Wow, this was the article I was looking for, it summarizes a number of thoughts about economics that I'd been having since the undergraduate days:
- There's an authority about the field that really isn't deserved. The models are not made properly, and there's a lot of hand-waiving. I studied economics with a class of engineers and everyone pointed this out.
- The pop-sci version of economics is a bunch of easy quips. Friedman's "everywhere a monetary phenomenon", Keynes "In the long run".
- The econ 101 version of economics is dominant in popular thought. You see it everywhere in newspapers. A more nuanced version of economics does exist, but the appeal to authority is strong in the field, because there's no real reasonable arguments, it's actually politics.
- Inflation is more interesting in a disaggregated view, for reasons mentioned. You can't look at it as a single figure.
- Relative price changes are what matter in society, because they represent changes in negotiation terms between different actors. Post-pandemic and Ukraine, we should expect to see more shortages as well as more strike action. Various groups like the RMT union will decide they need to flex their muscles. Chip shortages will cause negotiation positions to change across a wide variety of affected sectors like cars, meaning push will come to shove for certain lines of business.
The article talked a lot about winners and losers.
It's interesting that there's no mention of debtors and creditors.
The biggest winners in hyperinflation are people in massive debt. It's inflated away to nothing. The biggest losers are creditors for the opposite reasons.
When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount.
The thing that has nagged at you as it has me, is the simple fact that not only was “economics” conjured and molded by and for the interests of the upper echelon of society, to control the language and thoughts about its terms; but that at the core of it, it’s nothing more than fraud, deception, con artistry.
That’s all inflation is too, fraud that if you would commit it, e.g., you added filler to some product you delivered or forged signatures on delivery paperwork, you would be punished for.
You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service.
Friedman (et al) rejected empiricism. I was gobsmacked when I finally figured out what that meant. Like, wtf are they even arguing about if they reject reality?! (Ya, I am a slow learner.)
So agree or not with Nitzan's thesis, at least critics can have constructive debates about it.
> The econ 101 version of economics is dominant in popular thought. You see it everywhere in newspapers.
If only. Rent control wouldn’t exist. Policies that couldn’t pass any sane cost benefit trade off would be abolished. There would be a smooth, graduated marginal tax schedule. There would be congestion taxes on traffic.
The world would be incredibly different if Econ 101 was widely
understood.
The real point is that "inflation" is a badly defined term, and everybody uses a different meaning. So one person using the number measured by averaging the prices of a few real items says it's not purely monetary, while another using the value that converts monetary unities into real goods on the macroeconomic equations yells "what do you mean it's not purely monetary? It's defined that way, any real data was removed" (as a hint, you can't even measure that one).
If you get tired of this, there is a related discussion about the Keynesian investment multiplier. It's just as fun.
Inflation also ignores asset bubbles entirely by focusing on them as a separate class as not as too few houses or too few financial instruments being chased after by way too much money in the hands of the upper 90%/99%.
And this article barely mentions wages, unionization and wage-price spirals.
I thought the article made a lot of noise about very little.
Sure, inflation reports the change in price of an average basket, and some prices in the basket might have gone up a lot, and some down a lot. But that is a different issue, and not inflation.
The basket is carefully constructed to mirror what the average consumer consumes. Thus, the inflation of the basket measures how much more the average consumer has to spend on his consumption. That is certainly a useful number.
To your further points:
- [...] The models are not made properly, and there's a lot of hand-waiving.
I'd disagree, you must have come across the wrong models. Theoretical economics has many beautiful models precisely laid out. For example, the Arrow-Debreu equilibrium model [1] utilises "the Kakutani fixed-point theorem on the fixed points of a continuous function from a compact, convex set into itself." I doubt that any engineer can find fault with the specification of that model. Similarly, the Heckscher–Ohlin model of international trade is well specified and yields five informative theorems [2].
To which extent those models reflect, or can be applied to, the real world is an entirely different question of course.
Then there is empirical economics, a whole different ball park. But if you look at national accounts [3], for example, all those measurements are defined in excruciating detail, and there are books just dedicated to define the terms correctly.
- The pop-sci version of economics is a bunch of easy quips
Agreed. Some of them are more informative than others.
- The econ 101 version of economics is dominant in popular thought.
Yes, and that is quite bad, and is often exploited particularly by the political right, the business-friendly laissez-faire libertarians. James Kwak calls this Economism, and he has a great book about it [4].
- Inflation [...] can't look at it as a single figure.
Again, to the extent that it reflects the price increase for the consumption basket of an average consumer: yes, it is an interesting and important number, and in particular, it is one number. Obviously, with more numbers a more nuanced discussion is possible.
- Relative price changes are what matter in society.
Sure, they matter. But inflation in itself really matters also, per se.
By the way, Keynes pointed out that inflation need not be a bad thing. One thinks it is obviously bad because the average consumer has to pay more for his basket, thus can afford less of it. However, if there was, for example, a fiscal stimulus in the wake of a recession, and that leads to everyone having more money at their disposal, and aggregate demand rising, then there will be a new equilibrium with more demand, more supply, and higher prices (=inflation), but the average consumer having more of their basket than before. Good, not bad.
I found this analysis wildly off-base. No classical economist would suggest that increasing the money supply raises all prices uniformly, but the author seems to think that by showing that different goods' price changes are not uniform, that some how proves inflation is not a monetary phenomenon. What?
From Thomas Sowell's Basic Economics - "Inflation is a _general_ rise in prices. The national price level rises for the same reason that prices of particular goods and services rise - namely, that there is more demanded than supplied at a given price. When people have more money, they tend to spend more. Without a corresponding increase in the volume of output, the prices of existing goods and services simply rise because the quantity demanded exceeds the quantity supplied at current prices and either people bid against each other during the shortage or sellers realize the increased demand for their products at existing prices and raise their prices accordingly."
Note the emphasis on general. There is no reason to expect that the outcome of customers bidding against each other, or producers increasing prices to meet new demand levels would be uniform across all goods and services, furthermore, you would expect that the existing climate of the time would wildly swing the actors' actions involved in these bidding & pricing exercises.
It feels as though nowadays people feel entitled to make stuff up and have it be real through sheer force of repetition and words with multiple syllables. It's concerning that there are degrees in qualitative economics and non-programming computer science.
Inflation is a change in the price level, i.e. an average. TFA argues that inflation is misleading because prices don't change uniformly, and therefore inflation doesn't fully explain every change in the price of every possible commodity and service.
I think it's a straw man argument, because nobody claims that inflation fully explains changes in the prices of commodities. Instead, measuring inflation allows us to decompose these changes into a general component (i.e. inflation) and an idiosyncratic component (i.e. a change in relative prices), which is useful because it gives us more information about the causes of price changes. Inflation is only misleading if you're willingly misinterpreting it.
That's not what he's arguing. He's saying that restricting money supply as a solution to inflation only makes sense if the average price inflation represented price movements well. His contention is that it doesn't so restricting money supply isn't a solution.
I find that argument reasonably persuasive. His other point about inflation indices themselves being effectively useless, because of the inter price variability, I find less so. He skirts over the weightings which are key to the meaning of the index. They are weighted in such a way as to approximate the relative spending on each commodity. So the net effect of the index should be the inflation rate that you feel.
So average measures of inflation are valuable. The standard cures likely less so.
Indeed. Any suggestion that economists (neo-classical or otherwise) don't care enough about relative price changes is utterly ridiculous. They just don't call them inflation.
If this perspective carries the day - which is plausible - then all it will reveal is that basically nobody in the voting public should care about inflation:
1) Inflation is not a useful metric for financial planning. If your investments are keeping pace with inflation then you have completely failed to position yourself correctly relative to the massive money creation going on. The gold price trend is posting consistent real returns vs the CPI - which is stupid (if you believe the CPI measures inflation, anyway).
2) Inflation isn't a fair metric for referencing on wage raises. Again, we can see that wage earners are slowly getting crushed as a % of the economy [0]. If they are focusing on keeping up with the CPI then they'll get distracted from the fact that they could be doing a lot better if they could re-link wages with productivity.
