounced in bigger companies (where performance is more illegible), but the problem with small companies is that there are wide variations in their profitability and hence their ability to offer high salaries (and this is usually less than what big companies offer, hence their ability to get big). Job-switching here is the economy doing its job and funneling resources to the activities that generate the most consumer value.
This works so long as the company giving raises is successful vs the broader economy - however in the process of "creative destruction" in the economy a lot of what drives growth is new firms or innovative firms displacing old firms, thus the ability to pay a raise will be diminished in firms that fall into the "old" category vs the firms eating their lunch. It is just a statistical reality that if you stay at the same firm for 40 years that it is likely to at some point become an "old" firm.
Yeah that makes 100% sense, the issue is if you switch jobs too often is hurts your chances of being able to do that in the future. So it’s impossible to keep your pay in line with inflation, unless every ~4 years you switch to a role that has pay that makes up for your prior 4 years of inflation losses.
The whole point of inflation is to extract money from the economy to fund the government without tax increases. There's no way for wages to keep up with inflation.
> I had thought price increases don’t return to their prior levels
They don't under a fiat money system. They do under a system where the money is exchangeable at a fixed rate with something not under the control of the government.
I expected the downvotes. The truth isn't always popular. My whole life I've been relentlessly told the fiction that inflation is caused by greedy speculators, etc.
Hospitality is definitely tight. Good employees have been cooked by the pandemic, the boomer generation is aging in to constant medical attention, and newbies are understandably hesitant to enter in to public-facing roles where the teams are lean.
Inflation is the increase in prices. When inflation stops then prices stop rising. Deflation causes prices to go down, but the fed hates deflation and will act against it. So, yeah, prices won't be going down.
I’m not sure who this person is, but I feel they lose a credibility make two bullet points that seasonal effects being a thing is a noteworthy insight, and that they are difficult to assess. I mean yeah, they’re going to be difficult to assess when you’re only plotting 2-3 years of data.
> Paul Romer, economist and policy entrepreneur, is a co-recipient of the 2018 Nobel Prize in Economics Sciences and University Professor in Economics at NYU. He has spent his career at the intersection of economics, innovation, technology, and urbanization, working to speed up human progress.
I personally do find it surprising how over seasonal effects are often the primary number reported, and there isn't much effort to really understand them.
This was especially problematic for reporting unemployment numbers during the pandemic. All of the published unemployment numbers during the pandemic included seasonal effects, which is absurd to anyone giving the situation even a moments thought. Clearly the impact of the pandemic disrupted whatever seasonal pattern there may have been during stable period.
For unemployment during the pandemic including these seasonal effects would often invert conclusions about the data (e.g. "unemployment is higher this month" when the non-adjusted values were lower and vice versa).
Often times when we really care about an economic indicator it's during times where something strange is happening meaning we should be cautious about unquestioningly using seasonal effects in models.
Idk. Seasonal effects may be tricky, but that graph showing just two years is certainly not strong evidence of that as the author claims.
He makes reference to a prediction of a 100 bps decline, I think by the end of the year which seems kind of silly to me given the numbers appear to swing by more then 1000 bps over individual months. I’d be curious what he’s actually basing the claim on. He has some sort of model. I’d hope it’s not just based on what is shown in the article
It's a Nobel Prize winner in Economics, which doesn't mean much judging by the article, specially the creative interpretation of the data displayed in it.
It's officially the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel," it dates from 1968 not 1900, it isn't part of the original prizes funded by Nobel, there's no evidence Nobel - given his distrust of the profit motive - would have approved, and it's funded with an endowment from Sweden's Central Bank.
There have been calls for it to be abolished.
To say some of the awards have been controversial among science and arts laureates would be a huge understatement.
I think the original Nobel prize was some guy realizing he hadn't done enough good in his life and trying to rectify it.
I think the economics prize was a group of people with ties to money and power trying to add weight and credence to theories that would support their continued access to money and power.
Neither is flawless but one is much more ... noble?... than the other.
