Inflation?

[y66]

https://www.wsj.com/articles/is-inflation-sticking-around-bicycle-makers-offer-some-clues-11638374032?mod=hp_lead_pos10

 

For a glimpse at why inflationary pressures aren’t likely to ease anytime soon, consider the bicycle.

 

Bike prices in the U.S. and Europe rose sharply at the start of the pandemic because of booming consumer spending and snarl-ups in global supply chains that meant long delays and higher costs for manufacturers.

 

Now, manufacturers are working on building bikes for 2022 in a continuing environment of economic uncertainty—with more questions added recently by the emergence of the Omicron variant of the coronavirus. Today’s rampant demand and strangled supply are already pushing next year’s prices higher.

 

“The cost of our product is not going down,” says Richard Thorpe, chief executive of Karbon Kinetics Ltd., which sells Gocycle electric bikes world-wide from its base in Chessington, southern England. “If that is inflation, I wouldn’t call it transitory.”

 

Mr. Thorpe says that beginning Jan. 1, he plans to increase the prices of his range of folding e-bikes by up to 25%. The company’s latest models will cost between $4,999 and $6,999, depending on the specification, compared with $3,999 and $5,999 in 2021.

 

The price increase is needed to cover the higher costs of components and shipping, Mr. Thorpe says, and to provide a financial cushion should supply-chain bottlenecks again hurt production, as they did this year. The company is also aiming to bring in more per unit, after shortages have kept it from increasing production to meet demand.

 

Prices for handlebars, brake levers, reflectors and chains have risen sharply over the past 12 months. Mr. Thorpe is still waiting for delivery of a thousand pieces of an electrical component he ordered more than a year ago, and he is competing with auto makers and online ordering bots, which use software to scoop up stock, to get hold of computer chips.

 

He says he is making decisions based on his belief that supply-chain knots won’t untangle and that consumer demand won’t ebb anytime soon, and says Omicron, a possibly more-contagious variant of the virus that causes Covid-19, has reinforced that view. “It’s all disruption, which costs money,” Mr. Thorpe says. “It’s the Wild West out there.”

 

The bicycle industry’s challenges—when generalized across the economy—go to the heart of the policy conundrum facing the Federal Reserve and central banks around the world. Policy makers have earlier said they believe inflationary pressures will dissipate over time as high demand for consumer goods subsides and kinks in the global supply chain work themselves out.

 

With Omicron again closing borders, that process looks set to play out over a longer period of time than initially thought.

 

Fed Chairman Jerome Powell said Tuesday in testimony to lawmakers that “it now appears that factors pushing inflation upward will linger well into next year.” He signaled the central bank would consider quickening the wind down of its easy-money policies, which would open the door to raising interest rates in the first half of next year. Consumer-price inflation in the U.S. rocketed to a 31-year high in October.

 

The Bank of England has signaled it expects to begin gently lifting short-term interest rates in the U.K. imminently to restrain the accelerating growth in prices. Central banks from Canada to Australia to Norway, New Zealand and the Czech Republic have already begun withdrawing pandemic-era stimulus or nudging up borrowing costs to manage inflation.

 

Economists say the potential economic effects of Omicron are unclear, as health experts still don’t know how dangerous the variant is.

 

Bicycle makers and retailers say they see no respite on the horizon from the intense pressure on prices.

 

“We don’t see any improvement for 2022, for sure. We’re going to be in the same boat that we’ve been in since the end of the summer 2020, when there’s not enough supply to meet demand,” says Larry Pizzi, chief commercial officer at Alta Cycling Group LLC, based in Kent, Wash., which owns cycling brands including Diamondback, iZip and Redline.

 

The average selling price of a new bicycle in the U.S. in September was $346, up 28% compared with 2020 and 54% higher than the average selling price of a bicycle in 2019, according to data from NPD Group Inc., a market research agency.

 

Pandemic lockdowns in the U.S. and Europe turbocharged a cycling renaissance that was already benefiting from growing consumer interest in personal fitness, greener forms of transport and the proliferation of bike lanes in big cities.

 

Countries such as the U.K., where Prime Minister Boris Johnson is a cycling enthusiast, designated bicycle repair an essential service during lockdowns, allowing stores to remain open.

 

In the U.K., bicycle prices were 26% higher in October 2021 than they were at the beginning of 2020, according to official inflation statistics. The country left the EU on Jan. 31, 2020, remaking trade agreements. Brexit in most cases didn’t cause tariffs on imports of bikes or components from the EU, though it did disrupt supplies from EU manufacturers.

 

In Germany, bicycle prices were 9% higher in October than they were in January 2020, according to official inflation statistics published by Eurostat. In Sweden and Poland, prices were up 15% and 13% over the same period, respectively. In Lithuania they were up 16%, in Hungary 19% and in Slovenia 18%.

 

For Mr. Thorpe, of Karbon Kinetics, raising prices in 2022 is essential to cover ballooning costs.

 

A basic child’s bike might have 50 components. A full-suspension electric mountain bike might have 350. Gocycles have around 800. A single missing part can cause delays that bring the entire production process to a halt.

 

Mr. Thorpe resisted pushing up prices for Gocycles in 2021 because he spent a chunk of the year explaining to unhappy customers why supply-chain disruptions meant there would be delays to their orders. That and cost pressures mean the company is unlikely to report a profit this year, he says.

 

He says he is pressing ahead with price increases for 2022 because he doesn’t expect these supply-chain issues to get much better. He estimates the cost to the company of producing a single bike has shot up by 20% to 25% compared with the cost before the pandemic, as competition between manufacturers for common parts pushes prices skyward.

 

Seatpost prices have gone up 20% in the past 12 months. So have prices for the cranks the rider turns when pedaling. Handlebars are up 11%. Brake levers and calipers are up 14%. Chain prices are up 17%, and reflectors are up 50%, according to Karbon Kinetics.

 

Mr. Thorpe learned by email Wednesday that higher prices for magnesium—used in Gocycle wheels—mean future shipments of wheels will be 17% more expensive than they are now.

 

Multiple industries are competing for the batteries, semiconductor chips and tiny electronic components Gocycle uses for its dashboard displays, power management systems and charging ports.

 

Mr. Thorpe says at one point in the pandemic he became so desperate for stock he toyed with ordering some chips from sellers he knew little about on Chinese online commerce platform Alibaba. In the end he thought it wiser to stick with a trusted supplier and swallow sharply higher prices.

 

One essential circuit board in Gocycle bikes cost 1.66 euros, or about $1.87, as recently as six months ago. Now Mr. Thorpe says he is being quoted prices as high as 30 euros to 40 euros for the same tiny component.

