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Comment by yodsanklai | Hacker News Reader

I don't understand inflation. I understand that it's a measure of the price of things, but for me there should be two types of inflations 1. a dilution of money. Let say a central bank injects a lot of new money, then all prices will be higher, but salary will be higher too, and the overall effect is neutral 2. some prices increase due to change in supply or demand (e.g. gas or cereal), but salaries and everything else is unchanged.

In both cases, there's inflation according to the definition, but the second case is very different than the first, and it doesn't impact everybody equally (consumer vs saver).

I must misunderstand something because I never see this distinction in the medias.

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An increase in the supply of money doesn't correlate to the distribution of that increased supply into the hands of consumers (by way of salaries). Prices go up, and the cost burden of those prices are unequally distributed. Raw materials prices are usually first to increase in price and labor costs usually lag. Labor costs are usually determined by supply and demand of available labor rather than underlying raw materials costs or availability of money supply. The ability for governments and companies to borrow at low interest rates usually has a higher impact, but monetary policy uses interest rates to regulate the impact of inflation.

As far as labor competition, that only works if there are a wide variety of employers, rather than a few primary employers (Amazon, Walmart) who can effective set wages prices. Labor competition has also gone international, driving labor wages down in the US. Factors like these account for the relatively flat growth in bottom-level wages relative to CEO/shareholder wages, which have skyrocketed throughout the past 40-year neoliberal globalization period.

As far as this round of inflation, monetary supply arguments are a bit specious. The Fed's 'quantitative easing' (money printing goess brrrrr) is pretty trickle-down Reaganomics in practice, although they could have just printed monthly checks for average citizens instead of giving it all to large banks and corporations, who use it for things like stock buybacks.

A more plausible explanation is breakdown in the global supply chains and failure to build up resilient infrastructure domestically. Consider gasoline and diesel prices, which have knock-on effects in all transportation-related sectors (food delivery, goods delivery, commuter costs, etc.). In 2015 US crude oil exports were allowed for the first time since the early 1970s and at least one major refinery was closed. This has clearly impacted the supply of refined products in the USA:

"U.S. Fuel Exports Are Draining Domestic Diesel And Gasoline Supplies, May 2022"

https://oilprice.com/Latest-Energy-News/World-News/US-Fuel-E...

This is at least a simple concept: reduce supply when demand remains constant and prices will go up, aka inflation.

> instead of giving it all to large banks and corporations, who use it for things like stock buybacks.

this is nonsense and has no basis in reality, as far as I know

It's reported pretty frequently, although the Fed has put some limits on stock buybacks:

Background (ABC): "The Fed has bought roughly $2.1 trillion of Treasurys and mortgage-backed securities since the pandemic intensified in March [2020] That has flooded many short-term lending markets with cash, making it easier for many banks to borrow."

https://www.bankingdive.com/news/federal-reserve-stock-buyba...

> "The Federal Reserve said the country's largest banks can resume stock buybacks in the first quarter of 2021 with certain limitations, after the central bank released the results of its first-ever "mid-cycle" stress tests Friday... JPMorgan Chase was the first bank to announce it would resume share repurchases. Just minutes after the Fed released stress test results, the bank announced its board approved a new share repurchase program of $30 billion."

It's not just the banks, the airlines did the same thing:

"Companies that binged on buybacks now seek bailouts from taxpayers, March 2020"

https://www.cnn.com/2020/03/24/business/bailout-buybacks-air...

Yes the fed has taken actions that have suppressed interest rates. This makes it cheaper for everyone to borrow. What companies do with the money (like buyback shares, which is equivalent to a shareholder dividend) is a wholly separate issue

>but for me there should be two types of inflations 1. a dilution of money

Outside of the fact that "some people say" (generally anti-fed types) that inflation is an increase in the money supply, why is it you think that?

In economics inflation has a specific definition: a general rise in the price level. It can be caused by all kinds of things. A rapid rise in the money supply is one. A breakdown in available supply is another.