> The prize in economic sciences is awarded by the Royal Swedish Academy of Sciences, Stockholm, Sweden, according to the same principles as for the Nobel Prizes that have been awarded since 1901. [0]
https://www.nobelprize.org/prizes/economic-sciences/
Disagreeing and dismissing are two very different things.
There is nothing wrong with disagreeing with even the most respected of experts, history has proven they can be wrong often.
Simply ignoring someone because "I don't know who this is" is generally a bad idea, and even more ridiculous when that person does in fact have a well known reputation.
I’m not dismissing them. I didn’t know who they are. I simply stated that the article is trying to make a claim about seasonal effects by pointing two just two years of data. Which is dumb. Doesn’t matter who does it.
I disagree with the rigor of the analysis. I don’t have any strong opinions on the takeaways.
SVB's failure was barely a month ago, and has sent chills all over the banking sector, which has started to tighten lending all around. While the current inflation trends may seem troubling, it looks like higher interest rates have started to trickle their way towards cooling inflation significantly.
Of course this might not be the case, but at the very least I wouldn't expect the impact of SVB's failure to show up in any of these charts just yet.
Wasnt that the primary factor? They lent their money to the government at very low interest rates. When interest rates rose, the value of those loans fell.
> In March, the Consumer Price Index for All Urban Consumers increased 0.1 percent, seasonally adjusted, and rose 5.0 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in March (SA); up 5.6 percent over the year (NSA).
I understand what he is saying. The difference between the two lines was positive in the last month. But, compared to how large this positive gap was last August and September (looks like about 4% to 5%) this really seems negligible and possibly due to noise. And, it seems even more negligible compared to the cumulative negative (a good thing) gap since October. I think it's a little early to call the trend on one recent data point. Seems a little alarmist.
I really don’t think one (1) datapoint is enough to draw any conclusions about the seasonality of inflation.
I’m sure inflation will be at a higher than baseline level for some years but unless something like COVID happens again - what would be driving an increase in inflation?
If it’s from workers getting raises then why should we - the workers - worry about that? That’s literally the best place for the money to
be going in the whole system!
We rounded a corner in June, but the annual reporting hasn't caught up yet. Once we hit July, (annual) inflation is going to look a lot better, but has been better when you look at the monthly numbers. https://fred.stlouisfed.org/graph/?g=12rxD
Real inflation, that is the prices of essentials like food and prescriptions paid by people who aren't made of money, is still absurd and under-reported as usual.
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[ 2.3 ms ] story [ 176 ms ] threadI don't see how raising interest rates will help when the core issue with housing is the lack of supply. If anything higher rates will make it harder to add more supply.
why did this become a issue last 2-3 years. I don't understand this at all. Re raising interest rates will crush demand via job losses, foreclosures, dissuade flippers and property speculators.
Sure if you raise rates enough to cause a recession and massive job loss that would eventually push home prices down but it seems like building more housing would be a simpler, kinder solution.
Raising interest rates doesn't automatically lead to layoffs and businesses closing. It certainly might for faltering or weak companies, but it's not like x% interest rate increase === y% unemployment increase or z% business closure.
> foreclosures
Sure, if you have an adjustable rate mortgage, are massively underwater, and can't afford the new payments. That in and of itself is not a bad thing - if you couldn't afford the house five years ago at 4.5% fixed rate, you couldn't afford it at a 3% ARM either. There's no reason to think an increase in foreclosures would be anywhere close to 2008 levels simply because rates are increased to more historically reasonable levels.
> dissuade flippers and property speculators
Good.
The Fed can't do anything about housing supply. Mostly it's zoning regulations preventing it, lower mortgages to bring out the buyers might help a little but even when the market was roaring we hardly built anything.
The dumbest take though on the inflation issue was from the Washington Post, with this since-renamed headline: “Inflation is cooling, so why aren’t customers feeling it?” Well, slowing inflation isn’t exactly deflation, is it!
Sentences like that seem crazy to me - where is the hot labor market money going outside of faang? In my circle nobody is getting raises that overcome inflation unless they switch jobs, which is only viable every couple years at a max and has diminishing returns over time.
