Bad News About Inflation

https://paulromer.net/bad-news-about-inflation/

by stereoradonc • 3 years ago

73 110 3 years ago

wavesounds2• 3 years ago

My understanding is that a large portion of this "CPI index that excludes food and energy" is housing. Which might explain the seasonality mentioned in this blog post (people tend to move more in the warmer months).

I don't see how raising interest rates will help when the core issue with housing is the lack of supply. If anything higher rates will make it harder to add more supply.

dangwhy4• 3 years ago

I don't see how raising interest rates will help when the core issue with housing is the lack of supply.

why did this become a issue last 2-3 years. I don't understand this at all. Re raising interest rates will crush demand via job losses, foreclosures, dissuade flippers and property speculators.

wavesounds2• 3 years ago

Because of the pandemic which caused people to desire more space. Maybe they were living with their parents or roommates and want their own place, maybe they had kids during the pandemic, maybe they need a home office.

Sure if you raise rates enough to cause a recession and massive job loss that would eventually push home prices down but it seems like building more housing would be a simpler, kinder solution.

pc86• 3 years ago

Re raising interest rates will crush demand via job losses

Raising interest rates doesn't automatically lead to layoffs and businesses closing. It certainly might for faltering or weak companies, but it's not like x% interest rate increase === y% unemployment increase or z% business closure.

foreclosures

Sure, if you have an adjustable rate mortgage, are massively underwater, and can't afford the new payments. That in and of itself is not a bad thing - if you couldn't afford the house five years ago at 4.5% fixed rate, you couldn't afford it at a 3% ARM either. There's no reason to think an increase in foreclosures would be anywhere close to 2008 levels simply because rates are increased to more historically reasonable levels.

dissuade flippers and property speculators

Good.

svachalek2• 3 years ago

They don't raise mortgage rates, they raise the rates at which banks pay each other for overnight loans. But this tends to affect all other rates indirectly, including mortgages. They've only got one tool and it's a giant sledgehammer. From the looks of it they're trying to crash the economy, but avoid wrecking it so badly they can't start it up again.

The Fed can't do anything about housing supply. Mostly it's zoning regulations preventing it, lower mortgages to bring out the buyers might help a little but even when the market was roaring we hardly built anything.

gjsman-1000• 3 years ago

Who would’ve thunk that almost everything we did during the pandemic would be called into question whether it was really a good idea.

The dumbest take though on the inflation issue was from the Washington Post, with this since-renamed headline: “Inflation is cooling, so why aren’t customers feeling it?” Well, slowing inflation isn’t exactly deflation, is it!

dboreham• 3 years ago

That pesky second derivative.

soared2• 3 years ago

The gains in wages and employment that the hot labor market is delivering seem very large compared to the modest cost imposed by a temporary period of inflation.

Sentences like that seem crazy to me - where is the hot labor market money going outside of faang? In my circle nobody is getting raises that overcome inflation unless they switch jobs, which is only viable every couple years at a max and has diminishing returns over time.

Separately, is inflation temporary? I had thought price increases don’t return to their prior levels with the exception of gas, and seemingly a dozen eggs.

dangwhy4• 3 years ago

I think hot labor market is outside of white collar jobs. Thats why i am seeing with my family members who dont' work white collar jobs, demand is unlimited.

coldtea4• 3 years ago

Find it hard to believe this (except some regional or personal exceptions), since a lot of the demand for non-white-collar services comes from white collar employees who aren't exactly thriving and spending atm...

Except if there's some thriving export industry with domestic factories on the rise!

beambot• 3 years ago

Outside of FAANG? They're all doing layoffs too...

tekla• 3 years ago

No they're not. They are all hiring like crazy

svachalek2• 3 years ago

Inflation, as a rate of change, is dynamic. The Fed aims for it to be about 2%, but 7% is much too high so they are ramping up rates to put a stop to that. Prices rarely go back down (consistent falling prices would be deflation, which tends to be economically disastrous as it rewards doing nothing) but the rate can fall which is what he's referring to.

