U.S. inflation likely to remain elevated for up to four years – BofA

You live in a very different region to me. I just checked and it’s hovering at about 3%, and this is causing a lot of problems.

This doesn't make any sense. You'd expect many of your costs (utility, maintenance, etc) to go up with inflation.

>Asset inflation is inflation. That "real" inflation, also known as the consumer price index, hasn't been going up is a factor of both automation/economies of scale and an extremely bifurcated economy in which low end workers are making pennies, toilet paper is cheap, but a house in an area with a working economy costs triple what it did 10 years ago.

It costs triple, but because of lower interest rates monthly payments (ie. your actual spend) are going down. https://awealthofcommonsense.com/wp-content/uploads/2021/03/...

This is a really interesting point. A longstanding criticism of the reported unemployment numbers is that it doesn't take into account those who have given up / dropped out of the labor force.

Perhaps the CPI is similarly failing to capture people who have been shut out of the housing market altogether (e.g. homeless, staying with family longer than previous generations)

Believe It or Not, Real Estate Affordability Hasn’t Changed Much in 40 Years: https://www.supermoney.com/inflation-adjusted-home-prices/

I can tell you don’t own any investment properties.

It isn't though for the use of the inflation statistic.

It is a measure of if low-income earners are going to need wage hikes in order to survive. It is concerned with avoiding wage-price spirals where the cost to businesses of employing your average blue collar worker is increasing or not, and employed to drive those costs to businesses down.

It doesn't work at all for the average HN reader because you're probably in the middle ground where you either own enough assets or want to own enough assets that you're seeing crazy rises in prices in how you actually live, but you're not rich enough to care about inflation as a measure of when your uppity blue collar workers are going to start demanding higher pay (and even if you are rich enough, by virtue of the fact you're reading HN you've probably got fewer blue collar workers).

The inflation statistic is a number that isn't about you, which is why it seems so weird.

No one will have any idea whether inflation is happening or not by looking at a single market. That's why CPI doesn't do that. Housing prices could increase 2.5x in five years and not be an indicator of inflation, although that seems unlikely. But without examining a large sample of other markets, it's nearly a pure guess.

> Here's the problem - we use the Consumer Price Index to measure inflation, of which "housing" is only 33% - much of which is actually rent, which is quite a bit more inelastic than home prices.

Demand for housing across the board is inelastic (notwithstanding vacation homes or other "second" homes, in which demand is elastic and also a very niche market). Demand for credit is elastic, and so increases in the price of credit, i.e. the interest rate, will cause potential home-buyers to substitute into being renters.

> If someone buys an 8 unit condo building in 1980 and rents out each unit for a 20% profit, 20 years later they're still making a 20% annualized profit and maybe rent hasn't increased.

There's not enough information here to understand this scenario. It's not at all obvious that the landlord in 2000 is making an annualized profit of 20% unless he's the king of slum lords. Not only will maintenance and other recurring costs increase as inflation increases, the opportunity cost of the landlord using the land to house renters as compared to other productive uses of the land will also increase in nominal terms (and probably also in real terms unless the local economy is dysfunctional). Those costs - both the accounting and opportunity costs - will be passed onto the renters.

> Asset inflation is inflation.

Typically in economics, an increase in the "general price level" is inflation. In micro terms, inflation means the aggregated prices across all markets have increased relative to money, i.e. the increase is not accounted for by income or substitution effects. This doesn't mean all markets will be affected with equal price increases or anything. We'd still expect markets with inelastic demand to have higher price increases and markets with very elastic demand to have small price increases (though competitive markets will probably also have some shenanigans with quantity restriction, which aren't captured by the supply-demand model). We'd also expect some noise from various markets due to peculiar circumstances unique to each market. E.g. a potato blight creates a supply shock that causes a drastic increase in the price of potatoes, and which could have ripples in decreases in prices of complements and increases in prices of substitutes which is non-inflationary.

> That "real" inflation, also known as the consumer price index, hasn't been going up is a factor of both automation/economies of scale and an extremely bifurcated economy in which low end workers are making pennies, toilet paper is cheap, but a house in an area with a working economy costs triple what it did 10 years ago.

CPI is just a measure of inflation, i.e. the general increase in prices across aggregated markets, that uses sampling. (Also, the word "real" is overloaded in economics, and means changes that take into account inflation or, alternatively, ignore the use of money.) Inflation is quite tricky to measure, and so CPI must make loads of assumptions about substitutes, complements, and income effects (e.g. technological progress, economies of scale, productivity, etc.).

Also, for point of comparison, the minimum wage in CA has doubled since 2001, but the price level has not. It's a similar story in New York, Massachusetts, Illinois and Washington (and presumably other blue states). Red states like Texas or Florida have not had a significant de jure increase beyond the federal level in that time, though if I were to guess, the market minimum wage is simply above the legal minimum wage in those areas. It seems likely that low-end workers are making more, middle-income workers have stagnated and then upper-income workers have seen their income skyrocket.

I think debating inflation predictions for both the employer and employee could be an endless / counter productive and exhausting thing.

Probably better to make your case via the typical salary negotiation methods, discussing what you did, etc.

=D

But people aren't paid based on purchasing power, so what does inflation have to do with it?

Could be an interesting idea - you get paid 100,000 Big Macs per year. Changes with their price.

But that's not how things actually are.

Sounds like your inflation raise would need to be even higher than 2%.

ps. Fed changed their inflation targeting. The target is still 2% core PCE but now it's average targeting. They will allow inflation go above 2% and start to act only after the average inflation reaches 2% (over some unspecified timeline).

I believe Fed will have real fight to keep the inflation not going below 2% for the reasons Hartnett probably knows but don't wan to say.

If this is still the same event then all those people still could be right.

Notably, Krugman is not predicting low inflation this time around.

I'm totally open to the idea that "things are different this time" but an inflationary spike after the deflationary collapse of COVID isn't surprising at all. I definitely see some prices increasing but most of them are the same or less. It's really difficult to untangle what is inflation and what is just a lingering supply shock from everything being shut down. I just wish the inflation people would have more humility in their predictions.

But I would be very careful about either saying that a certain market reflects expectations (some markets have structural issues that prevent accurate estimates 100% of the time, TIPS is potentially one of them...markets also don't price binary/multivariate outcomes well at all), or saying that this represents "the future"...expectations about the future, obviously, change more than the future (the future is deterministic but from our perspective it is probabilistic, many things are possible but only one thing will actually happen...that is markets can be so volatile).

To say this another way, was the market right in January with 2% and right today with 2.5%? No. The Fed made this mistake over and over earlier this year: expectations are anchored, expectations are anchored, inflation won't rise because the market says X (again, the market is not a point estimate, it is a distribution centered around the breakeven, and doesn't work with multivariate outcomes).

High core PCE hurts investors and helps those who are in debt.

This is not related to anything else that BoA does.

https://www.reuters.com/article/us-banks-idUSTRE50F1Q7200901...