 

A switch for controlling power to the motor used to cost 80 euro cents. The cheapest he can source them now is 1.70 euros. A Gocycle needs seven of them.

 

Shipping a container full of parts from China costs him around $20,000, Mr. Thorpe says. It used to cost $4,000. Shortages of pallets and blockages at ports mean he can’t be certain when shipments will arrive. He estimates shipping costs for a single bike have effectively doubled, on average, depending on where exactly it is destined.

 

The flood of demand for bikes as the pandemic arrived took the industry by surprise, executives say, an example of how unprepared the global economy was for the mass switch in consumption to goods from services as the pandemic forced people to stay home.

 

That switch has fueled rapid price increases in everything from consumer electronics to used cars, propelling faster inflation overall. Consumer prices in the U.S. rose by an annual 6.2% in October, the fastest rate of price-growth in more than 30 years.

 

Alta’s Mr. Pizzi says at the beginning of the pandemic he thought he was going to be canceling orders. By April 2020, he says, he was asking his suppliers in Asia if there was any way they could increase production.

 

Before the pandemic, the company would have expected to sell 200,000 bikes a year. In 2020 it sold 250,000, completely exhausting its stock. “It was bike in, bike out,” Mr. Pizzi says.

 

Alta could easily have sold another 125,000 or so last year if its contractors in countries including Thailand, Cambodia and Vietnam could have kept up with retailers’ appetite, he says.

 

“The pandemic has been a curse for a lot of businesses, but it has been a blessing for ours,” says Woody Smith, owner of Bike Mart, which has five bike stores in Texas. He sold 13,400 bikes in 2019. In 2020, he sold 18,200 and this year he is on track to sell 22,000. Manufacturers of the bikes he sells over the past 18 months increased prices by around 8% and 10% on average, he says, which he passed on to his customers. He says he stayed in line with those recommended selling prices without adding any premium.

 

Part of the explanation for consumer demand for bikes is a Covid-19-related trend that is pushing up prices for all sorts of manufactured goods. The pandemic has meant people are less able to spend their income on eating out, overseas travel and other services, so have been splashing out on gadgets and recreational products instead.

 

Retailers say consumer demand pushing up bicycle prices is still intense. Some bike buyers are seeking ways to avoid traffic or public transport as they return to the regular commute, a trend that is fueling adoption of pricey electric bikes in particular. Some retailers say they are seeing recent converts to cycling upgrade basic models for more expensive rides.

 

Wary of being caught short of stock, Mr. Smith of Bike Mart says he has already placed orders for 75% to 80% of the bikes he anticipates he will need for Christmas 2022. Final prices with his suppliers haven’t been agreed upon, but he says he expects those models will be 8% to 10% more expensive than those he is selling this year.

 

Karbon Kinetics, the maker of Gocycles, has also absorbed other cost increases, including on staff. One new hire is a former aviation industry executive who has been tasked with managing the logistical headaches of tangled global supply chains. Others are focused on keeping up stocks of spare parts and servicing the growing number of Gocycles on the road. Energy prices are up, too.

 

The supply-chain mess meant Karbon Kinetics fell 40% short of its production goal this year, making only 3,000 of a planned 5,000 bikes—cutting the company’s expected revenue for the year.

 

Mr. Thorpe says he is hopeful of hitting the 5,000 mark in 2022, a more conservative goal than the 10,000 or so he had penciled in before the pandemic struck.

 

That is if he can get the parts. The prospect of further disruption because of the Omicron variant means he is more sure than ever that raising prices is the right strategy, as it will mean higher revenue on every bike he can deliver. “I’m so glad we made the plan we did,” he says.

[kenberg]

I still have my bike around somewhere.

I did not save my Superman comics from the 40s, and somewhere along the way I lost some blues recordings from the 30s, but I still got my bike.

The auction starts at 3K

[y66]

From Prakash Loungani's Nov 30 interview with Paul Krugman:

 

Loungani: Let's start with your November 14th tweet where you said: “I got inflation wrong I didn't see the current surge coming.” Can you tell us why you had reached that conclusion? What has happened since and where do you stand now: are you still sort of the captain of Team Transitory or are your views starting to shift?

 

Krugman: Okay, so I guess Chairman Powell told us today that the use of the term ‘transitory’ is just a passing fad. Let me describe where the debate was -- I think I find it helpful to think of it kind of in terms of how this has unfolded, where the debate was early this year and what has happened. So, this is a debate, you know, where people on either side are not stupid [and] not crazy, which is unusual these days.

 

Earlier this year we had in the United States the American Rescue Plan, which was a lot of money. And on one side of the debate, Larry Summers and Olivier Blanchard looked at the scale of it and said that is a huge amount of fiscal stimulus and we'll push the economy far above potential and lead to a lot of inflation. People like me took a look at it and said, yeah, that is a whole lot of money but it’s very low multiplier. Things like aid to state and local governments will not be spent rapidly, and a lot of the checks individuals would probably be saved -- it would probably be a low multiplier event and wouldn't overheat the economy that much.

 

What actually happened, at least as I read it, is that the low multiplier analysis was correct in that if fact if you look at final demand -- if you look at C + I + G – it’s up about 4% over the past 2 years, which is roughly in line with the normal growth of potential output. However, the economy looks overheated and inflationary. So, in some sense, neither side has been right about how the story would play out. We've actually had the low multiplier story but we've had the inflation.

 

I think, basically, nobody should be doing a victory dance in the end zone here. It hasn't come out the way anyone expected. My read on what's happened --which I thought was uncontroversial, but I've got this slightly hysterical pushback from some people on the other side this debate in private – is that we've run into supply constraints that probably we should have seen coming -- or some of them we should have seen coming -- but we didn't. I think there are actually two quite distinct supply constraint stories. One is the supply chain stuff that we all talk about. And the other is the Great Resignation, the surprise drop and persistence of low labor force participation.

 

The supply chain stuff is very much about the composition of demand because of the extreme skew towards goods, -- as opposed to services -- and durable goods in particular. And the numbers are really kind of eye-popping. It's faded a bit but at the peak durable goods consumption was 34% above pre=pandemic levels. So no wonder we have a problem with the supply chain. And that we should have seen coming but we didn't. It's a little bit like shadow banking -- once we understood what was happening it was obvious, but it wasn't obvious in advance.

 

The other is the Great Resignation and that has really been mind boggling, So we're still four million down from pre=pandemic employment in the United States. But all indicators are now pointing to a very, very tight labor market.

 

Okay, where I am now: The supply chain stuff should fade. The labor market stuff is very much up in the air. But the question has got to be: one-time overheating of the economy, whether it's because of demand or supply constraints, has historically not translated into sustained inflation, It takes a long period -- at least in the past it has taken a long period – of year after year of an overheated economy for it to get embedded in expectations. And so that's why, where I am right now is: we can talk about historical episodes, but right now this has not played out the way anyone expected, but it's not yet at the point where you want to say: hey, we have a fundamental prolonged overheating that is feeding into expectations.