3) Nobody knows how the CPI is calculated. If someone can find out the actual methods, weights and inputs then report back you get a virtual gold star. I did it once and it is a labyrinth to work out what they are actually measuring - I don't believe more than a small fraction of the people debating inflation understand or care about the details of what it measures.
To cap off a mild rant; it is not obvious why we care about what the truth about inflation is. Few people understand the number and it is unclear what use it is for decision making.
The more concerning factor is that the government is creating money on a grand and accelerating scale and that is going to end badly, like it always does. Cite some examples where it has led to a golden age? Printing money literally does not and cannot plausibly solve real problems.
Inflation is covert politics. As everyday items - especially including housing - become less and less affordable, the political system looks more and more like a plutocracy with power concentrated within an oligarchy, and less and less like a democracy.
That's the baseline reality. The rest is just misdirection and handwaving.
If this seems implausible, consider that the governor of the Bank of England recently said that workers should be "consider carefully" whether they wanted to pursue pay rises, while at the same time the energy monopolies in the UK are threatening to put 40% of the population into fuel poverty by massively hiking prices during a time of record profits.
And the Bank's own senior staff are receiving huge pay increases.
> Inflation isn't a fair metric for referencing if wage raises
Arguably this is the only one that the voting public really do care about - the relation between wages and the cost of living is one that historically produces unrest, and that's because it's not related to abstract figures but to each individual's cash flow which they experience directly.
It's also one where decades of political effort have gone into making sure there's no mechanism for people to demand higher wages.
The alternative to printing money would be to raise money through taxation, which is also politically infeasible.
I find it interesting that house prices are kept out of inflation. But if you are forced to rent forever due to unaffordable housing, in your later years you might be paying $3000/m rent instead of $0/m mortgage interest. But that fact is conveniently left out.
Not sure why your reference looks at hourly wage and not total compensation. Seems like a selective choice of metrics.
"But between 1979-2019, whilst net productivity has continued to increase by an expected 70%, hourly compensation in the country is less than a fifth of that at just 12%."
Why can't it be both monetary and non-monetary? Say it's a vector, one element per CPI category. Throw housing in for good measure.
The direction of this vector can change due to non-monetary stuff like Russia and oil. But if all of the categories, especially those without clear non-monetary drivers, rise, then it's also monetary.
So maybe X = p_monetary + Q_nonmonetaty where p is a scalar and Q is a vector.
I think it is both. But the monetary side is controllable by our constituency. Friedman was still right.
They aren't things you can add up, one is a cause of the other.
Monetary inflation is an increase in the money supply which happens when more money is borrowed, usually as a result of lower interest rates. Price inflation is in increase in the prices of good and services.
Monetary inflation causes price inflation and other things can also cause price inflation. But it's meaningless to add up monetary inflation and price inflation.
I like to think of money like water. You've got most people who spend every cent they get, that's rivers. You've got upper class people that save some, but if they have a lot they will spend slightly more, that's lakes. Then you've got the very top, whom no matter how much you give them, they won't spend another cent. Their the reservoirs.
So when you introduce money through debt, what you get is mostly the third group who takes out debt. If they have the money and don't actually spend it, you just get a lower velocity, you don't get any inflation. When assets are increasing faster than consumption items, of course they invest in assets, and you get stocks and homes and monkey jpeg reciepts going up.
That is, until a recession is coming around. When a recession is incoming, money managers look at history and find the best recession-proof investments. And it turns out some of those items are in the consumption basket. And it turns out widely inflated asset prices are exactly what you need to get out of.
What happens when you buy oils futures contracts 2 years out? Some bank will work out a arbitrage opportunity, hedge that contract, some other bank will hedge them, and within a few days the value of oil TODAY goes up. That's inflation.
And so you can say that expectations of interest rising causes recession fears, and those recession fears cause inflation. If the money supply drops, or is expected to drop, or we think that the likelyhood of debts getting margin-called is going to increase, you will see inflation.
But you can only see that inflation, as Friedman rightly pointed out, if the reservoirs are full. Wealthy people store possible inflation in their reservoirs. If as the Fed you completely ignore the possibility that the dam can release all of that water out into the rivers, you're always going to be surprised when it happens.
Lots of folks were following Friedman-like ideas in 2010:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
And nothing happened—just like the Keynesians said. See also 'expansionary austerity' that many right-leaning folks were pushing, which also turned out to be a bust:
The title makes this sound like another conspiracy theory about the government suppressing inflation in official numbers, but the article is actually a rational dive into the non-uniformity of inflation across various categories.
The last section attempts to link "differential" inflation to oligopolies, and I'm not sure I buy their arguments there, but it's thought-provoking nonetheless!
Did not have that idea when I read the title. Then again, I accept every view of inflation as just another well-intentioned guess as to what that actually is, since nobody can agree as to why we actually observe it IRL.
For me that applied even to the (second?) Zeitgeist movie on monetary theory, which was a very opinionated or even conspiratory view on the financial system, yet that was the model that actually stuck for me: Due to a single interest rate that was once taken higher than zero, there now is never enough money to pay back all debts. AKA there is no money, it just represents some else's debt.
Just a note: I meant the article title ("The Truth About Inflation") and not the (subsequently changed) submission title (which is now "Inflation is differential and restructuring (2021)").
The problem is that politicians and armchair critics prefer simple sound-bites like "government spending caused this problem" or perhaps "a lack of government spending caused this problem", I can't imagine how many frowns you would get in parliament/congress if your explanation of why inflation is so high was as long as the article, even if it was much more accurate than a sound bite.
People don't like the fact that the world is complicated and more inter-dependent than ever. I guess that's why some people go and live in the wilderness.
This is why I dislike the popularity contests we call "democracy" today. If you so much as hint at the complexity of questions, if you happen to admit that something is a trade-off, or that there are risks with a policy, you're out of the system in seconds.
Not that I have a better suggestion, mind you. Maybe sortition with an advisory panel of experts? But how would the experts be chosen?
It would be easy to draw from the top ranks of some guild system -- but probably also highly inequitable, as guilds tend to restrict the profession to their likes.
This is why political discussion, and partisan discussion in particular, is almost universally worthless.
Such discourse can be compared to memes, in the literal sense of the word. One sentence digs that seem to ring true get shared and thrown at political opponents. Nothing of value is created in such discourse, but the more effective memes proliferate through society and give advantage in voting season.
The biggest argument against inflation as a monetary phenomenon right now is the foreign exchange rate: inflation is higher in the US than in the Eurozone, while a dollar is worth significantly more euros than what it was worth a year ago.
In fact, if your salary is labelled in dollar and you live in Europe, your purchasing power increased in that period, which shows that the current level of inflation in the US isn't cause by the intrinsic value of the dollar going down.
I see what you are saying, but just because the cost of living goes up in the US, does that really mean that the value of the USD as a commodity in it's own right must go up/down?
Many countries have their own reserves for the USD, which they use for their own purposes, and may exchange their reserves with each other, in a way where the US isn't even involved at all.
So in the forex markets the USD is just another commodity, and not a direct representation of the cost of living in the USA.
Going the other direction though, if the value of the USD goes up or down, I can see how that would affect the cost of living _within_ the USA since it is the local currency there. But outside the USA, why would it affect the cost of living in another country where they use some other currency?
This isn't really my field though, I'm just throwing out my thoughts. If anything I've written is wrong, I'm happy to read an explanation as to why.
This is a good case for why we're looking at a global phenomenon, but as far as relative inflation it's not that much higher in the US, and currency markets are taking into account what they think will happen in the future, i.e. without Russian energy the eurozone will see much more expensive goods. But even Japan went from deflation to 2.5% inflation in the past few months, so the forex markets are considering where those lines will cross over.
Wait.. how can that be true? If a dollar last year is worth .5 dollars today, and a Euro last year is worth .8 Euros today, then surely the value of the dollar against the Euro has declined to .5/.8 of what it was last year?
Inflation can be thought of as a high dimensional vector with dimensions equal to the number of objects you buy with money.
Each person is affected by this inflation differently because they buy different things.
