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Comment by taylodl | Hacker News Reader

The fact the Fed is even contemplating a rate hike tells me they're misreading what's going on. The inflation we're seeing isn't a result of a hot economy needing to be kept in check, it's the fact that 40% of China's production is on lockdown and just about every product made, regardless of where it's made, is relying on part(s) coming from China. Supply is constrained and therefore prices are rising. Likewise, supply is constrained and that's impacting industrial output - hence a shrinking economy.

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In my neck of the woods, by far the largest and most impactful inflation has been in the housing sector - 50% price inflation over the past two years. This is entirely attributable to the Fed's pumping of soft assets like stocks, leading to a bunch of paper millionaires cashing out.

Also due to the fact that we stopped building new homes after 08. If supply keeps up with rising demand prices don't change.

I'm currently sitting in a house that completed construction in December. I suspect your information might not be right.

https://www.statista.com/statistics/1041889/construction-yea...

Even your source shows that ~17M homes have been built since 2008. I mean, it's a drop off from previous decades, but it's hyperbole to say no homes have been built.

"stopped building new homes" is clearly an exaggeration, but the spirit of the comment is spot on. Housing starts did collapse around '08, and only returned to the historical average in ~2021. Even so, we're still producing fewer units than we were producing in the 70's--when the population was ~60% of what it is now!

How can there be any doubt that this production glut has played a huge role in the rise of housing prices?

https://fred.stlouisfed.org/series/HOUST

> we're still producing fewer units than we were producing in the 70's--when the population was ~60% of what it is now

The population was growing around 1.1% a year in the 70s; it was 0.75% the last decade and is currently between 0.1% and 0.25% [1].

[1] https://united-states.reaproject.org/analysis/comparative-in...

To compare to housing starts, you need to compare to absolute numbers.

You also need to consider the fact that household sizes are trending downwards pretty consistently, so there needs to be more houses for the same number of people.

This is a complete anecdote, but I am surrounded by new neighborhoods all built in the last couple of years, and some new ones being built now. We also have a BUNCH of new 4 story apartments that have never been seen in suburban Houston before 2020.

I know Houston supposedly got a HUGE influx of people leaving NYC and SV in 2020-2021, but still, my home town of around 20k people just got 2 brand new neighborhoods in 2021 with 500 homes between them all selling for $300k+ when you used to be able to buy a house in town for $50-100k. Even with record breaking housing development, the cost of homes in the last few years in Houston has been ridiculous.

That's primarily linked to commodity/labor prices over the past couple years. And, to some degree because developers know that people buying in Texas have to buy. It's not like they're looking to upgrade from a current residence, they've already moved and have no place to live.

>Also due to the fact that we stopped building new homes after 08.

That's easily refuted with a quick search.

https://tradingeconomics.com/united-states/housing-starts

If you zoom out on that graph, housing starts were well-below average for over a decade and were actually trending down even before 08: https://fred.stlouisfed.org/series/HOUST

Decreased supply along with increasing population(demand) generally yields a shortage and increased prices.

It’s probably also that it really depends on the place. If you’re in SF really does feel like the housing market has stood still.

Housing units per capita is at an all time high. Housing units per working age person is at an all time high, by far.

Housing units per household is at year 2000 levels and in line with history.

Check the data, it's all on FRED

What you're repeating is common conversational talking points spread as fact.

It is true that building slowed in the 2010s, but housing was overbuilt in the 2000s too which neutralizes that. Also number of housing units under construction is at an all time high right now, while population growth is the slowest ever (including immigration) and decelerating.

Look to the Japanese property sector for the future of US pricing. Demographic story is a long one that will take decades to play out though. Immigration policy could change things

Japanese property values are reasonable because their zoning is decided at the national level and local residents have next to 0 power to stop people from building things in properly zoned areas.

That's a big reason too, but also because their population is declining.

https://www.google.com/search?q=japanese+population+growth+r...

What do you think happens to housing units per capita as population levels decline?

The US and China are on the same path, just some years behind. We can ignore demographics for the next handful of years, but it will become very impactful on a 10+ year time horizon. China will deal with the inverted population pyramid sooner than us, so it will be interesting to see if that affects their GDP surpassing the US.

Anyway, the property sector will be super interesting in 50 years, when everything is overbuilt relative to population size. I imagine eventually rents will naturally become deflationary

Japan also had a colossal real estate bubble pop in the early 90s, which created lasting lessons for Japanese real estate speculators.