Separately, is inflation temporary? I had thought price increases don’t return to their prior levels with the exception of gas, and seemingly a dozen eggs.
Except if there's some thriving export industry with domestic factories on the rise!
who are spending money at unprecedented rates.
The spending has consistently remained high throughout the elevated inflation period, but is projected to go down a little bit.
https://www.bankofthewest.com/Wealth-Management/insights/art...
blue collar workers fix many of those things that can’t stay broken.
appliances, utilities, transportation, etc.
white collar usually also means enough of a credit limit.
“necessary” is relative.
Yes, and broken things can delay being replaced because of caution with spending
Many realized how shitty the service jobs are in comparison so now employers have to pay them a lot more or hope they get fired from the white collar job to fill the service positions.
Why's deflation different from e.g. sitting on treasury bonds? The money was originally printed by the government, the bonds are issued by the government, so sitting on bonds does nothing except pays you for taking money out of the economy temporarily, same as deflation.
If e.g. nobody would ever buy a computer because it'd be 2% cheaper if you wait a year, you could just as well argue that if bonds yield 2% above inflation you could park your money in them and wait a year and have 2% more money so nobody would ever buy anything.
And similarly, somebody stuffing money under their mattress would be removing 20x the amount from circulation as they gain, with 5% deflation. So while one can easily imagine the 5% is financially equivalent to interest, the effect on the circulation isn't.
"Remove money from circulation" seems different than simple funding of services, though. It's not even obvious there should be any difference there, if the money were infinitely subdivisible. I don't think using personal finance equivalents like funding goods and services is sufficient to explain the effect.
An economist has probably written something in excruciating detail, making sure there's no shell games being played with the terms. So it's probably on me for not reading that instead of commenting here.
I think it's bad for greedy corporations who would see their their profit margin shrink, but periods of temporary deflation every once and a while feels like it could be healthy for society.
I hear this all the time, and I see little evidence that it's as strong an effect as everyone says.
Cars, computers, and phones are all deflationary (at last in normal times). And people seem to buy them just fine.
A $25,000 car becomes a $20,000 car the moment you drive it off the lot due to depreciation.
But the purchasing power of $25,000 cash becomes $26,500 after a year of 5% deflation, which means you _gained_ purchasing power by doing nothing (aka not spending money) as the result of deflation.
But no, I don't mean depreciation.
A 2019 vehicle that sits on a dealer lot slowly loses value over time. That has nothing to do with depreciation and everything to do with newer, better vehicles coming out over time. The same thing applies to computers and phones.
> Deflation is terrible for debtors. Prices and wages fall, but the value of your debt does not. So you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher wrote decades ago, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. (The experience of Japan, though, proves that an economy can have a prolonged period of moderate deflation without falling into that downward spiral.)
* https://www.brookings.edu/opinions/5-reasons-to-worry-about-...
The Great Depression is an extreme example of high deflation:
> Interest rates dropped to low levels by mid-1930, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment remained low.[13] By May 1930, automobile sales declined to below the levels of 1928. Prices, in general, began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931. Farmers faced a worse outlook; declining crop prices and a Great Plains drought crippled their economic outlook. At its peak, the Great Depression saw nearly 10% of all Great Plains farms change hands despite federal assistance.[14]
* https://en.wikipedia.org/wiki/Great_Depression
* https://en.wikipedia.org/wiki/Great_Depression#Debt_deflatio...
There are some arguments for good versus bad deflation:
* https://www.nber.org/digest/apr04/good-versus-bad-deflation-...
2. Most/all of the benefit of inflation to consumers is captured by lenders in the form of higher interest rates - there's a reason why so many rates are quoted as "prime + x".
3. Addressing your japan/great depression examples:
I get that the transition from an inflationary economy to a deflationary one can be horrendous for consumers. Sure. But that doesn't say anything about how consumers would fare under a steady state deflationary economy.
People consume cars, computers, and phones; the primary intent is to use the product. You might sell it used at some point, but that's not the primary intent, and you're almost certainly going to take a loss on resale.
People invest in companies, governments, and individuals; the primary intent is to provide a loan that will be repaid with interest.
