Latest Inflation Numbers and Discussion

[GenXguy]

Deflation is not merely going back to lower prices. Deflation is dangerous, especially long term deflation, because it builds up the expectation that prices are going to continue to decrease, therefore people don't spend money and then the economy dramatically slows down. Why buy a car if the prices have been going down for the past 8 months? Just wait another couple of months and they will be even less expensive.

Now project that attitude out across a wide spectrum of goods and services. Pretty soon companies aren't selling very much stuff, profits decline, cash flow withers, so they have to lay off people. Unemployed people don't buy much stuff either. It's a vicious cycle that feeds on itself, paralyzing the economy.

People use the same tired arguments about deflation that we've all heard before, but it's not always bad, especially when inflation has been running so high for years:
https://www.investopedia.com/articles/markets/111715/can-deflation-be-good.asp

 

[Qs Laptop]

People use the same tired arguments about deflation that we've all heard before, but it's not always bad, especially when inflation has been running so high for years:
https://www.investopedia.com/articles/markets/111715/can-deflation-be-good.asp

"Same tired arguments?"

Your link holds up Switzerland's experience in 2016 as "good deflation". It also cites examples from the late 19th century when the gold standard was in use.

Do you think these are valid examples? Switzerland instituted negative interest rates on their currency. The gold standard is not used anywhere in countries with a larger economy (or any country so far as I know.)

From the article: According to these economists, good deflation occurs when the aggregate supply of goods outstrips aggregate demand. This can be the result of advances in technology or improved productivity.

Yes, we've seen this with many electronic goods--computers, cell phones, HDTV's, etc. Technology improves along with the ability to efficiently produce these goods. The consumer gets better and better quality goods with the same price points as goods with less features just a few years ago. In some cases prices actually go down and you get more features.

But consumer electronics is just one area of the economy. Now, give me some examples of other products where technological improvements or improved productivity will lead to lower prices?

Furthermore, the supply of goods will only outstrip aggregate demand so long as the manufacturer allows it. Why would a manufacturer continue to flood the market with products if the price is continually decreasing?

 

[GenXguy]

Furthermore, the supply of goods will only outstrip aggregate demand so long as the manufacturer allows it. Why would a manufacturer continue to flood the market with products if the price is continually decreasing?

Snuffing out the competition. Look what OPEC did with oil for that reason. Also, if you sell a lot more of a product by lowering the price, you could still come out ahead in profits.

 

[CaptTom]

Deflation is not merely going back to lower prices. Deflation is dangerous, especially long term deflation, because it builds up the expectation that prices are going to continue to decrease, therefore people don't spend money and then the economy dramatically slows down...

That's a pretty sound argument, and I'll grant that it's one (maybe the only) potential negative impact of long-term deflation.

But, it assumes an awful lot of confidence in consumers acting rationally. When I look around at the choices my fellow consumers make, I have to question that hypothesis. I rather suspect many will keep spending at the same rate as always.

For the record, I don't advocate for long-term deflation. A period of deflation to reverse the recent inflation spike, yes. But long-term I'd prefer a steady, stable economy to either inflation or deflation.

 

[Running_Man]

For 100 years from 1820 to 1920 inflation was exactly equal to zero. There were periods of inflation and periods of deflation but the economy even though it struggled at times always recovered. These cycles tended to punish speculators Once the Federal Reserve got all their powers and removed gold from the currency model from 1920 to 2020 inflation has averaged 4.75% based on the value of gold. A dollar in 1920 is worth one cent in 2020. This has the advantage of eliminating the debt burden on debtors (capital holders and governments) and crushing savers.

Deflation will never be allowed to take hold, it does too much damage to debtors. Creditors and corporations need a healthy dose of inflation to become independently wealthy and to this point, stockholders have been able to join in on the fun.

 

[CaptTom]

...These cycles tended to punish speculators...

Yet another positive, IMHO.

Of course there are probably many ways to spin those same data. And during that timeframe we were seeing the beginnings of a massive change in technology, and in the rate of change itself. That can be disruptive. But to my earlier point, technological gains lead to productivity gains in the long run. And of course, to better standards of living.

 

[GenXguy]

More bad news on the inflation front.

"Wholesale inflation rose 0.6% in February, much more than expected"

https://www.cnbc.com/2024/03/14/pro...nflation-rose-0point6percent-in-february.html\

The producer price index, which measures pipeline costs for raw, intermediate and finished goods, jumped 0.6% on the month, double the Dow Jones estimate.

 

[MichaelB]

More bad news on the inflation front.

