Inflation: Official Rate vs. Observed Rate

[GenXguy]

IMO, there are many causes of our current inflation:

1. Government printing money which increases the money supply.
2. Labor shortages which forces employers to increase pay.
3. Supply shortages which forces buyers to bid the prices higher.
4. Low interest rates which means money is cheap which increases borrowing and the money supply.
5. QE which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. (QE as defined by investopedia)
6. Tax cuts and stimulus checks which increases the money supply while increases the national debt.

Reasons 1-6 appears to be happening now.

Note that I did not include an overheated economy simply because the latest increases in GDP is only 1.9% (3rd qtr 2021) according to:

https://www.statista.com/statistics...-from-preceding-period-in-real-gdp-in-the-us/

However, I have other concerns about inflation if inflation do get out of hand....

7. Public belief that prices are rising and causes panic buying. This causes a supply shortage.
8. High government debt which can affect the value of the dollar with respect to other currencies. If the value of the dollar decreases, everything foreign made will cost more.

7 and 8 are not happening now but may in the future.

Have I missed anything? Can other people chime in on the possible causes of inflation that is happening now?

There's a big one that I don't see listed there.

1) increased shipping costs

Also, I've heard some places are raising prices just because they think this is a good time to increase theirs while so much of everything is going up in price, so it's a good time to try to increase profits.

 

[GenXguy]

I expect that to continue for at least another 2-4 years but eventually the supply chain will be back to normal as will prices.

Inflation may moderate over the next few years, but that does NOT mean prices will return to previous levels. It just means that they won't keep increasing as quickly in price as they have been over the last year and maybe the next few years. But even then, they will likely continue to rise 2% to 3%, on average, year after year. Say good bye to those old prices. They won't be coming back.

 

[Montecfo]

Inflation may moderate over the next few years, but that does NOT mean prices will return to previous levels. It just means that they won't keep increasing as quickly in price as they have been over the last year and maybe the next few years. But even then, they will likely continue to rise 2% to 3%, on average, year after year. Say good bye to those old prices. They won't be coming back.

Ok. But is this news?

In fact some prices will fall.

And, I would not be surprised if as we improve the supply chain we get meaningful price declines.

In fact, we have thousands of new autos ready to hit the market as soon as chip supply improves, which I read is starting to happen.

You are going to have thousands of new cars hit the market all at once.

Just one example, but auto price rise has been an oft-cited driver of inflation.

 

[Running_Man]

The official inflation rate since 1964 is 743 percent increase, per BLS it would take 843 dollars today to buy what $100 in 1964https://www.inflationtool.com/us-dollar/1964-to-present-value. This is a 3.91% annual increase and I think that is as solid a base as any to understand what the most likely long term inflation rate will be offiicially in the years that follow with the extraordinary oversight of our central bankers.

However if you just kept the coinage itself from 1964 a hundred dollars silver coins worth today would be worth $2,000. (Up20X) $100 of gold coin is now $5,000. (UP50X). That is merely holding what was considered base money in 1964. $1,000 invested in S&P500 would be $100,000 today ignoring the 3 percent annual dividends that stocks paid. (UP100X) The average house cost $18,000 now is $374,000.(up21X) Sirloin steak 1964 $0.61 today $12.00 (up 20X).
Maximum Social security taxes paid by workers in 1964 $174 ($4,800 max wages times 3.625 percent) SS Tax - 2021 $8,853 ($142,800 times 6.2 percent) a 50X increase in taxes paid by participants matching the increase in gold price). Total US Government deficit 1964 305 billion dollars 2021 23 trillion (up 75X).

As a useful item of note only stocks have overperformed US government deficit spending.

Minimum wage $1.15, defacto is now $15.00 an hour (13X).

So the official rate since 1964 has been 3.9% but a strong case could be made that the actual rate to plan for is a 20X increase over a long term time period which is 5.4%, forgetting what the official rate is and using 3.9% for the annual increases in Social Security less the announced 35% shortfall as a basis for budgeting. Not a noticeable difference from one year to the next with the different baskets that everyone has and changes that can be made over time, but I think a good planning level on what to expect actual inflation to be in a long term budget, which is the only thing this prediction will be useful for.

