Category: Economics

Inflation running at 13 percent is characterized as being 8.6 percent

by philg

Inflation is at 8.6 percent: “Consumer prices jumped 8.6 percent in May compared to last year as inflation holds grip on U.S. economy” (NBC).

If we dig into the article a little, however, we find that current inflation, month-to-month, is actually at 13 percent per year (up 1 percent from month to month).

Another example… “U.S. inflation hit a new 40-year high last month of 8.6 percent“ (Politico):

America’s rampant inflation is imposing severe pressures on families, forcing them to pay much more for food, gas and rent.

The costs of gas, food and other necessities jumped in May, raising inflation to a new four-decade high and giving American households no respite from rising costs.

Consumer prices surged 8.6 percent last month from 12 months earlier, faster than April’s year-over-year surge of 8.3 percent, the Labor Department said Friday.

On a month-to-month basis, prices jumped 1 percent from April to May, a steep rise from the 0.3 percent increase from March to April. Much higher gas prices were to blame for most of that increase.

What does Zillow expect for inflation in house prices in our ZIP code (the non-waterfront parts of Jupiter, Florida)? (note that real estate inflation is explicitly excluded from official government CPI) A 14.6 percent boost.

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Supply chain disruptions will end up favoring newcomers in markets

by philg

Our HVAC guy here in South Florida mentioned that he formerly installed Mitsubishi mini-split (“ductless”) air conditioners. Mitsubishi has long been considered the quality leader in this market, which they pioneered in Japan and then in the U.S. Since coronapanic, however, he’s found that most of the Mitsubishi stuff that he used to install went out of stock. “I began putting in GREE, which has a longer warranty and actually seems to have fewer problems and failures.” GREE, a Chinese company founded in 1991 (Wikipedia), isn’t a supplier he would have considered prior to the interruption of his supply from Mitsubishi that was occasioned by the various lockdowns. Now he will default to GREE even when Mitsubishi is available.

I was going to put a UniFi system into our house. This is the brand that I knew and that a friend has had positive experience with. However, everything was out of stock. So I took a reader’s suggestion and purchased TP-Link’s Omada products, which are half the price of UniFi and, more importantly, in stock for 2-day shipping.

Is it fair to say that the “sorry, it’s out of stock” messages from the traditional market leaders are going to turn out to have been the most lasting market disruption of coronapanic?

Related:

  • The pre-coronapanic situation… “Is Lack of Competition Strangling the U.S. Economy?” (Harvard Business Review, 2018): There’s no question that most industries are becoming more concentrated. Big firms account for higher shares of industry revenue and are reaping historically large profits relative to their investment. … incumbent firms in a wide range of industries — airlines, beer, pharmaceuticals, hospitals — are wielding market power in ways that prevent rivals from emerging and thriving. The winners are winning bigger, while the number of new start-ups is falling. With waning competitive pressure, productivity growth slows, wages stagnate, and the gap between winners and losers widens. … Ten years ago, the top four U.S. airlines collected 41% of the industry’s revenue. Today, they collect 65%.
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NYT: the broadest economic recovery entails a falling GDP

by philg

This is one of my favorite New York Times headlines ever: “G.D.P. Report Shows the U.S. Economy Shrank, Masking a Broader Recovery”.

Our technocratically-managed economy is thriving, even if shrinking a bit (the per capita shrinkage would be more dramatic if you consider population growth, just as the headline “GDP growth” figures that we’re accustomed to seeing don’t represent an actual improvement for the average person because there are more people in the US every day). So we shouldn’t lose faith in the central planners.

Speaking of central planners, I visited a friend in D.C. who works as an economist at the Federal Reserve. A few days earlier, she had received the Economist magazine in the mail. The cover story: “The Fed that failed; Why the Federal Reserve has made a historic mistake on inflation”.

One of the things that I like least about the Economist is their faith in technocracy. All of the world’s problems can be solved with enlightened leadership. Here’s how the article begins…

Central banks are supposed to inspire confidence in the economy by keeping inflation low and stable. America’s Federal Reserve has suffered a hair-raising loss of control. In March consumer prices were 8.5% higher than a year earlier, the fastest annual rise since 1981. In Washington inflation-watching is usually the preserve of wonks in shabby offices. Now nearly a fifth of Americans say inflation is the country’s most important problem; President Joe Biden has released oil from strategic reserves to try to curb petrol prices; and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.

It is the Fed, however, that had the tools to stop inflation and failed to use them in time. The result is the worst overheating in a big and rich economy in the 30-year era of inflation-targeting central banks.

(I’m not a subscriber, so I don’t know how it ends. Maybe a reader can enlighten us all!)