It's unfortunate the propaganda du jour is "Inflation is caused by $15 minimum wage and other table scraps for the poor."

> is entirely attributable to the Fed's pumping of soft assets like stocks

The fed only stopped buying MBS a month ago.

(Also, they hold like $2T+ of them on their balance sheet. Im sure the 'experts' over at the fed will say this has no effect on the current market)

I can't find any source that says Fed stopped buying MBS.

The Fed publishes its balance sheet holdings publicly.

> a bunch of paper millionaires cashing out [to buy property]

so what did the seller of those property spend their profits on?

More expensive real estate

Yeah, cash out and leverage to bigger investments. Rinse and repeat.

You don't need to sell off stocks to invest in more real estate. Even small-time investors can get margin loans (or use them as collateral) to finance mortgages while avoiding the tax implications of liquidating investments.

Yeah, that loophole really needs to get closed. Meanwhile, Canada is focused on foreign buyers who are too lazy to set up dummy corps... https://www.thebeaverton.com/2022/04/canada-to-ban-foreign-h... (article is satire but perversely accurate)

Unless they moved into a van down by the river, a bigger even more expensive home. Ya gotta live somewhere!

And that somewhere is Florida.

Real estate prices aren't included in inflation (BLS CPI) calculations because those are investment assets, like buying stocks or gold bullion. The CPI does account for housing costs through rent and owner's imputed rent.

> The CPI does account for housing costs through rent and owner's imputed rent.

This can be very roughly approximated by a 10-year moving average on the product of (housing prices x mortgage rates). CPI shelter inflation is currently ticking up each month like clockwork, at 5% and climbing, and it has a long way still to go to catch up with that trend.

Except when it comes time to tax them then homes are taxed each year, in most of the US, on what they are currently valued at on the tax rolls.

Property taxes are indirectly included in the CPI through owner's imputed rent.

https://www.bls.gov/cpi/questions-and-answers.htm

Housing inflation is also exacerbated by low interest rates. I think severe taxes for unoccupied homes is a better solution than bumping rates though, as houses are already completely unaffordable for most and a rate hike just makes that worse for many while not limiting firms that buy in cash.

>I think severe taxes for unoccupied homes is a better solution than bumping rates though

Yeah but unoccupied units is only a few % in the hottest housing markets. This makes sense, considering that the opportunity cost of leaving a home empty is higher if the rent is higher. Because of this I'm inclined to believe it's popular-but-ineffective intervention, like banning foreign buyers (which also make up a few % of overall sales)

I'm sure there are a few different segments that could be targeted depending on the area. Housing inflation really does need to be solved without impacting the ability of a median income person to afford a house though. Housing affordability is one of the biggest economic problems of the modern age.

As with many complex problems, the solution will likely need to include multiple parts. Taxing unoccupied properties and putting limits on who or what can buy residential properties (and how many they can buy) could both be elements of a bigger affordable housing package.

A less complicated solution would be to build more housing. Governments weld a lot of power in this respect. They can use eminent domain to acquire land and they have the capability to finance projects on an unrivaled scale.

If we want low-cost housing, the government can provide that. Instead, we rely on a market that is designed to optimized for highest cost the market can bare.

> I think severe taxes for unoccupied homes is a better solution than bumping rates though

99% of homes are not vacant. The vacancy rate of housing is not significantly different from the past, in fact its actually lower than it was a few years ago. While I don't really mind the idea of taxing long-vacant properties to encourage use and discourage pure speculation, I don't think it'll make that much of a different in residential property valuations.

https://www.census.gov/housing/hvs/data/histtabs.html

It's a combination. But if you look at the actual data as it relates to consumer consumption, pretty clear the primary driver was demand driven.

The port backlogs that started in 2021 were due to excess consumption triggered by stimulus

Retail sales chart: https://fred.stlouisfed.org/series/RSXFS

Tell me you don't see a problem here ^ ?

Couple that with the massive drawdown in Chinese imports and no wonder inflation is blowing up.

United States Imports from China: https://tradingeconomics.com/united-states/imports-from-chin...

> pretty clear the primary driver was demand driven.

Perhaps after the sharp downward in 2020. But it isn't clear what is the primary driver after the 1st qtr of 2020.

That chart doesn't necessarily imply consumer consumption is driving the increase. It could be inflation that's driving the uptick in the chart.