>Let say a central bank injects a lot of new money, then all prices will be higher, but salary will be higher too

Maybe, maybe not. There's economic theory around the stickiness of wages; they don't react as quickly as the prices of goods. And that's understandable. It's easy to raise wages, but difficult to reduce them.

I would argue that goods prices also don’t display the same elasticity going down as they do going up. Whether they are less sticky I don’t know but will definitely look into relevant literature.

Few sellers into a market like the price going down, and labour prices are famously downwards inelastic, but price wars are a thing and many markets have an expectation that prices will go down, e.g., cloud computing costs in recent years. It's a mistake to try to completely detach your understanding of inflation from the commercial imperatives in specific markets.

I would venture that sellers overwhelmingly prefer stable prices to increasing prices. Rising prices require adjustment, which requires resources, and makes you the focus of customers' ire for what amounted to trying to keep things running the same. Meanwhile, any seller raising prices is setting up for a short- or long-term substitution effect away from their products.

Increasing prices in a market means increased turnover for those who sell into that market. You can easily find examples where increasing prices are worse for sellers than price stability, e.g., if increased costs eat up more than the new income or if the price increases happen in the context of a shrinking market, but as a rule price increases show that the market favours sellers over buyers.

> It can be caused by all kinds of things.

In theory water can run uphill. Sometimes it even does. But as a matter of overwhelming practice it is obvious that if the general price of goods is rising it is the government doing something. Otherwise there is nearly nothing that could cause a correlated rise of the price of everything. Eg, in this case the most likely culprit is wilfully shutting down the global economy and handing out money to everyone which is even worse, economically speaking, than their usual handout tactics to very wealthy people.

Maybe something like sustained moves in the oil price or coal price could do it. But the western governments have an official policy of annual inflation and the only tool they have is money printing, because it isn't like they invest in oil wells.

PS Maybe demographics, more mouths & higher prices. Here are Estonia's demographics - https://en.wikipedia.org/wiki/Demographics_of_Estonia. Looking at it, a change in the labour force that major could be a big contributor.

>In theory water can run uphill. Sometimes it even does. But as a matter of overwhelming practice it is obvious that if the general price of goods is rising it is the government doing something. Otherwise there is nearly nothing that could cause a correlated rise of the price of everything.

This caused general inflation of nearly everything https://en.wikipedia.org/wiki/1970s_energy_crisis

There is never a perfectly correlated rise in the price of everything no matter what happens. Some prices are stickier than others.

Ah the 70s energy crisis. I remember it like it was ... half a century ago. In fact I don't remember it because I'm younger than 80. I wasn't even alive.

Most people on this forum weren't even alive then. And we now live in an era where governments are inexplicably opposed to any of the easy options to secure energy. We should have been going nuclear in the 80s, 90s, 00s, 10s and now the 20s.

So while I'm happy to say that if we have an energy crisis that will cause inflation it isn't like we didn't see it coming 30-40 years in advance. The anti-fuel drive of the last decade hasn't helped any either. And I still blame regulatory interference.

> The anti-fuel drive of the last decade hasn't helped any either.

So either you're denying the claims that CO2 is causing climate change/catastrophe or you simply don't care about the future of civilisation/nature.

Which of these is it for you?

What, you can only think of 2 options?

It doesn't matter what effect CO2 is having on the climate, the future of civilisation will be more rosy if we maximise the availability of fossil fuels short term while transitioning to something more workable long term - like nuclear. Even renewable might work these days although it doesn't have the enviable technical profile of nuclear power.

The oil crisis coincided with US inflation, but was not the cause:

https://www.investopedia.com/articles/economics/09/1970s-gre...

TLDR quote:

> The Great Inflation was blamed on oil prices, currency speculators, greedy businessmen, and avaricious union leaders. However, it is clear that monetary policies that financed massive budget deficits and were supported by political leaders were the cause.