Update: After disabling JavaScript for this site in Microsoft Edge, I can see the whole article. Some choice excerpts:

Strip out energy and food and the euro zone’s inflation is 3%—but America’s is 6.5%. Also, America’s labour market, unlike Europe’s, is clearly overheating, with wages growing at an average pace of nearly 6%.

Uncle Sam has been on a unique path because of Mr Biden’s excessive $1.9trn fiscal stimulus, which passed in March 2021. It added extra oomph to an economy that was already recovering fast after multiple rounds of spending, and brought the total pandemic stimulus to 25% of gdp—the highest in the rich world. As the White House hit the accelerator, the Fed should have applied the brakes.

Is it fair to blame the Fed? When the government is spending like an alimony plaintiff, what could the Fed possibly have done to stop inflation?

The good news is that we can continue cheating hard-working foreigners, even as Americans continue to relax at home:

Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.)

When the Japanese (holders of $1.3 trillion of our debt) come over to redeem the 30-year Treasury Bonds that they purchased in good faith reliance on our integrity, they’ll be able to use that money to buy a one-week visit to Disney World for a family of three?

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Professor Krugman’s Nobel-grade thinking about inflation

by philg

Six months ago, the New York Times’s in-house Nobel-winning economist wrote “Wonking Out: I’m Still on Team Transitory” (9/10/2021):

if we finally get this pandemic under control, the inflation of 2021 will soon fade from memory.

Professor Krugman was correct about Joe Biden getting the pandemic until control. When the Science-rejecting Donald Trump was in the White House 350,000 Americans died with/from COVID-19 in 2020. Due to President Biden’s leadership and the vaccines that He developed, we’re on track to suffer only roughly a third of a million deaths in 2022.

Professor Krugman also seems to have been correct in predicting “the inflation of 2021 will soon fade from memory”, but maybe that is because the inflation of 2022 has been so much more dramatic?

The Nobel laurate is back this week with “How High Inflation Will Come Down”. He starts by doing what my former hedge fund manager friend says nearly all analysts do, i.e., extrapolating from recent events:

Rising prices will get worse before they get better.

Something new for an American journalist or politician… He blames Russia:

Russia’s invasion of Ukraine has caused the prices of oil, wheat and other commodities to soar.

This time it is different:

Forty years ago, as many economists will tell you, inflation was “entrenched” in the economy. That is, businesses, workers and consumers were making decisions based on the belief that high inflation would continue for many years to come.

Things are very different now. Back then almost everyone expected persistent high inflation; now few people do. Bond markets expect inflation eventually to return to prepandemic levels. While consumers expect high inflation over the next year, their longer-term expectations remain “anchored” at fairly moderate levels. Professional forecasters expect inflation to moderate next year.

If the professional forecasters are good at their jobs, why aren’t they absurdly rich via trading on their own previous forecasts and, thus, retired from forecasting?

Nobel-grade thinking… Prices will go down as soon as prices go down:

A lot of recent inflation will subside when oil and food prices stop rising, when the prices of used cars, which rose 41 percent (!) over the past year during the shortage of new cars, come down, and so on. The big surge in rents also appears to be largely behind us, although the slowdown won’t show up in official numbers for a while. So it probably won’t be necessary to put the economy through an ’80s-style wringer to get inflation down.

Professor Krugman agrees with what Chauncey Gardiner pointed out, i.e., that there will be growth in the spring:

The inflation of 2021-22 looks very different, and much easier to solve, from the inflation of 1979-80.

What if it takes a few springs for inflation to subside?

Related:

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Asset price inflation + inflation = demotivation for successful people?

by philg

Although quite a few people of modest means enjoy aviation as a hobby, those of us who fly small aircraft often encounter the financially comfortable ($10-100 million in savings; when a house in Palm Beach costs $210 million, a centimillionaire can’t be considered “rich”). U.S. government coronapanic policies made these folks quite a bit wealthier, sometimes doubling their net worth in nominal dollars. At the same time, what they’re able to charge for working hasn’t changed too much and the Trump tax law changes caused their marginal tax rate to go up (state income tax no longer deductible from federal).

All of these people have enough savings to retire, but many continued to work when a year of hard work could increase their net worth by 5 percent. Quite a few of them have said that they’ve scaled back their efforts ever since asset prices took off. A year of hard work will now bump the net worth by only 2 percent and the typical person I’m writing about is in his 50s or early 60s. He might have only 10 more years of reliably good health. Why spend that final decade of vigor at a desk and starting at a computer if it won’t move the wealth needle significantly? These people already own a house, a vacation house, and a reasonably new fleet of vehicles. They don’t have a landlord demanding a 40 percent rent increase. Why not play tennis, kiteboard, hit the golf course, ski every day, or travel?