 

[USGrant1962]

Nice post, interesting stats.

One correction is that the "announced" shortfall for SS is 24%, not 35%. Note that the 2021 Trustees Report includes estimates for the effects of Covid-19. https://www.ssa.gov/OACT/TRSUM/index.html

 

[Magus]

Ok. But is this news?

In fact some prices will fall.

And, I would not be surprised if as we improve the supply chain we get meaningful price declines.

In fact, we have thousands of new autos ready to hit the market as soon as chip supply improves, which I read is starting to happen.

You are going to have thousands of new cars hit the market all at once.

Just one example, but auto price rise has been an oft-cited driver of inflation.

I think its very unlikely you'll see auto prices drop anytime soon. We had been selling 16-17 million new cars a year and have been way under that since the pandemic hit. Just returning to the normal 16-17 million rate will get us back to normal inflation levels - we'd have to go over that to likely see deflation in vehicles and I think auto companies will be a lot smarter about production now that they are seeing such strong profits with fewer sales. Plus, vehicles input costs are not getting lower even if chips are easier - labor, steel, etc are all way higher than 20 months ago. I think inflation will actually continue to rise for another 3-4 months before starting to fall again but will likely be 5%+ for 2022, especially as owners equiv rent catches up to reality.

 

[Magus]

I'm not convinced they do know how to control inflation. I skimmed the article & found it interesting, but it didn't speak to the current environment much. Consider some of the following....

The article mentioned that Volcker raised the rate to 20% in 1980, but I saw another source that had it initially in 1978, but again in 1980; in 1980 there was a recession. The article didn't mention that in 1981 Reagan got his tax cut package & perhaps that should get some of the credit? Yet, are tax cuts being considered?

I don't have exactly comparable time frames, but public debt has gone from ~34% of GDP in 2000 to 100% in 2020. In 1980, the budget deficit was 2.6% of GDP; in 2020, it was 14.4%. Look up how much those will skyrocket as interest rates rise.

Think of the related policies the administration has. Much of current inflation coming from price of oil. While encouraging opec to pump more, administration is cancelling pipeline construction, pushing EVs, etc -- that is, multiple policies to deter domestic supply. So, conflicting goals.

I do think they believe they are managing expectations by declaring inflation to be transitory. Hoping folks will not buy before price increases; in that aspect, supply chain problems may be keeping that from getting out of hand thus far. Will it accelerate when shelves are stocked again. But also consider expectation for "not spending" -- that is, savings. With interest rates this low, possible savers know they are getting negative real return on saving. So, a different reason to go ahead & spend....

I'm not convinced there is a comprehensive strategy, much less a consensus. I hope I'm wrong.

And just think how much worse our debt and deficit would be with higher interest rates. I'd also add that we cut a LOT of inflation in the last 20-30 years by outsourcing manufacturing to China and other low cost areas. That hid a LOT of money supply increase that would have led to higher inflation. Going forward, this may not be a benefit at all (and could actually reverse if this supply chain shock causes re-sourcing back to the US), so I expect higher inflation in the next 20-30 years than in the prior 20-30 years.

 

[Magus]

Pretty sure we recently had a major tax cut which helped increase the debt/ GDP ratio.

There is little evidence the tax cuts increased our debt significantly. Taxable revenue collected increased a sizable amount the last few years [MOD EDIT] and we skipped a recession and actually re-accelerated GDP growth 7-8 years into an expansion, which never happens. And while stated tax rates dropped, some offsets were put in (eg: SALT reduction). When it comes to the economy, there are always offsets when it comes to tax cuts / increases.

 

[Turbo29]

Monetary diarrhea has a lot to do with inflation (and arguably with the soaring stock market).



