[kenberg]

Irwin refers to "a piece of economic data on Oct. 29 that is closely followed by economists but gets relatively few headlines — a surge in the employment cost index.'
Right. I had never heard of this index but the name is self-explanatory.
The following might be an example:
Yesterday I stopped at the drive-through window of Burger King. Only a few cars ahead of me, so it won't take long. Wrong. The staff was one person at the inside counter, one person working the drive-through, she was taking orders, taking the money, and packaging the burgers, and one person cooking everything for both drive-through and counter orders. They have had a perpetual sign seeking workers. The cost of a Whopper has gone up some 20% in the last year, presumably to pay workers more, but I suppose further increases are coming.
Not unique to the local BK I am sure.

For amusement: We subscribe to home delivery for WaPo. We live pretty far out and the paper deliverer handles WaPo, the local county paper, the Baltimore Sun, and other things such as, I believe, the Korean Times. Anyway, today she was short of Washinton Posts but had extra Wall Street Journals so we got the WSJ instead of WaPo. It happens. A good day for it to happen as it turned out.
WSJ has a several page insert called Year in Review. I recommend it.

Now I have to go online and print out the WaPo crossword puzzle. Gotta keep priorities straight.

[y66]

Paul Krugman said:

I will always associate inflation with the taste of Hamburger Helper.

In the summer of 1973 I shared an apartment with several other college students; we didn’t have much money, and the cost of living was soaring. By 1974 the overall inflation rate would hit 12 percent, and some goods had already seen big price increases. Ground beef, in particular, was 49 percent more expensive in August 1973 than it had been two years earlier. So we tried to stretch it.

Beyond the dismay I felt about being unable to afford unadulterated burgers was the anxiety, the sense that things were out of control. Even though the incomes of most people were rising faster than inflation, Americans were unnerved by the way a dollar seemed to buy less with each passing week. That feeling may be one reason many Americans now seem so downbeat about a booming economy.

The inflation surge of the 1970s was the fourth time after World War II that inflation had topped 5 percent at an annual rate. There would be smaller surges in 1991 and 2008, and a surge that fell just short of 5 percent in 2010-11.

Now we’re experiencing another episode, the highest inflation in almost 40 years. The Consumer Price Index in November was 6.8 percent higher than it had been a year earlier. Much of this rise was due to huge price increases in a few sectors: Gasoline prices were up 58 percent, used cars and hotel rooms up 31 percent and 26 percent respectively and, yes, meat prices up 16 percent. But some (though not all) analysts believe that inflation is starting to spread more widely through the economy.

The current bout of inflation came on suddenly. Early this year inflation was still low; as recently as March members of the Fed’s Open Market Committee, which sets monetary policy, expected their preferred price measure (which usually runs a bit below the Consumer Price Index) to rise only 2.4 percent this year. Even once the inflation numbers shot up, many economists — myself included — argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected. And on Wednesday the Fed moved to tighten monetary policy, reducing its bond purchases and indicating that it expects to raise interest rates at least modestly next year.

Inflation is an emotional subject. No other topic I write about generates as much hate mail. And debate over the current inflation is especially fraught because assessments of the economy have become incredibly partisan and we are in general living in a post-truth political environment.

But it’s still important to try to make sense of what is happening. Does it reflect a policy failure, or just the teething problems of an economy recovering from the pandemic slump? How long can we expect inflation to stay high? And what, if anything, should be done about it?

To preview, I believe that what we’re seeing mainly reflects the inherent dislocations from the pandemic, rather than, say, excessive government spending. I also believe that inflation will subside over the course of the next year and that we shouldn’t take any drastic action. But reasonable economists disagree, and they could be right.

To understand this dispute, we need to talk about what has caused inflation in the past.

Inflation, goes an old line, is caused by “too much money chasing too few goods.” Alas, sometimes it’s more complicated than that. Sometimes inflation is caused by self-perpetuating expectations; sometimes it’s the temporary product of fluctuations in commodity prices. History gives us clear examples of all three possibilities.

