Inflation is falling much faster than most people know
cepr.net
cepr.net
Keep in mind that: (1) the war in Ukraine, which could further disrupt multiple commodity markets (energy, grains, minerals), is still ongoing; (2) many global supply-chain issues have not yet been fully resolved; (3) many services that renew annually, including apartment rentals and most information/entertainment services, have not yet raised prices on all customers; and (4) we don't know the extent to which second- and third-order inflationary effects are still propagating, globally.
Also, keep in mind that in the past, central banks like the Fed have typically reacted too slowly and too late to control inflationary forces before things got too out of hand, which ended up being much worse for everyone. This time around, I'd much rather have the Fed and other central banks err on the side of over-tightening and causing a short-lived recession than under-tightening and fighting inflation in fits and starts for a decade, as has been the case in the past.
The way inflation is looking these past five months, the Fed should take a break from its interest rate hikes before, rather than after, it causes the next recession. That would be a much better choice than the course it is on.
We all know that something will break, but I guess they have to break before politicians can respond to the will of the voters.
I like the off-hand assertion that the fed causes most recessions. As if “they” have strong control the economy but are just too dumb or corrupt to only make the numbersgo up. Kind of embarrassing actually, for a “think tank”.
The purpose of a think tank is (often) to promote values of whoever funds it. So, while it may look embarrassing, they're doing exactly their job.
The Fed does not want a recession, but if it has to choose between a recession and high inflation, it's a simple choice. The choice of following the law. Which stipulates that the Fed has 2 jobs (the dual mandate): to keep inflation and unemployment law. Recession is not part of the law.
If you are earning and have debt that’s great news. Sure the cost of your weekly shops increased 1%, but your debt has dropped 7%.
- William Jennings Bryan
Inflation can also screw the equity value for home owners in the US because in the long term house equity value is very roughly inversely related to mortgageInterestRate -- that occurs because house prices are driven by how much people can loan for a mortgage, and maximum mortgage loan is limited by f(personalIncomeAfterOtherCosts, wholesaleInterestRate + bankMargin, futureIncomeStreamPrediction).
Living in New Zealand which all mortgages are variable rate (approximately), I can say inflation really screws large mortgage holders here.
[1] 2010 https://business.sdsu.edu/_resources/files/real-estate/resea...
Raising interest rates are a great way to combat demand driven inflation (everyone borrows money to buy a set amount of goods/services so prices increase).
It’s not a good way to deal with supply driven inflation in essential goods (say prices go up because a harvest fails).
But it needs to happen to ensure the currency doesn’t fall relative to other currencies thus making imports more expensive.
Simple example:
You start with a dollar. Every month it's value falls by 5 cents. However this month it only fell by 2 cents.
Over the last few months inflation has been about 2.5%
People can’t eat gas. The impact of a 5% to 10% increase in basic food prices is extreme on most income levels. Especially when you consider families with children.
But the world runs on fuel, so if fuel prices rise, prices rise in all other items. Food has to get to the cities from the farm somehow.
From 2009 to 2010, the price of gas went up by 25%. From 2014 to 2015 it went down by 25%. Do you think the true rate of inflation is measured by either of those numbers.
Technically the inflation numbers are posted both ways, including with and without “core energy” so everyone can see the effects either way.
Krugman explains it all fairly accessibly: https://archive.nytimes.com/krugman.blogs.nytimes.com/2010/0...
Is it that little? The stuff I buy seems to have gone up 20%+
I suspect my local supermarkets are raising prices partly because of inflation and partly to get fatter margins. Shopping for food on Amazon is sometimes cheaper!
[0] https://www.newyorkfed.org/research/policy/gscpi#/interactiv...
Even if inflation is falling faster than most people know, the way fed has played is hand is going to be devastating. Stock market has been destroyed. Stock market != economy is not true in this case. Most people’s savings are tied in the market one way or the other (401k, pensions, actual investments etc.). People who don’t have savings or have any form of debt have their debt have its interest go through the roof. People are losing jobs at the highest level of the economy, which will trickle down as the rich and the upper middle class downsizes its spending. Housing prices won’t go down because the supply/demand dynamics are still terrible in most places where people want to live. And people who bought at inflated rates are not selling anytime soon unless they absolutely have to.
Seattle, Los Angeles, Las Vegas, and most of the boom towns outside of Florida are only a few months behind The Bay.
A ~20% decline is going to more than wipe out all inflation adjusted (real) gains in almost all markets.
Holy cow. I'm in Austin. There a some lagging gas stations, but it is easy to get regular 87 gas for $2.45/gallon. The lowest price I've seen (cash price, not needing a membership card) is $2.37/gallon. It has been below $4 for a long time.