"Wholesale inflation rose 0.6% in February, much more than expected"

This is noisy data, so it could be a change in trend, or just measurement. Bond investors don’t see bad news here or in other inflation announcements over the past week. Rates are still lower than they were a month ago and show just a little change from a week ago. From today's FT

 

[Qs Laptop]

For 100 years from 1820 to 1920 inflation was exactly equal to zero. There were periods of inflation and periods of deflation but the economy even though it struggled at times always recovered.

Yes, but the economy was largely an agricultural based economy for much of that period, with population spread out. Then the flight to the cities occurred during the industrial revolution and the population increased.

In other words, I don't think you can compare the economy of our lifetime with the economy of the 19th century.

 

[Fermion]

Yes, but the economy was largely an agricultural based economy for much of that period, with population spread out. Then the flight to the cities occurred during the industrial revolution and the population increased.

In other words, I don't think you can compare the economy of our lifetime with the economy of the 19th century.

I actually find it interesting that people can compare the economy before the digital age to our current economy, and if you can't do that, then most everything is a guess (Firecalc, etc.). I certainly never thought something like Bitcoin could grow to $73,000 each. How do you account for this in a 1940s or 1950s economy?

 

[MarieIG]

Mod Hat On:

Please let this serve as a gentle reminder that - at the current time the forum rules prohibiting crypto discussions remain in effect.

Mod Hat Off.

 

[MichaelB]

I actually find it interesting that people can compare the economy before the digital age to our current economy, and if you can't do that, then most everything is a guess (Firecalc, etc.).

Your point is valid. One thing that can be compared over time is standard of living. Over long periods, some lasting hundreds of years, around the world and here in the US, standard of living did not change for most people. That causes deep and long lasting social unrest.

Tying that back into the thread topic, one way to look at the Fed policy goal is how to get inflation down and keep it low while supporting continued improvement in standard of living. That results from improvements in productivity, which in turn needs continued capital investment. Deflation does the opposite, which is why it is so dangerous.

 

[Car-Guy]

My understanding of the 2% target rate is it’s not exactly 2%, it’s “around 2%”.

Maybe that's similar to transitory. Is it 1yr, 2yrs or 10yrs....

 

[Gumby]

It might be helpful to reiterate what the Fed itself says about its 2% goal and the reasoning behind it.

The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.

For many years, inflation in the United States has run below the Federal Reserve’s 2 percent goal. It is understandable that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes. At the same time, inflation that is too low can weaken the economy. When inflation runs well below its desired level, households and businesses will come to expect this over time, pushing expectations for inflation in the future below the Federal Reserve’s longer-run inflation goal. This can pull actual inflation even lower, resulting in a cycle of ever-lower inflation and inflation expectations.

If inflation expectations fall, interest rates would decline too. In turn, there would be less room to cut interest rates to boost employment during an economic downturn. Evidence from around the world suggests that once this problem sets in, it can be very difficult to overcome. To address this challenge, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation modestly above 2 percent for some time. By seeking inflation that averages 2 percent over time, the FOMC will help to ensure longer-run inflation expectations remain well anchored at 2 percent.

Source: https://www.federalreserve.gov/faqs...mittee,maximum employment and price stability.

Some, including Nobel prize winning economist Paul Krugman, believe that 2% is too low and that the Feb should set a higher goal for PCE growth.

https://www.nytimes.com/2023/06/09/...e_code=1.ck0.d73S.0rczk58Nmh3g&smid=url-share

See also this analysis by the Brookings Institute
https://www.brookings.edu/articles/alternatives-to-the-feds-2-percent-inflation-target/

Interesting to review this in light of the difference between inflation rates when it was written in 2018 and in more recent years, but the major points made remain the same.

 

[GenXguy]

It might be helpful to reiterate what the Fed itself says about its 2% goal and the reasoning behind it.

Source: https://www.federalreserve.gov/faqs...mittee,maximum employment and price stability.

Indeed. That's the same page I linked to a few posts back. Let's hope they don't lose site of that target, although after the long run up, it needs to be lower now to get that average they spoke of back down to 2%.

 

[Gumby]

Did you read the other links about why it should be higher?

 

[CaptTom]

Your point is valid. One thing that can be compared over time is standard of living. Over long periods, some lasting hundreds of years, around the world and here in the US, standard of living did not change for most people. That causes deep and long lasting social unrest.

Tying that back into the thread topic, one way to look at the Fed policy goal is how to get inflation down and keep it low while supporting continued improvement in standard of living. That results from improvements in productivity, which in turn needs continued capital investment. Deflation does the opposite, which is why it is so dangerous.

I like the approach of looking at it from the perspective of standard of living.

I'd say that improvements in the average human standard of living were very slow (but steady) until sometime in the 1800's. Not only life expectancy, but the harder-to-quantify quality of life. As technology started driving ever more rapid productivity increases, the slope of this line steepened dramatically. As far as I can tell we're still on that trajectory.