The White House Council of Economic Advisers suggested in July that today’s inflation most closely resembles the inflation spike of 1946-1948. This was a classic case of “demand pull” inflation — that is, it really was a case of too much money chasing too few goods. Consumers were flush with cash from wartime savings, and there was a lot of pent-up demand, especially for durable goods like automobiles, after years of wartime rationing. So when rationing ended there was a rush to buy things in an economy still not fully converted back to peacetime production. The result was about two years of very high inflation, peaking at almost 20 percent.

The next inflation surge, during the Korean War, was also driven by a rapid increase in spending. Inflation peaked at more than 9 percent.

For observers of the current scene, the most interesting aspect of these early postwar inflation spikes may be their transitory nature. I don’t mean that they went away in a matter of months; as I said, the 1946-1948 episode went on for about two years. But when spending dropped back to more sustainable levels, inflation quickly followed suit.

That wasn’t the case for the inflation of the 1960s.

True, this inflation started with demand pull: Lyndon Johnson increased federal spending as he pursued both the Vietnam War and the Great Society, but he was unwilling at first to restrain private spending by raising taxes. At the same time, the Federal Reserve kept interest rates low, which kept things like housing construction running hot.

The difference between Vietnam War inflation and Korean War inflation was what happened when policymakers finally acted to rein in overall spending through interest rate increases in 1969. This led to a recession and a sharp rise in unemployment, yet unlike in the 1950s, inflation remained stubbornly high for a long time.

Some economists had in effect predicted that this would happen. In the 1960s many economists believed that policymakers could achieve lower unemployment if they were willing to accept more inflation. In 1968, however, Milton Friedman and Edmund S. Phelps each argued that this was an illusion.

Sustained inflation, both asserted, would get built into the expectations of workers, employers, companies setting prices and so on. And once inflation was embedded in expectations it would become a self-fulfilling prophecy.

This meant that policymakers would have to accept ever-accelerating inflation if they wanted to keep unemployment low. Furthermore, once inflation had become embedded, any attempt to get inflation back down would require an extended slump — and for a while high inflation would go along with high unemployment, a situation often dubbed “stagflation.”

And stagflation came. Persistent inflation in 1970-71 was only a foretaste. In 1972 a politicized Fed juiced up the economy to help Richard Nixon’s re-election campaign; inflation was already almost 8 percent when the Arab oil embargo sent oil prices soaring. Inflation would remain high for a decade, despite high unemployment.

Stagflation was eventually ended, but at a huge cost. Under the leadership of Paul Volcker, the Fed sharply reduced growth in the money supply, sending interest rates well into double digits and provoking a deep slump that raised the unemployment rate to 10.8 percent. However, by the time America finally emerged from that slump — unemployment didn’t fall below 6 percent until late 1987 — expectations of high inflation had been largely purged from the economy. As some economists put it, expectations of inflation had become “anchored” at a low level.

Despite these anchored expectations, however, there have been several inflationary spikes, most recently in 2010-11. Each of these spikes was largely driven by the prices of goods whose prices are always volatile, especially oil. Each was accompanied by dire warnings that runaway inflation was just around the corner. But such warnings proved, again and again, to be false alarms.

So why has inflation surged this year, and will it stay high?

Mainstream economists are currently divided between what are now widely called Team Transitory and Team Persistent. Team Transitory, myself included, has argued that we’re looking at a temporary blip — although longer lasting than we first expected. Others, however, warn that we may face something comparable to the stagflation of the 1970s. And credit where credit is due: So far, warnings about inflation have proved right, while Team Transitory’s predictions that inflation would quickly fade have been wrong.

But this inflation hasn’t followed a simple script. What we’re seeing instead is a strange episode that exhibits some parallels to past events but also includes new elements.

Soon after President Biden was inaugurated, Larry Summers and other prominent economists, notably Olivier Blanchard, the former chief economist of the International Monetary Fund, warned that the American Rescue Plan, the $1.9 trillion bill enacted early in the Biden administration, would increase spending by far more than the amount of slack remaining in the economy and that this unsustainable boom in demand would cause high inflation. Team Transitory argued, instead, that much of the money the government handed out would be saved rather than spent, so that the inflationary consequences would be mild.