MichaelBurge2• 3 years ago

deflation, which tends to be economically disastrous as it rewards doing nothing

Why's deflation different from e.g. sitting on treasury bonds? The money was originally printed by the government, the bonds are issued by the government, so sitting on bonds does nothing except pays you for taking money out of the economy temporarily, same as deflation.

If e.g. nobody would ever buy a computer because it'd be 2% cheaper if you wait a year, you could just as well argue that if bonds yield 2% above inflation you could park your money in them and wait a year and have 2% more money so nobody would ever buy anything.

nordsieck3• 3 years ago

consistent falling prices would be deflation, which tends to be economically disastrous as it rewards doing nothing

I hear this all the time, and I see little evidence that it's as strong an effect as everyone says.

Cars, computers, and phones are all deflationary (at last in normal times). And people seem to buy them just fine.

WalterBright5• 3 years ago

which tends to be economically disastrous

This is the conventional wisdom, but it's rooted in propaganda put out by the government. Deflation isn't any worse (or better) for the economy than inflation. It's the yin vs the yang, so to speak.

According to the government, inflation comes from profiteers, speculators, greedy capitalists, Putin, and any number of boogeymen. In reality, it comes from the government printing and spending excess cash. The government then tries to sell the idea that 2% inflation is good for you.

Now, government does need to raise money to fund its operations in one way or another. Inflation is arguably a reasonable (and fair) way to do it. But let's be honest about it.

tfehring• 3 years ago

Based on preliminary BLS data, average hourly earnings are up 6.1% Y/Y in leisure and hospitality, 5.5% in utilities, 5.5% in information, 5.4% in construction, and 4.7% in mining and logging. https://www.bls.gov/news.release/empsit.t19.htm

v0idzer0• 3 years ago

Your anecdotal evidence aside, unemployment is low and the labor market is hot. It’s mainly tech doing layoffs and that’s merely because they made so much money and grew so massive after covid they need to return to more sustainable spend levels

Zaheer• 3 years ago

Hot labor market is referring to Unemployment rate being near record lows [1].

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

coffeebeqn2• 3 years ago

Tech is deflating because of the crazy hiring during COVID and the VC/exit driven “business models” suffering most from the end of free money. Most employees in the US are in a stronger position than in years. Most people also haven’t been able to switch jobs - much less for a 50-100k raise.. ever. It’s easy to get lost in your bubble

hgsgm• 3 years ago

Price decease are deflation, not lack of inflation.

Same as when wages rise once

moneywoes• 3 years ago

Service industry jobs like restaurants

tyingq2• 3 years ago

Even that's tricky, as moving from $7/hour to $15/hour means you lose things like SNAP/Food Stamp benefits, jump from a 10% to a 12% tax bracket, etc.

Edit: Perhaps the ~$13k standard deduction is a better example line than the tax bracket. Just stating the wage growth isn't outpacing inflation as much as it might appear at first glance.

rib3ye• 3 years ago

Sometimes I go to In-and-Out Burger and I see hiring posters on the front door.

One year ago they offered $19/hr starting pay.

Today the poster says $22/hr.

Something is up.

toomuchtodo2• 3 years ago

Throwing US centric facts. 10,000 boomers retire every day. 1.8 million people 55+ die every year. A healthy economy makes anywhere between 150,000 and 250,000 jobs per month. There is no labor shortage, only a shortage of people willing to work jobs below a living wage, due to millions of people who left the labor force, either through retirement or death, during the pandemic.

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

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

https://www.axios.com/2022/12/16/the-missing-workers-who-are...

https://seekingalpha.com/article/4531829-older-workers-propp...

PaulDavisThe1st2• 3 years ago

Incredible. An actual realistic livable minimum wage!