To “solve” this problem, the government has decided to collapse this high dimensional object into a scalar number.
And now we are seeing a divergence between this scalar number and the actual high dimensional object.
Today with digitised transaction records, there is a ripe opportunity to convert these records back into a person-specific , high-dimensional object with pretty visualisations to aid with understanding.
The government already publishes separate indices for a few hundred separate spending categories, ranging from pet food to parking tickets[1]. The reason nobody bothers to do what you suggest is that it's a ton of work for pretty much zero return: the resulting numbers are not actionable and won't change anybody's opinions from what they already believed to be true.
Granted, the BLS indices are not raw prices. But using actual raw prices is a few orders of magnitude more work, and the results are rather unspectacular (if you summarize the price changes into lower dimensions you get similar results as what the good folks at the BLS already did for you) [2]
> Inflation can be thought of as a high dimensional vector with dimensions equal to the number of objects you buy with money.
No, that's just the changes in individual prices.
Inflation is the change in the price level, and it has always been that. Nobody has changed subreptitiously the definition of inflation in order to rip you off.
You need a model of all brains. I don’t care that tomatoes have doubled in price in 24 months because I can eat something else. But if all fruit and veg doubles then now we are talking inflation! I can no longer get a nutritional diet at the same cost. But my neighbour eats only McDonalds burgers and is largely unaffected.
So I am not a matrix to apply to the vector. Maybe more like a neutal net.
Are there any Personal Finance apps that gives you your own inflation number by tracking your spending? This seems like such an obvious feature but I've never seen it.
I think Friedman's general idea is correct. For me inflation is not about individual price levels but about the potential of increased/decreased price levels. If money supply increases, it makes room for increased price levels. Without increased money supply, it would only be possible for a product price to increase if another product price decreases. In reality I think inflation already occurs when money supply is increased - it's just not priced in as it takes time for prices to adjust. However, the period of time in which the increase happens, cannot be predicted - e.g. it can be 1 year or 100 years.
Seemed like a long winded persuasion that monetary policy doesn’t matter all that much and that at the end of the day, the disaggregated inflation we experience in the real world is the result of oligopolies, which to me, seems like a subtle plug for MMT.
I don’t buy it. I have heard plenty of economists and economically savvy people call BS on CPI as a metric for the very same reasons outlined here. CPI is a fallacy, mostly pushed by the the govt since it tends to generally be favorable to them and disguise the disaggregated nature of inflation. But that doesn’t mean that the underlying economic principles are false.
At it's most basic level, inflation tries to measure of the affordability of living. Mango prices go down and avocado prices go up, so I buy more mangos and fewer avocados. However, what really impacts my life is how much of my income I need to spend, overall, on groceries to eat well. Inflation doesn't capture the choices I must make to optimize my grocery bill, but it does do a decent job of representing how the all-important total on my grocery bill changes.
What inflation doesn't necessarily do is capture how my grocery bill changes relative to my paycheck. If you look at the historical inflation rate, it does a semi-decent job of indicating when weird stuff happens. Wars tend to be accompanied by spikes in inflation. Things get scarce. Supply chains get disrupted. There's less stuff to be had so, on average, people can afford less stuff. Everybody is making the same salary but things cost more. Pandemics can have similar effects. (We just happen to have gone from one directly into the other.)
Deflation coincides with recessions (e.g. 1929). You'd think things getting cheaper would be indicate people can afford more stuff, but it's just the opposite. People are making less, so they buy less, and prices come down as supply exceeds demand.
Inflation does need the context of average earnings to be useful, but it is useful given that context.
> To understand inflation as it actually exists, we must look not to economics textbooks, but to real-world data. That’s what political economist Jonathan Nitzan did during his PhD research in the early 1990s. His work culminated in a dissertation called Inflation As Restructuring.
The real world of PhD dissertations isn’t that different from that of economics textbooks.
Inflation isn’t measured on an average, it is measured on a basket. They are the same mathematically but the intention matters. If meat goes up 50% and fruits down 50% and the average is unchanged, that means the price of the basket that you will pay at the till is also unchanged, and you aren’t poorer.
Now you can argue that CPI baskets aren’t representative, and I think they often underweight real estate. But that doesn’t mean that you are measuring the wrong thing by using a basket.
It does explain though why the money printing 2008-2019 didn’t translate into CPI inflation, because that money was injected in the financial system, asset prices shot up, asset managers and VC investors got rich, but that didn’t affect main street. In 2020-2022, the pace of money printing massively accelerated and was directly introduced in everyone’s pockets through furlough schemes.
"Gell Mann Amnesia" applies here, and it would have been a much better article if it critically examined the genuinely interesting hypothesis that oligopoly power is a major factor in [specific instances of] inflation instead of spending most of it demolishing "silly economists haven't realised that relative prices also change" straw men.
(Especially since the silly economists actually have lots of theories about how specific instances of inflation are driven by dynamics of one particular sector like fuel prices to test against the "oligopoly" theory)
At the risk of going off-topic: I'd also like someone to write a similar blog post providing a convincing explanation of why the national debt supposedly isn't wrecking the US's future big time.
To me it absolutely is, because you can only keep borrowing money and paying the (increasingly large) interest on it for so long. Eventually it'll exceed your revenue and you have no choice but to print money and hyperinflate your currency... right? Yet modern economists keep arguing it's... fine? "It's not like your household debt" or whatever the argument is.
They say that Economics is the science on mistaking stocks for flows, and this is a very good example.
Interest is denominated in $/month. Loans are denominated in $. Mixing those up is like mixing up miles per hour and miles. They are different units of measurement - the first is a flow, the second is a stock.
Remember that bankers are people too, and they eat just like you do. Therefore interest is nothing more than the wages of bankers. They take those wages and they spend them back with firms in return for food and shelter. The firms then pay the banks with the money they earn from bankers. Round and round the money goes. Bankers earn on the turn as they say.
The same applies to government interest. It is paid on bonds and reserves to financial institutions who pay people a pension from them. Those pensioners then spend that income, which generates additional taxation (because that's how percentages work), which will then balance the amount government paid in the first place.
Therefore the tax that offsets the government interest payments comes from paying the interest payments.
It's just a way of stimulating output, or redistributing it away from the producers to pensioners and other people with money.
In fact all government spending creates the additional tax that offsets it - to the last cent for any positive tax rate. It's a simple geometric progression. The only question is when. If somebody doesn't spend all their income, then taxes are not collected from the spending, earning and re-spending process that would otherwise occur.
And that's what creates the 'deficit' - people deciding not to spend all they earn.
Also known as saving for a rainy day.
There is no need for government to pay interest at all. It's entirely a policy choice. People can then choose to continue to save for no reward, or they can spend the money, which will stimulate economic output.
"because you can only keep borrowing money and paying the (increasingly large) interest on it for so long."
Not if you are the US. Because the US $ is a reserve currency needed by the rest of the world (primarly for oil, since most of the oil is still priced in US $). So, what can US do? Well, it can print the $ indefinitely because the countries of the world will always need it to run their economies.
But, lets say that the need for US $ inside a country dissapears. What then? Then, that country is placed under sanctions by the collective West (examples Iran, North Korea and the Russian Federation) or, as was in the cases of Iraq and Libya, bombed to submission.
Which brings us to the answer why the US economy is staying afloat despite an enormous national debt and the obvious "living beyond one's means" budget.
The 30-year yield is 2.97%. The way you read those figures from the 30-year line is that the US can borrow $98.19 today, and have to pay back $100 plus a $2.88 coupon in 30 years. That's not a lot of interest. And if it weren't for the use of interest rates to fight inflation, it could potentially be driven lower.
If the US could borrow $100 today and pay back $99 in 30 years, a negative rate, what would be the right amount to borrow?
The USD is safe because the borrowing is:
- in dollars
- from Americans (to a great extent; "In June 2021 approximately $20.9 trillion of outstanding Treasury securities, representing 74% of the public debt, belonged to domestic holders. Of this amount $6.2 trillion or 22% of the debt was held by agencies of the federal government itself")
- matched by real economic growth still
- and the US has adequate domestic oil production for its needs
There undoubtedly is a limit, but we're not seeing warning signs yet.