Inflation did in fact shoot up, but the odd thing is that overall spending isn’t extraordinarily high; it’s up a lot this year, but only enough to bring us more or less back to the prepandemic trend. So why are prices soaring?

Part of the answer, as I and many others have noted, involves supply chains. The conveyor belt that normally delivers goods to consumers suffers from shortages of port capacity, truck drivers, warehouse space and more, and a shortage of silicon chips is crimping production of many goods, especially cars. A recent report from the influential Bank for International Settlements estimates that price rises caused by bottlenecks in supply have raised U.S. inflation by 2.8 percentage points over the past year.

Now, global supply chains haven’t broken. In fact, they’re delivering more goods than ever before. But they haven’t been able to keep up with extraordinary demand. Total consumer spending hasn’t grown all that fast, but in an economy still shaped by the pandemic, people have shifted their consumption from experiences to stuff — that is, they’ve been spending less on services but much more on goods. The caricature version is that people unable or unwilling to go to the gym bought Pelotons instead, and something like that has in fact happened across the board.

Here’s what the numbers look like. Overall consumption is up 3.5 percent since the pandemic began, roughly in line with normal growth. Consumption of services, however, is still below prepandemic levels, while purchases of durable goods, though down somewhat from their peak, are still running very high.

No wonder the ports are clogged!

Over time, supply-chain problems may largely solve themselves. A receding pandemic in the United States, despite some rise in cases, has already caused a partial reversal of the skew away from services toward goods; this will take pressure off supply chains. And as an old line has it, the cure for high prices is high prices: The private sector has strong incentives to unsnarl supply chains, and in fact is starting to do that.

In particular, large retailers have found ways to get the goods they need, and they say they’re fully stocked for the holiday season. And measures of supply-chain stress such as freight rates have started to improve.

Yet supply-chain problems aren’t the whole story. Even aside from bottlenecks, the economy’s productive capacity has been limited by the Great Resignation, the apparent unwillingness of many Americans idled by the pandemic to return to work. There are still four million fewer Americans working than there were on the eve of the pandemic, but labor markets look very tight, with record numbers of workers quitting their jobs (a sign that they believe new jobs are easy to find) and understaffed employers bidding wages up at the fastest rate in decades. So spending does appear to be exceeding productive capacity, not so much because spending is all that high but because capacity is unexpectedly low.

Inflation caused by supply-chain disruptions will probably fall within a few months, but it’s not at all clear whether Americans who have dropped out of the labor force will return. And even if inflation does come down it might stay uncomfortably high for a while. Remember, the first postwar bout of inflation, which in hindsight looks obviously transitory, lasted for two years.

So how should policy respond?

To squeeze or not to squeeze, that is the question

I’m a card-carrying member of Team Transitory. But I would reconsider my allegiance if I saw evidence that expectations of future inflation are starting to drive prices — that is, if there were widespread stories of producers raising prices, even though costs and demand for their products aren’t exceptionally high, because they expect rising costs and/or rising prices on the part of competitors over the next year or two. That’s what kept inflation high even through recessions in the 1970s.

So far I don’t see signs that this is happening — although the truth is that we don’t have good ways to track the relevant expectations. I’ve been looking at stories in the business press and surveys like the Fed’s Beige Book, which asks many businesses about economic conditions; I haven’t (yet?) seen reports of expectations-driven inflation. Bond markets are essentially predicting a temporary burst of inflation that will subside over time. Consumers say that this is a bad time to buy many durable goods, which they wouldn’t say if they expected prices to rise even more in the future.

For what it’s worth, the Federal Reserve, while it has stopped using the term “transitory,” still appears to believe that we’re mostly looking at a fairly short-term problem, declaring in its most recent statement, “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”

Still, an unmooring of inflation expectations is possible. Given that, what should policymakers be doing right now? And by “policymakers” I basically mean the Fed; political posturing aside, since, given congressional deadlock, nothing that will make a material difference to inflation is likely to happen on the fiscal side, inflation policy mainly means monetary policy.

I recently participated in a meeting that included a number of the most prominent figures in the inflation debate — a meeting in which, to be honest, those of us still on Team Transitory were definitely in the minority. The meeting was off the record, but I asked Larry Summers and Jason Furman, a top economist in the Obama administration, to share by email summaries of their positions.

