Inflation Has Outpaced Wage Growth. Now It’s Cutting into Spending
wsj.com
wsj.com
For obvious, numerous reasons we are producing less stuff now than before, so we have less available to consume.
Prices must outpace wages, or we get empty shelves, or we can ration. But we MUST consume less on average.
We could talk about taking from the rich, but actually the rich don’t consume all that much in aggregate, so that doesn’t help much (wealth and income don’t matter for this purpose, only consumption).
For better or for worse, human labor and fossil fuels are the two most indefensible ingredients of our current global economic system, and the supply of both has been badly disrupted.
Obviously a lot has changed since the 70s, but why exactly aren't we having 70s stagflation or worse in the US? Do domestic oil and gas play a role?
If America were producing its own things alone, the supply shock would have pushed inflation much much higher.
9.1% isn't massive?
We are extremely privileged to be able to acquire resources even if one producer goes down.
Optimistically I’d guess we’re looking at 3-5 years to get inflation under control and that might include a recession (thats already started).
But the easiest way to guess at the future is to look at similar problems of the past.
Bank of Canada already said inflation won’t be under control for 2 more years.
What it does sound like is younger people hoping for a recession because they think it will collapse housing prices. They’re wrong, but what’s new.
2 quarters of negative GDP growth is a recession. We’ve had 1 quarter so far and lay offs are increasing.
I hope not, but with increasing rates we stand a good chance.
The highest authority on this matter is the NBER. Their definition is pasted, below. I don’t see a significant decline and so far it has not impacted employment. We’re still adding a quarter million net jobs each month.
“A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
> What it does sound like is younger people hoping for a recession because they think it will collapse housing prices. They’re wrong, but what’s new.
I wish I had your crystal ball.
we had strong unions back then which would demand double-digit COLA raises in salary producing a wage-price spiral.
given how people could actually afford homes back then, though, i don't think this was a particularly bad thing.
what we have now contains all the inflation in the system to the upper class and asset bubbles.
we need either to have the cost of housing deflate or the wages paid to inflate. it will be less painful to inflate wages. this isn't what we're going to do though.
Are you sure? Numbers I looked at suggested both global and US manufacturing output is up both in terms of output and percent of GDP. So consumption could rise.
https://www.macrotrends.net/countries/WLD/world/manufacturin...
For example:
The only way that prices will fall is if demand wanes, or supply increases.
No one said people starving is great for the economy. It’s a statement of fact that inflation will not abate unless demand falls or supply increases. It’s pretty hard to increase supply right now.
This is certainly what traditional economics says (they consume, rather than invest) because it's what rich people want us to think, but it doesn't hold out.
For one thing, their private jets and charter flights eat up a lot of fuel. Their lifestyles aren't free.
Second, attribution is a hard problem. When all the poor people drive to work in offices in places chosen by rich people, to create surplus value for the rich, who is consuming all that gasoline? Is it the rich, who benefit from this economic system and the poor being forced to participate? Or is the poor, who are the ones directly buying and using the fuel? Hard to say; at the individual level, attribution is probably impossible.
Third, the whole notion of "poors consume; the rich invest" is only true in proportionate terms. Sure, the billionaires don't directly consume 100,000 times as much as average people--simply because that would be ridiculous. No one can eat 100,000 hamburgers for lunch. But they do consume 100-1000 times more than average people--fuel is a big one, and those 20,000-SF houses aren't cheap to maintain--and this adds up. Their footprint on resources is bad enough; their overuse of land is destructive--this kind of private wealth is a catastrophic misallocation of resources.
Finally, what tends to happen with the rich is that they don't put their money into direct consumption (because, again, there's no hedonic payoff to having 100,000 hamburgers for lunch; 99,995+ will go to waste) so much as they use what they have to further secure personal and familial advantages, both economic and political. That's what this investment is: the configuration of society by the last round's winners to ensure they'll win the next round. This has resulted in an economic system that benefits them and keeps the middle classes comfortable enough to survive but--you're right on this--is unsustainable.