Interestingly, the Fed decided to stop reporting M2 recently. Maybe not reporting it will make it all go away.

M1 still being reported:

 

[2177V]

There is little evidence the tax cuts increased our debt significantly. Taxable revenue collected increased a sizable amount the last few years [MOD EDIT] and we skipped a recession and actually re-accelerated GDP growth 7-8 years into an expansion, which never happens. And while stated tax rates dropped, some offsets were put in (eg: SALT reduction). When it comes to the economy, there are always offsets when it comes to tax cuts / increases.

Here are some data to ponder:

US GDP increased by only 2.1% for 3rd qtr 2021 according to:

https://www.bea.gov/data/gdp/gross-domestic-product

US Inflation rate is 6.22% for Oct 2021 and climbing from 5.39% according to:

https://inflationdata.com/Inflation/Inflation_Rate
/HistoricalInflation.aspx#/

The US debt ceiling is currently 28 trillions dollars according to:

https://www.cnet.com/personal-finan...and-what-happens-if-congress-doesnt-raise-it/

The current US tax revenues is only 3.8 trillion dollars according to

https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762

USA debt to GDP ratio is the 8th largest in the world according to:

https://worldpopulationreview.com/countries/countries-by-national-debt

Conclusions

(1) Current Inflation rate is greater than our increase of GDP.

(2) Our national debt is 769% of our current tax revenues

(3) We are not in a good place.

My greatest concern is foreign investors of US equities may get nervous that we are not controlling the debt. This may create a decline in the stock market if the foreign investors consider investment in the US stock market too risky. The US dollar to foreign currencies exchange rate may decline because we are printing money. Foreign countries may demand more dollars and this causes more inflation when prices of foreign products increases.

 

[youbet]

(1) Current Inflation rate is greater than our increase of GDP.

Not exactly. You should say: "Inflation for the 12 months ending in Oct is greater than the 3rd quarter increase in GDP annualized." That way everyone would be aware that's it's not a completely apples to apples comparison.

Just pondering the data as you suggested.............

 

[finnski1]

Monetary diarrhea has a lot to do with inflation (and arguably with the soaring stock market).



Interestingly, the Fed decided to stop reporting M2 recently. Maybe not reporting it will make it all go away.

M1 still being reported:

This has been stated earlier but is just not true. They only changed the frequency from weekly to monthly for the M2 supply.
https://fred.stlouisfed.org/series/M2SL

 

[Turbo29]

This has been stated earlier but is just not true. They only changed the frequency from weekly to monthly for the M2 supply.
https://fred.stlouisfed.org/series/M2SL

Thanks for pointing this out.

 

[Magus]

Yep, and they still actually do post weekly #s for M2, its just not seasonably adjusted anymore. Here is a list of M2 metrics from Fed Reserve:

https://fred.stlouisfed.org/categories/29

 

[Koolau]

So, the 64 dollar question: Is it "different" this time? I can smell the inflation in the air which I have not since the mid 80's. Stocks are on a tear. US deficit/debt is in uncharted territory. Gummint pending for its own sake seems the plan now. Labor markets are bizarre. Strategic shortages are happening. Shipping is in turmoil. GeoPolitical issues have emerged that were not at least obvious even a couple of years ago. China has finally all but admitted that they WILL be the dominant economy at any cost. Oh, and Covid still not only rages but is still dividing us. Other than that, not much has changed from 2008. YMMV

 

[SecondCor521]

So, the 64 dollar question: Is it "different" this time? I can smell the inflation in the air which I have not since the mid 80's. Stocks are on a tear. US deficit/debt is in uncharted territory. Gummint pending for its own sake seems the plan now. Labor markets are bizarre. Strategic shortages are happening. Shipping is in turmoil. GeoPolitical issues have emerged that were not at least obvious even a couple of years ago. China has finally all but admitted that they WILL be the dominant economy at any cost. Oh, and Covid still not only rages but is still dividing us. Other than that, not much has changed from 2008. YMMV

One could read history and analyze. I'm reading this right now:

https://www.amazon.com/This-Time-Di...+time+is+different+book&qid=1637954939&sr=8-1

But there are others out there.