Does it matter to an economy when more of the most successful people retire younger? If we assume that their financial success can be attributed to luck, then it might be good. More positions will be open at the top of various enterprises, which will motivate people in their 40s to work harder. If, on the other hand, we assume that hard work, skill, and intelligence were primarily responsible for success, the American workforce is losing a lot of its best people.

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Inflation prediction to check in 2028

by philg

“Will Inflation Stay High for Decades? One Influential Economist Says Yes” (WSJ):

When the global economy tanked in March 2020, the rate of inflation looked like it was heading to zero. That made it a surprising moment for former U.K. central banker Charles Goodhart to predict that inflation would hit between 5% and 10% in 2021—and stay high.

“The coronavirus pandemic will mark the dividing line between the deflationary forces of the last 30 to 40 years and the resurgent inflation of the next two decades,” said the 85-year-old economist in an interview. He predicted that inflation in advanced economies will settle at 3% to 4% around the end of 2022 and remain at that level for decades, compared with about 1.5% in the decade before the pandemic.

He argued that the low inflation since the 1990s wasn’t so much the result of astute central-bank policies, but rather the addition of hundreds of millions of inexpensive Chinese and Eastern European workers to the globalized economy, a demographic dividend that pushed down wages and the prices of products they exported to rich countries. Together with new female workers and the large baby-boomer generation, the labor force supplying advanced economies more than doubled between 1991 and 2018.

Now, he said, the working-age population has started shrinking across advanced economies for the first time since World War II, and birthrates have declined as well. China’s working-age population is expected to shrink by almost one-fifth over the next 30 years.

The beauty of the above theory is that we can mark our calendars to test it! I propose January 15, 2028. At least currently, the BLS releases CPI numbers on January 12. The economy is subject to heavy manipulation by politicians seeking reelection, but 2027 won’t have been an election year.

How about we say that this guy is a genius if inflation has, in fact, run at an average rate of higher than 3 percent for the period January 2021 through December 2027? I don’t think it is fair to demand that he be held to the 4 percent upper bound due to the fact that desperation and incompetence among politicians could easily result in some months or years of runaway inflation. I’m going to schedule a blog post for January 15, 2028!

With houses in any reasonably desirable neighborhood going up by 20-50 percent per year, you might argue that betting that Charles Goodhart is correct is too easy. But the WSJ mentions some naysayers.

A central criticism of Mr. Goodhart’s thesis is that countries with more retirees and fewer workers, such as Japan, have the opposite problem—very low inflation rates.

(Wikipedia says that he has a Ph.D. from Harvard and is an professor emeritus at LSE, but he is “Mr. Goodhart” rather than being presented as a colleague of Dr. Jill Biden, MD, PhD.)

I’m prepared to love Professor Dr. Goodhart because he references the Black Death in responding to the above criticism:

Mr. Goodhart argued that workers likely won’t save enough for their retirement, and that pensioners consume more than they produce, especially with healthcare. The dwindling pool of savings, combined with increased corporate spending to secure supply chains and make up for a lack of workers, will push up interest rates, he predicted. He said the Black Death, a 14th century pandemic, triggered a quarter-century of soaring wages and rampant inflation.

See

for my own Black Death obsession.

If Goodhart is correct, anyone who doesn’t take a fixed-rate 30-year mortgage offered at 3.25 percent is going to feel stupid!

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The Money Mandarins are responsible for our debased money

by philg

Raging inflation at the sushi and noodles place near Legoland (burned some $4.50/gallon dinosaur blood in the minivan):

Can we find someone to blame for our debased money? The Wall Street Journal can! “The Humbling of the Federal Reserve” (3/14/2022):

The central bank faces an inflation mess of its own making.

Government spending excesses in 2020 and 2021 played a role, but the Fed made all of that easier to pass by maintaining the policies it imposed at the height of the pandemic recession for two more years. Low interest rates make deficits seem more fiscally manageable than they really are. The Fed has continued to buy Treasurys and mortgage-backed securities even as inflation nears 8%—right up until this week’s meeting.

What went wrong? The Fed is supposed to have the world’s smartest economists and access to the best financial information. How could they make the greatest monetary policy mistake since the 1970s?

Part of the answer lies with the Fed’s economic models, which are rooted in Keynesian analysis in which demand trumps all. The Fed models give little thought to incentives for or barriers to the supply-side. As finance scholar Emre Kuvvet wrote recently on these pages, among economists in the Federal Reserve System, Democrats outnumbered Republicans by 10.4 to 1 in 2021. They prefer James Tobin over Milton Friedman.

This leads the Fed to overestimate the growth effect of federal spending but underestimate the growth benefits of regulatory and tax reform. For years after the 2008-2009 recession, the Fed’s governors and regional bank presidents predicted faster GDP growth than what happened. But they missed the faster growth after the 2017 tax reform.