[kenberg]

My first reaction to the interview with Krugman was that he confirmed a common view: If you want to figure what's going to happen don't ask an economist.

After thinking about it a bit. that still might be my view. The Great Resignation caught them flat-footed?

[akwoo]

My first reaction to the interview with Krugman was that he confirmed a common view: If you want to figure what's going to happen don't ask an economist.

After thinking about it a bit. that still might be my view. The Great Resignation caught them flat-footed?

 

I'm not at all surprised that the Great Resignation caught economists flat-footed.

 

One of the possible (there's some evidence for it, but it's not that strong, but neither is there a lot of evidence against it) strange things about labor economics is that, at the macroeconomic level, the slope of the supply curve for labor might be negative. In simple words, this is saying that, if you pay people more, they actually work less (because they earn enough for their life with less work). This is so against everything else in economics (normally, if the price of something goes up, more people are willing to sell more of it) that economists have a hard time grasping it and accounting for it.

[kenberg]

I'm not at all surprised that the Great Resignation caught economists flat-footed.

 

One of the possible (there's some evidence for it, but it's not that strong, but neither is there a lot of evidence against it) strange things about labor economics is that, at the macroeconomic level, the slope of the supply curve for labor might be negative. In simple words, this is saying that, if you pay people more, they actually work less (because they earn enough for their life with less work). This is so against everything else in economics (normally, if the price of something goes up, more people are willing to sell more of it) that economists have a hard time grasping it and accounting for it.

 

Yes, but they have taken on the job of grasping it and accounting for it.

 

What people expect, what they expect from a job, from the government, from life, matters. Expectations change.

Growing up in the 1940s-50s, the expectation was that children were born to married couples, the father had a job and supported the family, the mother took care of the kids. Largely (not completely but largely) these expectations matched what I saw among my friends.

Those expectations changed over the years. Mothers work, they need child care for their kids. Whatever we think about the good and bad of this change, it happened.

The pandemic and our response to it brought about further change. Jobs disappeared, some temporarily, some permanently. Child care was never all that great and it got much tougher to find and pay for. When some jobs started coming back, many of these jobs became more dangerous to the health of the worker. Kids were not in classrooms and so how is that handled? And so on. It never occurred to economists that this might affect how people responded? I'm no economist, I'm not trained in social analysis, but it occurred to me. I'm not saying I anticipated exactly what would happen but I'm not being paid to do that sort of analysis

 

In the summer of 1961, between my first and second year of grad school. I worked a temporary job doing mathematics. Skipping false modesty, I was well regarded. So they selected me to help on an analysis of military plans in a hypothetical war. I was fine with the math. But the model was built on assumptions that I considered to be somewhere between naive and absurd. Maybe call it "very hypothetical". It's not enough to "do the math". The model has to reflect reality.

 

I get tired of hearing "Who could have anticipated this?". Maybe the people who make a good living by predicting the effects of actions and counter-actions?

[y66]

Yes, but they have taken on the job of grasping it and accounting for it.

I would say "attempting to grasp and explain" based on available data and something resembling a rational model. My sense is that Krugman and Summers do update their models and their thinking as new data become available, but it's not like the data become available in real time which is why we see evolving debates like the one they've been having.

[kenberg]

I would say "attempting to grasp and explain" based on available data and something resembling a rational model. My sense is that Krugman and Summers do update their models and their thinking as new data become available, but it's not like the data become available in real time which is why we see evolving debates like the one they've been having.

 

Ok, there is something to that.

I still think too many things are written off as just totally unforeseeable.

 

A couple of quickies, discussed before

Afghan: The US announces that we will pull out, after which Afghan soldiers will be on their own. Afghan soldiers desert and the government quickly collapses. Unforeseeable?

A campaign opens to defund the police. People who live in tough neighborhoods, including Black citizens in tough neighborhoods, are strongly opposed to this. Unforeseeable?

The government sponsors a student loan program that lends a great deal of money to a great many people with lax supervision. The country is then hit with a massive student debt problem. Unforeseeable?

And I have already commented on the Great Resignation. Also unforeseeable? Mind-boggling, as Krugman says.

And I could go on for a while.

 

The people who have responsibility for planning things seem to suffer from unforeseeable events very frequently.

I realize that tough problems are tough. I do. I will continue to hope for better.

 

Sticking with inflation: Did it really not occur to anyone that since covid had a substantial impact then just perhaps they should be a bit cautious about trusting the conclusions of a model that did not take this impact into account?

[pilowsky]

My understanding of the unfortunately named "Defund the police" slogan was that there was a lot more nuance to the campaign that lay behind it.

The single largest demographic of police in the USA (could be true elsewhere) is military veterans who are white males.

The primary training of this group is not in the area of deescalation and non-violence.

Add to this the toxic swamp of firearms in the USA and there is a recipe for fear, loathing and dangerous escalation of conflict that might otherwise be peacefully resolved.

What the "defund" campaign sought was a reallocation of funds within the municipal departments responsible for serving and protecting citizens.

Not the elimination of law and order.

 

 

 

[Winstonm]

My understanding of the unfortunately named "Defund the police" slogan was that there was a lot more nuance to the campaign that lay behind it.

The single largest demographic of police in the USA (could be true elsewhere) is military veterans who are white males.

The primary training of this group is not in the area of deescalation and non-violence.

Add to this the toxic swamp of firearms in the USA and there is a recipe for fear, loathing and dangerous escalation of conflict that might otherwise be peacefully resolved.

What the "defund" campaign sought was a reallocation of funds within the municipal departments responsible for serving and protecting citizens.

Not the elimination of law and order.

Totally correct but in this country perceptions rule - a poor choice of words crippled a useful idea.

[kenberg]

At the very least, the people who chose the words "Defund the police" were apparently stunned to discover that some people, really stupid people from their point of view, thought that "Defund the police" advocated cutting off funding for the police. The extent to which "Defund the police" meant that we should defund the police varied from one advocate to another, but the designers of this slogan really should not have been surprised at the reaction. It left them on the defensive, desperately trying to explain that they did not mean what the slogan said, or at least what a large number of people took it to mean.

 

Of course Krugman's views on the inflation debate are relevant: I quote: " So, this is a debate, you know, where people on either side are not stupid [and] not crazy, which is unusual these days.". Got it. Since Krugman was wrong about inflation he has to acknowledge that some people, not many of course but a few, people who disagree with him are neither stupid nor crazy. Most are either stupid or crazy, but not all. The occasional exception. So he thinks. Same with defund the police. How could people be so stupid or crazy as to think that this slogan suggests defunding the police? Maybe the organizers should have thought about this slogan a bit more? Or, maybe, those who favored this slogan because they meant exactly what it appears to say, and some did, needed to think that through?