If last year it cost $1 to buy a dozen eggs. And now it costs $2 to buy a dozen eggs, it would cause a spike in the chart. Same amount of purchases, but different prices.

It's hard to tell from that chart whether the rise to $600 billion in consumption is due to more consumption or higher prices. Is it 2 * $1/dozen = $2 or 1 * $2/dozen = $2. We end up at $2, but one is via greater consumption and the other via inflation.

The chart is very obvious. We have a 10y trend of gradual increases YoY in consumption. Then the pandemic hits and we have a 30%+ increase in consumption in the span of a year.

That doesn't happen by mistake, and if you look at the personal income charts it becomes even more obvious.

Also the various spikes in consumption clearly aligns with when the respective spending packages were passed.

The fact that it took a whole year for people to understand the root cause is quite amazing, given that we have this very obvious data. But there was a vested interest in it being a supply side issue, so I'm not surprised

> The chart is very obvious.

It is only obvious to people who have already drawn their conclusions and are looking for justifications to back up their conclusions.

> That doesn't happen by mistake, and if you look at the personal income charts it becomes even more obvious.

Once again, you already had your conclusion and went looking for "data". Personal income spiked briefly and fell back down back to its linear trajectory.

> The fact that it took a whole year for people to understand the root cause is quite amazing, given that we have this very obvious data. But there was a vested interest in it being a supply side issue, so I'm not surprised

Looks like there is vested interested everywhere.

In my experience, people who see the "obvious" in a very complicated issue are agenda driven people with vested interests. Also, my comment was in relation to consumption and inflation. My point was that you can't necessarily see inflation in consumption because you can't tell if the increase in consumption was due to inflation or more purchases. Something you completely ignored.

Durable goods make up ~20% of the US economy at best (~12.7% on average according to the Cleveland Fed [1]).

Food, energy, & financing are >50% of the US economy.

The rest of the economy is primarily services - which have very little impact from the supply of screws & toasters coming out of China going down.

[1] https://www.clevelandfed.org/en/newsroom-and-events/publicat....

most services require some material goods associated with the service. Even if wages aren't raised, those materials would cause prices to rise.

The vast majority of "services" in the US are healthcare, food services, technology, and financial services.

Aside from cloud hardware, the impact on the rest due to supply constraints from China has been extremely minimal.

Very little food comes from China. Almost 0 energy. And financing costs are 100% set by the Fed.

China plays a very small part in the US inflation story.

> "services" in the US are healthcare, food services, technology, and financial services.

with the exception of financial services, all of the other services you listed require commodity materials to work - things like food services require utensils, plates, napkins, not to mention the food. Healthcare has a lot of materials (not just the direct, but indirect materials like reagents for labs and diagnostics) which often come from overseas rather than locally produced.

As for technology, it's such a broad area that i dont know what to say about it but at least for compute, there's a lot of shortages of commodity hardware recently.

Not saying that all of the shrinkage and inflation is caused by the supply chain slowdown from china, but a large percentage of it is. The rest is from labour shortages.

Utensils and napkins are a rounding error on restaurant costs.

> Very little food comes from China.

Food per se may not come much from China, industrial food production is as exposed to supply chain issues involving China as anything else.

> The rest of the economy is primarily services - which have very little impact from the supply of screws & toasters coming out of China going down.

That feels intuitively correct to me, but I’d like to see some data. For example the shampoos and ointments and such used in hair and nail salons all comes from China. OTOH essentially all restaurant food is domestic.

The shampoo used in a hair salon is maybe 10% of the price you pay. The rest is labor, rent (finance), debt (finance), utilities (energy).

The vast majority of traditional services have ~50% of revenue going directly to labor.

> The fact the Fed is even contemplating a rate hike tells me they're misreading what's going on.

Irrespective of the source, the Fed rate hike (well, and QT, which it is expected to also deploy) is the only tool it has available to deal with inflation, which is still, for now, the bigger problem from the perspective of it's mandate.

The fact that (possibly transitory if policy were neutral) slowdown is occurring while the Fed is taking that action, though, means it is especially critical for Congress to take fiscal action to fine tune the impacts or there is a very high risk of recession occurring before inflation is controlled, producing a period of stagflation which is both tremendously painful across the economy and very difficult to escape from.

The problem is Congress is basically asleep at the switch on economic policy.

Congress dumped boatloads of money into the economy over the past two years and failed to provide oversight.