A physical object could be considered an investment, but only if that object is rare or somehow naturally limited (e.g. real estate).
So with inflation, you're rewarded for making investments, because otherwise your money will lose value sitting in fat stacks under your mattress. With deflation, you're rewarded for keeping those stacks hidden away, because it's a risk-free way for it to gain value.
US economy experienced massive growth through periods of deflation 1815 and 1860, and 1865 to 1900, as a result of industrialization and increased international trade.
I think people greatly overestimate the impact of monetary policy. Consumer demand and technological improvement drive growth more than anything. Climate change and rising oil prices drive investment in renewables for example. Consumer demand for computing drove technological improvements, which drove investment and falling prices. In my view, this would happen regardless of monetary policy.
You forget that in a deflationary economy prices would go down. Most of Wall Street, of course, is not their own money. It's borrowed money. Borrowed from pensioners, from central banks, from every bank in existence.
Deflation would not only make it in the banks interest never to loan a cent again, it would suck something like 95% of the money out of the stock market (so no, it definitely wouldn't be in your interest to still own profitable firms).
Wall Street is mostly smoke and mirrors, to convince people to work to pay pensioners and banks, and siphon off a healthy percentage for themselves. It just wouldn't work in a deflationary economy and it's the source of most of the money in the US economy. Without it we'd have to do something crazy like have the government run ~50 moonlanding-sized projects at the same time to make up for it.
This is the conventional wisdom, but it's rooted in propaganda put out by the government. Deflation isn't any worse (or better) for the economy than inflation. It's the yin vs the yang, so to speak.
According to the government, inflation comes from profiteers, speculators, greedy capitalists, Putin, and any number of boogeymen. In reality, it comes from the government printing and spending excess cash. The government then tries to sell the idea that 2% inflation is good for you.
Now, government does need to raise money to fund its operations in one way or another. Inflation is arguably a reasonable (and fair) way to do it. But let's be honest about it.
That can cause the prices of some assets to go up, but others will correspondingly go down, making it a net zero effect.
And inflation is equally bad if you have cash or any assets denoted in cash. It's also bad because taxes don't necessarily index with inflation. For example, much of capital gains are illusory because of inflation, yet you get taxed on that inflated value, not the real value.
https://fred.stlouisfed.org/series/UNRATE
Same as when wages rise once
Edit: Perhaps the ~$13k standard deduction is a better example line than the tax bracket. Just stating the wage growth isn't outpacing inflation as much as it might appear at first glance.
Here's a chart from the NY Times showing what it looks like in practice: https://static01.nyt.com/images/2021/11/10/opinion/10coy-new...
-- https://www.nytimes.com/2021/11/10/opinion/benefits-cliff-we...
For low wage people with children, they really are often better off in a low wage job than a middle wage job. In the example given, going from 25K a year to 50K would mean a lower standard of living.
The war on poverty has been a miserable failure.
One year ago they offered $19/hr starting pay.
Today the poster says $22/hr.
Something is up.
https://fred.stlouisfed.org/series/CIVPART
https://fred.stlouisfed.org/series/UNRATE
https://www.axios.com/2022/12/16/the-missing-workers-who-are...
https://seekingalpha.com/article/4531829-older-workers-propp...
Some advice I saw on a video a couple of months ago, targetting employers:
"Take a look on Zillow (or wherever) and get a good feel for the median rental cost of a 1 bedroom apartment where you are based. If you can't afford to pay your employers at least 3x that, maybe you either shouldn't be in business at all, or should plan on doing it all yourself"
Excellent advice, that perhaps In-and-Out Burger has taken.
There's a reason it's generally well liked.
That is how raises happen. The economy doesn't grow uniformly - new industries take off and cannibalize old industries, and the people in the old industries eventually lose their jobs while all of the gains in growth go to people in the new industries.
Folks who expect better-than-inflation raises without switching into a hotter industry or moving into a new role remind me of the Parable of the Drowning Man [1]. You have to help yourself and go move into the areas that are making money. Assume that about 20% of your actual job should consist of hunting for a better job (and that > 50% should be setting you up for a better job - ideally you are learning new skills in your current job that will be useful in higher-paying positions).