Yes, I know about Milton Friedman's quote that inflation is always and everywhere a monetary phenomenon. He was oh so very wrong about most things:

https://evonomics.com/the-truth-about-inflation-why-milton-f...

This would be interesting to discuss, but I just don't have the time... :(

Encyclopedia Britanica defines inflation as: inflation, in economics, collective increases in the supply of money, in money incomes, or in prices.

The first definition was the one used for centuries and the one that should still be used unless you are trying to confuse cause for effect.

> In economics inflation has a specific definition: a general rise in the price level. It can be caused by all kinds of things.

When the prices of all goods and services go up, it is the thing you measure them against that is going down. If there were no currency, there would be no inflation, only changes in relative prices.

The old Milton Friedman quote is still true, as far as we know:

> “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

What has changed it that "the quantity of money" has become much harder to figure out.

> all prices will be higher, but salary will be higher too

Salaries are the price of labor. As other prices go up, there is no particular reason these prices wouldn't do the same.

If non-labor prices rise before salaries, salary increases would need to compensate for the already paid higher prices.

> Outside of the fact that "some people say" (generally anti-fed types) that inflation is an increase in the money supply, why is it you think that?

Because for much of our existence, trade has been facilitated by commodity-based currencies which would inflate when new deposits of the commodity were found.

Inflation isn't 1 thing and it doesn't have 1 cause. There are many ways to measure inflation.

What you are suggesting, is exactly what economists and central bankers try to figure out. To adjust monetary policy correctly you need to differentiate these things.

Many of the policy recommend associated with inflation are really only associated with the first type of inflation. If its supply sides, then the recommended responses are totally different.

2008 is actually a good case, the central bank didn't react correctly because high oil prices were giving them false information.

> I must misunderstand something because I never see this distinction in the medias.

The media doesn't understand theses things either. And neither do the people listening to it.

Inflation is a tricky concept and attempts to grasp it using purely monetary intuitions are liable to confuse. Inflation is a summary statistic that tries to compress the behaviour of many markets, in an economy where markets come into being and wither away, into one time series, and summary statistics of complex phenomena rarely behave simply.

Blair Fix has a nice essay that outlines some of the problems with the conception of inflation that lies behind the CPI: https://economicsfromthetopdown.com/2021/11/24/the-truth-abo...

There are two types of inflation:

- PRICE INFLATION, which is typically what is tracked by the CPI. If the CPI was, say, 100 last year, and 105 now, it means there was 5% inflation in the price of the basket of goods tracked by the BLS.

- MONETARY SUPPLY INFLATION. This is the total amount of currency in circulation. The US Federal Reserve publishes the M2 money supply. This is one factor that affects PRICE inflation (the first type), but if people don't spend a lot of the money supply each year, then prices don't increase a lot. The other factor affecting price inflation is MONETARY VELOCITY.

As for what affects relative differences (some goods getting more expensive than the general inflation, while others not as much), it is supply or demand. As demand changed, especially during the pandemic, supply struggled to adapt and match it, and maybe overshot and so on. The economy is not a steady state.

> Let say a central bank injects a lot of new money, then all prices will be higher, but salary will be higher too

I'm not in a place to fetch any sources right now, but hasn't it been proven that wage growth has not been keeping up with increases in money supply, or inflation over the last couple of decades? Particularly for manual labor or service jobs.

You seem to assume that one would automatically track the other, but the increased supply in money isn't going to consumers directly. Not to mention that even if it would "trickle down" at some point, your wage increase lags in perspective to inflation and you'd always be getting hit with a reduction in purchasing power for some period of time.

During the Bretton Woods era, the quasi-gold-standard that reigned until Nixon floated the dollar, hourly wage rates and productivity in the US were pretty closely correlated. In the years after, which saw a huge realignment in finance, the 70s oil crisis, and a general weakening of labour power, this relationship broke down, with an almost complete severance of the relationship.

