Inflation?

[y66]

Two things are true:

 

1. There is a specific supply disruption in the automotive sector and it's a big deal because cars are important

 

2. The general strain on shipping and logistics is high demand not a disruption to the supply chain

 

Repeat after me, says : "There is no supply chain crisis. There is unusually high demand. There is no supply chain crisis. There is unusually high demand. There is no ..."

 

https://trib.al/zksdQGy

[johnu]

1) No one knows really how to measure "inflation." Housing and health care are impossible to truly measure.

As a non-mathematician once explained to me, you can't calculate an average because the "numbers" are all different.

[y66]

Long-term inflation expectations have fallen significantly over the past few weeks, to the lowest levels going back to March 2021, at least according to 5-year, 5-year forward breakeven rates.

 

 

This series is a measure of expected inflation (on average) over the five-year period that begins five years from today.

 

https://fred.stlouisfed.org/series/T5YIFR

[y66]

This might be the single most important chart for understanding the current inflation situation. For 25 years prior to 2020, the prices of durable goods like cars, washing machines, and couches fell every single year. Then in 2021 that suddenly and dramatically reversed.

 

For a quarter century, American consumers enjoyed steadily falling prices for durable goods. But then in 2021 those same prices started to rocket upward, as this chart (inspired by David Beckworth) shows. This is one reason that many economists don’t expect last year’s high 7 percent inflation rate to last much longer. Durable goods are traded in a global market, so if American consumers’ demand for cars and washing machines continues to outstrip supply, foreign companies like Samsung and Ikea will gladly supply more.

 

The more worrying sign on this chart is actually the recent, small uptick in the services inflation rate. While this looks small on the chart, it matters because consumers spend so much more on services. So even small changes in the average price of services has a significant impact on the overall cost of living.

 

https://fullstackeconomics.com/18-charts-that-explain-the-american-economy/

[y66]

f I had to go back and define the window where inflation downshifted it’d be the second half of March. 5-year breakevens peaked, ocean freight rates started falling, transport stocks plunged, mortgage rates soared above 4.5%, used vehicles prices fell, Amazon overstaffed.

 

[y66]

The @PIIE study referenced uses straightforward and standard methodologies to conclude that partial tariff removal could reduce the CPI by 1 to 2 percent.

 

Can liberalizing trade reduce US CPI inflation?

[hrothgar]

One point that I haven't yet see made

 

For years, manufacturers were optimizing supply chain efficiency at the expense of supply chain resilience. (Think about just in time inventory models and the like which dramatically decrease holding costs so long as everything is working smoothly)

 

Recent experience has shown that these systems can run into issues if there are supply chain disruptions.

 

We might see a shift back towards firms holding more inventory, countries bringing more manufacturing in house, and the like.

 

The trade off - of course - being that these sorts of systems are less efficient which means inflation

[mycroft]

I have seen several articles that said "the world learned the wrong thing from Toyota and JIT". They saw only the cost reduction from storage and inventory-on-books, and missed the "what are the expected failure cases for JIT, what is the delay of those failure cases, and how much inventory do we need of each type of component to survive them?" part. Because paying attention to that part hurts "line goes up" on the quarterly balance sheet - even if it cushions the blow of "line goes way down" when more than one of those failures occurs at the same time.

 

After all, we'll get 10 successes for every failure, and I get paid on success. And if the failure crashes the entire company - well, I might have moved on by then; if they fire me I still get paid well; and MBAs can do the same job in any industry(*), and with a proven track record and "the world fell apart and took us with it. You can't blame me for that, and anyway what is the chance it'll happen again?" for the one outlier, I won't have to worry about finding another job.

 

The workers? The customers (who are "always right")? All the downstream effects of the products the company created? Me and all the people I associate with made *bank*, what's your point?

 

And that's assuming that the goal of these people is keeping the company in business (and they failed). The ones that go in with the intent to loot it for everything they can and leave the rotting husk to die by the side of the road are worse.

 

(*) Note that I have history with this comment, but that's what Harvard sells, and they seem to have convinced the world to buy it. Perhaps by installing MBAs in enough of the hiring positions in companies...

[y66]

Inflation in the United States has probably peaked.

 

I realize in saying that I risk coming across as the boy who cried “no wolf.” I called inflation wrong last year. Much of current inflation reflects huge price increases in sectors strongly affected either by pandemic distortions or, lately, by Russia’s invasion of Ukraine, but at this point measures that try to exclude these exceptional factors are also running high, suggesting that the U.S. economy as a whole is overheated:

 

 

But the economy is probably cooling off as the Federal Reserve’s monetary tightening gains traction. And the news flow on inflation has changed character. For most of the past year, just about every report on prices surprised on the upside. These days many, though not all, reports are surprising on the downside. Measures that attempt to gauge underlying inflation, like the “core” consumption deflator released this morning, are mostly, although not all, drifting down.

 

Furthermore, there is no hint in the data that inflation is becoming entrenched.