There’s also the issue of high gas taxes there as sibling mentioned, but I remember that something in the refining process is also a major contributor.
Not to say that this isn't a one-off example of this!
Which is to say, the cost of labor has not been increasing that fast. Though, it's not a single faceted issue. I want to emphasize that. With that said, I do suspect this inflationary era has a slightly different character than previous due to a very different corporate landscape (eg: it wasn't previously the case that there were only 3 main airlines, just a couple companies owning the more than majority of grocers, etc..)
[1] https://www.statista.com/statistics/222127/quarterly-corpora....
U.S. corporate profits 2012-2022, by quarter - Statista
There are a few object lessons in "how to lie with economic data" here. Let's tease them apart.
1. The original chart is in billions of dollars, across long time periods. So the first error is use of long run time series in nominal values. In that case, most of your time series are going to be "at record levels". Care to guess why?
2. If you look at the source of that chart, which is NIPA data, you'll see those magic words "without CCA and Inv adj". What do they mean? What it means is that you are ignoring depreciation of fixed assets and revaluation of inventory. So for example, if you run your business and pay $10 in labor and inputs and obtain $20 in sales, then you have a profit of $10, right? Well, not if you wore down your equipment by $5. Then you only have a profit of $5. So capital consumption must be taken into account if you want a measure of profits that is close to what an actual business would use. For the same reason, if you have a pile of unsold inventory, do you value it at your purchase cost or at the cost you would be able to sell it? It should be the latter, so again you do want the inventory valuation adjustment. The net result is you want to be looking at net operating surplus if you are mining your NIPA data for a measure of profits, not profits before capital consumption or inventory valuation adjustments. Of course NIPA style net operating surplus is not the same as GAAP profits because a number of other adjustments are made, but it's a reasonable proxy when looking at macro data.
3. Mixing non-financial and financial is a big no-no, especially as you are talking about inflation, and this means non-financial goods.
So if we fix all of that, then what do we see? Record profits? Nope.
Here you go:
https://fred.stlouisfed.org/graph/?g=Y4h3
As a pro-tip, it generally pays to have an awareness of economic history. So, for example, if someone shows you a chart that says there was low inflation in the late 1970s, then you know they are lying somehow, because you understand this was a period of high inflation. This is something you should know without a chart, and use it to check the chart. Similarly, a basic fact of US corporate history is that the corporate profits in the 1950s and 1960s were enormous. Higher than any period since. That was the golden age of corporate power in the U.S., when we were told "What's good for General Motors is good for America". It was also the conglomeration mania. Additionally, Baby Boomers were having kids and buying tons of stuff, borrowing and spending heavily. Credit was loosening. The US was the undisputed king of the world, without foreign competitors of any serious measure, and they were raking in the cash.
Though, is the overall thesis (that corporate profits are a significant factor to recent inflation) still incorrect? I'm really curious what your take is to this marketplace.org segment and Rep Katie Porter's presentation on the subject. Links here: https://www.marketplace.org/shows/make-me-smart/corporate-pr...
Long bonds?
I am intrigued by Kalshi but very few people are interested in betting on stuff for stuff sake.
Most money is exchanged on markets where people bet on the world’s reaction to such events and the impact on asset prices or yields
Prediction markets are expected to have negative return on average once the house takes a cut.
Realistically, it seems central banks and politicians will die on the hill of deflation and do everything in their power to avoid it, even if it means (as it has in ‘89, ‘01, ‘08, and ‘20) just kicking the can down the road and causing greater, less stable bubbles.
That said, look at the stock market - it has been deflationary this year. So cash is King in this environment. Just not so much at the grocery store or when you get your utility bill.
> As a vector, jerk j can be expressed as the .. third time derivative of position
‘Dick: “jerk off”’
Is that like how it was convenient in the 2010’s when discussing “terrorist attacks on US soul” to conveniently leave out 2001 because it was an “outlier?”
The consumer price index has been relatively flat since the Fed started raising interest rates.
https://tradingeconomics.com/united-states/consumer-price-in...
The generally quoted inflation rate compares now to this time last year – so until next June, it includes the increases that happened before the Fed decided there was a problem.
This is useful in a lot of contexts, but if you want to know whether prices will be higher next month, it doesn’t make a whole lot of sense to use a lagging indicator.
The PCE, which the Fed uses—not the CPI—as its inflation gauge for policymaking has not been flat (historically, the PCE and CPI have generally been pretty close, but the PCE shot up much more than the CPI in the recent inflation, and did not quickly drop and stay near zero monthly % change like the CPI in response to the Fed intervention [it was low in July and November, but not the intervening months.])