Wages Are Not an Important Driver of US Inflation, San Francisco Fed Study Finds
bloomberg.com
bloomberg.com
This sounds cruel but it is the only counterweight to runaway housing costs, if we are going to live in a world where housing is an investment and we restrict new supply severely.
I’m not saying this is a good thing, but we can’t just wave a wand and make housing-as-investment go away without creating real hardship for people (whose lives we are trying to improve with these measures, running counter to the goal).
Even homesteading a log cabin on free land or building a mud hut is an investment. Houses take significant labor and materials to construct and there is no way around this. Add and land which can either be created nor destroyed and this only becomes more obvious.
Housing is an investment because it represents significant input in material and labor which only returns ulity slowly over time. It doesnt matter if are living in a commune, capitalist society, or alone. That only changes who invests in it.
And "free in most of the world" dramatically oversimplifies an entire spectrum of healthcare funding models.
Have you met people?
That causes a boom and bust in housing production and turns housing into an investment - like the classic car market.
We saw a similar effect during the pandemic when the used car market became like the classic car market due to lack of supply.
The solution was to get back to producing more cars. Same with housing.
Price level (the Fed targets PCE not CPI, but that’s tangential; they are both price level measures) going down is deflation, which the Fed wants to avoid much more than inflation.
The Fed doesn’t really want the CPI to go down at all (significantly anyway) just to stop going up.
It doesn’t even want it to stop going up, just to moderate the rate of increase to around 2% annually.
Here, they see "justified by circumstances"-acceptance of price hikes and act accordingly. Holding back on such a price hike would actually hurt your bottom line, as people do not switch brands so easily in real life.
In response to Covid The Fed "goosed" the economy by "printing" a ridiculous amount of new dollars. That obviously devalued what was already in circulation.
Devalue === worth less Worth less === buys less
Voila...inflation.
The reason you / we don't understand is because no one - gov, Fed or media - wants the come clean on the impact of The Fed's Covid related decisions.
It literally exactly is.
> It's about your dollar having less value.
That’s exactly the same thing.
> The reason you / we don't understand is because no one - gov, Fed or media - wants the come clean on the impact of The Fed's Covid related decisions.
Almosf everyone (policy makers, media, outside observers) recogbizes and openly acknowledges that the recent inflation is largely a stimulus (mix of fiscal and monetary, though you focus on specifically the monetary part) overshoot from the extremely sharp but also extremely short, and with an extraordinary rapid bounce back, COVID recession. Trying to make this an “everyone is hiding it” conspiracy is... amusing, I guess, but not grounded in reality in any way.
The value of your dollar is *deflating*. And that's because where there used to be X there are now more of X. A lot more.
It's not a conspiracy theory when 99% of the time the narrative is "...it's the Russians and war..." or whatever BS they push and barely passing references to "oh btw The Fed flooded the money supply...again...and has devalued your dollars...effectively raising your taxes".
FFS stop with the hyperbole, stop being so naive, and stick to the facts. Please.
Yes, “the number of dollars I must give to get a fixed set of goods is larger” is exactly the same thing as “the number of things I can get for a fixed quantity of dollars is smaller”. General price increases and dollars being less are identical.
> It's not a conspiracy theory when 99% of the time the narrative is "...it's the Russians and war...
It wouldn’t be if that were true 99% of the time, but its not so, as you say:
> FFS stop with the hyperbole, stop being so naive, and stick to the facts. Please.
So it's The Russians? And The Fed's decisions have nothing to do with it? Come on now. Who aside from the masses is buying that?
And instead of tossing around cliches (e.g., conspiracy theories) just stick the facts. There's a narrative in the media and it doesn't mention The Fed. Funny enough, you seem to be championing that narrative. I can see w hy you're confused and lazily playing the cliche card. Good luck with that.
No, again, they are exactly the same.
> Because looking at it from the two different perspectives leads to two different conclusions.
It doesn't, though.
> So it’s The Russians? And The Fed’s decisions have nothing to do with it?