[y66]

As I pointed out in my latest column, the politics of inflation are dominated by concerns about gasoline and food prices — precisely the prices over which policymakers in general, and the president in particular, have the least influence. Economists, by contrast, usually focus on measures that try to get at underlying inflation, excluding highly volatile stuff like, well, energy and food.

 

Actually, the traditional definition of “core” inflation — the one usually used by the Federal Reserve — which excludes only energy and food, has been problematic in the post-pandemic era. Why? Because we’ve been seeing some wild fluctuations in other prices, like used cars. So there’s growing emphasis on other measures of core inflation, like the Dallas Fed’s “trimmed mean” measure, which excludes extreme price movements in either direction. You can see the difference in this figure, which shows three-month rates of change in the two measures since 2020 (month to month is too noisy, whereas annual changes lag too far behind events):

 

Not rotten at the core.Federal Reserve Bank of Dallas, FRED

Traditional core inflation has been highly variable, the alternative measure less so. Both measures, however, have eased off lately. It looks as if underlying inflation is running at something like 3.5 to 4 percent.

 

Easing inflation is good. But we’re still well above 2 percent inflation, which the Fed and other central banks have traditionally seen as their target. And the Fed is set to continue tightening until that target is hit.

 

So why is 2 percent the target? I’m not going to crusade against the 2 percent solution. But anyone interested in economic policy should know that the history of how 2 percent came to define “price stability” is peculiar, and that the argument for keeping that target is grounded less in straightforward economics than in almost metaphysical concerns about credibility. More

[Winstonm]

So we have moved from Voodoo economics to economics of voodoo.

[y66]

From Disinflation begins by Noah Smith:

 

For over a year now, we’ve seen inflation rise relentlessly. Price rises have lowered real wages for most workers, driven popular anger, and threatened economic stability. But there are finally indications that the tide is turning. In March, financial markets were predicting an annualized inflation rate of around 3.5% over the next five years; now, that number is down to 2.6%.

 

More

[y66]

https://messaging-custom-newsletters.nytimes.com/template/oakv2?productCode=PK&te=1&nl=paul-krugman&emc=edit_pk_20220708&uri=nyt://newsletter/7b6bf091-8bed-561a-a2a0-30e47eba5d17

 

One of the sad paradoxes of politics is that few economic indicators matter more for public opinion — for voters’ evaluation of the government in power — than energy prices, especially the price of gasoline. This isn’t just a U.S. phenomenon: Inflation driven by soaring energy prices has undermined the popularity of leaders across the Western world.

 

Why do I call this a sad paradox? Because while policy can have a big effect on overall inflation, it doesn’t have much effect on energy prices. The rates for oil, in particular, are set on world markets; even the U.S. president (let alone the leaders of smaller nations) has very little influence on that global price.

 

Still, given the political salience of prices at the pump, leaders have an incentive to do what they can to bring them down a bit or at least be seen making the effort. So a few days ago, President Biden tweeted an appeal to “the companies running gas stations” to “bring down the price at the pump to reflect the cost you’re paying for the product.” Indeed, wholesale gasoline prices have fallen about 80 cents a gallon since early June, while the decline in retail prices has been less sharp.

 

The reaction to his remark was, however, savage. Most notably, Jeff Bezos in a tweet assailed Biden for “a deep misunderstanding of market dynamics.”

 

Hmmm. Did Bezos check out what we know about the market dynamics of gasoline prices (or order an underling to do it)? Because if he had, he would have learned that there are some peculiar things about those dynamics — things that suggest at least some justification for Biden’s appeal. Serious research offers a lot more support for the idea that market power has played a role in recent inflation than you’d imagine from the ridicule heaped on that notion, including from Democratic-leaning economists.

 

Monopoly power isn’t the principal cause of inflation, which has been driven by an overheated economy plus external shocks like Russia’s invasion of Ukraine. But there’s a reasonable case that monopoly power is a cause of inflation — and blanket attacks on the mere possibility reflect, well, a deep misunderstanding of market dynamics.

 

So, about those gas prices. As economists at the St. Louis Fed recently pointed out, there’s a longstanding phenomenon in the fuel market known as asymmetric pass-through or, more colorfully, rockets and feathers. When oil prices shoot up, prices at the pump shoot up right along with them (the rocket). And when oil prices plunge, prices at the pump eventually fall, but much more gradually (the feather).

 

Why this asymmetry? There have been a number of economic papers trying to understand it, pretty much all of which stress the market power of companies that face limited competition (something Bezos surely knows a lot about.) The clearest explanation I’ve seen is in a relatively old paper by Severin Borenstein, Richard Gilbert and A. Colin Campbell. I’d summarize their argument as follows: When oil prices shoot up, owners of gas stations feel empowered not just to pass on the cost but also to raise their markups, because consumers can’t easily tell whether they’re being gouged when prices are going up everywhere. And gas stations may hang on to these extra markups for a while even when oil prices fall.

 

Is there evidence for this story? Yes. Notably, the rockets and feathers phenomenon seems to be strongest in areas where individual gas stations face relatively little competition.