> To me it absolutely is, because you can only keep borrowing money and paying the (increasingly large) interest on it for so long.
No. This is modelled and understood reasonably well. There are limits, of course (though the Reinhard-Rogoff paper stipulating a significant drop in growth beyond a certain level of debt to GDP is considered flawed [1]). But moderately growing debt can be sustained indefinitely.
A blog post explaining this well would be useful indeed, I wonder whether Krugman has written one (but haven't found one after a quick search).
And people lived through it all and the country is still around, and not a bad place to have lived, all things considered, during its history. Most of the times you may not have wanted to live there were unrelated to finances (e.g., Civil War, if you were Catholic during the 1500s).
Indeed, it always annoyed me when the CPI a) excludes actual costs of living and b) alongside things like "food" included "flat-screen TVs".
Staple foods might cost 25% more, but hey, those TVs are down 20%, so yay!
An old company of mine was very proud that everyone's payrise began equivalent to CPI increase, before any other performance related increases.
That was nice, but it's a CPI that excludes rent/mortgage payments in a massive property bubble. When your rent that was already 40% of your net income goes up by 25%, CPI is meaningless.
When we suggested their base pay raise also consider that aspect, we got a blank stare and "no, no, CPI... <vague hand gestures>"
Mind you, it's like the "unemployment rate", for statistical purposes, you're not unemployed if you worked somewhere for one hour plus, paid or unpaid.
So the percentage of our population on the unemployment benefit always tracks higher than the official unemployment rate.
I mean, I guess that's their measure, and it's useful for statisticians, but it's not meaningful for citizens.
> I wonder if eventually the Fed will try to track inflation as a vector rather than a single number.
They already do, they just publish it as a single number for simplicity and ease of comparison. Multiply your vector by weights corresponding to "relevance" and you get PCE.
What does tracking inflation as a vector mean? My memory of vectors was that they are a direction and a magnitude. But I don’t see how this relates to inflation.
The BLS already publishes per category CPIs, alongside the aggregates[1]. Presumably you'd want the Fed to use different weights than the BLS (overweight "necessities"?) for monetary policy. But they already do, they vastly underweight food and energy prices, using "core inflation"[2]. (Besides, they typically use the BEA PCE deflator[3], rather than BLS CPI for monetary policy.)
Occasionally you'll hear that this is part of some government conspiracy to suppress true cost of living measures or some such. I think that's largely nonsense as CoL adjustments in government departments are always done with plain CPI, only the Fed uses Core. The logic of using Core (excl. food and energy) is mostly pragmatic, it's just a simple smoother, they could also use trimmed or rolling averages. The raw inflation is pretty volatile, based on that they'd have to adjust policy rates up and down all the time.[4]
I can sort of see the point the writer is trying to make. Certainly inflation is not evenly distributed - see healthcare, see post-K-12 education, see housing - but all that said they don't seem to grapple with the recent history of inflation. I'm thinking of Volkher putting a stop to inflation by raising interest rates - cutting off the money supply.
As for the idea that oligopolies are behind inflation, it seems a cry too much the reverse of saying it's all Governments fault.
That's a lot of words and complicated statistics to argue against a simple graph showing M1+M2 supply since 2020 overlaid on a graph of inflation in the same time period. I think the lady doth protest too much...
The author talks about how accounting identifies are weird gotchas but the problem here isn't that there is a weird gotcha, the problem with MV = PT is that pretty much all variables are unknown except the general price level. Nobody knows what the real quantity of money is, nobody knows what the velocity is since it would require marking individual dollars and counting how many times they change hands.
The real quantity of money is pretty well known (notwithstanding disputes over which monetary aggregate is the "correct" measure of inflation, which made monetarist monetary aggregate targeting impractical in practice). PT is basically GDP, and obviously we also track the P component so transaction volumes can be inferred
The problem with the monetarist version of MV = PT isn't that we can't measure the variables, it's that we have measured the variables and that makes it clear that the monetarist assumption that the residual V is fairly stable in the long run and with respect to monetary policy change is clearly incorrect.
Inflation, in all theories, doesnt measure the change in quality of the product either. Planned obsolescence is a stealth and legal form of product destruction that the buyer doesnt know about until after they have purchased something which is why the saying exists "buyer beware".
I'd be interested to see plots of median or upper-quartile inflation across the CPI categories in there too. In periods of high inflation, is the high variation really random variation about an increased centre, or does it reflect the departure of an extreme from an unchanged centre?
In the article and my suggestion, there's also an unexamined assumption here that the CPI categories are peers, on which it's valid to do statistics. It's not clear to me that "medical care commodities" and "shelter" are really things it makes sense to take an arithmetic mean of.
I changed the linkbait title* to something that the article actually says, but it's a bit obscure. If there's a different phrase in the article that gives a clearer summary of what it actually says, we can change it again.
Inflation is an expansion in the money supply, such as new discoveries of gold or or printing paper money or creating credit. A baker would say he will 'raise' or 'lower' the price of his bread, not 'inflate' it. Defining inflation by the CPI or a similar measure is like defining the rain as a "increase in height of a river". It is the rain that CAUSES the rise in the river, and inflation CAUSES a general rise in prices.
As an absolute layman to this field, the Friedman’s "inflation is ‘always and everywhere a monetary phenomenon’" has appeal to me in that it offers a (simple?) solution: "government austerity" as noted in the article. Whenever I read other views on inflation and even this article, they fail on providing any solution for either fixing or taming the inflation.
Simple, easy to understand, and ineffective solutions are always popular.
The classic policy lever works just fine for the past 30 years or so in the west: whenever inflation goes up, put up interest rates. That raises the cost of credit, puts people out of work and closes marginal businesses, thereby reducing demand.
> As an absolute layman to this field, the Friedman’s "inflation is ‘always and everywhere a monetary phenomenon’" has appeal to me in that it offers a (simple?) solution: "government austerity" as noted in the article.
Government austerity is bad policy and has been for just about all of its history:
Bafflingly long article which I read all the way to the end waiting for a point. The first point was interesting, inflation is an average, maybe its variance can tell us something. The current inflationary spike is evidently driven by used car prices. Then a long ramble to conclude that it's caused by large corporations. Driving up used car prices? OK
If economists accept that there are winners and losers in society, they will never agree on a single theory. Therefore, the most successful economic theory, neoclassical economics, rejects that assumption, despite it being factually wrong. It is successful precisely because it can be agreed by all economists.
The "monetary phenomenon" is a symptom the illness is private money: money MUST BE an unit of measure of many substrate (work, time, resources) we all agree, so MUST BE generated out of thin air (as it is) by STATES not by some privates that loan to the States generating the meaningless "public debt", a concept that simply CAN'T EXISTS.
If State's treasury generate money and all Citizens behind them exchange that money, taxes act for their own purpose witch is not financing States out of Citizens pockets but to redistribute richness to ensure a fair enough society where those who do more/are lucky get rewarded but still NOT being able to assume so much economical power to endanger the society at a whole.
Than inflation will not exists, or at least it's a kind of marginal concept almost non one is interested in.
If we are, like we are now, than inflation, mostly artificial, is a mean to cyclically made people poor to push a change against peoples and peoples will, like war or a new society built not to serve us humans but to serve very few of us who happen to be a human cancer, human as any cancer is part of the ill person, equally dangerous and lethal, to be cured by all means to try to survive...
If people do not understand that in sufficient enough mass, well a modern society is not possible and that means those who understand can only do their best to survive AGAINST other citizens-subjects waiting for a cyclic collapse and when this collapse happen, since there is no Democracy so no human rights try to get the hardest and inhuman revenge against those who happen to have, again, provoked the mess. Hoping that again in the history such big mess have made enough people understand who is the enemy.
If you think a separate society can work, like Indian's casts... Well... Try to look at history, yes for a certain time it work, but only for a certain time, so here the choice is moral in the sense: did we live ONLY for us or also for leaving an heritage?