You're absolutely correct to say that "hit the rich" is far from sufficient here. We in the middle class are going to need to sacrifice. Thing is, no one's going to sacrifice anything with the current upper class in charge. Would you give up anything for these people and the society they've built? I sure wouldn't. You can't ask people in the middle classes to eat less meat and fly less often if you're taking a private jet to Davos. Neoliberalism has a lot of problems, but a big one is that these WEF people have literally none of the moral authority on which they seem to believe they operate.
[1] https://www.bloomberg.com/graphics/2022-wealth-carbon-emissi...
No matter what the economic system, somehow you need to convince someone to work in the sewer and operate complex orgs of thousands of people.
One option is to use a gun - you point it at people you don’t like and make them sewer workers.
Another is to arbitrarily hire and have no consequences. This leads to incompetence and mismanagement, as often happens in government everywhere and in socialist / communist nations that nationalize industries and staff them with political hires.
In capitalist societies we give more stuff to people who do hard jobs and / or are highly effective. This is the carrot - work a high stress or shitty job and get more stuff. The stick for failure is you get less stuff, but at least you aren’t shot in the head as they do in other systems.
You can argue until you’re blue in the face about neolibs / the rich / whatever. Doesn’t change the fact that inequality is a requirement for society to function if you expect someone to work in shit-filled holes underground all day while others pontificate about philosophy.
I think you realized that you were on shaky ground and stuck "effective" in there, but I'm going to call you on that one: please, explain to me how the strong correlation between shitty jobs and shitty pay is entirely about leveraged value creation and not at all about social status and Rules for Rulers?
Please, if you don’t like America then don’t come here, or if you are here just leave. However a lot of supposed socialist utopias in Europe have effectively zero immigration that allows you to be a full citizen on their pension rolls. Just see how hard it is to immigrate to the Netherlands or Norway.
That won't stop me from trying.
It's not about how they spend money, it's about how they "make" money. It's about their passive income.
The economy is a machine that squeezes workers: it pays as little as possible while extracting as much value as possible. The juice that results from the squeeze then gets distributed according to who owns the financial assets. One person's passive income is another person's obligation to pay up while receiving no actual work in return. The true excess of the rich is the juice from the squeeze -- getting paid for being rich -- not in the particulars of how they spend it.
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Ok, so that framing was hyper aggressive, more than I think is fair, because there is another side to this story: as a consumer, you get to put the squeeze on producers and make them compete, investment carries risk, consumer excess exists too, etc etc. You know the story, you've heard it a hundred times before. However, I'd wager you have heard the "how capitalism works for you" side at least 10x as often as the "how capitalism works against you" side, which should be suspicious, because both are true and both are highly relevant to your life. Also, if you felt that the paragraph above was hyper aggressive, you should also feel that the traditional narrative is hyper aggressive, because they are mirror copies of each other.
This hints at the real issue which is that our policies and culture have been hijacked to aggressively favor capital at every turn. The inevitable result is "the wedge" graph, US economy expands 5x while 80% of people see a regression in wealth. The rising tide does not float all boats. Actually, it sinks most of them. Even the meager promises of the "rising tide" social contract have been broken. It's time to push back.
A property that makes 5% of its value a year, when interest rates are paying 6%, is a bad investment.
Instead of 3-properties at $1 million (total) returning 0.05 million / year, you should sell those three properties and put $1 million into the bank and get 0.06 million/year.
Real estate is an excellent inflation hedge since as inflation goes up, the value of the real estate and the rent you can get for it both go up in tandem.
Another way to discourage rent seeking is to tax ownership of land more.
Not necessarily. Raising interest rates lowers inflation.
So increasing interest rates is a double-whammy on housing. The increased mortgage prices lowers home values, fighting inflation _AND_ causes future profits to be discounted (relative to the risk-free bond rate).
The housing market was overheating earlier this year because low 2.5% interest rates meant that people's monthly payments were much lower than people expected. But now that we have 6% mortgage prices, the monthly mortgage price is increasing (which will eventually force housing prices down).
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This is why rising interest rates is the main tool of the Fed right now. Its not the perfect solution, but its sufficient until Congress enacts lasting change (ie: policy changes that lead to an increased supply of our luxury goods). The bank can only change interest rates so much before it becomes unreasonable.
Going from 1% rates to 2% is in many ways a bigger change than say a 15% to 16% increase.
Make no mistake, the Fed are not idiots, they have been trying to introduce inflation for a long time, but initially they succeeded in asset inflation only. With the help of Covid and the war, they got their wish.
