Inflation: Official Rate vs. Observed Rate

[SecondCor521]

^ I think:

The Fed is looking at all sorts of data and are pretty smart in being able to interpret it. I think they are having to guess a little bit as to the "transitory" thing. But predictions are hard, especially about the future, as Yogi Berra I think said once. I think they are aware and have heightened sensitivity to look for signs of it not being transitory.

If it isn't transitory, the Fed, as I mentioned before, has plenty of firepower to address the situation. I think whether we have the political and societal will to address the situation is what will matter more. On that I have no idea.

You are right, @vchan, that expectations of higher prices can drive demand, which can in turn drive prices higher *if there isn't a commensurate increase in supply*, which would be the normal response by a capital market. So if there are limitations to supply of goods and/or an unwilling Fed, those could lead to persistent inflation.

I personally think the supply chain will work itself out. I'm puzzled by the labor market - there are lots of good paying jobs out there and prices are high, so I would think more people would be willing to take those jobs. But that isn't happening. I've read the reasons across the political spectrum and I find none of them satisfying.

In other news, President Biden did nominate Powell to another Fed chair term. I'd expect him to get confirmed by the Senate.

[Hamlet]

Quote:

Originally Posted by GenXguy I disagree. I'm definitely not low income, but I already have my budget cut very lean with nowhere left to cut, and I have a very healthy stash, but inflation has devalued my savings by multiple years of retirement in the last year alone. You can't always expect your investments to outgain inflation, especially with stocks so overvalued and a big correction still on the horizon. Plus, people typically invest more conservatively as they get older so they don't take such a massive hit to their portfolios when the markets drop and can take well over a decade to recover as inflation continues to increase prices. If someone is low income and still working, they will likely be getting raises to help compensate for inflation. If you have a massive savings, it's just taken a big hit in devaluation, and even if you are still working and get a raise, that's not going to make up for the massive devaluation of your current savings.

Do you not own stocks? The only way that your savings would be down this year from inflation is if you had a very low equities % in your portfolio. The market is up something like 26% ytd. If you have 50% stocks and your cash/bonds returned 0%, you would still be looking at an overall 13% ytd return. Which is significantly higher than inflation.

If your equity % is so low that you are down inflation-adjusted for the year, this is a good reminder that inflation is a big danger to all cash portfolios.

[Hamlet]

Quote:

Originally Posted by SecondCor521 ^ I think: I'm puzzled by the labor market - there are lots of good paying jobs out there and prices are high, so I would think more people would be willing to take those jobs. But that isn't happening. I've read the reasons across the political spectrum and I find none of them satisfying.

I think the recent changes in the labor market are going to be studied for decades. I don't think it is any one thing. I think a bunch of things have reduced the size of the labor market. In no particular order-

1. Reduced immigration
2. Covid relief programs
3. People near retirement that were laid off and just went with it because their portfolios have exploded
4. Reduced availability of childcare
5. A chunk of workers actually died from Covid
6. A chunk of workers are taking care of relatives sick with long Covid

The real question is - what percentage of the people who have left the labor market are going to re-enter it? Is the labor pool permanently smaller now, or is there going to eventually be a return to the last 30 years of "normalcy"?

In twenty years, we'll know for sure

[all4j]

Quote:

Originally Posted by vchan2177 My question: Since the government knows how to control inflation, why isn't the government doing it?

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.

[2177V]

Quote:

Originally Posted by Hamlet What in the world makes you think the economy is currently weak? The economy is blazing right now..

The economy is currently weak for two reasons: (1) COVID-19 is still with us. (2) FED policy of QE and low interest rates have prop up the weak economy. However, this is NOT sustainable.

Here are recent articles by the NY post and Forbes both dated last month that you should read:

https://nypost.com/2021/10/18/us-has...ns-economists/

https://www.forbes.com/sites/pedroda...h=725ecb21c7b0

These articles are consistent with my opinion.

Perhaps you can cite a recent article that state that your so called "strong" economy is sustainable in 2022 and 2023. I would like to see the data that supports that argument.

[Dtail]

Quote:

Originally Posted by all4j 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.

Good post.

