The Inflation Thread

[LFC]

"Greedflation" is finally being taken seriously by mainstream economists, who seem about as useful as the mainstream media. They've been reporting on record profits at a number of companies in multiple industries for over a year but the sage people who are supposed to understand this best have taken this long to catch up with the data.

Once dismissed as a fringe theory, the idea that corporate thirst for profits drives up inflation, aka "greedflation," is now being taken more seriously by economists, policymakers and the business press.

Why it matters: Though inflation is starting to come down, it still remains well above the Fed's target level of 2%, and understanding what's causing inflation is key to combatting it — now and the next time.

The idea that profits drove our current bout of inflation surfaced in the last few years among progressive economists and lawmakers but was waved away by more mainstream types as a "conspiracy theory." That changed earlier this year.

[LFC]

Are labor costs greatly impacting inflation? The short answer is "no." The longer answer is "f*** no."

Analysis shows that higher labor costs are passed along to customers in the form of higher nonhousing services prices, however the effect on overall inflation is very small. Labor-cost growth has no meaningful effect on goods or housing services inflation. Overall, labor-cost growth is responsible for only about 0.1 percentage point of recent core PCE inflation.” (emphasis added)

Fascinating research from the San Francisco Federal Reserve Bank, pondering the impact of wage gains on inflation.

Counterintuitively, they found that rising wages have a minimal impact on inflation. How little? The study found that a “1% point increase in labor costs causes only a 0.15% rise in core PCE inflation” over four years – an increase of less than 0.04% annually.

[LFC]

Phil Gramm? Isn't Mr. Mental Recession dead yet? And he's still a hack.

Let’s cut to the chase: “America’s Enormous Math Mistake” is a popular video on YouTube that claims the poor are much less poor than the official statistics suggest because those statistics ignore government welfare like Food Stamps and Aid to Dependant Children and lots of other safety net programs. If this were true, it would mean we have been measuring income inequality incorrectly (perhaps wealth inequality as well).

It is untrue.

Since 2008, the Census Bureau has included government transfers in its Supplemental Poverty Measure. It took 0.77 seconds to find 253,000,000 results on Google showing exactly how the government measures this.

Call it ” ‘America’s Enormous Math Mistake’s Mistake.”

Was this ignorance? Willfull misrepresentation? Sheer stupidity? Or is anything economic Phil Gramm touches simply destined to be a dumpster fire of lies, foolishness, and incompetency?

You may remember Phil Gramm. He’s the (thankfully) former U.S. Senator who said Americans were a “nation of whiners” suffering from a “mental recession.”

In 2008.

This was as the country was sinking into the worst recession since the Great Depression.

Gramm wrote a book that was published last year, “The Myth of American Inequality: How Government Biases Policy Debate.” Phil and his co-authors perform sleight-of-hand tricks to convince you that, hey, income and wealth inequality aren’t nearly as bad as you might think. Who ya gonna believe, me and my our jiggered stats, or your own lyin’ eyes?

[LFC]

Ritholtz on the 2% inflation target. That number was pretty much pulled out of somebody's ass, yet the Fed and other nations cling to it like it's something with robust, scholarly support.

2% Inflation Target is Silly

One of the more foolish arguments1 that seem to be emanating from the Fed about their intention to raise rates another quarter point today: The 2% inflation target that has been in place pretty much the entire post-financial crisis era.

There is no empirical evidence that shows 2% as the optimal long-run inflation target, for a central bank that has a dual mandate of price stability and maximum employment. It is a round number that people kinda made up and stayed with for no apparent reason.

If there was something magical about 2% as the ideal balance between prices and jobs, that would be avery different thing. But the 2% inflation target is LITERALLY a random number that originated in New Zealand in the 1980s.2 Roger W. Ferguson Jr., former Vice Chairman of the Federal Reserve observed in a recent CFR note, “Surprisingly, it came not from any academic study, but rather from an offhand comment during a television interview.” For reasons no one has intelligently articulated, other countries subsequently adopted it as their target.

Laurence Ball, Professor of Economics at Johns Hopkins and Research Associate at the National Bureau Of Economic Research, made the case in 2013 that 4% was a more rational target. “Raising inflation targets to 4% would have little cost, and it would make it easier for central banks to end future recessions,” he noted.3

He refers back to another piece he wrote in May of this year on a key inflation indicator that the Feds use which is basically beyond incorrect, falling well into useless.

Jerome Powell and the Federal Reserve spend a lot of time worrying about Inflation Expectations.

They shouldn’t.

Generally, Sentiment Surveys are useless — most of the time — the exception being on rare occasions at the extremes.

They aren’t merely lagging, backward-looking indicators, but instead, inform us as to what the public was experiencing about 3-6 months ago. Typically, it takes people a few weeks or months to subconsciously incorporate broad, subtle changes into their internal mental models, and longer to consciously recognize those nuanced shifts.

Beyond short-term trend extrapolation, inflation expectations have little to no ability to provide insight into the intermediate-future (e.g., 6-12 months) inflation. As to the longer-term, the 5-Year Forward Inflation Expectation Rate are ridonkulously, hilariously, laughably useless. They are so silly as to be “Not even wrong” — just goofy irrelevant guesses.

[goldenvalley]

I know nuttin' about nuttin' when it comes to economics but I think human nature leads us to "fight the last war."  The last big inflation was in the late 70's I remember it well. The anticipated inflation following the housing bubble bursting didn't really materialize. But the economy now is different from the 70's...less manufacturing, lots more social services and the psyche of corporations was perhaps different then too.   The old method of raising interest rates remains even if that means putting people out of work because heaven forbid! too many people have jobs and money to buy things.  At the same time the Fed has no mechanism to lower prices that perhaps increased due to supply chain issues where industry won't lower prices even as costs decrease and the supply chain is working a bit better.  Seems like being able to do that would not only slow inflation but return things to what they were before the inflationary period began.  In our capitalistic society that can't be done by government.

[jackd]

In the 70's Nixon did it with wage and price controls followed by Ford with WIN (whip inflation now) pins.

[goldenvalley]

Jul 28, 2023 22:55:47 GMT jackd said:

In the 70's Nixon did it with wage and price controls followed by Ford with WIN (whip inflation now) pins.

Imagine what the current Supreme Court would do with that sort of attempt.  

[pnwguy]

Jul 29, 2023 0:45:21 GMT goldenvalley said:

Jul 28, 2023 22:55:47 GMT jackd said:

In the 70's Nixon did it with wage and price controls followed by Ford with WIN (whip inflation now) pins.

Imagine what the current Supreme Court would do with that sort of attempt.  

That's easy to predict.  If it's a REPUBLICAN in the White House, then unrestrained executive power is fully endorsed.  It's only Democratic presidents that must be boxed in by SCOTUS.  Nixon would be free to impose anything on private businesses, especially those on his enemies list.

[AnBr]

Obviously.