Summers offered a grim prognosis, declaring, “I see a clearer path to stagflation as inflation encounters supply shocks and Fed response than to sustained growth and price stability.” The best hope, he suggested, was along the lines of what the Fed has now done, end its purchases of mortgage-backed securities (which I agree with because I don’t see what purpose those purchases serve at this point) and plan to raise interest rates in 2022 — four times, he said — with “a willingness to adjust symmetrically with events.” In other words, maybe hike less, but maybe hike even more.

Furman was less grim, saying, “We should not drop the goal of pursuing a hot economy,” but he wanted us to slow things down, to “get there by throwing one log on the fire at a time.” His policy recommendation, however, wasn’t that different. He called for three rate hikes next year, as the Fed said on Wednesday that it was considering.

Where am I in this debate? Clearly, a sufficiently large rate hike would bring inflation down. Push America into a recession, and the pressure on ports, trucking and warehouses would end; prices of many goods would stop rising and would indeed come down. On the other hand, unemployment would rise. And if you believe that we’re mainly looking at temporary bottlenecks, you don’t want to see hundreds of thousands, maybe millions of workers losing their jobs for the sake of reducing congestion at the Port of Los Angeles.

But what both Summers and Furman are arguing is that the inflation problem is bigger than temporary bottlenecks; Furman is also in effect arguing that tapping on the monetary brakes could cool off inflation without causing a recession, although Summers doesn’t think we’re likely to avoid at least a period of stagflation when bringing inflation down.

The Fed’s current, somewhat chastened, position seems almost identical to Furman’s. The latest projections from board members and Fed presidents are for the interest rate the Fed controls to rise next year, but by less than one percentage point, and for the unemployment rate to keep falling.

Perhaps surprisingly, my own position on policy substance isn’t all that different from either Furman’s or the Fed’s. I think inflation is mainly bottlenecks and other transitory factors and will come down, but I’m not certain, and I am definitely open to the possibility that the Fed should raise rates, possibly before the middle of next year. I think the Fed should wait for more information but be willing to hike rates modestly if inflation stays high; Furman, as I understand it, thinks the Fed should plan to hike rates modestly (in correspondence he suggested one percentage point or less over the course of 2022, matching the Fed’s projections) but be willing to back off if inflation recedes.

This seems like a fairly nuanced distinction. It is, of course, possible that bad inflation news will force far more draconian tightening than the Fed is currently contemplating, even now.

Maybe the real takeaway here should be how little we know about where we are in this strange economic episode. Economists like me who didn’t expect much inflation were wrong, but economists who did predict inflation were arguably right for the wrong reasons, and nobody really knows what’s coming.

My own view is that we should be really hesitant about killing the boom prematurely. But like everyone who’s taking this debate seriously, I’m hanging on the data and wonder every day whether I’m wrong.

What's up with all the burger stories? Was this trend also perhaps foreseeable?

[pilowsky]

The Economist introduced the MacPPP decades ago as an accurate measure of the cost of living because the Big Mac is a (relatively) uniform product.
It is mad all over the world and incorporates a basket of essential goods and services.
Labour costs.
Freight.
Agriculture.
etc etc.
Which is why everyone bangs on about hamburgers and inflation.

Personally I'm not fond of Scottish food.

[kenberg]

I would be happy to sit down with Paul Krugman and swap burger stories. The only job I ever got fired from was at a burger place where I was frying fries. There was another short-term job that paid better so I would call in from the short-term job and say that I was sick. For some reason, when I "got well" they didn't want me frying fries anymore.

We might well be going through some sort of structural change in the workplace.

[y66]

From The Missing Data in the Inflation Debate by Austan Goolsbee at University of Chicago:

Quote

With inflation growing at its fastest rate in decades, economists are locked in a debate over whether it stems from too much stimulus or from temporary, pandemic-induced supply-chain pressures. Less discussed are the ways that the pain of inflation may not be shared equally.

Prices have soared for physical products but have risen only modestly for services. The cost of gasoline is up 58 percent in the last year, while health insurance prices have fallen almost 4 percent. Meat prices are up 13 percent, dairy 1.6 percent. Boys’ apparel is up 8.4 percent, while girls’ apparel is down 0.4 percent.