I often look back on the play of a hand that did not go so well. Often I can see, in retrospect, something I should have thought of. Something in plain sight, I just missed it. I am suggesting that the same thinking, preferably before everything falls apart, could be useful in social/political/financial situations. Often there seems to be a "damn the torpedoes, full speed ahead" approach. Such an approach can work. Often it doesn't work. Torpedos can, well, they can torpedo plans.

[Winstonm]

At the very least, the people who chose the words "Defund the police" were apparently stunned to discover that some people, really stupid people from their point of view, thought that "Defund the police" advocated cutting off funding for the police. The extent to which "Defund the police" meant that we should defund the police varied from one advocate to another, but the designers of this slogan really should not have been surprised at the reaction. It left them on the defensive, desperately trying to explain that they did not mean what the slogan said, or at least what a large number of people took it to mean.

 

Of course Krugman's views on the inflation debate are relevant: I quote: " So, this is a debate, you know, where people on either side are not stupid [and] not crazy, which is unusual these days.". Got it. Since Krugman was wrong about inflation he has to acknowledge that some people, not many of course but a few, people who disagree with him are neither stupid nor crazy. Most are either stupid or crazy, but not all. The occasional exception. So he thinks. Same with defund the police. How could people be so stupid or crazy as to think that this slogan suggests defunding the police? Maybe the organizers should have thought about this slogan a bit more? Or, maybe, those who favored this slogan because they meant exactly what it appears to say, and some did, needed to think that through?

I often look back on the play of a hand that did not go so well. Often I can see, in retrospect, something I should have thought of. Something in plain sight, I just missed it. I am suggesting that the same thinking, preferably before everything falls apart, could be useful in social/political/financial situations. Often there seems to be a "damn the torpedoes, full speed ahead" approach. Such an approach can work. Often it doesn't work. Torpedos can, well, they can torpedo plans.

I took Krugman’s crazy or stupid as reference to wild-eyed Trump supporters.

[pilowsky]

What is "stupidity"?

It has nothing to do with education or accomplishment in any field.

 

There's a nice explanation with cartoons here: https://sproutsschoo...y-of-stupidity/

Here's the Editors introduction: https://ms.wearesparkhouse.org/downloads/9781506402741_Editor's%20Introduction%20to%20the%20Reader's%20Edition.pdf

 

Here's an excerpt:

BONHOEFFER'S LETTERS FROM PRISON

In his famous letters from prison, Bonhoeffer argued that stupidity is a more dangerous enemy of the good than malice, because while "one may protest against evil; it can be exposed and prevented by the use of force, against stupidity we are defenseless. Neither protests nor the use of force accomplish anything here. Reasons fall on deaf ears."

Facts that contradict a stupid person's prejudgment simply need not be believed and when they are irrefutable, they are just pushed aside as inconsequential, as incidental. In all this, the stupid person is self-satisfied and, being easily irritated, becomes dangerous by going on the attack.

[kenberg]

Ok, I may have gotten this off track. My thinking is that some things that are claimed as unforeseeable could be at least partially foreseen, and it would be a good idea to do so. I gave a few examples that I think have merit, but I have said enough about that.

 

Apparently, the fed plans to step up its efforts in interest rates. My first thought about that, and no one will disagree, is that I lack the knowledge to judge. I think inflation has become a threat, and I understand that raising interest rates is one tool. But that's about it as far as I understand things.

 

Here is a Wapo article:

https://www.washingt...on-powell-fomc/

 

Economists and policymakers often cite backlogged supply chains for driving prices up. But they also point to high consumer demand that is far outpacing levels seen before the pandemic. Such high demand was boosted, in part, by major stimulus measures passed by Congress, along with the Fed's own monetary supports.

 

Powell defended the Fed's moves, saying that monetary and fiscal aid during such extreme circumstances helped stabilize the recovery and bring about "really strong growth, really strong demand, high incomes," even as the economy is experiencing high inflation now.

 

"People will judge in 25 years whether we overdid it or not. But the reality is we are where we are," Powell said. "We think our policy is the right one for the situation that we're in."

 

Sounds as if Powell is far from certain. I like that.

The Dow went up after this if, that means anything, which I am not sure it does.

[y66]

https://www.nytimes.com/2021/12/15/upshot/jerome-powell-inflation-pivot.html?campaign_id=9&emc=edit_nn_20211216&instance_id=47966&nl=the-morning&regi_id=59211987&segment_id=77152&te=1&user_id=2d8b72dd84a9ff194896ed87b2d9c72a

 

Inflation has been building for months. But it was over 13 days this fall that Jerome Powell, the Federal Reserve chair, decided the central bank needed to get more serious about trying to choke it off.

 

The story of the latest Powell pivot — the abrupt move toward tighter monetary policy announced Wednesday — shows a great deal about the decision-making approach of the man President Biden has nominated for a second term as the nation’s top central banker.

 

In short: He may stick to his chosen policy path in the face of public pressure as long as evidence doesn’t undermine his assumptions, but he’s willing to change course quickly when data emerges that suggests the world is different.

 

The Fed’s policy committee announced Wednesday that it would speed up the end of the central bank’s bond-buying program and was likely to raise interest rates sooner than had been envisioned as recently as early November. The mantra of Fed officials through the summer months that inflation was likely to be transitory is now, officially, history.

 

More than usual in a Federal Reserve news conference, Mr. Powell narrated the events that caused his policy pivot.

 

Complaints about high inflation have been surging since the spring, but Mr. Powell and the Fed stuck to their view that it would fade and that they needed to move gingerly in pulling back on stimulative policies. That started to change with a piece of economic data on Oct. 29 that is closely followed by economists but gets relatively few headlines — a surge in the employment cost index.

 

That surprisingly high number suggested that employers’ spending on wages and benefits was rising faster in the summer months than economists had thought. It put Mr. Powell on alert that inflationary pressures had the potential to be broader and longer lasting than the Fed had been expecting.

 

That, he said, made him consider adjusting plans for a Fed policy meeting five days later, to wind down the central bank’s bond-buying program faster than analysts expected. He and his colleagues on the Federal Open Market Committee instead stuck to the plan, but two more data points in the ensuing days were making clear that inflation risks were building.

 

First, on Nov. 5, a robust employment report showed strong job creation and a rapidly falling unemployment rate. Then, on Nov. 10, the Consumer Price Index showed a surge in inflation. That was enough for Mr. Powell. As colleagues began giving speeches and interviews in the days that followed, they made clear that a more hawkish approach to monetary policy was in the offing, which Mr. Powell affirmed in congressional testimony last week.

