Economist suggests that inflation may be low for a while

[RobLJ]

The simplest explanation is that we are in a persistent deflationary environment due to....aging of the population and no immigration (it's the Japan & Europe syndrome). Cheap energy also factors in.

Low demand and low investment (corps are putting their profits into stock buybacks, not productivity, so the cycle resumes; this is good for stock owners like me and most of you, not the overall economy).
I'm sorry but high inflation and >3% growth was so 1970s in the US. Both parties will deficit spend: the GOP by cutting taxes every chance they get and the Dems by spending. Take your choice, but there is not much of a difference, and surrprisingly to the classicists it will have very little influence on overall inflation and growth.

And yes if you are older, groceries and some other costs will go up. If you have a paid-for house and vehicle and Medicare, you are not going to experience the inflation younger citizens will experience. Inflation is an aggregate measure. DW and I are in significant deflation, exacerbated by no travel.
Most of us on the blawg suffer extreme 1st world 10%er problems, but you all know that, to some extent. I never anticipated living this life, but that's just me. The market did very well by me and DW.
I've ignored healthcare costs, but I'm covered until Medicare; sorry. Some/many of you possibly may be facing huge inflation there if ACA gets thrown out, which is quite possible, but that's the way the ball bounces politically. I'm relatively immune as a RedState State employee, which is unfair, but it is what it is. If I get COVID or cancer, I'll get huge health inflation also, but I'll probably be dead.

[RobLJ]

To clarify slightly, for the last 20-30 years, the .1% and profitable corporations have sat on their gains, probably rationally.
This is deflationary, in the extreme. There is not much money outside of these gains for the lower 95% to spend to inflate.

One way to look at this is the posters here who spend less than 2% of their stash (this is not a critique of them, just an observation about this "paradox of thrift" and the effects on the macroeconomy.) We here have probably little effect on the macroeconomy but I think it is a microcosm of how corporate and 1% wealth is .... not spent or spent unproductively to not inflate the economy.

Despite my inner thrift (I was born of Depression children), I really enjoy the blow the dough thread, although I almost have to put a gun to my head to blow dough, so I'm mostly criticizing myself here.

A change in our tax regimen might perhaps make a difference against the demographics or perhaps not. But I see little likelihood of a significant change in this, but I could be surprised--likely will be by events I don't foresee.

[Koolau]

Quote:

Originally Posted by pb4uski I dunno about inflation because we don't have much that we can compare apples-to-apples... but I do know that our spending is way below a year ago. For those that I can compare apples-to-apples.... electric rate per KW is 8.8% higher. Insurance (home, auto, umbrella, et al) is the same as last year. Property tax rate is actually a hair lower than 2019, but property tax is higher due to town-wide reappraisal hitting lakefront property more than total.

You are correct that much of the apples to apples comparisons are difficult to make when we quit spending money! About all we buy is health insurance (up significantly), electricity (up a bit), food primarily at Costco (up about 15% this year on OUR "market basket".) Phones - no change. Oh, taxes ARE down due to the tax cut.

No, we don't buy fuel (2 fill ups in 9 months). We no longer eat out (once a month now instead of almost once a day - AND the prices are up significantly WITH poorer selection.) No we haven't traveled though our last "jaunt" to the Big Island in January was DOUBLE for airfare what we paid last Sept.

I'm not panicked by inflation at this point, but I simply don't believe the numbers I see describing the official rate. Maybe the fairest way to say it "It bears no relationship to our experience." As always, YMMV.

[Gumby]

I guess the wise move is to use your own experience in your model. For example, we have no children so I don't really need to adjust my model for inflation in educational expenses. My house is paid for, so housing inflation likewise has little effect on us. Knock wood, we have retiree health insurance from my last employer, which will morph into a fully paid Medicare advantage plan when the time comes, so even healthcare inflation is, at this point, moot for us. We don't buy clothes anymore, so that is irrelevant to us too, as are the cost of autos, as we have two quite new low mileage ones and I don't see buying any more. We also have no need for more consumer electronics.