But wage inflation needs to match the goods/services inflation, because without it, borrowers will be even less able to pay their debts.
In order to really stamp out inflation, the Fed would need to raise the interest rate to 10%, essentially forcing the US to declare bankruptcy.
The Fed is hoping to introduce a mild recession, which, they hope, would reduce all kinds of inflation, without them having to raise the rates above 3.5% or so.
The idea that the rich pay interest to themselves is laughable.
Of course, the idea of land as an investment in the first place is one of the root causes (if not the root cause) of endlessly-rising cost of living, and we're long overdue to address that root cause (namely: by instituting land value taxes).
"My political opponent is attacking the middle class and their investments!"
Assuming they're sold to owner-occupiers who were previously renting, you've increased housing supply in that segment of the market, but you've reduced supply in the letting market, so the net effect will be zero. It won't change net demand or supply across the market as a whole.
If they were keeping those flats empty, that would be a different story.
Housing can not be seen as an investment. We can not have it be an investment, and a necessity, at the same time.
Housing can not, and should not ever produce more returns than the most basic index fund. If it does, no matter how many you build it will still be inaccessible to many.
You may argue that well, if there is more housing then there will be less money to make from investing in it. But here’s the kicker: what do top share holders do if they suspect the operations of the company they have shares in is going to make their shares worth less? They work as hard as they can to change the operations and minimize what they can do.
The same is true when housing is an investment. A property owner will act in their own best interest to reduce the ability for their investment to become worth less money.
This could mean toxic environmentalism, where you don’t actually care about the environment, but you’re using it as an argument against building houses. It could mean actively not giving permits to new constructions. It could mean actively lobbying the government to prevent certain classes of homes being built. Heck it goes all the way to actively reducing side walks, public transportation, etc.
And this is why we can’t just say “uh build more”. The “lack of supply” is a symptom. Not a cause.
The cause is simply that we accept that real estate can be an investment vehicle.
In a sense, every house is unique, and land is certainly unique by it's location and also finite. There really are some number of acres within a particular distance of a city centre.
I guess my gut reaction is that your comment might be right (I am not sure) but strikes me as idealistic.
There’s a couple of things that can help here:
1. Right to build. No local government should be able to say no to you building a small multi family home or single family home on their land.
2. A graduated (by year) increase on renting income for homes. Places that had been rental residences for a few years prior to this also should be forced to stay residential for a while.
3. Empty home wealth tax. If a house has been empty for more than six months a year, it should be taxed a percentage of its fair market value based on vacancy months.
4. Mortgages returns on investment should be limited to a certain margin over inflation. Or just match inflation. More than that should be taxed.
Are these good ideas? Maybe, idk. I’m not the person that’s gonna come up with the model of how to accomplish this. But it’s potentially a starting point.
How would this work in practice and enforced?
Not really. The net effect would be a distribution of wealth across a broader number of people (former renters, now owners) instead of one person (landlord who is accumulating wealth by charging rents from a number of people).
I understand that we typically think of owning property as a means of increasing wealth, more so than renting. But this is only true because we let home values increase.
And it might not even be true now, if renters places their savings other investments.
Property taxes and maintenance costs continue forever.
See the study linked in that article: https://www.theguardian.com/environment/2021/nov/05/carbon-t...
That's not taking money from the rich, it's funding the basis for society and can pay into debt releasing obligations.
What's fundamentally flawed at the central bank is it's one way street. Congress needs to act.
If I had to distinguish Taco bell from, say, McDonalds, I would say that Taco bell has the advantage of being filling but not putting you in a food coma.
One of it's biggest unsung heroes is the bean burrito; It avoids most questions about the meat and has been a popular option among folks who wanted to avoid meat in their diets. It's... almost healthy. Almost.
Taco Bell would be if a large corporation operated a bunch of kebab shops, but used the absolute cheapest ingredients possible (with said ingredients largely being precooked and prepackaged such that anyone with so much as basic motor skills can slap a kebab together in 15 seconds), "Europeanized" it until there's only superficial resemblance to a kebab at best, and then sold it for similarly cheap prices from drive-thru fast food restaurants.