 

“I think that the data we got toward the end of the fall was a really strong signal that inflation is more persistent and higher, and that the risk of it remaining higher for longer has grown,” he said in the news conference. “And I think we are reacting to that now.”

 

The particular constellation of evidence that emerged from those three data points from Oct. 29 to Nov. 10 — since confirmed by other data releases — suggested that an inflation problem that once seemed mainly confined to automobiles, airfare and a handful of other products had become more broad-based.

 

And as employers pay more in wages and other costs to keep their workers, the possibility that they simply pass those costs on to customers in a self-reinforcing cycle of higher pay and higher prices has become more real. This so-called wage-price spiral was a feature of the sustained high inflation that lasted from the late 1960s to the early 1980s.

 

Central bankers always face a tension between underreacting and overreacting to the latest economic headlines. On one hand, if they react too quickly to incoming information, policy can become erratic, creating unnecessary market volatility and failing to see through temporary forces that buffet the economy.

 

But if they react slowly, it can create a risk of becoming out of step with the realities of the economy. Historical examples include when the European Central Bank increased interest rates in 2008 even as what would become the global financial crisis was starting to drag down the European economy.

 

In the worst case, it could drive the economy to bad results out of some mix of stubbornness, ego and a refusal to admit a mistake.

 

Mr. Powell’s strategy has been to set out a forecast of how Fed leaders believe the economy is likely to evolve, stick to his guns even in the face of outward pressure, but then be ready to change course abruptly if the evidence becomes compelling that the forecast was wrong.

 

That is also the pattern exhibited in an earlier Powell pivot, in late 2018 and early 2019, although that was a shift in the opposite direction from this one.

 

The Powell Fed raised interest rates four times in 2018, earning withering public attacks from President Donald Trump. And at its December 2018 meeting, almost all the officials gathered envisioned multiple additional rate hikes over the course of 2019 to head off inflation.

 

In the days that followed, markets plunged and bond and other markets suggested the Fed had made a mistake — that the economy was not in position to withstand those rate increases. Mr. Powell abruptly changed tone in January 2019, and by the middle of the year was cutting rates rather than raising them.

 

In that episode as now, Mr. Powell resisted the accusation that the Fed had made a mistake. (“I wouldn’t look at it that we’re behind the curve,” he said Wednesday. “I would look at it that we’re in position now to take the steps that we’ll need to take, in a thoughtful manner, to address all of the issues, including that of too-high inflation.”)

 

His first term as Fed chair has, in effect, been an embodiment of a quote possibly apocryphally attributed to John Maynard Keynes: “When the facts change, I change my mind. What do you do?”

 

As they weigh whether to confirm him to a second term or not, senators will ultimately be judging whether the Powell pivots, especially this most recent one, have been too fast, too slow, or just about right.

[kenberg]

Irwin refers to "a piece of economic data on Oct. 29 that is closely followed by economists but gets relatively few headlines — a surge in the employment cost index.'

Right. I had never heard of this index but the name is self-explanatory.

The following might be an example:

Yesterday I stopped at the drive-through window of Burger King. Only a few cars ahead of me, so it won't take long. Wrong. The staff was one person at the inside counter, one person working the drive-through, she was taking orders, taking the money, and packaging the burgers, and one person cooking everything for both drive-through and counter orders. They have had a perpetual sign seeking workers. The cost of a Whopper has gone up some 20% in the last year, presumably to pay workers more, but I suppose further increases are coming.

Not unique to the local BK I am sure.

For amusement: We subscribe to home delivery for WaPo. We live pretty far out and the paper deliverer handles WaPo, the local county paper, the Baltimore Sun, and other things such as, I believe, the Korean Times. Anyway, today she was short of Washinton Posts but had extra Wall Street Journals so we got the WSJ instead of WaPo. It happens. A good day for it to happen as it turned out.

WSJ has a several page insert called Year in Review. I recommend it.

Now I have to go online and print out the WaPo crossword puzzle. Gotta keep priorities straight.

[y66]

I will always associate inflation with the taste of Hamburger Helper.

 

In the summer of 1973 I shared an apartment with several other college students; we didn’t have much money, and the cost of living was soaring. By 1974 the overall inflation rate would hit 12 percent, and some goods had already seen big price increases. Ground beef, in particular, was 49 percent more expensive in August 1973 than it had been two years earlier. So we tried to stretch it.

 

Beyond the dismay I felt about being unable to afford unadulterated burgers was the anxiety, the sense that things were out of control. Even though the incomes of most people were rising faster than inflation, Americans were unnerved by the way a dollar seemed to buy less with each passing week. That feeling may be one reason many Americans now seem so downbeat about a booming economy.

 

The inflation surge of the 1970s was the fourth time after World War II that inflation had topped 5 percent at an annual rate. There would be smaller surges in 1991 and 2008, and a surge that fell just short of 5 percent in 2010-11.

 

Now we’re experiencing another episode, the highest inflation in almost 40 years. The Consumer Price Index in November was 6.8 percent higher than it had been a year earlier. Much of this rise was due to huge price increases in a few sectors: Gasoline prices were up 58 percent, used cars and hotel rooms up 31 percent and 26 percent respectively and, yes, meat prices up 16 percent. But some (though not all) analysts believe that inflation is starting to spread more widely through the economy.

 

The current bout of inflation came on suddenly. Early this year inflation was still low; as recently as March members of the Fed’s Open Market Committee, which sets monetary policy, expected their preferred price measure (which usually runs a bit below the Consumer Price Index) to rise only 2.4 percent this year. Even once the inflation numbers shot up, many economists — myself included — argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected. And on Wednesday the Fed moved to tighten monetary policy, reducing its bond purchases and indicating that it expects to raise interest rates at least modestly next year.

 

Inflation is an emotional subject. No other topic I write about generates as much hate mail. And debate over the current inflation is especially fraught because assessments of the economy have become incredibly partisan and we are in general living in a post-truth political environment.

 

But it’s still important to try to make sense of what is happening. Does it reflect a policy failure, or just the teething problems of an economy recovering from the pandemic slump? How long can we expect inflation to stay high? And what, if anything, should be done about it?

 

To preview, I believe that what we’re seeing mainly reflects the inherent dislocations from the pandemic, rather than, say, excessive government spending. I also believe that inflation will subside over the course of the next year and that we shouldn’t take any drastic action. But reasonable economists disagree, and they could be right.

 

To understand this dispute, we need to talk about what has caused inflation in the past.