Indeed, virtually the only areas where inflation would affect us are food, fuel and utilities. Does that match the CPI? I don't know, but I assume for my purposes that it does. You might make your own inflation measure based on how you spend your money and use that instead.

[VFK57]

I am not an economist and neither major portion of ERed on this forum. However many retirees are worried what is the future of US$/ inflation. The reason is simple: Currently world reserve currency, what most countries keep are 60% in US$. However the EU and China are getting close to our GDP numbers and if we are talking about durable goods, we cannot compete with China. What would happen to inflation if our 60%of the world reserve currency would drop let say to 50% or lower? How it could affect the inflation?

[Starsky]

Inflation is the lodestar upon which many investment decisions will hinge. TLDR: Inflation is not possible as long as Banks don't lend.

The money printing part is irrelevant if the money lending part breaks down, which is what seems to be happening. Banks are rightly tightening up a lot on lending because of the poor economy and people's ability to repay. And savings are going up and debt is being paid off as people save the money they have in fear they will need it to survive an uncertain future. Both of those activities are highly deflationary.

Right now, the cost for some goods is going up; but wages are not, and consumer credit is dropping a lot. Under current conditions, inflation will not be an issue, even if the Fed wants it. On the other hand, if the Fed bypasses the banking system and provides enough direct stimulus, inflation could become real. The Fed wants more inflation to lower their cost of debt.

Here's a great article that discusses this topic in excellent detail: The Federal Reserve’s Bazooka is Broken – Will Direct Lending Be Next?

We are at such low interest rates, that stimulus via interest rates is now impossible. If interest rates were to become negative it would force a run on the banks. That is one reason the Fed wants a digital dollar, and maybe even to get rid of paper currently entirely. As mentioned at the recent IMF meeting, paper currency is literally the only thing standing between us and negative interest rates. Read the IMF blog here: Cashing In: How to Make Negative Interest Rates Work

The fed thus has two tools at its disposal to stimulate consumption and create inflation. They can get rid of cash and lower interest rates to negative rates; or they can make the Fed its own bank and allow them to lend directly and distribute digital credits to the needy and unemployed - and perhaps even as direct UBI payments. (Or they could do both.) Either solution is nothing but extreme.

I've been spending an inordinate amount of time reading and listening to economists and investors discuss this topic because it is fundamental to how we deploy our assets. I believe there is no doubt that we are headed into a deflationary spiral as bankruptcies and foreclosures start to roil the commercial market and things trickle down from there. Investment-wise, for now this means holding more bonds and cash than I've ever held before. We also have a lot of very good rental real estate. I did sell one house, but we're going to hold onto the rest as our hedge on the inflation side. If prices go up, we make money; if they go down, our ROI goes up. :shrug:

[Koolau]

Quote:

Originally Posted by Starsky <SNIP> We are at such low interest rates, that stimulus via interest rates is now impossible. If interest rates were to become negative it would force a run on the banks. That is one reason the Fed wants a digital dollar, and maybe even to get rid of paper currently entirely. As mentioned at the recent IMF meeting, paper currency is literally the only thing standing between us and negative interest rates. Read the IMF blog here: Cashing In: How to Make Negative Interest Rates Work

DW hates it when I buy something with "money." She thinks we're losing money (the cash back thing) which is, of course true in the short run. If "money" disappears, we would be much more vulnerable to coercion IMHO. YMMV

[cyber888]

Quote:

Originally Posted by GenXguy I have to disagree. The 7% increase in my homeowner's insurance has nothing to do with taxation. And when you are figuring your drawdown using the 4% rule, you MUST include taxes. You can't separate that out as if it doesn't exist as a real expense. That's ridiculous. Property taxes are a real expense and must be calculated in. That's part of my personal inflation that is figured as part of the 4% rule. The paid off house does NOT affect my drawdown related to the 4% rule at all and would work against me if I was to sell because in most areas that I would consider moving to, home values have actually gone up. So it's a negative all the way around which would require me to increase my spending. I wasn't thinking about it earlier, but someone else mentioned health care insurance premiums. My insurance premiums through work went up 60% in July, along with higher deductibles and coinsurance! Grocery bills are up, electric bill is up. I don't drive much, so gas prices don't affect me much, but the gubment decided to raise taxes on that to offset some of the price drop along with increasing many other fees like car registrations by 50%. As many experts are predicting, inflation is expected to soar, and is already higher than the government figures in terms of real inflation.