Everyone is pointing at the Fed for causing inflation and ignoring the fact that Congress gave business owners five-to-seven figure payouts in straight cash. You can find out how much businesses around you received from the PPP, and there's no shortage of small companies who received a few hundred grand in aid.

Imagine what you'd do with a $250k check from the government.

I think there is more than one reason for the current inflation. The supply crunch is one factor. The stimulus is another. In particular the Biden stimulus is considerably different than the Trump stimulus in that it gave the money to people who would spend it on goods and services instead of people who would just stuff it into their market accounts. This caused a demand spike right at a time when supply was unusually constrained.

Unfortunately as the stimulus was known to be a short term thing this did not lead to people starting factories to make products to sell. By the time they got it running the stimulus would run out and they would be left holding the bag.

> the Fed rate hike (well, and QT, which it is expected to also deploy) is the only tool it has available to deal with inflation

And the signalling of aggressive hiking, though not all at once, is very important. By saying they will do it and then following through they can change course in a few months depending on conditions.

One of the important lessons from the 1970s was but unfortunately positive feedback loop baked into inflation escalators all based on expectations plus the only way to break the cycle was Carter to recruit Voelker to basically shut things down to damn that curve. Since then the Fed has used an interesting combination of oracular opacity alternating with clarity to try to prevent a repeat of the 1970s situation.

That's one thing that India got right in response to Covid. The primary focus of the stimulus to alleviate the supply side constraints[1][2].

Many were questioning the approach of focusing on supply side, making small changes, observing and reacting instead of a big mega stimulus the likes of USA did. Good to see some merit in India.

[1]https://economictimes.indiatimes.com/news/economy/policy/wai...

[2]https://twitter.com/sanjeevsanyal/status/1461787145027338245

I think India’s position was much more fiscally constrained to even consider a demand-side stimulus. I think a means-tested demand-side stimulus was still warranted given the number of people and industries who lost their livelihood because of multiple shutdowns.

Yes it's the perfect storm for economic theories... increases in the money supply and actual product shortages both causing inflation at the same time.

Meanwhile increasing interest rates are in a nasty intersection with banks and other lenders stuck with low interest 30 year loans on their books, which make them very vulnerable to any new lenders.

definitely popcorn time.

> with low interest 30 year loans

Are those loans supported by other low interest loans they took themself?

Sure, checking accounts and the like.

I was thinking about banks taking loans from Fed.

I may be wrong, not an expert in this topic.

Not usually in the bank's case - we have to hope - and if they are hopefully the various buffers against duration mismatches are sufficient - but then again this was the reason why Northern Rock and a bunch of other lenders went under in the 2008 crash.

Agree that many don't appreciate this, however...

This is more true in Europe than the US. Most of the inflation there is due to (1) Increases in the price of energy and (2) Supply chain issues.

While those are also true in the US, much of the inflation in the US is due to wage increases (something like 40-50% of the inflation I believe). These are likely the result of a number of factors including the US having outsized stimulus relative to other developed countries (especially the fiscal stimulus).

So it is more reasonable for the Fed to consider tightening. And for the Europeans to be significantly slower on their tightening. Thus, what you are seeing in the currency markets where the EUR/USD is decreasing.

I'm pretty sure that's why they waited so long to raise interests, as they thought supply chain issue would be resolved and all will come back to normal.

Although that doesn't really explain the inflation of asset values.

Supply chain issues can explain assert values rising. People/groups put money into assets instead of goods.

Saving rate went through the roof and it's not stuffed under people's mattresses

Just because inflation is being caused by supply constraints, doesn't mean that raising interest rates is an inappropriate response.

Some of it is from greed. Inflation is 8.5% but almost all the major food producers have raised prices by ~15%.

A lot of commodity inputs into food production are up way more than 8.5% (e.g., corn, wheat). And a lot of the farmers inputs (e.g., energy, fertilizer) are up more than 8.5%.

The 8.5% is a weighted, blended average of a lot of things.

So it could be reasonable that if you were selling bread, that the price would need to go up more than 8.5%.

The question is whether their profit margins are up? I don't know.

>The question is whether their profit margins are up? I don't know.

I would naturally expect companies to hold larger profit margins when there is instability. Setting up a business with low profit margin in a volatile business environment would be like building a house on a concrete slab right next to a river that often overflows its banks.

Actually considering the price of wheat from price of bread even 10% increase probably isn't too much. But that doesn't mean there hasn't be similar cost increases in other parts of the chain from commercial bakeries to store and transport.

