Inflation is wiping out pay increases for most Americans | Hacker News Reader

Inflation is wiping out pay increases for most Americans

washingtonpost.com

57 pointsVicterius23 comments

I recently negotiated a 10% raise after two years, which my calculations show did not even cover the inflation that I have experienced. My costs are up almost 20% in that same timeframe. They wanted to give me 5%. Not sure how they plan to retain workers with that strategy.

What’s worth noting right now is that, contra most inflation scenarios, current inflation seems to be at least substantially driven by supply chain constraints, not money supply or any of the other traditional villains. A lot of this is COVID related - shutdowns in factories and logistics centers, radically changed demand profiles, etc. have caused supply chain constraints in ways we haven’t seen in a long time, and that seem much more likely to be transitory (on the ~2-3 year timescale) than other inflationary moments.

All that’s to say it’s a weird scenario right now and a lot of the conventional wisdom about inflation (such as it is) is even less useful than normal.

Solving this supply chain inflation by raising interest rate quite literally translates to - we will make people earn less so that they reduce demand for goods and services, thus controlling the inflation.

Raising too fast will cause a recession, solving the inflation problem. But then unemployment would be a problem and interest rates would go back down.

All this is to say, while it is imperative to raise rates now to control inflation, this solution comes at the expense of average people.

The real solution to supply side problems is for the government to fix - by making structural changes that enable supply to increase. E.g. reducing import tariffs in the short term, reducing production taxes (increase taxes on $500k+ earners and billionaires if you must) and making healthcare cheaper via open competition of providers (not of insurance)

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 deflationary event were to push them back down) [1]. So if the average price of CPI goods and services for your average American has gone up 7%, then they've effectively lost 7% of their purchasing power permanently. I'm not sure why this "transitory" meme about supply chains and covid keeps persisting on HN.

0. https://finance.yahoo.com/news/fed-chairman-jerome-powell-re...

1. https://www.lynalden.com/inflation/#transitory

> unless an unlikely deflationary event were to push them back down

Would you consider a large increase in supply-chain capacity to be a deflationary event?

It's debated whether current inflation is predominantly caused by supply-chain issues in the first place, so assuming that as the base case isn't stable ground. But let's not focus on the cause of our predicament for a moment.

Here's a chart of the Consumer Price Index: https://fred.stlouisfed.org/series/CPIAUCSL

Rolling 12 month average % changes to CPI is what's reported by the media when talking about inflation, such as "a 7% increase to inflation". Notice how CPI rarely ever goes down. This is by design. In fact, deflation is usually worse for everyone versus inflation. Nobody wants big swings of either, so it's typical for central banks such as the Federal Reserve to control either direction, and they usually hedge on the side of inflation as their target. So that's why I said it's a very unlikely event to have deflation.

> But let's not focus on the cause of our predicament for a moment

That’s my point, though - if we’re not focusing on the Cause of the predicament, we’re extremely unlikely to be able to handle it correctly.

> they usually hedge on the side of inflation as their target. So that's why I said it's a very unlikely event to have deflation

Yes, but, again, this is not a normal inflationary event. I agree that there are other factors affecting the situation, but the supply chain issues are clearly a substantial component, even if they’re only debatably the predominant factor. That component is being influenced from outside normal monetary policy and can clearly shift pretty quickly. Given that, the dangers of deflationary pressure, and the frankly appallingly shallow general understanding and zeitgeist around inflation, I’ll say again that I think it’s worth keeping in clear view the degree to which the current situation is being driven by factors outside the traditional monetary model, lest we decide to do something rash that we later find was stupid in the middle of what’s still actually a pandemic and not a normal business cycle.

The thing is if business raises their prices because of these reasons do you think they will lower them once the problem goes away?

Maybe in some industries/categories where there is a lot of equivalent goods and is competitive. However that is not the case for everything.

The money supply issues, coupled with financial system competition from BRIC, will lead to a worse future than the present.

The western world is never going back to the post-USSR high it was enjoying. Ever. The competitors have awakened and are making their moves globally. Most westerners are asleep.

BRIC is an out of date meme from the 2000s that isn't used anymore by any serious economists. B and R were dominant off of the commodity boom and have receded substantially, I has potential but is held back by poor governance, and C is legitimately an economic power (although too unstable politically to hold financial control) but is causing pretty much all the supply chain issues with their stubborn zero-covid strategy and is sabotaging their own economy. Geopolitically, you're right, but economically, there's more threat from crypto than BRICs to the current order

>economically, there's more threat from crypto than BRICs to the current order

I am blown away by this belief of yours. Crypto is basically a scam.

>Inflation is wiping out pay increases for most Americans

Wrong.

Most Americans have not gotten pay increases.

This is not quite Voodoo Economics yet and we're not even going to progress that far unless some leadership comes along with a decent understanding of at least Business Math.

When I negotiated my salary last year, one of the things I brought up was inflation. I felt it put me at a disadvantage given that I expected it to quickly get whittled down in value shortly after settling it. A more rational thing to do would have been to wait until inflation settled down and then to use the new and less-volatile cost-of-living benchmark as a basis for negotiation.

http://archive.today/A442l

In the classical inflation scenario, rising wages without rising output leads to price increases as input costs get bid up. So the wage increases we see in a tight labor market are what cause inflation in the first place.

To stop systemic waves of this kind society needs resource buffers right ?

Higher prices lead to higher wages. That’s been fairly well established (I thought).

The silver lining is that debt becomes cheaper and easier to service in an inflationary environment.

That's the theory - we'll see how it holds up in practice. Shelter, transportation, energy, food, all that has gone up by 10 % last year, no end in sight. Looking forward to the 10 % raise, but the fear is that my institution will go out of business 5 years from now, because after the 2008 crisis people stopped having children, they couldn't afford it.

The higher prices started with the trade war and wage increases were inevitable especially with imited immigration+remain in Mexico. It was all explained at rallies but they didn’t want it to extend to “those people”.

Wage growth lags price growth, and in general most people make the same or less for a given type of job than 30 years ago

I thought it was on the contrary well established that wages haven't been following inflation for the past decades.

I think the data shows that real wages have been roughly flat for decades (meaning that nominal wages have followed inflation).

> After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then.

https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...

Reverse. Higher costs lead to higher prices. Cost can be pay or materials or taxes, doesn’t matter to business. Cost is cost.

Price is constrained by efficacy of competitors.

If your only person in town that digs holes, you can use a spoon and charge anything you want. Until someone buys a backhoe and Charges half your price.

Wages are constrained the same way. If your making lots of money, and need more help but only 1 guy available. He is going to get paid a lot. If there 10 people free you offer the lowest that someone is willing to take that you still make money.

If your the government and want to spend money then you just print a bunch of money. This is true source of inflammation.

Reply on news.ycombinator.com