Ah, the in-app coupons. Honestly, these are kind of a requirement nowadays if you want any fast food for a decent price.
Go look on your phone for the price of that same Domino's pizza without the coupon: for me, that same pizza would be $21.24 before sales tax. The coupon is a 62.5% discount!
When the had the "$3 off pickup" coupons for a while that stacked ($10 minimum), you could extend it to a 69.5% discount.
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Earlier this week I coupon stacked and got a McDonald's double cheeseburger, a large diet soda, a Wendy's Crispy Chicken Sandwich (+Tomato, +Pickles) and a Wendy's large fry for a total of $2.88 across both transactions, sales tax included. 1300 calories that served as both my lunch AND dinner. I couldn't make equivalent food at home for that price, despite sale shopping.
Without coupons, and deal stacking? $9.54, which means I got a 70% discount.
If I bought all that in just one of the stores (instead of going to two, since they're next to each other), it'd likely be closer to $11.
It's basically their regular price. Unlike something like McDonald's which requires the app, precise location permissions, and limits coupon frequency.
As my personal benchmark, I use one of the more 'solid' local chains, that IMO captures most of the essence of a 'Corner Shop' pizza. i.e. the oven probably isn't wood fired, but it's going to be better ingredients and IMO better quality product than a major chain. (1)
In any case, their 2 Large 2 Topping 'coupon' has gone up from 20 to 25$ over the last year. A 25% increase, which is pretty notable to me.
I've also seen my local mexican chain raise their prices, but by a lower mark. My 6-pack of enchiladas has both gone up in price (from 10 to 11.50, a 15% increase) and is no longer quite large enough to minmax over 3 meals (2 at a time used to fill me up. not anymore.)
(1) - To give you an example of a 'corner shop' pizza, or at least what it means to me. Imagine a place where the staff is friendly but smokes weed outside the store half the time. The local residents don't really care however, because the pizza comes out even better those days. It's one of those places you don't brag about going to, yet gets all the compliments if you bring it to a party.
Dominos with coupon is now cheaper than frozen pizza around here.
I only really eat chicken, so my dog counts as an interested party with regards to meals. It doesn't take much effort (eg don't sauce her food, nothing fried, lots of rice and veggies in the rice cooker) and she is always thrilled for the variety.
I wish I could buy them one by one or two by two ... four seems like such an odd number of buns. What about families of 1,2,3 and 5.
Some places even let you buy the "restaurant" or "catering" frozen bread/buns that are pre-cooked but not fully baked. So they're risen, half-baked and frozen, ready to be "baked" from frozen by the final restaurant/caterer. That's how restaurants do it, they don't all bake or buy fresh-bread every day.
The biggest problem with hamburgers is the bread which I can't seem to get in packs of one or two. Lettuce and tomatoes you can use for any meal but if you buy 4 buns you either eat hamburger half the week or throw them away.
I've taken to using buns for sandwiches (extra buns around an egg is a decent breakfast).
So I found a local butcher who makes a 'steakhouse' grind (chuck, brisket, short ribs) for about $7/lb. Two slices of cheddar are about a buck for non-Kraft cheese, buns and condiments are about another buck. Takes me about 9 minutes to cook at home, and I have a custom, super fresh and hot burger that tastes better than anything I've every had at a restaurant. Now I do miss out on fries, but eh, chips will do as a replacement. At the end of the day, I have a burger and chips for about $5, plus leftover stuff for other sandwiches. Throw in a decent beer, and I'm still cheaper than the microbrewery. And no driving required.
Of course, I have to do the difficult part of cooking. /s
Hit up the salad bar for this stuff if your grocery store of choice has one. It's usually measured by weight, and it is much cheaper and less wasteful.
He was thinking of buying a box of lobster tails a few months back. Wholesale price was $800 for the box. He ended up passing.
Just think, wholesale prices are out of control, how can a restaurant not raise prices to stay in business?
If you were below that, land prices in many popular and economically booming area were increasing out of your reach.
What should wage workers do except demand more at the bottom?
If we don't demand higher wages the the printed dollars just end up among the really rich.
Hopefully we can cool off before getting there. Plus the government can't really affect wages. I'm surprised nobody has suggested increasing tax rates as a way to cool the economy off, but that's political, so probably much more difficult.