 

In such a situation, badgering gas stations to get their prices down may actually make some sense. We can argue about its effectiveness, but it’s not stupid, given what we know about the relevant market dynamics.

 

What at least a few readers may notice is that the market power explanation of rockets and feathers — an explanation with an impeccable academic pedigree, developed by economists who had no obvious political ax to grind — is pretty much the same argument politicians like Elizabeth Warren have made about how monopoly power may have contributed to recent overall inflation. That is, some politicians argue that corporations have taken advantage of a generally inflationary environment to jack up their markups, in the belief that they will face less public backlash than they would in normal times. And this exploitation of market power has pushed inflation even higher.

 

Such arguments have been greeted with ridicule and horror, even from some Democratic-leaning pundits and economists. But they make sense, as illustrated by the economic literature on gasoline prices. And what appears to be true for gasoline prices could be true more generally. New research by Mike Konczal and Niko Lusiani of the Roosevelt Institute, a progressive think tank, finds that recent price increases have been largest in industries that had limited competition — as indicated by high markups — even before the pandemic. That’s the same kind of evidence that supports the view that asymmetric adjustment of gasoline prices reflects market power.

 

The mystery to me is why so many of my colleagues, in both the economics profession and the economics punditocracy, have had such an extremely negative reaction to any suggestion that market power might be playing a role in inflation and that presidential jawboning might make some contribution to anti-inflation strategy. <snip>

[y66]

Here's Paul Krugman explaining why the shelter component of the CPI aka Owner's Equivalent Rent lags current market rents and still has a ways to go before catching up. Since the shelter index accounts for ~40 percent of the all items less food and energy index aka the core CPI which the Fed uses to guide policy, we can expect to see continuing upward pressure on the core CPI from increasing (average) shelter costs for several months after market rents plateau (which they appear to be doing) and continuing pressure on the Fed to get inflation under control.

[kenberg]

Here's Paul Krugman explaining why the shelter component of the CPI aka Owner's Equivalent Rent lags current market rents and still has a ways to go before catching up. Since the shelter index accounts for ~40 percent of the all items less food and energy index aka the core CPI which the Fed uses to guide policy, we can expect to see continuing upward pressure on the core CPI from increasing (average) shelter costs for several months after market rents plateau (which they appear to be doing) and continuing pressure on the Fed to get inflation under control.

 

I have no idea of how detailed the data can be. Krugman's argument is that the push on rental prices is driven by the Virginia Woll, room of my own, effect as more people work at home and just generally spend more time at home. It seems that this effect would be stronger on three-bedroom apartments than on one-bedroom apartments. Is it?

 

Like many/most people there was a time when I lived in pretty basic living quarters. Maybe I'll see if I can see what a similar place would cost today, and compare this with inflation.

[y66]

At past Jackson Hole conferences, I have discussed broad topics such as the ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct…

 

Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain…

 

July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting… At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases. [Josh adds: the subtext here from the “at some point” is that while the rate increases will get smaller eventually, September is still likely to be another 75-basis-point increase.]

 

[W]e must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

[y66]

From Paul Krugman:

 

For as long as I’ve been paying attention to economic news, pundits and investors have waited anxiously for the monthly report by the Bureau of Labor Statistics on the employment situation. That’s still true, and there was some important news in today’s report. More on that later.

 

But another report from the bureau, which came out on Tuesday, was a real eye-opener. It was, in particular, the best news about inflation we’ve seen in a long time — even though it never mentioned inflation.

 

More

Let me offer a quick-and-dirty, though nerdy, way to understand that report’s implications. The following picture shows unemployment versus vacancies — the Beveridge curve — with each point representing that relationship at intervals over the past 15 years and with unemployment truncated at 8 percent to exclude the depths of the pandemic slump:

 

Not so ugly after all?Bureau of Labor Statistics, author’s doodling

 

Until August, vacancies were much higher than prepandemic experience suggested they should be for any given rate of unemployment. The red line represents eyeball econometrics — not a formal statistical estimate but my rough take on the apparent trade-off between unemployment and job offerings during the recovery from the pandemic slump.

 

The green dotted line shows combinations of unemployment and vacancies that would yield the same vacancy ratio that prevailed in 2019, when inflation wasn’t a problem. (For sticklers: It shows the ratio of vacancy to unemployment rates, which isn’t exactly the measure Ball et al use, but that’s a trivial difference.)

 

What you can see (from the intersection of the solid red and dotted green lines) is that until very recently, it looked as if restoring the prepandemic vacancy ratio would indeed require something like 5 percent unemployment.

 

But August was significantly below the red line. It’s only one month’s data, but it suggests that the trade-offs may be improving as the economy recovers from Covid disruptions. A high unemployment rate may not be necessary after all.

[sharon j]

I find economics at the national level difficult to understand. I hope it is ok to post a link here to a couple of John Stewart podcasts that discusses it. I found the broadcast "How Do We Fix the Economy?" especially interesting. https://www.youtube.com/results?search_query=john+stewart+economist