[2177V]

Quote:

Originally Posted by all4j I'm not convinced they do know how to control inflation. 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. I'm not convinced there is a comprehensive strategy, much less a consensus. I hope I'm wrong.

Good point about the national debt. Here is the debt situation:

_________________________cut and pasted________
Debt to GDP Ratio by Country 2021

What countries have the largest debt in the world? Here is a list of the top ten countries with the most national debt and population data:
Japan237.54%126,050,804Venezuela214.45%28,704,954Sudan177.87%
Greece174.15%10,370,744Lebanon157.81%6,769,146Italy133.43%60,367,477Eritrea127.34%3,601,467Cape Verde125.29%561,898Mozambique124.46%32,163,047Portugal119.46%10,167,925Barbados117.27%287,711Singapore109.37%5,896,686United States106.70%332,915,073Bhutan103.85%779,898Cyprus101.04%1,215,584

__________________cut and pasted_____________

We are number 8th nation with the highest debt to GDP ratio of 106%. The nations #1 to #6 are nations with depressed economies especially Japan which the Nikkei stock market has crashed 30 years ago and there is no full recovery. For years, people was saying that the national debt does not matter. They should look at Japan and what happened to Japanese investors after the crash. I am not spreading fear. All I am saying is that getting into debt will eventually catches up to you. I myself can live beyond my means and live like a multiple miilionaire but that life style is not sustainable. Some people think the US economy is doing good. That is because we are living beyond our means.

[Hamlet]

Quote:

Originally Posted by vchan2177 The economy is currently weak for two reasons: (1) COVID-19 is still with us. (2) FED policy of QE and low interest rates have prop up the weak economy. However, this is NOT sustainable. Here are recent articles by the NY post and Forbes both dated last month that you should read: https://nypost.com/2021/10/18/us-has...ns-economists/ https://www.forbes.com/sites/pedroda...h=725ecb21c7b0 These articles are consistent with my opinion. Perhaps you can cite a recent article that state that your so called "strong" economy is sustainable in 2022 and 2023. I would like to see the data that supports that argument.

Are you really basing your opinion of the economy on the future predictions of the NY Post? Forbes is at least a little reputable, but the NY Post? Regardless, they are making future predictions, which they’ve never shown any ability to do.

Listen, no one knows whether the economy is “sustainable”. However, by every normal measure the economy is hot right now. GDP is growing, 6.7% in Q2 and 2.0% in Q3. GDP is higher than it was before COVID started. The economy has added 5.8 million jobs this year, including 531k last month. Every single store and restaurant I go into has help wanted signs offering hourly rates much higher than anything I’ve ever seen them offer. None of that is consistent with a weak economy.

https://data.bls.gov/timeseries/CES0..._view=net_1mth

[GenXguy]

Quote:

Originally Posted by Hamlet Do you not own stocks? The only way that your savings would be down this year from inflation is if you had a very low equities % in your portfolio. The market is up something like 26% ytd. If you have 50% stocks and your cash/bonds returned 0%, you would still be looking at an overall 13% ytd return. Which is significantly higher than inflation. If your equity % is so low that you are down inflation-adjusted for the year, this is a good reminder that inflation is a big danger to all cash portfolios.

Uhh... I think you didn't read/understand my post and missed the point. I have stocks and specifically referenced stocks in my previous post. I also stated that they are overvalued and that it's only a matter of time before they come crashing down, and that you can NOT expect them to protect you from inflation, even over more than a decade, as history has shown.

But wen it comes to devalued savings, I was referring to the savings/investments in dollars I had from one year ago, not the additional equity I've built from investments over the last year. I have a diversified portfolio but lean more conservative. The only reason they are up so much is because the economy was coming out of a pandemic caused recession. Don't expect those gains to continue - probably just the opposite! So combined with skyrocketing inflation, it will be a double whammy.

As I've mentioned several times, I'm seeing total costs up about 15% over the last year just living the same lifestyle due to higher costs on the same things I have to pay for. Some things aren't up much, other things up significantly, and some things that weren't up much before are now suddenly jumping up in price.

[GravitySucks]

Quote:

Originally Posted by all4j 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.