Cf. http://cloudfront.mediamatters.org/static/uploader/image/201...

Wage growth has been keeping up with inflation, you are maybe thinking of productivity?

There’s no such thing as ‘the economy’. There is only ‘lots of people making independent decisions’

Inflation is a measurement one of the observable effects of all of those decisions over time. Businesses deciding how to set prices and when to offer discounts and what products or services to offer. Customers deciding what businesses to purchase from.

Inflation isn’t something that ‘does things’. It is a thing that happens.

And inflation alone isn’t a very interesting number - what really matters is economic activity.

Like, if Alice sells widgets for $10, and Bob has $100 to budget for widgets, he’ll buy ten widgets.

If Alice increases her prices by 10%, if Bob can’t also increase his widget budget, he’s going to wind up only buying 9 widgets. But if Bob also finds he can increase his budget by 10% he’ll still go ahead and buy 10 widgets.

The distinction you’re making above is just between cases where the same degree of inflation is accompanied by different changes in economic activity.

And the causal relationships between inflation and economic growth are not simple, linear, universal, or unidirectional.

A lot of it had to do with the really weird demand patterns that developed over the last two years. We went from 100 demand to 20 as lockdowns happened, then 200 demand as economies opened, then back to 20 again as a new wave of lockdowns took hold.

If you were a manufacturer, you had no real way to deal with this unpredictability. Do you add capacity to cater to the post-lockdown 200 demand? If you do, you might end up with too much inventory as demand goes back to the usual 100.

Throw in the clogged up ports and higher input costs due to Russia-Ukraine war and we have this strange period where everyone is confused and no one really knows what to do

>If you were a manufacturer, you had no real way to deal with this unpredictability. Do you add capacity to cater to the post-lockdown 200 demand? If you do, you might end up with too much inventory as demand goes back to the usual 100.

Retailers, too. Both Target and Walmart have reported having far too much inventory. It's one thing when one store has a fire sale on a product it bought too much of, but multiple stores finding that they did so across the board? That's very unusual.

Have salaries increased over recent years in line with the increase in money supply? I’ve certainly not seen this, but this is only anecdata.

At my (consumer) level, the only obvious effect I can think of has been cheaper interest rates for loans.

During Covid, wages grew faster than ever in recent history, but slower than prices. On average.

They have not. However I would expect it to even out in the near future. Real wages won’t stay down for long.

> 1. a dilution of money. Let say a central bank injects a lot of new money, then all prices will be higher, but salary will be higher too, and the overall effect is neutral

More money does not necessarily mean decreased buying power. If you have more people or if the money isn't in circulation, the buying power will stay the same, therefore not causing inflation.

>If you have more people or if the money isn't in circulation, the buying power will stay the same, therefore not causing inflation.

Exactly. Money is just another good in the economy (albeit a bit special). Its supply and demand ebbs and flows like any other.

This is one of the things I find so funny about the known quantity trait of Bitcoin. Why would you want an underlying currency that can't increase its supply? It will inevitably increase in value and people will substitute for other methods of exchange.

Because if people use is less, it will decrease in value, making it attractive to spend, reaching equilibrium. It's not perfect, but either is "someone in charge prints a ton of money and gives it to their friends".

Typically when we say “more money” we mean more money in circulation. What’s the point of any other meaning?

These claims are usually supported by graphs about how much USD/EUR/... are provided by the respective central banks, which does not measure money in circulation, but total money existing. It's important to distinguish between the two since they are easily confused and a lot of existing money not in circulation can lead to rapid inflation if something mobilizes this money, which might be what we're seeing right now.

I think what's missing here is in case 1, it's not just the amount of money, but how much money is chasing each available good. You can imagine if the money supply doubles, a loaf of bread can be the same price as before if there are twice as many people demanding the same portion of bread (for a very crude approximation)

Or to put it another way, maybe case 1 is demand-side inflation, and case 2 is supply-side inflation.