 

Inflation, goes an old line, is caused by “too much money chasing too few goods.” Alas, sometimes it’s more complicated than that. Sometimes inflation is caused by self-perpetuating expectations; sometimes it’s the temporary product of fluctuations in commodity prices. History gives us clear examples of all three possibilities.

 

The White House Council of Economic Advisers suggested in July that today’s inflation most closely resembles the inflation spike of 1946-1948. This was a classic case of “demand pull” inflation — that is, it really was a case of too much money chasing too few goods. Consumers were flush with cash from wartime savings, and there was a lot of pent-up demand, especially for durable goods like automobiles, after years of wartime rationing. So when rationing ended there was a rush to buy things in an economy still not fully converted back to peacetime production. The result was about two years of very high inflation, peaking at almost 20 percent.

 

The next inflation surge, during the Korean War, was also driven by a rapid increase in spending. Inflation peaked at more than 9 percent.

 

For observers of the current scene, the most interesting aspect of these early postwar inflation spikes may be their transitory nature. I don’t mean that they went away in a matter of months; as I said, the 1946-1948 episode went on for about two years. But when spending dropped back to more sustainable levels, inflation quickly followed suit.

 

That wasn’t the case for the inflation of the 1960s.

 

True, this inflation started with demand pull: Lyndon Johnson increased federal spending as he pursued both the Vietnam War and the Great Society, but he was unwilling at first to restrain private spending by raising taxes. At the same time, the Federal Reserve kept interest rates low, which kept things like housing construction running hot.

 

The difference between Vietnam War inflation and Korean War inflation was what happened when policymakers finally acted to rein in overall spending through interest rate increases in 1969. This led to a recession and a sharp rise in unemployment, yet unlike in the 1950s, inflation remained stubbornly high for a long time.

 

Some economists had in effect predicted that this would happen. In the 1960s many economists believed that policymakers could achieve lower unemployment if they were willing to accept more inflation. In 1968, however, Milton Friedman and Edmund S. Phelps each argued that this was an illusion.

 

Sustained inflation, both asserted, would get built into the expectations of workers, employers, companies setting prices and so on. And once inflation was embedded in expectations it would become a self-fulfilling prophecy.

 

This meant that policymakers would have to accept ever-accelerating inflation if they wanted to keep unemployment low. Furthermore, once inflation had become embedded, any attempt to get inflation back down would require an extended slump — and for a while high inflation would go along with high unemployment, a situation often dubbed “stagflation.”

 

And stagflation came. Persistent inflation in 1970-71 was only a foretaste. In 1972 a politicized Fed juiced up the economy to help Richard Nixon’s re-election campaign; inflation was already almost 8 percent when the Arab oil embargo sent oil prices soaring. Inflation would remain high for a decade, despite high unemployment.

 

Stagflation was eventually ended, but at a huge cost. Under the leadership of Paul Volcker, the Fed sharply reduced growth in the money supply, sending interest rates well into double digits and provoking a deep slump that raised the unemployment rate to 10.8 percent. However, by the time America finally emerged from that slump — unemployment didn’t fall below 6 percent until late 1987 — expectations of high inflation had been largely purged from the economy. As some economists put it, expectations of inflation had become “anchored” at a low level.

 

Despite these anchored expectations, however, there have been several inflationary spikes, most recently in 2010-11. Each of these spikes was largely driven by the prices of goods whose prices are always volatile, especially oil. Each was accompanied by dire warnings that runaway inflation was just around the corner. But such warnings proved, again and again, to be false alarms.

 

So why has inflation surged this year, and will it stay high?

 

Mainstream economists are currently divided between what are now widely called Team Transitory and Team Persistent. Team Transitory, myself included, has argued that we’re looking at a temporary blip — although longer lasting than we first expected. Others, however, warn that we may face something comparable to the stagflation of the 1970s. And credit where credit is due: So far, warnings about inflation have proved right, while Team Transitory’s predictions that inflation would quickly fade have been wrong.

 

But this inflation hasn’t followed a simple script. What we’re seeing instead is a strange episode that exhibits some parallels to past events but also includes new elements.

 

Soon after President Biden was inaugurated, Larry Summers and other prominent economists, notably Olivier Blanchard, the former chief economist of the International Monetary Fund, warned that the American Rescue Plan, the $1.9 trillion bill enacted early in the Biden administration, would increase spending by far more than the amount of slack remaining in the economy and that this unsustainable boom in demand would cause high inflation. Team Transitory argued, instead, that much of the money the government handed out would be saved rather than spent, so that the inflationary consequences would be mild.

 

Inflation did in fact shoot up, but the odd thing is that overall spending isn’t extraordinarily high; it’s up a lot this year, but only enough to bring us more or less back to the prepandemic trend. So why are prices soaring?

 

Part of the answer, as I and many others have noted, involves supply chains. The conveyor belt that normally delivers goods to consumers suffers from shortages of port capacity, truck drivers, warehouse space and more, and a shortage of silicon chips is crimping production of many goods, especially cars. A recent report from the influential Bank for International Settlements estimates that price rises caused by bottlenecks in supply have raised U.S. inflation by 2.8 percentage points over the past year.

 

Now, global supply chains haven’t broken. In fact, they’re delivering more goods than ever before. But they haven’t been able to keep up with extraordinary demand. Total consumer spending hasn’t grown all that fast, but in an economy still shaped by the pandemic, people have shifted their consumption from experiences to stuff — that is, they’ve been spending less on services but much more on goods. The caricature version is that people unable or unwilling to go to the gym bought Pelotons instead, and something like that has in fact happened across the board.

 

Here’s what the numbers look like. Overall consumption is up 3.5 percent since the pandemic began, roughly in line with normal growth. Consumption of services, however, is still below prepandemic levels, while purchases of durable goods, though down somewhat from their peak, are still running very high.

 

No wonder the ports are clogged!

 

Over time, supply-chain problems may largely solve themselves. A receding pandemic in the United States, despite some rise in cases, has already caused a partial reversal of the skew away from services toward goods; this will take pressure off supply chains. And as an old line has it, the cure for high prices is high prices: The private sector has strong incentives to unsnarl supply chains, and in fact is starting to do that.

 

In particular, large retailers have found ways to get the goods they need, and they say they’re fully stocked for the holiday season. And measures of supply-chain stress such as freight rates have started to improve.

 

Yet supply-chain problems aren’t the whole story. Even aside from bottlenecks, the economy’s productive capacity has been limited by the Great Resignation, the apparent unwillingness of many Americans idled by the pandemic to return to work. There are still four million fewer Americans working than there were on the eve of the pandemic, but labor markets look very tight, with record numbers of workers quitting their jobs (a sign that they believe new jobs are easy to find) and understaffed employers bidding wages up at the fastest rate in decades. So spending does appear to be exceeding productive capacity, not so much because spending is all that high but because capacity is unexpectedly low.