Differences like that mean that the inflation rate a person faces depends on what that person buys and where he or she lives and shops. People who live in more rural states, for example, most likely drive significantly more miles per year — so fuel inflation would matter a great deal to them.

Quote

The pain associated with inflation may be the most acute for those at the bottom. From mid-2019 to early 2020, the Consumer Expenditure Survey, the government’s primary data source on how consumers spend money, showed that those in the highest 20 percent of earnings spent, on average, less than two-thirds of their annual income. Households among the lowest 40 percent of earners actually spent more than their annual income, meaning they are most likely dipping into savings or taking out loans (although inflation can reduce the burden of debt for borrowers). Even at the same inflation rate, rising prices pinch spenders more.

Online shopping is also surely exacerbating inflation inequality. Before the Covid pandemic, I helped Adobe Analytics create a measure of online inflation analogous to the government’s Consumer Price Index (C.P.I.). Using anonymized data from Adobe’s marketing analytics division, we examined more than one trillion online transactions made between 2014 and 2017. We found annual online price inflation averaged almost 1.5 percentage points lower than the equivalent C.P.I.

Over the past 12 months, that gap has likely widened. Adobe’s latest release found online prices over that interval to be 3.5 percent higher — more than three full percentage points below the headline inflation rate of 6.8 percent. In November, online prices fell 0.2 percent as the C.P.I. rose 0.8 percent.

In other words: The more someone shops online rather than in stores, the less inflation the individual has faced. Notably, shopping online is far more common among high-income people. And during the pandemic the practice has grown more prevalent. Digital Commerce 360, a research company, estimates that three-quarters of the growth in the retail business in the United States in 2020 came from e-commerce.

Quote

It’s always possible that economists are wrong to worry about inflation inequality. The data may show the cost of living rising at about the same rate for everyone. If it does show differences, measures of inflation inequality are likely to become weapons in the partisan battles over the economy in the same way other data has.

But people understand that their economic situation is based on whether their income grows faster than their cost of living. Both of those vary across American society. It’s time for the government data to reflect that.

[kenberg]

As to how gas prices affect the poor: During my first few years of grad school, maybe 1960-1964, I couldn't afford a car so any rise of gas prices would have had only an indirect effect. Then a friend inherited a car so he sold me his 53 Ford for $35 with the agreement that if it was still running a year later I had to give him another $35. It wasn't.
But the larger point, that inflation hits hardest for those living close to the edge, is obviously correct. In doing my weekly grocery shopping back then, a cashier made a $1 error punching the keys on the register. Of course I caught it, she insisted she had made no error, I insisted she must have, she checked, and she had made an error. Now a number comes up from the register, I am asked to hit ok, I hit ok. Becky still checks receipts, but I never do. Never? Well, hardly ever.
My understanding is that the programs that give support to families with children have been seriously affected. If we are to help people hit by inflation, let's start there.

[pilowsky]

kenberg, on 2021-December-30, 13:22, said:

but I never do. Never? Well, hardly ever.

You are the very model of a modern mathematician.

[microcap]

As a 35 year investment professional, I have given the topic of inflation a ton of thought. Here are a few takeaways:

1) No one knows really how to measure "inflation." Housing and health care are impossible to truly measure. The CPI is absolute junk and we'd be better off if they never calculated or reported it. It has just led to terrible policy over the years. I suspect European measurement is even worse, but I have not researched it.

2) No one knows what actually causes inflation. Anyone who thinks Keynes was right has not paid attention for 40 years. [KRugman, Reich, and 99% of Wall Street believe in Keynesian economics." Friedman and monetarism are closer, but also wrong in the environment of electronic money. Since 2009, the US and other central banks have "printed" trillions with no inflation at all. If you have a good answer to this question, boy would I love to hear it.

3) There is certainly inflation, but the bond markets [and I agree with it] are telling you that the cause is different and more temporary than the 70's.

As always, I generate lots of questions but never any answers!