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

[USGrant1962]

Quote:

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

Really, when? After skyrocketing from the response to the Great Recession debt-to-GDP was basically flat from 2013 through 2019 (up maybe 5%).

https://fred.stlouisfed.org/series/GFDEGDQ188S

It shot up again from the Covid-19 response.

[2177V]

Quote:

Originally Posted by Hamlet Are you really basing your opinion of the economy on the future predictions of the NY Post? Forbes is at least a little reputable, but the NY Post? Regardless, they are making future predictions, which they’ve never shown any ability to do.

I am not basing my argument of a weak economy "solely" on the opinion of the NY Post and Forbes. I simply use those two articles to support my position. Many other economists also agreed with me....but I would have to add many more links which you will then attack those articles so it is useless for me to do so.

I am also basing my opinion of a weak economy on inflation. Inflation is a sign of an economy in trouble. This is why the Fed is going to raise interest rates and start tapering. Last year... Lowering interest rates and QE were necessary because the economy was weakening. Hence, there should be no disagreement on that point. The current problem with the Fed is that the economy may not be strong enough to raise interest rates and have less QE which may explain the hesitation. If the economy is really strong as you suggested, then there will be no hesitation.

As I stated in another post, the economy has the "appearance" of doing well because we are living beyond our means. If your son is living beyond his means and drives a $100K sports car...does that mean that he is in a strong economic position? The $100K sport car gives the "appearance" that he is doing well but reality may be different.

You may disagree with all of these points but I am OK with that.

[Hamlet]

Quote:

Originally Posted by vchan2177 I am also basing my opinion of a weak economy on inflation. Inflation is a sign of an economy in trouble. This is why the Fed is going to raise interest rates and start tapering. Last year... Lowering interest rates and QE were necessary because the economy was weakening. Hence, there should be no disagreement on that point. The current problem with the Fed is that the economy may not be strong enough to raise interest rates and have less QE which may explain the hesitation. If the economy is really strong as you suggested, then there will be no hesitation.

Inflation is not a sign of a weak economy. Inflation is a sign of an overheated economy ( the opposite of weak ) or supply-side issues constraining production. Right now it appears that both of those are contributing to inflation, although there is no way to be sure how much each is contributing until the supply side issues are worked out.

I agree that rates should start going up shortly. I’m sure the Fed will go slowly in that direction, since the negatives of over tightening are much worse than inflation levels that were not unusual in the 1980s ( generally considered a pretty good time economically).

[2177V]

In a way….We are both right. I am right in saying that if the economy was strong, the Fed would be raising interest rates and tapering QE would be happening today. You are right in saying the economy is strong because of inflation. My point is that the strong economy was the result of high government spending, increasing the money supply, etc. I call it a weak man on steroids. Take away the steroids, you have a weak man. Take away high government spending, stimulus, etc you have a weak economy. The increasing debt/GNP ratio also supports my argument. If this ratio was low you win this argument. If this ratio is high I win this argument. Another example, the government has to raise the debt ceiling or else the US government will default. If the government can live within their means, we can maintain a level debt ceiling. The economy is doing well because the government is spending our way to prevent our economy from collapsing. The day of reckoning will come like it did for Japan and other nations with a high ratio. This means an era of austerity for our children. You are right in the short term. I am right in the long term.

[all4j]

Quote:

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

I'm not sure if you are just making an observation or trying to counter my point. Just in case I haven't been clear, I'll try to be more specific.

1st, I assume you are referring to TCJA? Hard to believe it has been almost 4 years since it became law. As to whether it has "helped" increase debt/gdp, I'll leave that to others. I've not seen convincing evidence that shows causation & not just correlation. Would be hard to separate out its effects from the fed interventions, stimulus payments et al & clearly show extent of that help. I assume that means the expectation is that the ratio will go down after 2025 & expiration of many parts of tcja?

