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Comment by rory | Hacker News Reader

Have we ever had inflation that was not caused by demand/supply issues? Isn't that kind of definitional to inflation?

The definition of inflation is nominal changes in prices. This can be caused by supply/demand shocks, which is where the term "transitory" comes from--inflation during a period of economic transition. The alternative to this is persistent inflation, which is largely the result of monetary or fiscal policy, and not due to supply/demand "issues" (well, or you could say, the only market where there is an issue is the currency market)

If we had high persistent inflation, we would expect long term, consistent increases in prices. This is compared to "normal" persistent inflation, which we typically target around 3%. This target is set by the Fed.

If we wanted, we could target 10% inflation on a persistent basis by using monetary policy that was deliberately inflationary.

The argument being made by the government and by the media is that our current inflation (40% for cars, etc) that weighs out to 7.5% is the result of a supply/demand shock, and which must be resolved by working out these short term market inefficiencies/failures.

There are real arguments for monetary inflation (especially wrt asset inflation), but the fact that cars are up 40% and housing vacancy rates are so low and our supply chain is so backed up makes a very tangible case for us being in a transitory period of inflation which can not be dramatically improved by monetary or fiscal policy.

Housing vacancy rates will go up. Landlords and those selling houses just need to keep pushing the price higher until the market will no longer bear it; there is some price at which people will no longer occupy such a high fraction of houses.

I think widespread disbelief of inflation, and hesitancy to embrace the 'new normal' has lead to sticky prices. These sticky prices means some goods and labor is 'cheaper' than it would otherwise be, leading to 'shortages.' In part I explain such low unemployment rate at present due to labor being a couple percentage points cheaper than it was a year or two ago.

I think the point being made is that the portion of inflation caused by used car inflation is likely transient & due to a well-known cause (automakers shut factories due to Covid) that is being remedied. The question all along has been how much of inflation is due to obvious transitory effects like this one.

Vehicles are not only "behind" on supply (which is difficult enough to overcome in an industry that's so dialed in to production capacity that quick bumps in production aren't possible), but they continue to be produced at below normal capacity and so the shortage is increasing, not catching up.

The chip shortage is playing an outsized role here. Vehicles are being delivered with IOUs to come back in a year or two to have chips retrofitted in order to enable options listed on the window sticker. Everything from climate control and heated seats, to wireless phone charging, to autostop/gas saving measures, to lane keeping and collision avoidance. And delivery numbers are still extremely low.

Catching up means either years of bringing up total factory capacity to beyond pre-covid levels and catching up on the chip shortage... or a recession or other event that suppresses demand.

Transient in this sense only applies if we're taking about fractions of a decade, not fractions of a year.

> Transient in this sense only applies if we're taking about fractions of a decade, not fractions of a year.

I don't know the answer to this, but if the choice is either let inflation run hot like this for another couple of years or engineer a recession, is there a clear policy answer? The benefits of a hot economy seem to outweigh the downsides from the perspective of high employment, but perhaps not in other ways.

Just 2 years ago, the worry was whether we would end up in a deflationary spiral and have no real policy levers to exit. Given the lag time for any policy response to take effect, it seems really hard to get correct. I definitely don't envy anyone who's making policy decisions on this.

I think this sort of comment isn't very helpful. This isn't a theoretical discussion: when people discuss this issue they're asking what we should do about the specific demand/supply issues. The answer to that question depends on the details.

To use a ridiculous example, let's say the problem was a surge in the price of Christmas trees. One solution to the problem is to change central bank policy; a second solution is to do nothing and wait until December 26th. Clearly the price increase is caused by demand/supply issues, but it's possible to think more deeply about what's causing the demand and supply and come up with different prescriptions for how to deal with it.

Conversely, I think it's unhelpful to excuse away inflation as supply/demand issue and explain that if you just exclude all the things people buy, inflation really isn't that bad. Inflation in the 70's was also caused by supply/demand issues and problems with supply chains (that's what an oil shock is).

Obviously the specifics determine the appropriate response, but they don't invalidate the headline number. That's the same logic the inflation panic folks used to pretend there was high inflation when there wasn't.

If all you want to do is point at the headline number and go no farther, that’s fine. But it seems fairly pointless unless the goal is just to kvetch about something that’s generally unfortunate. In this thread nobody is denying the headline number, they’re just pointing out that a lot of these effects may cease to exist in the future even if we do nothing else. Hence maybe it’s not something to panic about.

As `treis was pointing out, what matters is demand/supply of what. Assets? Labour? Cash?

Inflation can be caused by "demand/supply" issues with currency, namely if much more currency is 'printed', currency may become less dear and thus price of goods come up.

Whether you want to apply that to our current situation or not, demand/supply applies to dollars as much as anything else.

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