How do you get “it’s the Russians” and “the Fed’s decisions have nothing to do with it” from me saying, “Almost everyone (policy makers, media, outside observers) recognizes and openly acknowledges that the recent inflation is largely a stimulus […] overshoot from the extremely sharp but also extremely short, and with an extraordinary rapid bounce back, COVID recession”, again?
> Who aside from the masses is buying that?
No one is buying or selling the thing you are arguing against. (In fact, the Fed Chair has actually credit the Russian War in Ukraine with contributing to the same demand decline that the Fed is trying to engineer to fight inflation, not with causing inflation. [0])
> And instead of tossing around cliches (e.g., conspiracy theories) just stick the facts.
You are the one who has invented a conspiracy of coordinated false messaging that is divorced from the facts.
> There’s a narrative in the media and it doesn’t mention The Fed.
Where?
> Funny enough, you seem to be championing that narrative.
That’s defensible if you ignore…the only thing I said about the causes of inflation, and just go on pure fantasy.
[0] https://www.federalreserve.gov/newsevents/speech/powell20221...
Friedman made the argument that productivity (GDP growth per capita) has no effect on inflation, and interest rates just move where you choose to measure 0, hence his famous quote that "inflation is always and everywhere a momentary phenomenon" (paraphrased)
Also increasing productivity and technological progress should (and usually does)result in lower prices of goods.
Of course for things like cars or phones you end up paying the same or more for a superior product with more features, efficiency etc. instead.
https://www.schwab.com/learn/story/will-us-dollar-be-dethron...
Other currencies?
Certainly not in what it will buy in the USA.
Wages definitely are not driving inflation, wages will never keep up very well nor catch up.
Prices will never come down, except in unusual circumstances like overblown bubbles in market-based commodities where the market controls the value more so than underlying utility.
The problem comes with the fact that the US dollar being the global currency of trade, means that everything is originally priced in US dollars, so the strength or weakness of the US dollar does not change the price.
Furthermore the US is somewhat self-sufficient in terms of trade in key inflation areas such as food, so the dollar is ending up hurting exporters and reducing corporates profits.
The purpose of raising rates is to increase the interest share of income and protect that from inflation [0]
[0]: https://economicsfromthetopdown.com/2023/04/16/how-interest-...
Real estate collapsed during the pandemic so all the pandemic-era money went into peoples savings accounts and then onto everyday goods, which capitalists used to make more money. The savings rates of Americans points to this picture as well.
https://www.axios.com/2023/05/30/new-paper-predicts-rising-w...
The paper seems to indicate that the labor market did not affect inflation early on, but will continue to drive inflation henceforth.
From the paper:
> However, even as the effects of price shocks have waned, the effects of tight labor markets have begun to cumulate. Our decomposition shows that, as of early 2023, tight labor market conditions still accounted for a minority share of excess inflation. But according to our analysis, that share is likely to grow and will not subside on its own. The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance.
Here's the paper:
https://www.brookings.edu/wp-content/uploads/2023/04/Bernank...
Wage increases usually cause an increase in prices. They had remained stagnant for about 40 years. I wonder if keeping inflation higher than 3% would help wages rise naturally without intervention by the government.
[1] https://tradingeconomics.com/united-states/inflation-cpi
> We find that, contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge that began in 2021 was the result of shocks to prices...
And their overall train of thought is. in 2021 people thought inflation was due to wages but it wasn't, and in 2022 people thought inflation was due to wages but it wasn't, and so far in 2023 inflation isn't due primarily to wages... but the rest of 2023 inflation is going to be due to wages so we better lay people off now.
Not exactly a great track record here. It really reads like they came in with a conclusion and are looking for any way to support it - because the data they surface doesn't support their conclusion. At least from my skim of the paper. Essentially the paper is data showing wages aren't a main driver, ???, followed by "but wages are scary so you should stop them from rising anyway."
Well respected economists, but I'm not impressed at all by this bit of work.