Some advice I saw on a video a couple of months ago, targetting employers:

"Take a look on Zillow (or wherever) and get a good feel for the median rental cost of a 1 bedroom apartment where you are based. If you can't afford to pay your employers at least 3x that, maybe you either shouldn't be in business at all, or should plan on doing it all yourself"

Excellent advice, that perhaps In-and-Out Burger has taken.

nostrademons2• 3 years ago

"... unless they switch jobs"

That is how raises happen. The economy doesn't grow uniformly - new industries take off and cannibalize old industries, and the people in the old industries eventually lose their jobs while all of the gains in growth go to people in the new industries.

Folks who expect better-than-inflation raises without switching into a hotter industry or moving into a new role remind me of the Parable of the Drowning Man [1]. You have to help yourself and go move into the areas that are making money. Assume that about 20% of your actual job should consist of hunting for a better job (and that > 50% should be setting you up for a better job - ideally you are learning new skills in your current job that will be useful in higher-paying positions).

[1] https://en.wikipedia.org/wiki/Parable_of_the_drowning_man

joshspankit3• 3 years ago

Well I mean there’s a valid argument to be made that giving an employee a raise instead of finding/training a new employee is not only cheaper in the short term, but can provide exceptional ROI in the long-term (depending on industry of course).

As long as the employee is producing X amount of value for the company and the value is greater than the total cost of that employee the math is simple, reasonable, and healthy.

soared2• 3 years ago

Yeah that makes 100% sense, the issue is if you switch jobs too often is hurts your chances of being able to do that in the future. So it’s impossible to keep your pay in line with inflation, unless every ~4 years you switch to a role that has pay that makes up for your prior 4 years of inflation losses.

WalterBright5• 3 years ago

The whole point of inflation is to extract money from the economy to fund the government without tax increases. There's no way for wages to keep up with inflation.

I had thought price increases don’t return to their prior levels

They don't under a fiat money system. They do under a system where the money is exchangeable at a fixed rate with something not under the control of the government.

CyberDildonics• 3 years ago

This is exactly right, I don't know why it was downvoted.

misssocrates2• 3 years ago

Didn't the Fed say it was transitory inflation? What changed?

seizethecheese2• 3 years ago

Labor market is tightest in hospitality (if I remember correctly). Professional services and tech have cooled a lot.

joshspankit3• 3 years ago

Hospitality is definitely tight. Good employees have been cooked by the pandemic, the boomer generation is aging in to constant medical attention, and newbies are understandably hesitant to enter in to public-facing roles where the teams are lean.

Eddy_Viscosity2• 3 years ago

Inflation is the increase in prices. When inflation stops then prices stop rising. Deflation causes prices to go down, but the fed hates deflation and will act against it. So, yeah, prices won't be going down.

fauxpause_3• 3 years ago

I’m not sure who this person is, but I feel they lose a credibility make two bullet points that seasonal effects being a thing is a noteworthy insight, and that they are difficult to assess. I mean yeah, they’re going to be difficult to assess when you’re only plotting 2-3 years of data.

PheonixPharts2• 3 years ago

You can just click the "about" tab:

Paul Romer, economist and policy entrepreneur, is a co-recipient of the 2018 Nobel Prize in Economics Sciences and University Professor in Economics at NYU. He has spent his career at the intersection of economics, innovation, technology, and urbanization, working to speed up human progress.

I personally do find it surprising how over seasonal effects are often the primary number reported, and there isn't much effort to really understand them.

This was especially problematic for reporting unemployment numbers during the pandemic. All of the published unemployment numbers during the pandemic included seasonal effects, which is absurd to anyone giving the situation even a moments thought. Clearly the impact of the pandemic disrupted whatever seasonal pattern there may have been during stable period.

For unemployment during the pandemic including these seasonal effects would often invert conclusions about the data (e.g. "unemployment is higher this month" when the non-adjusted values were lower and vice versa).

Often times when we really care about an economic indicator it's during times where something strange is happening meaning we should be cautious about unquestioningly using seasonal effects in models.

fauxpause_3• 3 years ago

Idk. Seasonal effects may be tricky, but that graph showing just two years is certainly not strong evidence of that as the author claims.