 

Inflation caused by supply-chain disruptions will probably fall within a few months, but it’s not at all clear whether Americans who have dropped out of the labor force will return. And even if inflation does come down it might stay uncomfortably high for a while. Remember, the first postwar bout of inflation, which in hindsight looks obviously transitory, lasted for two years.

 

So how should policy respond?

 

To squeeze or not to squeeze, that is the question

 

I’m a card-carrying member of Team Transitory. But I would reconsider my allegiance if I saw evidence that expectations of future inflation are starting to drive prices — that is, if there were widespread stories of producers raising prices, even though costs and demand for their products aren’t exceptionally high, because they expect rising costs and/or rising prices on the part of competitors over the next year or two. That’s what kept inflation high even through recessions in the 1970s.

 

So far I don’t see signs that this is happening — although the truth is that we don’t have good ways to track the relevant expectations. I’ve been looking at stories in the business press and surveys like the Fed’s Beige Book, which asks many businesses about economic conditions; I haven’t (yet?) seen reports of expectations-driven inflation. Bond markets are essentially predicting a temporary burst of inflation that will subside over time. Consumers say that this is a bad time to buy many durable goods, which they wouldn’t say if they expected prices to rise even more in the future.

 

For what it’s worth, the Federal Reserve, while it has stopped using the term “transitory,” still appears to believe that we’re mostly looking at a fairly short-term problem, declaring in its most recent statement, “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”

 

Still, an unmooring of inflation expectations is possible. Given that, what should policymakers be doing right now? And by “policymakers” I basically mean the Fed; political posturing aside, since, given congressional deadlock, nothing that will make a material difference to inflation is likely to happen on the fiscal side, inflation policy mainly means monetary policy.

 

I recently participated in a meeting that included a number of the most prominent figures in the inflation debate — a meeting in which, to be honest, those of us still on Team Transitory were definitely in the minority. The meeting was off the record, but I asked Larry Summers and Jason Furman, a top economist in the Obama administration, to share by email summaries of their positions.

 

Summers offered a grim prognosis, declaring, “I see a clearer path to stagflation as inflation encounters supply shocks and Fed response than to sustained growth and price stability.” The best hope, he suggested, was along the lines of what the Fed has now done, end its purchases of mortgage-backed securities (which I agree with because I don’t see what purpose those purchases serve at this point) and plan to raise interest rates in 2022 — four times, he said — with “a willingness to adjust symmetrically with events.” In other words, maybe hike less, but maybe hike even more.

 

Furman was less grim, saying, “We should not drop the goal of pursuing a hot economy,” but he wanted us to slow things down, to “get there by throwing one log on the fire at a time.” His policy recommendation, however, wasn’t that different. He called for three rate hikes next year, as the Fed said on Wednesday that it was considering.

 

Where am I in this debate? Clearly, a sufficiently large rate hike would bring inflation down. Push America into a recession, and the pressure on ports, trucking and warehouses would end; prices of many goods would stop rising and would indeed come down. On the other hand, unemployment would rise. And if you believe that we’re mainly looking at temporary bottlenecks, you don’t want to see hundreds of thousands, maybe millions of workers losing their jobs for the sake of reducing congestion at the Port of Los Angeles.

 

But what both Summers and Furman are arguing is that the inflation problem is bigger than temporary bottlenecks; Furman is also in effect arguing that tapping on the monetary brakes could cool off inflation without causing a recession, although Summers doesn’t think we’re likely to avoid at least a period of stagflation when bringing inflation down.

 

The Fed’s current, somewhat chastened, position seems almost identical to Furman’s. The latest projections from board members and Fed presidents are for the interest rate the Fed controls to rise next year, but by less than one percentage point, and for the unemployment rate to keep falling.

 

Perhaps surprisingly, my own position on policy substance isn’t all that different from either Furman’s or the Fed’s. I think inflation is mainly bottlenecks and other transitory factors and will come down, but I’m not certain, and I am definitely open to the possibility that the Fed should raise rates, possibly before the middle of next year. I think the Fed should wait for more information but be willing to hike rates modestly if inflation stays high; Furman, as I understand it, thinks the Fed should plan to hike rates modestly (in correspondence he suggested one percentage point or less over the course of 2022, matching the Fed’s projections) but be willing to back off if inflation recedes.

 

This seems like a fairly nuanced distinction. It is, of course, possible that bad inflation news will force far more draconian tightening than the Fed is currently contemplating, even now.

 

Maybe the real takeaway here should be how little we know about where we are in this strange economic episode. Economists like me who didn’t expect much inflation were wrong, but economists who did predict inflation were arguably right for the wrong reasons, and nobody really knows what’s coming.

 

My own view is that we should be really hesitant about killing the boom prematurely. But like everyone who’s taking this debate seriously, I’m hanging on the data and wonder every day whether I’m wrong.

What's up with all the burger stories? Was this trend also perhaps foreseeable?

[pilowsky]

The Economist introduced the MacPPP decades ago as an accurate measure of the cost of living because the Big Mac is a (relatively) uniform product.

It is mad all over the world and incorporates a basket of essential goods and services.

Labour costs.

Freight.

Agriculture.

etc etc.

Which is why everyone bangs on about hamburgers and inflation.

 

Personally I'm not fond of Scottish food.

[kenberg]

I would be happy to sit down with Paul Krugman and swap burger stories. The only job I ever got fired from was at a burger place where I was frying fries. There was another short-term job that paid better so I would call in from the short-term job and say that I was sick. For some reason, when I "got well" they didn't want me frying fries anymore.

 

We might well be going through some sort of structural change in the workplace.

[y66]

From The Missing Data in the Inflation Debate by Austan Goolsbee at University of Chicago:

 

With inflation growing at its fastest rate in decades, economists are locked in a debate over whether it stems from too much stimulus or from temporary, pandemic-induced supply-chain pressures. Less discussed are the ways that the pain of inflation may not be shared equally.

 

Prices have soared for physical products but have risen only modestly for services. The cost of gasoline is up 58 percent in the last year, while health insurance prices have fallen almost 4 percent. Meat prices are up 13 percent, dairy 1.6 percent. Boys’ apparel is up 8.4 percent, while girls’ apparel is down 0.4 percent.

 

Differences like that mean that the inflation rate a person faces depends on what that person buys and where he or she lives and shops. People who live in more rural states, for example, most likely drive significantly more miles per year — so fuel inflation would matter a great deal to them.