> How should tech workers be negotiating yearly raises taking inflation into account
They shouldn’t. Tech worker compensation doesn’t follow inflation, it follows investment in the tech industry. So in this situation where you have high inflation causing interest rate hikes, you should expect your compensation to stay the same (if you keep your job, due to inelasticity) or to fall (because you were made redundant).
If however you work in Wendy’s, then your wages (note that nobody talks about service workers having compensation) are somewhat more determined by inflation because if Wendy’s gives all their workers a real wage cut they will probably quit en mass.
You do it by comparing how much more money you would get if you would change jobs. Inflation by itself is quite uninteresting unless you are negotiating for a large group of people.
This article makes a number of misleading claims I think stemming from a misunderstanding of inflation- which does not mean "price increase" but rather "a general increase in the prices of goods and services in an economy"- that's right, we define it as an average.
Okay, what about the variation? Definitely, prices for different goods change differently, and the NYT even has a calculator that estimates it for you based on your consumption:
https://www.nytimes.com/interactive/2022/05/08/business/econ...
Try it out with a few different choices- you'll see that pretty much everyone experiences significant price increases, out of line with the previous decade- so the CPI while not perfect definitely tells us something.
The fact that the standard deviation is greater than the mean does not tell us its not meaningful- for example, if I give you 1 million samples from a normal distribution with mean 0.1 and std 1.0, you can meaningfully tell me the mean is greater than 0.
Individual components of the price index don't give a useful item to take the variance of, because very few people have all their expenses in one component. We'd actually like the dispersion of the change in expenses for each person/company to understand how much expenses rise in general. I suspect this will be significantly smaller since most people have 'similar' spending profiles, at least compared to the hypothetical consumers which only buy one component of the price index.
Okay so why do prices change differentially more during inflation? This is a tough one, and recently there are obvious confounding factors (covid) that make it difficult to dissect. But I think even Friedman would expect this, because he claims that quantity of money leads inflation by 6 months-2 years, and we wouldn't expect it to propagate through all supply chains at equal speed. This also means that the standard theory is predictive and can't just be an accounting identity- the prediction (which we can make after the huge increase in M2 in 2020) is that prices will rise, with some delay but eventually about 30%. I'm not counting any change in the output of the economy here, so with covid disruption I wouldn't expect this to have particularly good accuracy. Let's see how it pans out!
Finally, we can look at things like the price of gold: it rose significantly pretty much in line with the M2 money supply. I don't know of anything that would significantly affect gold supply recently, so it would seem the demand comes from devaluation of the dollar or fear of it.
> Price-change variation rises and falls with the average rate of inflation.
I think we can see it as a decay of money as a tool, its main function of being a unit of account becomes disrupted because its self-referential aspect increases.
This article conflates monetary inflation with the EFFECTs of monetary inflation...
Inflation within the context of state level economics is the reduction in relative value of current monetary holdings.
That's it.
There's nothing magical, hidden, or complicated about it.
How it arrives, how it is dealt with, and how much is desirable for specific effects is all up for debate and the article has some great info and analysis there.
The most common reasons are monetary expansion and scarcity changes in resources. The most common methods of adjustment are monetary contraction and increases in resources.
lordnacho|3 years ago
- There's an authority about the field that really isn't deserved. The models are not made properly, and there's a lot of hand-waiving. I studied economics with a class of engineers and everyone pointed this out.
- The pop-sci version of economics is a bunch of easy quips. Friedman's "everywhere a monetary phenomenon", Keynes "In the long run".
- The econ 101 version of economics is dominant in popular thought. You see it everywhere in newspapers. A more nuanced version of economics does exist, but the appeal to authority is strong in the field, because there's no real reasonable arguments, it's actually politics.
- Inflation is more interesting in a disaggregated view, for reasons mentioned. You can't look at it as a single figure.
- Relative price changes are what matter in society, because they represent changes in negotiation terms between different actors. Post-pandemic and Ukraine, we should expect to see more shortages as well as more strike action. Various groups like the RMT union will decide they need to flex their muscles. Chip shortages will cause negotiation positions to change across a wide variety of affected sectors like cars, meaning push will come to shove for certain lines of business.
onlyrealcuzzo|3 years ago
It's interesting that there's no mention of debtors and creditors.
The biggest winners in hyperinflation are people in massive debt. It's inflated away to nothing. The biggest losers are creditors for the opposite reasons.
When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount.
frankfrankfrank|3 years ago
That’s all inflation is too, fraud that if you would commit it, e.g., you added filler to some product you delivered or forged signatures on delivery paperwork, you would be punished for.
You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service.
specialist|3 years ago
Yes and: This OC refers to the empirical data.
Friedman (et al) rejected empiricism. I was gobsmacked when I finally figured out what that meant. Like, wtf are they even arguing about if they reject reality?! (Ya, I am a slow learner.)
So agree or not with Nitzan's thesis, at least critics can have constructive debates about it.
barry-cotter|3 years ago
If only. Rent control wouldn’t exist. Policies that couldn’t pass any sane cost benefit trade off would be abolished. There would be a smooth, graduated marginal tax schedule. There would be congestion taxes on traffic.
The world would be incredibly different if Econ 101 was widely understood.
marcosdumay|3 years ago
The real point is that "inflation" is a badly defined term, and everybody uses a different meaning. So one person using the number measured by averaging the prices of a few real items says it's not purely monetary, while another using the value that converts monetary unities into real goods on the macroeconomic equations yells "what do you mean it's not purely monetary? It's defined that way, any real data was removed" (as a hint, you can't even measure that one).
If you get tired of this, there is a related discussion about the Keynesian investment multiplier. It's just as fun.
lamontcg|3 years ago
And this article barely mentions wages, unionization and wage-price spirals.
FabHK|3 years ago
Sure, inflation reports the change in price of an average basket, and some prices in the basket might have gone up a lot, and some down a lot. But that is a different issue, and not inflation.
The basket is carefully constructed to mirror what the average consumer consumes. Thus, the inflation of the basket measures how much more the average consumer has to spend on his consumption. That is certainly a useful number.
To your further points:
- [...] The models are not made properly, and there's a lot of hand-waiving.
I'd disagree, you must have come across the wrong models. Theoretical economics has many beautiful models precisely laid out. For example, the Arrow-Debreu equilibrium model [1] utilises "the Kakutani fixed-point theorem on the fixed points of a continuous function from a compact, convex set into itself." I doubt that any engineer can find fault with the specification of that model. Similarly, the Heckscher–Ohlin model of international trade is well specified and yields five informative theorems [2].
To which extent those models reflect, or can be applied to, the real world is an entirely different question of course.
Then there is empirical economics, a whole different ball park. But if you look at national accounts [3], for example, all those measurements are defined in excruciating detail, and there are books just dedicated to define the terms correctly.
- The pop-sci version of economics is a bunch of easy quips
Agreed. Some of them are more informative than others.
- The econ 101 version of economics is dominant in popular thought.
Yes, and that is quite bad, and is often exploited particularly by the political right, the business-friendly laissez-faire libertarians. James Kwak calls this Economism, and he has a great book about it [4].
- Inflation [...] can't look at it as a single figure.
Again, to the extent that it reflects the price increase for the consumption basket of an average consumer: yes, it is an interesting and important number, and in particular, it is one number. Obviously, with more numbers a more nuanced discussion is possible.
- Relative price changes are what matter in society.
Sure, they matter. But inflation in itself really matters also, per se.
By the way, Keynes pointed out that inflation need not be a bad thing. One thinks it is obviously bad because the average consumer has to pay more for his basket, thus can afford less of it. However, if there was, for example, a fiscal stimulus in the wake of a recession, and that leads to everyone having more money at their disposal, and aggregate demand rising, then there will be a new equilibrium with more demand, more supply, and higher prices (=inflation), but the average consumer having more of their basket than before. Good, not bad.
[1] https://en.wikipedia.org/wiki/Arrow–Debreu_model
[2] https://en.wikipedia.org/wiki/Heckscher–Ohlin_model#Conclusi...