(My answer would be "No, it's not *that* different." But I'm an incorrigible optimist.)

 

[Nords]

ETA: I just reread Nords' Fog of work post: https://www.early-retirement.org/forums/f30/the-fog-of-work-42328.html and found this gem which probably explains a lot of "The Great Resignation" after a year plus of telecommuting or being laid-off and stuck home, "Free of the fog of work, many of us would return to the office after a sabbatical and think "What a bunch of toxic crap." (At least one of you ERs had that epiphany.) With the BS bucket filled to overflowing, the planning would be promptly executed and swiftly implemented. No more random walking but a sure stride to the nearest exit." Was the pandemic a real world forced escape for some of the fog?

When I wrote that post (over 12 years ago!) I was thinking of 30 days of military leave (ideally not in the middle of transferring to a new duty station), or the typical months of corporate sabbaticals, or maybe a gap year between jobs.

I never foresaw that it would take a global pandemic of self-isolation homeschooling lockdowns to show people that (for most of us) the workplace sucked even worse. And this time, everyone had already formed their plan...

 

[clifp]

When I wrote that post (over 12 years ago!) I was thinking of 30 days of military leave (ideally not in the middle of transferring to a new duty station), or the typical months of corporate sabbaticals, or maybe a gap year between jobs.

I never foresaw that it would take a global pandemic of self-isolation homeschooling lockdowns to show people that (for most of us) the workplace sucked even worse. And this time, everyone had already formed their plan...

Well, that was definitely worth rereading again. Nice to see you back, I just started posting again a few weeks ago.

It will be interesting to see how many of the recent folks will stay unemployed for a long time.

 

[Hamlet]

Conclusions

(1) Current Inflation rate is greater than our increase of GDP.

This is incorrect. The 2.1% increase in GDP is real GDP, which is already adjusted for inflation.

 

[GenXguy]

Ok. But is this news?

In fact some prices will fall.

You'll be able to cherry pick a few things, but if you go by pre-pandemic pricing vs. today, you'll be hard pressed to find decreases. And it's going to get a LOT worse. I stand by that the vast majority of prices are not going to return to pre-pandemic pricing by the time inflation moderates in the years ahead, which could be a while. Open up your pocket book and be prepared to spend more and more.

Yes, so, it's obviously still news to some people.

 

[GenXguy]

Minimum wage $1.15, defacto is now $15.00 an hour (13X).

It's $7.25 in the U.S. at the federal level. That's 6.3X. In some states and specific locations, it's higher, but it's still less than $15/hr in most places as of today. In my state, it's $11/hr, but ALL surrounding states that border us have a lower minimum wage, with some stuck at the federal minimum... as of today.

 

[Nords]

Well, that was definitely worth rereading again. Nice to see you back, I just started posting again a few weeks ago.

Thanks, Clif, and you too!

I've been spending most of my forum time at the one run by ESIMoney. I check back here weekly for keywords.

 

[Theo]

Change in distribution of demand for goods vs services explains a lot of the inflation. I expect if the covid situation is ever resolved, demand patterns will revert back as will inflation.

 

[Magus]

It's $7.25 in the U.S. at the federal level. That's 6.3X. In some states and specific locations, it's higher, but it's still less than $15/hr in most places as of today. In my state, it's $11/hr, but ALL surrounding states that border us have a lower minimum wage, with some stuck at the federal minimum... as of today.

I think he means our minimum wage is effectively $15/hr at this point since the vast majority of entry level jobs start at this or higher now in most of the country and rising rapidly due to high demand for labor and little availability. He’s more or less right overall, certainly cities of any size are basically there.

You are correct the legal minimum wage is lower in most of the country

 

[MichaelB]

Does anyone have any data to support the assertion that the “effective minimum wage” is $15 per hours. It sure doesn’t show in the BLS data.