If the money is doubled but most of it goes into offshore investment funds because those on the receiving end already have enough bread then the price of bread doesn’t really change, but venture cap funding becomes more readily available.

And P/E ratios go to fantasy land!

An investment fund is not a bank vault. The money leaves the fund and enters the economy. In particular it will be invested in companies, which will use it to buy assets and pay wages. The effect is similar as if you had spent it in the first place.

It’s hard to imagine that demand for bread doubling doesn’t result in the price going up. I don’t think this is the example you were going for.

Lyn Alden wrote a very understandable guide to "inflation" which turns out to be different beast that are lumped together: https://www.lynalden.com/inflation/

See also previous HN post on inflation: https://news.ycombinator.com/item?id=27099536

You're going down the ladder instead of up. We measure inflation via CPI where CPI is really just an indicator. When CPI hits 8.1% we know inflation is above expectations but that doesn't mean inflation is literally 8.1%. Only that it's within that order of magnitude. Going down the ladder to contributing statistics like money supply gives you even less of the true picture. Inflation is systemic can't really be boiled down to a number at all.

We have the same argument over "true unemployment". There absolutely isn't any possible way to come up with a number to accurately represent the massively complex employment situation. We use U3 as a key indicator.

Think about it like measuring how smart you are via your SAT score. It's a good indicator but it's not the whole story. And when there are sudden shifts it implies something is wrong.

I'm trying to remember where I heard this from, but I found this idea pretty useful.

Mainly because I know what inflation is, but I didn't spend enough time thinking about what it means and what it tells me.

> Inflation is simply the delta between a past price and the current one, over a set of goods / services, which we represent using an average of some kind, usually ignoring certain kinds of price changes. For example some inflation measures ignore rent.

> It would be useful to have every measure of inflation cite the raw vector (which would be good to standardise) as well as listing what it excludes visibly.

> The underlying vector would show us much more, such as are all prices increasing / decreasing? Are some going in the opposite direction?

This would give us space to have a more nuanced discussion about causes and how much weight they may have.

Mistakes / errors in recollection are my own =)...

Inflation isn't meant to measure the change in consumer purchasing power.

There's CPI and PPI and other measures to measure how prices change to different groups.

If you want to measure the change in purchasing power just measure corporate revenues by sector to PPI by sector. Or CPI to HH or personal income.

> just measure corporate revenues by sector to PPI by sector. Or CPI to HH or personal income

This sounds very cryptic to me. Could someone explain what this means, and why it measures changes in purchasing power?

CPI is supposed to measure the change in prices as it affects consumers.

It's obviously not perfect. Not all consumers have the same type of spending. In particular, the housing component...

Anyway - if consumer prices go up 10%, but HH income goes up only 2% - then consumers have lost ~8% of their purchasing power.

Inflation is an increase in the money supply.

If you see everything from this lens then it all makes sense.

Prices of specific commodities and consumables may rise or fall, but if the money supply and demand remains the same the overall combined price of everything remains the same.

Inflation is an increase in money supply over an increase in the value of things to buy with money (or we could say the size of the economy). Money supply could increase, but if it is balanced with a growth in good supply, inflation doesn’t occur. This is why it can’t be computed directly.

That is not true, inflation is exactly when the money supply increases. It doesn’t matter what happens to “good supply”. In fact the supply of goods increases in response to a price increase. That’s why most people think a low level of inflation is healthy.

if money supply doubles and velocity halves, there shouldn't be inflation.

Production can overcome monetary inflation. PCs don't cost $5,000 anymore even though there's more US Dollars circulating.

Cities that gain many high earning jobs will see housing inflation even though employers do not create money. This is independent of national level monetary policy.

Let's say your money supply is based on gold, which is relatively fixed. However, your economy and population keep growing. So a loaf of bread cost 1 gram of gold one your country only had 1 million people, but now you have 100 million people and the same amount of gold you are using for money. How much does a loaf of bred cost (bread production has gone up 100 times to match population increase)? (simple estimate: .01 gram of gold). So deflation has occurred. If your gold supply increased 100 times, the prices wouldn't have changed.