I'm not sure I agree that this inevitably leads to the conclusion that deflation is dangerous. Innovation and productivity gains are an organic thing. They will happen whether or not the investor class gets richer every year.

Looking at it from the perspective of those with the capital, sure, they want inflation, not deflation. But I contend that a good innovation will be rewarded by the markets regardless of inflation or deflation.

 

[Qs Laptop]

Indeed. That's the same page I linked to a few posts back. Let's hope they don't lose site of that target, although after the long run up, it needs to be lower now to get that average they spoke of back down to 2%.

You keep saying that but the fact is that inflation was lower than 2% for much of the 2010's, so maybe this 18-20 month spike is getting it back on track at a 2% average?

 

[Chuckanut]

Here’s another data point:

The Producer Price Index for final demand rose 0.6 percent in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

 

[GenXguy]

You keep saying that but the fact is that inflation was lower than 2% for much of the 2010's, so maybe this 18-20 month spike is getting it back on track at a 2% average?

According to the BLS, the consumer price index is up about 18% in the last 3 years alone (although most people have seen real world inflation of much more than that). And it's probably going to be well over 2% this year. So how many years will it take and at what inflation level to get it back to 2%? Let's say from Jan 2021 to Dec 2030, for example.

Here’s another data point:

The Producer Price Index for final demand rose 0.6 percent in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

Same data point.
https://www.early-retirement.org/fo...ers-and-discussion-120454-17.html#post3063327

 

[MichaelB]

The Empire State Manufacturing Survey came out this morning, substantially below expectation at -20.9. This survey tracks general business conditions and manufacturing activity. https://www.newyorkfed.org/survey/empire/empiresurvey_overview#tabs-1

Business activity continued to decline in New York State, according to firms responding to the March 2024 Empire State Manufacturing Survey. The headline general business conditions index fell nineteen points to -20.9. Demand softened as new orders declined significantly, and shipments were lower. Unfilled orders continued to shrink, and delivery times were little changed. Inventories declined. Labor market indicators weakened, as employment and hours worked both decreased. The pace of input price increases moderated somewhat, while the pace of selling price increases held steady. Firms expect conditions to improve over the next six months, though optimism remained subdued.

Some data points to increasing activity and inflationary pressure, and other data leads to slowing conditions. Even the Atlanta Fed GDP tracker is unusually volatile. https://www.atlantafed.org/cqer/research/gdpnow It’s difficult to draw meaningful conclusions with such ambiguous data.

 

[GenXguy]

So why is the market up today?

Looks like the market is catching on to the news:

S&P 500 falls on inflation concerns, heads for weekly loss

https://www.cnbc.com/2024/03/14/stock-market-today-live-updates.html

 

[MichaelB]

Looks like the market is catching on to the news:

S&P 500 falls on inflation concerns, heads for weekly loss

https://www.cnbc.com/2024/03/14/stock-market-today-live-updates.html

At the very least it’s a stretch to correlate short term changes in equity markets with any data announcements. The outlook for inflation has not changed that’s much.

 

[pb4uski]

According to the BLS, the consumer price index is up about 18% in the last 3 years alone (although most people have seen real world inflation of much more than that). And it's probably going to be well over 2% this year. So how many years will it take and at what inflation level to get it back to 2%? Let's say from Jan 2021 to Dec 2030, for example. Same data point.
https://www.early-retirement.org/fo...ers-and-discussion-120454-17.html#post3063327

Yes, but if we have a starting point of Jan 2020, (pre-covid) to Feb 2024, according to BLS CPI data it takes $120.29 to buy in Feb 2024 what you could buy for $100 in Jan 2020. That is an average annual rate of 4.63%.

IMO, bad, but not outrageously bad. IOW, if during that 4 year period inflation had been 4.63% annually then there would be a lot less outrage than there is.

 

[GenXguy]

Yes, but if we have a starting point of Jan 2020, (pre-covid) to Feb 2024, according to BLS CPI data it takes $120.29 to buy in Feb 2024 what you could buy for $100 in Jan 2020. That is an average annual rate of 4.63%.

IMO, bad, but not outrageously bad. IOW, if during that 4 year period inflation had been 4.63% annually then there would be a lot less outrage than there is.

Yeah, that would be more than double the Fed core PCE target for 4 straight years. I would not be happy and people would still be struggling with high prices. And of course, some things have shot up even more than the CPI figure. I wasn't even happy with the inflation we had prior to the big spike because I saw prices going up faster than inflation for so many of my big bills even when inflation was supposedly low based on the gub'ment figures.