[kenberg]

microcap, on 2021-December-31, 07:11, said:

As a 35 year investment professional, I have given the topic of inflation a ton of thought. Here are a few takeaways:

1) No one knows really how to measure "inflation." Housing and health care are impossible to truly measure. The CPI is absolute junk and we'd be better off if they never calculated or reported it. It has just led to terrible policy over the years. I suspect European measurement is even worse, but I have not researched it.

2) No one knows what actually causes inflation. Anyone who thinks Keynes was right has not paid attention for 40 years. [KRugman, Reich, and 99% of Wall Street believe in Keynesian economics." Friedman and monetarism are closer, but also wrong in the environment of electronic money. Since 2009, the US and other central banks have "printed" trillions with no inflation at all. If you have a good answer to this question, boy would I love to hear it.

3) There is certainly inflation, but the bond markets [and I agree with it] are telling you that the cause is different and more temporary than the 70's.

As always, I generate lots of questions but never any answers!

I am skeptical of many things, and that can include being skeptical of extreme skepticism. But in so far as you are saying that experts often speak with more confidence than the history of expert pronouncements justifies, I completely agree.

Oh. I am glad to see some new posters. Welcome.

[shyams]

I am not an economics trained person, I am not an investment professional, and most of my investments are for the long-term (with very few ins-outs in the middle). Here is my layman opinion -- hopefully aimed at provoking more thought.

microcap, on 2021-December-31, 07:11, said:

1) No one knows really how to measure "inflation." Housing and health care are impossible to truly measure. The CPI is absolute junk and we'd be better off if they never calculated or reported it. It has just led to terrible policy over the years. I suspect European measurement is even worse, but I have not researched it.

The UK Office for National Statistics (ons.gov.uk) has been measuring CPI and RPI on a consistent basis. Yes we have free healthcare which may make comparisons easier but the methodology is documented and transparent. Our media never talks about "core inflation excluding gas prices" or other kinds of variant inflation figures.

A proportion of the country also buys private healthcare insurance (either as an employer-provided perk or as a self-bought feature) -- I am quite sure that health insurance costs form part of the CPI and their weights are proportionally lower because it is not universally bought. The local media (incl. BBC) often talk about how some portion of the inflation affects the pensioners more. The media websites often carry a rudimentary "personalised inflation calculator" to help people understand what is happening.

In short, the fact that inflation is not properly measured may be a US phenomenon, not a European one. We probably know a bit more about what inflation means to us.

microcap also said:

2) [...] Since 2009, the US and other central banks have "printed" trillions with no inflation at all. If you have a good answer to this question, boy would I love to hear it.

Yes, the central bank printing trillions did not impact inflation as we know it because the money did not flow back to the average household.If (hypothetically) all the QE funds were instead distributed to every tax-paying American as a tax rebate check, your country (and consequently the world) would have seen inflation like never before.

The inflation, if any, is happening in asset prices. There were expert-written articles making the rounds about "asset inflation" that are worth reading; some are too complex for my understanding. That asset prices are rising due to surplus liquidity is more likely a causal rather than a coincidental relation.

Given that asset inflation impacts the average folk mostly when they try to buy homes, the millionaire folk when they try to buy art, and the billionaire folk when they try to buy corporations, not much media attention is given to whether & how asset inflation can be harmful.

[y66]

Matt Yglesias said:

Two things are true:

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

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

Karl Smith at Bloomberg said:

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

https://trib.al/zksdQGy

[johnu]

microcap, on 2021-December-31, 07:11, said:

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

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

[y66]

Lisa Abramowicz at Bloomberg said:

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



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

https://fred.stlouis...g/series/T5YIFR

[y66]

Timothy B Lee said:

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

Quote

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

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

https://fullstackeco...erican-economy/

[y66]

Conor Sen at Bloomberg said:

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

https://twitter.com/...889492554108929

[y66]

Lawrence H. Summers said:

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

Can liberalizing trade reduce US CPI inflation?

[hrothgar]

One point that I haven't yet see made

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

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

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

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

[mycroft]

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

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

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

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

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

[y66]

Paul Krugman said:

Inflation in the United States has probably peaked.

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



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

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

[y66]

Paul Krugman said:

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

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


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

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

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

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