Why is that bad? Given the asset inflation it is only anticipated wages catch up or assets crash.
It's not like printing money and "helping people" has not been done a bunch in the past - it always works out the same way, to a different extent depending on other circumstances. To some extent, e.g. minimum wage laws could be beneficial... inflation+redistribution where the gains in wages for the poorest outstrip the resulting inflation that only affects those whose earnings didn't increase because they were already well above the new threshold, I guess? According to this article, we appear to be well beyond that point.
Specifically apart from rising rates I would expect this to eventually hit public company earnings in a big way and hence prompt more layoffs in public/private tech.
Last earnings season didn’t see much of an impact. We are a couple of weeks out from earnings, I wonder if this or the next quarter will be where we will see more layoffs and the tech jobs market generally tighten?
In a downturn, an expensive new phone will be the first thing to get cut from consumer shopping budgets. And indiscrimate marketing spend will be the first thing to be cut from business spending.
It's taken a lot longer to play out than I expected, but you can get a decent sense of consumer spending via revolving credit e.g. credit cards.
https://fred.stlouisfed.org/series/CCLACBW027SBOG
You can see how rapidly this has been rising since the covid deleveraging. But we're now back to trend and rates/real prices will be higher.
As long as consumers continue to lever up aggressively, earnings will be somewhat supported. But we're about to run into a brick wall with maxed out credit
This seems to be more of slow role out in stages. I could totally see this taking another quarter or two before it hits earnings in a big way.
The biggest expense for most people is housing: rents are high, buying is shockingly expensive compared to the 1980s-1990s. Raising wages, which should happen, will only drive those prices even higher unless you drastically increase the supply.
Building a massive amount of practical starter homes around every major city would go a very long way.
How did we avoid inflation for so long during this low-rate regime? In 1870 we had the same issue - deflation in the face of money creation...the industrial revolution was happening at the same time which ate up all the money in productivity gains.
For our era, it was China. Chinese manufacturing kept things cheap even as we printed and printed. That's over too.
Get ready to be poorer, there is no alternative scenario...Americans are just going to be poorer.
The Chinese-focused East-Asian manufacturing worked because you could get mid-range labor from China/Malaysia, low-end from interior parts of China/Vietnam/Bangladesh, and high-end labor from Korea, Taiwan, and Japan.
Latin America is a good candidate because of the easy availability of raw materials and short supply lines to America. But their internal stability is a huge problem.
https://data.worldbank.org/indicator/NE.IMP.GNFS.ZS?most_rec...
Place I wanted to retire to went from 800K, which is attainable, to 2.1 million in the last two years.
Bring on the high interest rates.
(Good luck though, high interest rates kill nearly every sacred cow in politics)
That $2.1M house might go down to $1.5M, but if rates go from 6% to 10% you'll be paying more each month (assuming 20% down, borrowing over 30 years)
Worse, if prices continue to sink you'll be trapped in negative equity.
that's a bit misleading considering that the debt was already 23 trillion before the pandemic.
33% of US debt happened due to pandemic response; was that well spent?
What happens if the future bails on paying off dead peoples debt? Get sued by dead financiers if they legislate that dead peoples contracts are not theirs to honor?
Real resource use is a more important conversation to the species than deals made by great great great grandads a future estate try to grift on.
“Pull yourselves by your boot straps and pay off these notes the dead rich took out against old assets over valued by contemporary standards, future people!” Makes absolutely no sense.
Just a summary ( https://www.economicsdiscussion.net/inflation/top-3-reasons-... ) "[...] top three reasons for overestimation of True Inflation by CPI. The reasons are: 1. Quality adjustment bias 2. Substitution bias 3. Introduction of new products."
it certainly doesn’t instill confidence
"Substitution Bias" will change your personal basket and your weights, but it's reflection of real inflation.
The problem isn't CPI being too high. Or too low. It's that people don't understand what it's saying, or they argue with the weight of the baskets.
(EDIT: And of course even the inflation in a very specific good - like 1 pound of uncoocked prime grade beef, will itself vary depending on geographic location, doesn't mean the average is right or wrong, when they tried to find the average person in the US military they couldn't find him - not a single person met the average once you factored in just half a dozen measurements. It doesn't mean averages are meaningless though)