[3] https://en.wikipedia.org/wiki/National_accounts
[4] https://economism.net/
vectorfrog|3 years ago
From Thomas Sowell's Basic Economics - "Inflation is a _general_ rise in prices. The national price level rises for the same reason that prices of particular goods and services rise - namely, that there is more demanded than supplied at a given price. When people have more money, they tend to spend more. Without a corresponding increase in the volume of output, the prices of existing goods and services simply rise because the quantity demanded exceeds the quantity supplied at current prices and either people bid against each other during the shortage or sellers realize the increased demand for their products at existing prices and raise their prices accordingly."
Note the emphasis on general. There is no reason to expect that the outcome of customers bidding against each other, or producers increasing prices to meet new demand levels would be uniform across all goods and services, furthermore, you would expect that the existing climate of the time would wildly swing the actors' actions involved in these bidding & pricing exercises.
Guest42|3 years ago
lottin|3 years ago
I think it's a straw man argument, because nobody claims that inflation fully explains changes in the prices of commodities. Instead, measuring inflation allows us to decompose these changes into a general component (i.e. inflation) and an idiosyncratic component (i.e. a change in relative prices), which is useful because it gives us more information about the causes of price changes. Inflation is only misleading if you're willingly misinterpreting it.
lucozade|3 years ago
I find that argument reasonably persuasive. His other point about inflation indices themselves being effectively useless, because of the inter price variability, I find less so. He skirts over the weightings which are key to the meaning of the index. They are weighted in such a way as to approximate the relative spending on each commodity. So the net effect of the index should be the inflation rate that you feel.
So average measures of inflation are valuable. The standard cures likely less so.
vertere|3 years ago
roenxi|3 years ago
1) Inflation is not a useful metric for financial planning. If your investments are keeping pace with inflation then you have completely failed to position yourself correctly relative to the massive money creation going on. The gold price trend is posting consistent real returns vs the CPI - which is stupid (if you believe the CPI measures inflation, anyway).
2) Inflation isn't a fair metric for referencing on wage raises. Again, we can see that wage earners are slowly getting crushed as a % of the economy [0]. If they are focusing on keeping up with the CPI then they'll get distracted from the fact that they could be doing a lot better if they could re-link wages with productivity.
3) Nobody knows how the CPI is calculated. If someone can find out the actual methods, weights and inputs then report back you get a virtual gold star. I did it once and it is a labyrinth to work out what they are actually measuring - I don't believe more than a small fraction of the people debating inflation understand or care about the details of what it measures.
To cap off a mild rant; it is not obvious why we care about what the truth about inflation is. Few people understand the number and it is unclear what use it is for decision making.
The more concerning factor is that the government is creating money on a grand and accelerating scale and that is going to end badly, like it always does. Cite some examples where it has led to a golden age? Printing money literally does not and cannot plausibly solve real problems.
[0] https://www.weforum.org/agenda/2020/11/productivity-workforc...
TheOtherHobbes|3 years ago
That's the baseline reality. The rest is just misdirection and handwaving.
If this seems implausible, consider that the governor of the Bank of England recently said that workers should be "consider carefully" whether they wanted to pursue pay rises, while at the same time the energy monopolies in the UK are threatening to put 40% of the population into fuel poverty by massively hiking prices during a time of record profits.
And the Bank's own senior staff are receiving huge pay increases.
pjc50|3 years ago
Arguably this is the only one that the voting public really do care about - the relation between wages and the cost of living is one that historically produces unrest, and that's because it's not related to abstract figures but to each individual's cash flow which they experience directly.
It's also one where decades of political effort have gone into making sure there's no mechanism for people to demand higher wages.
The alternative to printing money would be to raise money through taxation, which is also politically infeasible.
quickthrower2|3 years ago
refurb|3 years ago
"But between 1979-2019, whilst net productivity has continued to increase by an expected 70%, hourly compensation in the country is less than a fifth of that at just 12%."
bojangleslover|3 years ago
The direction of this vector can change due to non-monetary stuff like Russia and oil. But if all of the categories, especially those without clear non-monetary drivers, rise, then it's also monetary.
So maybe X = p_monetary + Q_nonmonetaty where p is a scalar and Q is a vector.
I think it is both. But the monetary side is controllable by our constituency. Friedman was still right.
dskloet|3 years ago
Monetary inflation is an increase in the money supply which happens when more money is borrowed, usually as a result of lower interest rates. Price inflation is in increase in the prices of good and services.
Monetary inflation causes price inflation and other things can also cause price inflation. But it's meaningless to add up monetary inflation and price inflation.
ItsMonkk|3 years ago
So when you introduce money through debt, what you get is mostly the third group who takes out debt. If they have the money and don't actually spend it, you just get a lower velocity, you don't get any inflation. When assets are increasing faster than consumption items, of course they invest in assets, and you get stocks and homes and monkey jpeg reciepts going up.
That is, until a recession is coming around. When a recession is incoming, money managers look at history and find the best recession-proof investments. And it turns out some of those items are in the consumption basket. And it turns out widely inflated asset prices are exactly what you need to get out of.
What happens when you buy oils futures contracts 2 years out? Some bank will work out a arbitrage opportunity, hedge that contract, some other bank will hedge them, and within a few days the value of oil TODAY goes up. That's inflation.
And so you can say that expectations of interest rising causes recession fears, and those recession fears cause inflation. If the money supply drops, or is expected to drop, or we think that the likelyhood of debts getting margin-called is going to increase, you will see inflation.
But you can only see that inflation, as Friedman rightly pointed out, if the reservoirs are full. Wealthy people store possible inflation in their reservoirs. If as the Fed you completely ignore the possibility that the dam can release all of that water out into the rivers, you're always going to be surprised when it happens.
throw0101a|3 years ago
Empirical data says money supply often doesn't do much. See Japan for example:
* https://fred.stlouisfed.org/graph/?g=PA7P
Data series:
* https://fred.stlouisfed.org/series/FPCPITOTLZGJPN (JP inflation)
* https://fred.stlouisfed.org/series/MYAGM2JPM189S (JP M2)
> Friedman was still right.
Lots of folks were following Friedman-like ideas in 2010:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://economics21.org/html/open-letter-ben-bernanke-287.ht...
And nothing happened—just like the Keynesians said. See also 'expansionary austerity' that many right-leaning folks were pushing, which also turned out to be a bust:
* https://www.washingtonpost.com/news/wonk/wp/2012/10/12/imf-a...
* https://archive.ph/Efnum
* https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Exp...
* https://www.theguardian.com/business/ng-interactive/2015/apr...
seoaeu|3 years ago
orwin|3 years ago
that would made his inflation theory the only theory he was right about.
Even in this case, 90+% of the money supply is created by private banks, so wouldn't that make big bank responsible for inflation?
unknown|3 years ago
[deleted]
schemescape|3 years ago
The last section attempts to link "differential" inflation to oligopolies, and I'm not sure I buy their arguments there, but it's thought-provoking nonetheless!
a3w|3 years ago
For me that applied even to the (second?) Zeitgeist movie on monetary theory, which was a very opinionated or even conspiratory view on the financial system, yet that was the model that actually stuck for me: Due to a single interest rate that was once taken higher than zero, there now is never enough money to pay back all debts. AKA there is no money, it just represents some else's debt.
schemescape|3 years ago
lbriner|3 years ago
People don't like the fact that the world is complicated and more inter-dependent than ever. I guess that's why some people go and live in the wilderness.
kqr|3 years ago
Not that I have a better suggestion, mind you. Maybe sortition with an advisory panel of experts? But how would the experts be chosen?
It would be easy to draw from the top ranks of some guild system -- but probably also highly inequitable, as guilds tend to restrict the profession to their likes.
helen___keller|3 years ago
Such discourse can be compared to memes, in the literal sense of the word. One sentence digs that seem to ring true get shared and thrown at political opponents. Nothing of value is created in such discourse, but the more effective memes proliferate through society and give advantage in voting season.
littlestymaar|3 years ago
In fact, if your salary is labelled in dollar and you live in Europe, your purchasing power increased in that period, which shows that the current level of inflation in the US isn't cause by the intrinsic value of the dollar going down.
executesorder66|3 years ago
Many countries have their own reserves for the USD, which they use for their own purposes, and may exchange their reserves with each other, in a way where the US isn't even involved at all.