Jeff Snider from Alhambra Partners routinely makes this distinction: https://alhambrapartners.com/2021/10/13/perfect-time-to-revi...

They have a great podcast: https://podcasts.apple.com/au/podcast/eurodollar-university/... and routinely appear on finance podcasts to explain this.

There is monetary supply inflation (increase in quantity of money), which WOULD be neutral if you would do an airdrop to everyone in economy in the same proportions and this would then be the same as price inflation, but that kind of inflation would be useless. What is going on is the goverment prints money, gives it to the largest economic actors, to 'stimulate the economy' and then it 'trickles down' and we get increased volatility of prices which usually means a bigger increase in more necessary consumer goods (food, housing).

PPP and Covid unemployment checks aren't pure trickle-down.

Obviously giving money directly consumers is going to cause more consumer price increases than people who don't buy consumer goods.

> the overall effect is neutral

Even if the injected money were to be distributed evenly, people holding a lot of savings in the form of cash are penalized when compared to those with assets and debt.

Different schools of thought have different ideas regarding the best perspective on inflation.

Price inflation measured through a basket is what media is usually referring to. .. that can be impacted by all sorts of things, be it price hikes in some industries or broad and steady price increases through prior monetary inflation.

No inflation is neutral though. Even monetary inflation has beneficiaries as those closer to the source of new money pay old prices the longest, for example.

There is expected and unexpected inflation https://www.oxfordreference.com/view/10.1093/oi/authority.20...

You are right, and some central banks only use the basic interest rate as a remedy in all cases. It seems to me that case 2 cannot be solved through this mechanism.

My feeling is that most media is close to financial markets and gets corralled into its point of view.

>You are right, and some central banks only use the basic interest rate as a remedy in all cases. It seems to me that case 2 cannot be solved through this mechanism.

It can. Interest rates rise -> money becomes more expensive -> investment dries up -> demand is quenched -> things become cheap again

It seems to me that the medicine is worse than the disease in this case.

The alternative destroys the whole economy.

Money is a social construct. If you untether it from any notion of value, it dies, and we're back to barter and subsistence farming or switching to a foreign currency.

https://www.investopedia.com/terms/h/hyperinflation.asp

Mathematically if the supply of money stays fixed there cannot be general inflation. Some prices could go up but the overall level of spending must be constant (so buyers would substitute or else other prices would decrease).

Mathematically if the supply of goods and services go down, but the supply of money stays fixed, prices will go up.

I would expect that reducing the supply of oil (and to a lesser extent natural gas) would cause that sort of things, by reducing the ability to transport goods, to manufacture all kind of things, and even to grow food (besides tractors running on oil, most fertilizers are made from natural gas).

There's this constant tug of war between supply/demand (also applies to powerful/regular folks, those with money/without, etc). Inflation is the delta by which one side is winning against the other.

> I don't understand inflation

Justifying inflation is a bit like justifying climate change: everyone (or at least most) agree on the effect but there are as many chains of causation as people who agree on the effect

Just a funny observation. If you want to get 100 replies to something on HN, just start your post in good faith with: "I don't understand".

Inflation is skimming from those with savings by those who control the economy.

We are experiencing both. During the pandemic governments inflated the money supply to fund vaccines, cash payouts to citizens, and huge programs to keep payrolls flowing. The pandemic also increased demand on consumer goods because people were spending their stimulus checks on goods since you couldn't go out or travel. Add on the fact that there are shortages of goods because many producers were slowed down significantly by lockdowns and staff shortages.

So we have both fewer goods available for purchase and less valuable money to buy them with.

Consumer spending decreased during Covid, then rebounded. The extra money was poured into the stock market and cryptocurrency bubbles.

https://www.bls.gov/opub/ted/2022/changes-to-consumer-expend...

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