I’m pretty sure you live in a high cost area is your healthcare went up 60% and taxes up 7%.. My cousin pays $10,000 in realty tax and I pay $2,700. My premiums have not gone up nor my taxes. My cousin blames their state tax, not inflation.

[devans0]

I follow Keynes economics. I do much better in my investments than I did in the past because of that switch. Until I see otherwise, I will stick with what works for me.

Retirement CPI is different than the general CPI. The government uses the general CPI because it is cheaper. Our paid off homes are more than offset with increased medical, drugs, and insurance. Additionally, as we age, we have diminishing human capital to offset higher costs of services.

My fear is a prolonged stagflation.

I am not in line with conventional thinking, but I'm now comfortable with my investment strategy. It has been stress tested a few times and I do fairly well in avoiding the worst and do better in capitalizing the rebounds. I see areas that will be rebounding very well already.

Edit add, it was an economist on this site that clued me to change my thinking. I went back to school to learn more about econ. Being a retired student is different, to say the least.

[gooddog]

"Economist suggests that inflation may be low for a while"

When did ER become a comedy site?

[aleabo]

Quote:

Originally Posted by gooddog "Economist suggests that inflation may be low for a while" When did ER become a comedy site?

[2177V]

My opinion: Inflation will occur if the federal government wants inflation to occur.

The federal government has just spent trillions of dollars for COVID-19. Paying it back can mean raising taxes. However, voters will push back on raising taxes. However, if there is inflation, then wages will increase to keep up with inflation. When wages go up, taxes increases...without any push back by voters. Hence Inflation is a stealth tax increase. It also means people with a $3M portfolio will be under pressure to invest to keep up with inflation. However, the federal government is less interested in maintaining investor's portfolio than maintaining government spending.

If you were a government official and inflation starts to rise, will you tell the fed to raise interest rates to control inflation?..or let inflation happen? Wall Street will probably prefer the latter since raising interest rates tend to affect the stock market.

[Out-to-Lunch]

Quote:

Originally Posted by vchan2177 If you were a government official and inflation starts to rise, will you tell the fed to raise interest rates to control inflation?..or let inflation happen?

Indulge me in a little bit of nostalgia. I am old enough to remember when it was understood that government officials did not tell the fed what to do.

[arch57]

Quote:

Originally Posted by enjoyinglife102 Inflation low for a long time? When does that start? Housing prices are soaring and so are building materials. My grocery store is no indicator of deflation, just the opposite. Another example of government inflation numbers not meaning much, similar to the referenced market predictions.

I have been complaining to any one who listens that the actual inflation we see in our everyday lives is never truly measured. It's in the governments best interest to keep the CPI low as so many outlays are tied to that number.

As an anecdotal example I always keep a good supply of deck screws of all lengths around for quick projects around the house and yard. Bought a big stash 10 years ago for $5.99 1lb box. Was shocked this past summer when I went to Home Depot and found they are now $9.99 a box, same brand and size.

Point being that at average 1.76% CPI over 10 years (which is a close guess) those deck screws should be $7.16 and this creeping inflation occurs in thousands of items that don't get tracked in my opinion.

And another is what I call "having some fun" index. Things like cost of a lobster roll or whole-belly clam dinner that families treat themselves to once in awhile have also doubled over 10 years. Prices for sporting events, concerts, etc. (pre Covid) are also way higher than the numbers stated by economists.

Most of us here track our spending in one way or another and utilities, insurance, food, auto repair all seem to outpace CPI. My rant has ended!

[2177V]

Quote:

Originally Posted by Out-to-Lunch Indulge me in a little bit of nostalgia. I am old enough to remember when it was understood that government officials did not tell the fed what to do.