[1] https://en.wikipedia.org/wiki/Parable_of_the_drowning_man
As long as the employee is producing X amount of value for the company and the value is greater than the total cost of that employee the math is simple, reasonable, and healthy.
This tendency is more pronounced in bigger companies (where performance is more illegible), but the problem with small companies is that there are wide variations in their profitability and hence their ability to offer high salaries (and this is usually less than what big companies offer, hence their ability to get big). Job-switching here is the economy doing its job and funneling resources to the activities that generate the most consumer value.
I've been hearing this for 20 years so far.
Still no problems.
> I had thought price increases don’t return to their prior levels
They don't under a fiat money system. They do under a system where the money is exchangeable at a fixed rate with something not under the control of the government.
> Paul Romer, economist and policy entrepreneur, is a co-recipient of the 2018 Nobel Prize in Economics Sciences and University Professor in Economics at NYU. He has spent his career at the intersection of economics, innovation, technology, and urbanization, working to speed up human progress.
I personally do find it surprising how over seasonal effects are often the primary number reported, and there isn't much effort to really understand them.
This was especially problematic for reporting unemployment numbers during the pandemic. All of the published unemployment numbers during the pandemic included seasonal effects, which is absurd to anyone giving the situation even a moments thought. Clearly the impact of the pandemic disrupted whatever seasonal pattern there may have been during stable period.
For unemployment during the pandemic including these seasonal effects would often invert conclusions about the data (e.g. "unemployment is higher this month" when the non-adjusted values were lower and vice versa).
Often times when we really care about an economic indicator it's during times where something strange is happening meaning we should be cautious about unquestioningly using seasonal effects in models.
He makes reference to a prediction of a 100 bps decline, I think by the end of the year which seems kind of silly to me given the numbers appear to swing by more then 1000 bps over individual months. I’d be curious what he’s actually basing the claim on. He has some sort of model. I’d hope it’s not just based on what is shown in the article
It's officially the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel," it dates from 1968 not 1900, it isn't part of the original prizes funded by Nobel, there's no evidence Nobel - given his distrust of the profit motive - would have approved, and it's funded with an endowment from Sweden's Central Bank.
There have been calls for it to be abolished.
To say some of the awards have been controversial among science and arts laureates would be a huge understatement.
At least the money doesn't come from selling armament...
> To say some of the awards have been controversial among science and arts laureates would be a huge understatement.
More controversial than Nobel Peace Prizes?
I think the economics prize was a group of people with ties to money and power trying to add weight and credence to theories that would support their continued access to money and power.
Neither is flawless but one is much more ... noble?... than the other.
https://en.wikipedia.org/wiki/Alfred_Nobel
> The prize in economic sciences is awarded by the Royal Swedish Academy of Sciences, Stockholm, Sweden, according to the same principles as for the Nobel Prizes that have been awarded since 1901. [0] https://www.nobelprize.org/prizes/economic-sciences/
There is nothing wrong with disagreeing with even the most respected of experts, history has proven they can be wrong often.
Simply ignoring someone because "I don't know who this is" is generally a bad idea, and even more ridiculous when that person does in fact have a well known reputation.
I disagree with the rigor of the analysis. I don’t have any strong opinions on the takeaways.
Of course this might not be the case, but at the very least I wouldn't expect the impact of SVB's failure to show up in any of these charts just yet.
Disclaimer: Not an economist
Spring isn’t in the air. That’s the smell of fresh cut dollars.
Didn't the BLS say 5.6%, not 5.8%? From https://www.bls.gov/cpi/
> In March, the Consumer Price Index for All Urban Consumers increased 0.1 percent, seasonally adjusted, and rose 5.0 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in March (SA); up 5.6 percent over the year (NSA).
What am I missing?
I’m sure inflation will be at a higher than baseline level for some years but unless something like COVID happens again - what would be driving an increase in inflation? If it’s from workers getting raises then why should we - the workers - worry about that? That’s literally the best place for the money to be going in the whole system!
K-shaped recovery and inequality for the 99%.