So in the forex markets the USD is just another commodity, and not a direct representation of the cost of living in the USA.
Going the other direction though, if the value of the USD goes up or down, I can see how that would affect the cost of living _within_ the USA since it is the local currency there. But outside the USA, why would it affect the cost of living in another country where they use some other currency?
This isn't really my field though, I'm just throwing out my thoughts. If anything I've written is wrong, I'm happy to read an explanation as to why.
noduerme|3 years ago
fallingfrog|3 years ago
j7ake|3 years ago
Each person is affected by this inflation differently because they buy different things.
To “solve” this problem, the government has decided to collapse this high dimensional object into a scalar number.
And now we are seeing a divergence between this scalar number and the actual high dimensional object.
Today with digitised transaction records, there is a ripe opportunity to convert these records back into a person-specific , high-dimensional object with pretty visualisations to aid with understanding.
em500|3 years ago
Granted, the BLS indices are not raw prices. But using actual raw prices is a few orders of magnitude more work, and the results are rather unspectacular (if you summarize the price changes into lower dimensions you get similar results as what the good folks at the BLS already did for you) [2]
[1] https://download.bls.gov/pub/time.series/cu/cu.txt, https://download.bls.gov/pub/time.series/cu/cu.series, https://data.bls.gov/cgi-bin/srgate
[2] http://www.thebillionpricesproject.com/
lottin|3 years ago
No, that's just the changes in individual prices.
Inflation is the change in the price level, and it has always been that. Nobody has changed subreptitiously the definition of inflation in order to rip you off.
quickthrower2|3 years ago
So I am not a matrix to apply to the vector. Maybe more like a neutal net.
ItsMonkk|3 years ago
I_am_tiberius|3 years ago
sudden_dystopia|3 years ago
I don’t buy it. I have heard plenty of economists and economically savvy people call BS on CPI as a metric for the very same reasons outlined here. CPI is a fallacy, mostly pushed by the the govt since it tends to generally be favorable to them and disguise the disaggregated nature of inflation. But that doesn’t mean that the underlying economic principles are false.
beloch|3 years ago
What inflation doesn't necessarily do is capture how my grocery bill changes relative to my paycheck. If you look at the historical inflation rate, it does a semi-decent job of indicating when weird stuff happens. Wars tend to be accompanied by spikes in inflation. Things get scarce. Supply chains get disrupted. There's less stuff to be had so, on average, people can afford less stuff. Everybody is making the same salary but things cost more. Pandemics can have similar effects. (We just happen to have gone from one directly into the other.)
Deflation coincides with recessions (e.g. 1929). You'd think things getting cheaper would be indicate people can afford more stuff, but it's just the opposite. People are making less, so they buy less, and prices come down as supply exceeds demand.
Inflation does need the context of average earnings to be useful, but it is useful given that context.
zeckalpha|3 years ago
The real world of PhD dissertations isn’t that different from that of economics textbooks.
cm2187|3 years ago
Now you can argue that CPI baskets aren’t representative, and I think they often underweight real estate. But that doesn’t mean that you are measuring the wrong thing by using a basket.
It does explain though why the money printing 2008-2019 didn’t translate into CPI inflation, because that money was injected in the financial system, asset prices shot up, asset managers and VC investors got rich, but that didn’t affect main street. In 2020-2022, the pace of money printing massively accelerated and was directly introduced in everyone’s pockets through furlough schemes.
jschveibinz|3 years ago
notahacker|3 years ago
(Especially since the silly economists actually have lots of theories about how specific instances of inflation are driven by dynamics of one particular sector like fuel prices to test against the "oligopoly" theory)
dataflow|3 years ago
To me it absolutely is, because you can only keep borrowing money and paying the (increasingly large) interest on it for so long. Eventually it'll exceed your revenue and you have no choice but to print money and hyperinflate your currency... right? Yet modern economists keep arguing it's... fine? "It's not like your household debt" or whatever the argument is.
neilwilson|3 years ago
Interest is denominated in $/month. Loans are denominated in $. Mixing those up is like mixing up miles per hour and miles. They are different units of measurement - the first is a flow, the second is a stock.
Remember that bankers are people too, and they eat just like you do. Therefore interest is nothing more than the wages of bankers. They take those wages and they spend them back with firms in return for food and shelter. The firms then pay the banks with the money they earn from bankers. Round and round the money goes. Bankers earn on the turn as they say.
The same applies to government interest. It is paid on bonds and reserves to financial institutions who pay people a pension from them. Those pensioners then spend that income, which generates additional taxation (because that's how percentages work), which will then balance the amount government paid in the first place.
Therefore the tax that offsets the government interest payments comes from paying the interest payments.
It's just a way of stimulating output, or redistributing it away from the producers to pensioners and other people with money.
In fact all government spending creates the additional tax that offsets it - to the last cent for any positive tax rate. It's a simple geometric progression. The only question is when. If somebody doesn't spend all their income, then taxes are not collected from the spending, earning and re-spending process that would otherwise occur.
And that's what creates the 'deficit' - people deciding not to spend all they earn.
Also known as saving for a rainy day.
There is no need for government to pay interest at all. It's entirely a policy choice. People can then choose to continue to save for no reward, or they can spend the money, which will stimulate economic output.
wheelerof4te|3 years ago
Not if you are the US. Because the US $ is a reserve currency needed by the rest of the world (primarly for oil, since most of the oil is still priced in US $). So, what can US do? Well, it can print the $ indefinitely because the countries of the world will always need it to run their economies.
But, lets say that the need for US $ inside a country dissapears. What then? Then, that country is placed under sanctions by the collective West (examples Iran, North Korea and the Russian Federation) or, as was in the cases of Iraq and Libya, bombed to submission.
Which brings us to the answer why the US economy is staying afloat despite an enormous national debt and the obvious "living beyond one's means" budget.
pjc50|3 years ago
https://www.bloomberg.com/markets/rates-bonds/government-bon...
The 30-year yield is 2.97%. The way you read those figures from the 30-year line is that the US can borrow $98.19 today, and have to pay back $100 plus a $2.88 coupon in 30 years. That's not a lot of interest. And if it weren't for the use of interest rates to fight inflation, it could potentially be driven lower.
If the US could borrow $100 today and pay back $99 in 30 years, a negative rate, what would be the right amount to borrow?
The USD is safe because the borrowing is:
There undoubtedly is a limit, but we're not seeing warning signs yet.FabHK|3 years ago
No. This is modelled and understood reasonably well. There are limits, of course (though the Reinhard-Rogoff paper stipulating a significant drop in growth beyond a certain level of debt to GDP is considered flawed [1]). But moderately growing debt can be sustained indefinitely.
A blog post explaining this well would be useful indeed, I wonder whether Krugman has written one (but haven't found one after a quick search).
[1] https://www.newyorker.com/news/john-cassidy/the-reinhart-and..., https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt, https://krugman.blogs.nytimes.com/2013/05/26/reinhart-and-ro...
throw0101a|3 years ago
Define "so long".
Not too long ago the UK refinanced debt from South Sea Sea Bubble (1700s), Napoleonic and Crimean Wars (1800s), and World War 1 (1910s):
* https://www.theguardian.com/business/blog/2014/oct/31/paying...
There were points in British history that debt hit >250% of GDP:
* https://en.wikipedia.org/wiki/United_Kingdom_national_debt#M...
And people lived through it all and the country is still around, and not a bad place to have lived, all things considered, during its history. Most of the times you may not have wanted to live there were unrelated to finances (e.g., Civil War, if you were Catholic during the 1500s).
323|3 years ago
Argentina does it every 10 years or so, and the next day after default banks line up to credit it again.
Greece practically (but not technically) defaulted in the 2012 European debt crisis.
China owns a lot of US debt. Now they are starting to question how wise that is.
aeternum|3 years ago
I wonder if eventually the Fed will try to track inflation as a vector rather than a single number.
EdwardDiego|3 years ago
Staple foods might cost 25% more, but hey, those TVs are down 20%, so yay!