What happens next? We’re told to expect an 0.25 percent increases in interest rates. How much of a difference can that make when interest rates remain lower than inflation (i.e., when you’d have to be a fool not to borrow)?

The news from Legoland isn’t all bad, incidentally. There are no problems too challenging for Presidents Biden and Harris to tackle from the White House:

History lesson: a stroller was often as important as a battle axe:

Related:

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A retail day in the post-coronapanic U.S.

by philg

I try not to brag about going to places that only the one-percenters can afford, but I visited a gas station yesterday. Sign inside: “We do not know why Dunkin is closed or when it will open”.

The Palm Beach County government office where we went to obtain new passports for the kids thanks us for our patience during “this brief disruption”:

Speaking of disruption, how long does it take government workers to do what is probably 10 minutes of work? (issuing a passport renewal) 8-11 weeks for “routine” and 5-7 weeks for “expedited” (plus a week of mailing time under the latest USPS procedures?). During this time, the “customer” cannot leave the U.S. because the old passport must be included with the application. travel.state.gov:

Speaking of backlogs at government monopolies, the FAA aircraft registration branch says “We are processing documents received on approximately November 9, 2022.” If we assume that they meant November 9, 2021, that’s 120 days ago. The assumption in the regulations was that this would almost never take more than 90 days and, therefore, the “pink slip” of the application was valid for 90 days. By failing to clear out this backlog, therefore, the FAA has actually increased its workload because now they are guaranteed to get requests for letters of extension for each and every aircraft that anyone is seeking to register.

After the passport paperwork was submitted, the counter-serve restaurant, “experiencing staff shortages”:

Then the gelato shop next door, which couldn’t make milkshakes because they were waiting for more milk to be delivered. They won’t accept $100 bills (“Manhattan food stamps” back in the day when $100 was real money) despite the fact that a family of four could easily spend $50 (gelato plus drinks plus tip):

Leaving these here for a future economic historian.

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Open house today in our neighborhood

by philg

There’s a house for sale in our neighborhood (we rent a 2BR for $2800/month). It went on the market about a week ago. The first showings are today, 10a-4p, and “All contracts must be submitted by 5:00pm on March 3rd.” This million dollar home (built in 2012; re-sold in 2017 for $1.3 million) sits on a princely quarter-acre lot and offers a vast interior space of 4,574′. It was “coming soon” at $2.95 million two weeks ago, but the asking price now is $3.225 million (escaping NY, MA, and CA vaccine coercion and mask orders is not cheap!). The house comes with the opportunity for a lifetime close friendship with the appliance repair brothers, sisters, and binary resisters (i.e., there is a Sub-Zero fridge).

Zillow estimates the value at $2.225 million. Redfin admits “we don’t have enough information to generate an accurate estimate at this time.”

Your entire collection of hard-to-buy vehicles, e.g., Honda Accords, has to fit in the two-car garage. There is no basement or attic, so the garage also needs to serve as storage.

Let’s compare actual inflation in the cost of this house compared to the government’s official inflation rate. $1.29 million in April 2017 was equivalent to $1.48 million in January 2022 (the most recent month available for the BLS calculator). If the house sells for $3.225 million, therefore, it will represent an additional 118 percent inflation over the officially published rate.

Update, May 13: The house closed at $3 million, according to Zillow/Redfin.

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Restaurant closures point to more inflation ahead?

by philg

A popular restaurant in booming South Florida, February 22, 2022:

(“Sorry, we are closing for lunch due to staffing. Our new hours of operation are Monday through Saturday, 4:00 pm to 9:00 pm.”)

It took them nearly an hour to put a $28 stew over spaetzle on my table on a Tuesday night (about 80 percent full). Most of this dish would have had to be pre-cooked. The waitress explained “we have only two cooks on the line tonight”.

A few days earlier, I had talked to a restauranteur and chef from Maskachusetts. After several decades, she’d closed her usually-busy restaurant. “I was paying 14-year-olds $20 per hour to wash dishes and I had to train them,” she explained.

With tax and tip, my entrée cost about $36, but what would have been the cost to get food in an amount of time considered normal back in 2019? To me, that’s the inflation that is pent-up in our economy. Maybe the cost to the consumer needs to go to $45, for example, (a 25% bump) in order to give the restaurant enough money to hire additional kitchen staff. The lunch closure, for an Econ 101 student, suggests that whatever the prices that a restaurant can charge to serve lunch aren’t high enough to yield a profit after paying staff to come in during lunch. (A counter-service or fast food restaurant might still be able to survive, though, because their labor cost percentage is lower than at table-service restaurants.)

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