He makes reference to a prediction of a 100 bps decline, I think by the end of the year which seems kind of silly to me given the numbers appear to swing by more then 1000 bps over individual months. I’d be curious what he’s actually basing the claim on. He has some sort of model. I’d hope it’s not just based on what is shown in the article

rfmc2• 3 years ago

It's a Nobel Prize winner in Economics, which doesn't mean much judging by the article, specially the creative interpretation of the data displayed in it.

TheOtherHobbes• 3 years ago

There is no Nobel Prize for Economics.

It's officially the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel," it dates from 1968 not 1900, it isn't part of the original prizes funded by Nobel, there's no evidence Nobel - given his distrust of the profit motive - would have approved, and it's funded with an endowment from Sweden's Central Bank.

There have been calls for it to be abolished.

To say some of the awards have been controversial among science and arts laureates would be a huge understatement.

JenrHywy2• 3 years ago

Dismissing someone of Roamer's stature in his field of expertise has to be peak HN.

PaulDavisThe1st2• 3 years ago

Would it be ok if Paul Krugman did it, though?

ProfessorLayton• 3 years ago

SVB's failure was barely a month ago, and has sent chills all over the banking sector, which has started to tighten lending all around. While the current inflation trends may seem troubling, it looks like higher interest rates have started to trickle their way towards cooling inflation significantly.

Of course this might not be the case, but at the very least I wouldn't expect the impact of SVB's failure to show up in any of these charts just yet.

Disclaimer: Not an economist

taeric• 3 years ago

Of course, svb didn't fail due to bad lending. So...

ivalm2• 3 years ago

Right, but higher capital requirements cause decrease in lending.

ac292• 3 years ago

Wasnt that the primary factor? They lent their money to the government at very low interest rates. When interest rates rose, the value of those loans fell.

seizethecheese2• 3 years ago

Economists estimate this to be equal to rough 0.3% higher interest rates.

weard_beard• 3 years ago

“Seasonal” ha!

Spring isn’t in the air. That’s the smell of fresh cut dollars.

mysecretaccount• 3 years ago

From February to March, the CPI index that excludes food and energy shows that prices rose at an annual rate of 5.8% this year

Didn't the BLS say 5.6%, not 5.8%? From https://www.bls.gov/cpi/

In March, the Consumer Price Index for All Urban Consumers increased 0.1 percent, seasonally adjusted, and rose 5.0 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in March (SA); up 5.6 percent over the year (NSA).

What am I missing?

zeitgeistcowboy• 3 years ago

I understand what he is saying. The difference between the two lines was positive in the last month. But, compared to how large this positive gap was last August and September (looks like about 4% to 5%) this really seems negligible and possibly due to noise. And, it seems even more negligible compared to the cumulative negative (a good thing) gap since October. I think it's a little early to call the trend on one recent data point. Seems a little alarmist.

jarsin• 3 years ago

Yes listen to this guy and please short treasury bonds. I need more rocket fuel on the way up.

skybrian• 3 years ago

Looking at that graph, I'm thinking "about the same as last year at this time."

coffeebeqn2• 3 years ago

I really don’t think one (1) datapoint is enough to draw any conclusions about the seasonality of inflation.

I’m sure inflation will be at a higher than baseline level for some years but unless something like COVID happens again - what would be driving an increase in inflation? If it’s from workers getting raises then why should we - the workers - worry about that? That’s literally the best place for the money to be going in the whole system!

rco8786• 3 years ago

Why are we using 2 data points and acting like it’s a trend.

zeckalpha5• 3 years ago

We rounded a corner in June, but the annual reporting hasn't caught up yet. Once we hit July, (annual) inflation is going to look a lot better, but has been better when you look at the monthly numbers. https://fred.stlouisfed.org/graph/?g=12rxD

1letterunixname2• 3 years ago

Real inflation, that is the prices of essentials like food and prescriptions paid by people who aren't made of money, is still absurd and under-reported as usual.

K-shaped recovery and inequality for the 99%.

Bad News About Inflation

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