The pain associated with inflation may be the most acute for those at the bottom. From mid-2019 to early 2020, the Consumer Expenditure Survey, the government’s primary data source on how consumers spend money, showed that those in the highest 20 percent of earnings spent, on average, less than two-thirds of their annual income. Households among the lowest 40 percent of earners actually spent more than their annual income, meaning they are most likely dipping into savings or taking out loans (although inflation can reduce the burden of debt for borrowers). Even at the same inflation rate, rising prices pinch spenders more.

 

Online shopping is also surely exacerbating inflation inequality. Before the Covid pandemic, I helped Adobe Analytics create a measure of online inflation analogous to the government’s Consumer Price Index (C.P.I.). Using anonymized data from Adobe’s marketing analytics division, we examined more than one trillion online transactions made between 2014 and 2017. We found annual online price inflation averaged almost 1.5 percentage points lower than the equivalent C.P.I.

 

Over the past 12 months, that gap has likely widened. Adobe’s latest release found online prices over that interval to be 3.5 percent higher — more than three full percentage points below the headline inflation rate of 6.8 percent. In November, online prices fell 0.2 percent as the C.P.I. rose 0.8 percent.

 

In other words: The more someone shops online rather than in stores, the less inflation the individual has faced. Notably, shopping online is far more common among high-income people. And during the pandemic the practice has grown more prevalent. Digital Commerce 360, a research company, estimates that three-quarters of the growth in the retail business in the United States in 2020 came from e-commerce.

It’s always possible that economists are wrong to worry about inflation inequality. The data may show the cost of living rising at about the same rate for everyone. If it does show differences, measures of inflation inequality are likely to become weapons in the partisan battles over the economy in the same way other data has.

 

But people understand that their economic situation is based on whether their income grows faster than their cost of living. Both of those vary across American society. It’s time for the government data to reflect that.

[kenberg]

As to how gas prices affect the poor: During my first few years of grad school, maybe 1960-1964, I couldn't afford a car so any rise of gas prices would have had only an indirect effect. Then a friend inherited a car so he sold me his 53 Ford for $35 with the agreement that if it was still running a year later I had to give him another $35. It wasn't.

But the larger point, that inflation hits hardest for those living close to the edge, is obviously correct. In doing my weekly grocery shopping back then, a cashier made a $1 error punching the keys on the register. Of course I caught it, she insisted she had made no error, I insisted she must have, she checked, and she had made an error. Now a number comes up from the register, I am asked to hit ok, I hit ok. Becky still checks receipts, but I never do. Never? Well, hardly ever.

My understanding is that the programs that give support to families with children have been seriously affected. If we are to help people hit by inflation, let's start there.

[pilowsky]

but I never do. Never? Well, hardly ever.

 

 

You are the very model of a modern mathematician.

[microcap]

As a 35 year investment professional, I have given the topic of inflation a ton of thought. Here are a few takeaways:

 

1) No one knows really how to measure "inflation." Housing and health care are impossible to truly measure. The CPI is absolute junk and we'd be better off if they never calculated or reported it. It has just led to terrible policy over the years. I suspect European measurement is even worse, but I have not researched it.

 

2) No one knows what actually causes inflation. Anyone who thinks Keynes was right has not paid attention for 40 years. [KRugman, Reich, and 99% of Wall Street believe in Keynesian economics." Friedman and monetarism are closer, but also wrong in the environment of electronic money. Since 2009, the US and other central banks have "printed" trillions with no inflation at all. If you have a good answer to this question, boy would I love to hear it.

 

3) There is certainly inflation, but the bond markets [and I agree with it] are telling you that the cause is different and more temporary than the 70's.

 

As always, I generate lots of questions but never any answers!

 

B-) :rolleyes:

[kenberg]

As a 35 year investment professional, I have given the topic of inflation a ton of thought. Here are a few takeaways:

 

1) No one knows really how to measure "inflation." Housing and health care are impossible to truly measure. The CPI is absolute junk and we'd be better off if they never calculated or reported it. It has just led to terrible policy over the years. I suspect European measurement is even worse, but I have not researched it.

 

2) No one knows what actually causes inflation. Anyone who thinks Keynes was right has not paid attention for 40 years. [KRugman, Reich, and 99% of Wall Street believe in Keynesian economics." Friedman and monetarism are closer, but also wrong in the environment of electronic money. Since 2009, the US and other central banks have "printed" trillions with no inflation at all. If you have a good answer to this question, boy would I love to hear it.

 

3) There is certainly inflation, but the bond markets [and I agree with it] are telling you that the cause is different and more temporary than the 70's.

 

As always, I generate lots of questions but never any answers!

 

B-) :rolleyes:

 

I am skeptical of many things, and that can include being skeptical of extreme skepticism. But in so far as you are saying that experts often speak with more confidence than the history of expert pronouncements justifies, I completely agree.

 

Oh. I am glad to see some new posters. Welcome.

 

 

 

[shyams]

I am not an economics trained person, I am not an investment professional, and most of my investments are for the long-term (with very few ins-outs in the middle). Here is my layman opinion -- hopefully aimed at provoking more thought.

 

1) No one knows really how to measure "inflation." Housing and health care are impossible to truly measure. The CPI is absolute junk and we'd be better off if they never calculated or reported it. It has just led to terrible policy over the years. I suspect European measurement is even worse, but I have not researched it.

The UK Office for National Statistics (ons.gov.uk) has been measuring CPI and RPI on a consistent basis. Yes we have free healthcare which may make comparisons easier but the methodology is documented and transparent. Our media never talks about "core inflation excluding gas prices" or other kinds of variant inflation figures.

 

A proportion of the country also buys private healthcare insurance (either as an employer-provided perk or as a self-bought feature) -- I am quite sure that health insurance costs form part of the CPI and their weights are proportionally lower because it is not universally bought. The local media (incl. BBC) often talk about how some portion of the inflation affects the pensioners more. The media websites often carry a rudimentary "personalised inflation calculator" to help people understand what is happening.

 

In short, the fact that inflation is not properly measured may be a US phenomenon, not a European one. We probably know a bit more about what inflation means to us.

 

2) [...] Since 2009, the US and other central banks have "printed" trillions with no inflation at all. If you have a good answer to this question, boy would I love to hear it.

Yes, the central bank printing trillions did not impact inflation as we know it because the money did not flow back to the average household.If (hypothetically) all the QE funds were instead distributed to every tax-paying American as a tax rebate check, your country (and consequently the world) would have seen inflation like never before.

 

The inflation, if any, is happening in asset prices. There were expert-written articles making the rounds about "asset inflation" that are worth reading; some are too complex for my understanding. That asset prices are rising due to surplus liquidity is more likely a causal rather than a coincidental relation.

 

Given that asset inflation impacts the average folk mostly when they try to buy homes, the millionaire folk when they try to buy art, and the billionaire folk when they try to buy corporations, not much media attention is given to whether & how asset inflation can be harmful.