But whether or not it helped is really beside the point I was trying to make. I was not so much looking at past to explain how we got to present, but rather what would be done going forward. Perhaps I'm ill informed, but I don't hear much about tax cuts going forward. I don't dispute they have occurred in the past

The walk down memory lane did raise another point going back to OP's original post. It might be instructive for some to refresh how cpi is calculated. 1st, it is very different now than when Volcker was at fed. More relevant to this, the basket of goods measured in 2020 & 2021 is based on surveys in 2017 & 2018. Note that is pre-pandemic. So, if our buying today in 2021 differs from 2017/2018, you should almost expect differences between government numbers & personal experience

[GravitySucks]

Quote:

Originally Posted by all4j I'm not sure if you are just making an observation or trying to counter my point. Just in case I haven't been clear, I'll try to be more specific. 1st, I assume you are referring to TCJA? Hard to believe it has been almost 4 years since it became law. As to whether it has "helped" increase debt/gdp, I'll leave that to others. I've not seen convincing evidence that shows causation & not just correlation. Would be hard to separate out its effects from the fed interventions, stimulus payments et al & clearly show extent of that help. I assume that means the expectation is that the ratio will go down after 2025 & expiration of many parts of tcja? But whether or not it helped is really beside the point I was trying to make. I was not so much looking at past to explain how we got to present, but rather what would be done going forward. Perhaps I'm ill informed, but I don't hear much about tax cuts going forward. I don't dispute they have occurred in the past The walk down memory lane did raise another point going back to OP's original post. It might be instructive for some to refresh how cpi is calculated. 1st, it is very different now than when Volcker was at fed. More relevant to this, the basket of goods measured in 2020 & 2021 is based on surveys in 2017 & 2018. Note that is pre-pandemic. So, if our buying today in 2021 differs from 2017/2018, you should almost expect differences between government numbers & personal experience

Yes the 2017 tax cuts. Generally tax cuts are thought to increase inflation.

But I doubt this round of inflation is mostly caused by anything but the pandemic.

[SecondAttempt]

We are living in the macroscale equivalent of a remote mining camp. We've all heard anedotes about eggs being $10 a piece in the Yukon or Amazon. That's because there is no supply. Of course we have inflation right now because logistics networks are clogged. 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.

I do worry a little about labor shortages and the Great Resignation.

[FLSUnFIRE]

Quote:

Originally Posted by SecondCor521 I personally think the supply chain will work itself out. I'm puzzled by the labor market - there are lots of good paying jobs out there and prices are high, so I would think more people would be willing to take those jobs. But that isn't happening. I've read the reasons across the political spectrum and I find none of them satisfying.

It confounds me too. I've also read that employers are super picky and see lots of anecdotal news stories about willing workers that can't get hired in entry level jobs.


As a very newly FIREd guy, I have been asked a few times if I'm part of the "great resignation" when people learn of my new station in life.... sort of, I guess based off of the timing, but I was plotting for this long before it became the thing to do! I doubt most of those that dropped out of the labor force recently have XX times living expenses saved up though!


ETA: I just reread Nords' Fog of work post: https://www.early-retirement.org/for...ork-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?

[CaptTom]

Quote:

Originally Posted by SecondAttempt ... That's because there is no supply. Of course we have inflation right now because logistics networks are clogged. 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. I do worry a little about labor shortages and the Great Resignation.

A week ago I would have agreed with you. Supply chain stories are making all the headlines.

But I read an interesting article (don't have the link handy, sorry) which convinced me the problem is on the demand side. This was backed up with a lot of numbers, such as massive increases in the number of containers passing through ports, trucking miles driven and quantities of products.

I'm convinced. There's been a surge in demand, for a number of reasons I think we can all pick out. The supply chain was barely squeaking by with a "just in time" mentality. We broke it. Yes, it'll adjust. How long that takes is anyone's guess. Maybe inflation will just cool the demand.

As for labor shortages, again, that makes sense to me. Lots of people pulled the trigger rather than giving in to "OMY." Others saw the folly of working more than absolutely necessary. Others behaved as if the stimulus and unemployment checks were a permanent thing. Probably a lot of other reasons, but to me, no mystery.

[2177V]

Quote:

Originally Posted by GravitySucks Yes the 2017 tax cuts. Generally tax cuts are thought to increase inflation. But I doubt this round of inflation is mostly caused by anything but the pandemic.

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/...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?