An old company of mine was very proud that everyone's payrise began equivalent to CPI increase, before any other performance related increases.
That was nice, but it's a CPI that excludes rent/mortgage payments in a massive property bubble. When your rent that was already 40% of your net income goes up by 25%, CPI is meaningless.
When we suggested their base pay raise also consider that aspect, we got a blank stare and "no, no, CPI... <vague hand gestures>"
Mind you, it's like the "unemployment rate", for statistical purposes, you're not unemployed if you worked somewhere for one hour plus, paid or unpaid.
So the percentage of our population on the unemployment benefit always tracks higher than the official unemployment rate.
I mean, I guess that's their measure, and it's useful for statisticians, but it's not meaningful for citizens.
diffeomorphism|3 years ago
They already do, they just publish it as a single number for simplicity and ease of comparison. Multiply your vector by weights corresponding to "relevance" and you get PCE.
https://www.thebalance.com/personal-consumption-expenditures...
Gigachad|3 years ago
em500|3 years ago
Occasionally you'll hear that this is part of some government conspiracy to suppress true cost of living measures or some such. I think that's largely nonsense as CoL adjustments in government departments are always done with plain CPI, only the Fed uses Core. The logic of using Core (excl. food and energy) is mostly pragmatic, it's just a simple smoother, they could also use trimmed or rolling averages. The raw inflation is pretty volatile, based on that they'd have to adjust policy rates up and down all the time.[4]
[1] https://www.bls.gov/news.release/cpi.t01.htm
[2] https://en.wikipedia.org/wiki/Core_inflation
[3] https://www.bea.gov/data/personal-consumption-expenditures-p...
[4] https://krugman.blogs.nytimes.com/2010/02/26/core-logic/ (Sorry, can't find a non-paywalled link)
hackeraccount|3 years ago
As for the idea that oligopolies are behind inflation, it seems a cry too much the reverse of saying it's all Governments fault.
perryizgr8|3 years ago
https://thefreethoughtproject.com/80-of-all-us-dollars-in-ex...
imtringued|3 years ago
notahacker|3 years ago
The problem with the monetarist version of MV = PT isn't that we can't measure the variables, it's that we have measured the variables and that makes it clear that the monetarist assumption that the residual V is fairly stable in the long run and with respect to monetary policy change is clearly incorrect.
Proven|3 years ago
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Terry_Roll|3 years ago
throw0101a|3 years ago
Actually it does. See The Canadian Consumer Price Index Reference Paper by StatCan, chapter seven, "Quality Change and Adjustment":
* https://www150.statcan.gc.ca/n1/pub/62-553-x/2014001/chap/ch...
quickthrower2|3 years ago
twic|3 years ago
In the article and my suggestion, there's also an unexamined assumption here that the CPI categories are peers, on which it's valid to do statistics. It's not clear to me that "medical care commodities" and "shelter" are really things it makes sense to take an arithmetic mean of.
dang|3 years ago
* "Please use the original title, unless it is misleading or linkbait" - https://news.ycombinator.com/newsguidelines.html
yyy888sss|3 years ago
kklisura|3 years ago
pjc50|3 years ago
The classic policy lever works just fine for the past 30 years or so in the west: whenever inflation goes up, put up interest rates. That raises the cost of credit, puts people out of work and closes marginal businesses, thereby reducing demand.
If you look at https://www.macrotrends.net/countries/USA/united-states/infl... it's been kept perfectly in the 0-4% range by this process.
throw0101a|3 years ago
Government austerity is bad policy and has been for just about all of its history:
* https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da...
(Of course this doesn't mean spending should be done without thought.)
adammarples|3 years ago
js8|3 years ago
sylware|3 years ago
It is not "mother nature": there are moneraty/economic "rules" made/enforced by a few humans to organise(oppress?) others humans. Don't be fooled.
To deal with inflation is to deal with those humans who are increasing prices.
kkfx|3 years ago
If State's treasury generate money and all Citizens behind them exchange that money, taxes act for their own purpose witch is not financing States out of Citizens pockets but to redistribute richness to ensure a fair enough society where those who do more/are lucky get rewarded but still NOT being able to assume so much economical power to endanger the society at a whole.
Than inflation will not exists, or at least it's a kind of marginal concept almost non one is interested in.
If we are, like we are now, than inflation, mostly artificial, is a mean to cyclically made people poor to push a change against peoples and peoples will, like war or a new society built not to serve us humans but to serve very few of us who happen to be a human cancer, human as any cancer is part of the ill person, equally dangerous and lethal, to be cured by all means to try to survive...
If people do not understand that in sufficient enough mass, well a modern society is not possible and that means those who understand can only do their best to survive AGAINST other citizens-subjects waiting for a cyclic collapse and when this collapse happen, since there is no Democracy so no human rights try to get the hardest and inhuman revenge against those who happen to have, again, provoked the mess. Hoping that again in the history such big mess have made enough people understand who is the enemy.
If you think a separate society can work, like Indian's casts... Well... Try to look at history, yes for a certain time it work, but only for a certain time, so here the choice is moral in the sense: did we live ONLY for us or also for leaving an heritage?
emptysongglass|3 years ago
What are some counter-arguments I should prepare myself for?
zarzavat|3 years ago
They shouldn’t. Tech worker compensation doesn’t follow inflation, it follows investment in the tech industry. So in this situation where you have high inflation causing interest rate hikes, you should expect your compensation to stay the same (if you keep your job, due to inelasticity) or to fall (because you were made redundant).
If however you work in Wendy’s, then your wages (note that nobody talks about service workers having compensation) are somewhat more determined by inflation because if Wendy’s gives all their workers a real wage cut they will probably quit en mass.
yxhuvud|3 years ago
sorokod|3 years ago
https://en.m.wikipedia.org/wiki/Boots_theory
Straw|3 years ago
Okay, what about the variation? Definitely, prices for different goods change differently, and the NYT even has a calculator that estimates it for you based on your consumption: https://www.nytimes.com/interactive/2022/05/08/business/econ... Try it out with a few different choices- you'll see that pretty much everyone experiences significant price increases, out of line with the previous decade- so the CPI while not perfect definitely tells us something.
The fact that the standard deviation is greater than the mean does not tell us its not meaningful- for example, if I give you 1 million samples from a normal distribution with mean 0.1 and std 1.0, you can meaningfully tell me the mean is greater than 0.
Individual components of the price index don't give a useful item to take the variance of, because very few people have all their expenses in one component. We'd actually like the dispersion of the change in expenses for each person/company to understand how much expenses rise in general. I suspect this will be significantly smaller since most people have 'similar' spending profiles, at least compared to the hypothetical consumers which only buy one component of the price index.
Okay so why do prices change differentially more during inflation? This is a tough one, and recently there are obvious confounding factors (covid) that make it difficult to dissect. But I think even Friedman would expect this, because he claims that quantity of money leads inflation by 6 months-2 years, and we wouldn't expect it to propagate through all supply chains at equal speed. This also means that the standard theory is predictive and can't just be an accounting identity- the prediction (which we can make after the huge increase in M2 in 2020) is that prices will rise, with some delay but eventually about 30%. I'm not counting any change in the output of the economy here, so with covid disruption I wouldn't expect this to have particularly good accuracy. Let's see how it pans out!
Finally, we can look at things like the price of gold: it rose significantly pretty much in line with the M2 money supply. I don't know of anything that would significantly affect gold supply recently, so it would seem the demand comes from devaluation of the dollar or fear of it.
nathias|3 years ago
> Price-change variation rises and falls with the average rate of inflation.
I think we can see it as a decay of money as a tool, its main function of being a unit of account becomes disrupted because its self-referential aspect increases.
FuriouslyAdrift|3 years ago
Inflation within the context of state level economics is the reduction in relative value of current monetary holdings.
That's it.
There's nothing magical, hidden, or complicated about it.
How it arrives, how it is dealt with, and how much is desirable for specific effects is all up for debate and the article has some great info and analysis there.
The most common reasons are monetary expansion and scarcity changes in resources. The most common methods of adjustment are monetary contraction and increases in resources.