Isn't that a tautology? In a basket of goods there's almost certainly going to be something that's inflating above average. That means you'll always have some sector (that's inflating faster than general inflation) to blame for "greed".

Were the food producers not being greedy before those price increases as well? I don't understand.

Some of this could be trickle down effects no?

If inflation is 8.5 percent and the seed company raises prices by 9 percent (rounding up cause they arent really sure what inflation actually is), the fertilizer company goes up 9 percent, the tractor parts goes up even more (cause supply chain shortages), and the harvest contractors rates have to go up 9 percent, and the distribution that gets the harvest to the producer goes up 9 percent, what does the final price look like? Has there been analysis like that?

Wait. Doesn't overheating produce exactly the same result? Supplies get constrained because demand went up. So now, demand stays stable and supplies are reduced. The gap is the same, isn't it?

Don't forget about corporations price gouging their customers. There is a little bit of that too. And too much "money printing."

There can be a lot of reasons for inflation.

This is what I think too, and I think it's going to lead to an unnecessary recession. Eventually, hitting the economy on the head with a large enough brick will drive demand down enough that even supply chain issues won't contribute to inflation, but that's an economy with such stagnant demand that it's definitely a recessed one.

   >>> The inflation we're seeing isn't a result of a hot economy needing to be kept in check, it's the fact that 40% of China's production …

Isn't inflation mostly a necessity of printing extraordinary amounts of dollars and euros during covid?

> Isn't inflation mostly a necessity of printing extraordinary amounts of dollars and euros during covid?

Given that other rounds of QE did not produce inflation, no, it's not a “necessity” of that. Money supply is a factor in inflation vs deflation, but do are lots of other things.

All inflation is a direct consequence of monetary policy

not sure of you can categorically claim this - why did inflation in the 70's oil crisis happen?

Or is it? we really have very few experiments to determine this. War can certainly cause both inflation, and deflation. While monetary policy can adapt to an extent, it's unclear that it's the primary driver of inflation in all circumstances.

Monetary policy is a factor, but definitely not the only factor. Supply shock inflation is pretty common throughout history.

> supply is constrained

and money is not constrained. What could go wrong?

Inflation should take care of demand. A constrained supply is going to move the demand curve to higher prices - which we're seeing. The higher prices will bring demand in alignment with supply.

Traditionally, to deal with the problem of constrained supply you would lower rates to make more capital available in order to create more supply-producing assets. I don't think the Fed should lower rates in this situation because we all know that building more factories won't solve the supply chain issues due to the pandemic. However, we need to balance that against investing more in automation since having fewer workers due to the pandemic.

They're in quite the pickle!

> Inflation should take care of demand.

Indeed, may as well buy now (if you can) since you'll get less for the same money in the future.

> The higher prices will bring demand in alignment with supply.

Unless the stimulus cash injection policy allows people to continue to buy now (see above).

With everything opening back up and experiencing a labor shortage it would be very difficult to justify any further stimulus monies. I don't think we have to worry about that.

Economists expected a rise in inflation due to stimulus spending in 2020 - that had already been factored in to their forecasts. What has surprised them is the rate of inflation is higher than expected. I'm arguing the reason they're surprised is they were only considering financial policy and not also including the effects of constrained supply - which is also why they also missed forecasting a shrinking economy.

Hayek’s greatest contribution to economics was to show that society is far more complex than we realize, with little pieces of knowledge dispersed among millions of individuals. “The curious task of economics,” he famously wrote in “The Fatal Conceit,” which he published in 1988, “is to demonstrate to men how little they really know about what they imagine they can design.”

https://www.washingtonpost.com/news/volokh-conspiracy/wp/201...

> ...because we all know that building more factories won't solve the supply chain issues due to the pandemic.

Wouldn't it be wise to start building more factories so that a supply chain disruption in one area doesn't cause such painful shortfalls in supply on a global scale? It seems like a China-free supply chain would be making bank right now. I guess you'd have to weigh the time to ramp that up versus the odds of China locking down severely again. Still, I would hope that a lasting consequence of this would be a diversification of supply chains to mitigate this kind of problem in the future.

I think it's mostly due to the Federal Reserve printing trillions of dollars out of thin air in 2020.

https://fred.stlouisfed.org/series/M2SL

The inflation we're experiencing now is a lagging indicator of the massive stimulus of 2 years ago.

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