True. The Fed is supposed to be independent and will do what is best for the economy. The Fed did their part by dropping short term interest rates to almost zero and did quantitative easing. Negative rates are out of the question because this will cause European and Japanese money to flow out of the US stock market because their own countries already have negative interest rates. There is a currency exchange risk if the dollar drops in value so I expect the US stock market to crash when foreign investors pull out and invest in another country.

Therefore the Fed is out of tools. The only tool left is monetary policy which is more government spending which is happening now. After that, this is nothing left. I am just saying what happens if inflation do start to creep up? The Fed can either cease QE or raise interest rates. Either case, the stock market will take a hit.

Doing nothing translate to inflation but this helps the stock market. I am convinced the government will "tell" or "recommend" that the Fed do nothing and let inflation happens because this leads to higher wages to keep up with inflation and higher wages means higher taxes. With higher taxes, this stabilizes the national debt. It may be political suicide to raise taxes on the middle class but inflation will allow the taxes to be raised with higher wages without any political consequences.

[Out-to-Lunch]

Quote:

Originally Posted by vchan2177 True. The Fed is supposed to be independent and will do what is best for the economy. The Fed did their part by dropping short term interest rates to almost zero and did quantitative easing. Negative rates are out of the question because this will cause European and Japanese money to flow out of the US stock market because their own countries already have negative interest rates. There is a currency exchange risk if the dollar drops in value so I expect the US stock market to crash when foreign investors pull out and invest in another country. Therefore the Fed is out of tools. The only tool left is monetary policy which is more government spending which is happening now. After that, this is nothing left. I am just saying what happens if inflation do start to creep up? The Fed can either cease QE or raise interest rates. Either case, the stock market will take a hit. Doing nothing translate to inflation but this helps the stock market. I am convinced the government will "tell" or "recommend" that the Fed do nothing and let inflation happens because this leads to higher wages to keep up with inflation and higher wages means higher taxes. With higher taxes, this stabilizes the national debt. It may be political suicide to raise taxes on the middle class but inflation will allow the taxes to be raised with higher wages without any political consequences.

BTW, I wasn't even disagreeing with you. I was acknowledging that there is political influence, even if in principle there shouldn't be.

[Koolau]

Quote:

Originally Posted by vchan2177 My opinion: Inflation will occur if the federal government wants inflation to occur. The federal government has just spent trillions of dollars for COVID-19. Paying it back can mean raising taxes. However, voters will push back on raising taxes. However, if there is inflation, then wages will increase to keep up with inflation. When wages go up, taxes increases...without any push back by voters. Hence Inflation is a stealth tax increase. It also means people with a $3M portfolio will be under pressure to invest to keep up with inflation. However, the federal government is less interested in maintaining investor's portfolio than maintaining government spending. If you were a government official and inflation starts to rise, will you tell the fed to raise interest rates to control inflation?..or let inflation happen? Wall Street will probably prefer the latter since raising interest rates tend to affect the stock market.

You may be correct, but if the FED raises rates to combat inflation, the gummint will suddenly be paying way more for interest. THAT is not a scenario the gummint would like. I know. I know. I'm giving gummint too much credit for thinking beyond its next move, so YMMV.

[VFK57]

I think the proof of very possible high inflation is clearly stated in US Debt Clock. How it is possible to repay this huge Debt without high inflation?
https://usdebtclock.org/

[meierlde]

Quote:

Originally Posted by VFK57 I think the proof of very possible high inflation is clearly stated in US Debt Clock. How it is possible to repay this huge Debt without high inflation? https://usdebtclock.org/

The whole point of Modern Monetary Theory is you don't have to pay it back. The government should do like the British Government did in 1751 (in the Middle of the 7 years war) and issue perpetual bonds like the consols https://en.wikipedia.org/wiki/Consol_(bond) Note that this article says that the us issued such bonds in the 1870s (btw a period of deflation) . With the way the financial market there is a big demand for safe bonds and bonds of an issuer who can just print money are the only such instruments. Note that during the late years of the Clinton Admin there was concern over how the economy would work with the then current thoughts that the federal debt would be paid off.

[VFK57]

There is an opinion of Larry Summers, he states that raising US Debt will not crush the dollar:
https://www.yahoo.com/finance/news/l...162713110.html