Characterizing inflation

[SecondAttempt]

This could probably fit in other recent threads but I'm starting a new one to avoid hijacking anyone's thread that has drifted to a similar topic.

When the Fed started Quantitative Easing in 2008, there were a lot of people screaming to anyone who would listen that it would cause rampant inflation. And the CPI/PCE kept drifting down.

So now we are seeing very high inflation following less dramatic acts of the Fed. Is there something to be learned here?

Maybe inflation has a very long time constant, 14 years or so.

Maybe money supply and interest rates have less influence on inflation than we want to believe.

And what about the gold bugs? In the face of high inflation the price of gold seems to be on a downtrend, of course that is in USD which is superstrong against almost all other currencies right now.

It is so surprising to me how wrong everyone has been about inflation, both the political extremists and the professional economists!

 

[plex]

Perhaps, keeping interest rates below inflation and printing a fairly significant amount of money for over a decade will no doubt create some pressure to trigger inflation spiking. But the real problem is it puts the fed in a position where it can only pump even more money when the next recession occurs, or do without their only real tool to encourage the end of a recession, because if they are already doing QE, they certainly cannot have been raising rates. The problem was, when the recession inevitably started to come in 2020, the fed did not care whether it was a bad idea or not, they cranked up the money supply even harder, because it was the only tool they had.

That is to say, the fed could have done QE for quite a long time, even a decade, and ended up as heroes, if they could have finally taken their foot off the gas in the late teens, and perhaps after some temporary patching to ease the sudden covid shock, slowly backed off from using QE. This placed the economy in a position where there was no other option but for inflation to eventually surge very hard, as the money printing was suddenly far exceeding in 2020-2021 the amount of goods and services normally available (classic inflation).

Money printing is a dangerous game, the longer it goes on, the more likely, and the larger the collapse that can eventually occur. Rome being the most extreme example involving a world leading power, where money debasing, the equivalent of printing, occurred for centuries, and when it finally blew up, it was horrifying.

 

[Montecfo]

The big difference is the massive government spending in 2020-2022. Many times what was done in the Great Financial Crisis era. This added to the QE, 0% rates from the Fed and supply chain disruption from mandated shutdowns was a witch's brew.

Gold has not been a great investment for a long time. Crypto speculation and the strong dollar have made it even less so this cycle.

 

[DJRR]

In my mind the velocity of money is a key component to the inflation. Adding money per se does not cause general inflation if no one uses it. For ex. we have free use of the millions/billions? of ben franklins held by drug dealers and black market people.

In 2001 the money was given to airlines in bailouts, in 2008 in was given to banks, 2009 GM, 2016 to all corporations via lower tax and to the wealthiest taxpayers. You can find your own examples, the point being that these companies did not invest in new ventures nor did the economy grow significantly. Companies primarily bought back shares and wealthy people primarily saved/invested or bid up collectibles like art. None of this makes a difference in the "real world" but it did creep into the real estate market via low interest rates. The net result was more concentration of wealth, a ton of public debt, little growth, and asset bubbles in bitcoin, pokemon cards, and eventually housing.

When Covid hit the money was given to "average" people. Unemployment benefits higher than wages in rural america, tax stimulus checks, child tax credits, etc. These people spent a much larger % of this money than corporate america and the wealthy did in the real economy. This accelerated the velocity of money at the same time as a supply shortage due to covid shutdowns. The result is inflation in the real economy. Corporations are still unwilling to invest to increase supply to meet the demand so the Fed now is trying to destroy demand by causing a global recession.

 

[marko]

In my mind the velocity of money is a key component to the inflation. Adding money per se does not cause general inflation if no one uses it. For ex. we have free use of the millions/billions? of ben franklins held by drug dealers and black market people.

In 2001 the money was given to airlines in bailouts, in 2008 in was given to banks, 2009 GM, 2016 to all corporations via lower tax and to the wealthiest taxpayers. You can find your own examples, the point being that these companies did not invest in new ventures nor did the economy grow significantly. Companies primarily bought back shares and wealthy people primarily saved/invested or bid up collectibles like art. None of this makes a difference in the "real world" but it did creep into the real estate market via low interest rates. The net result was more concentration of wealth, a ton of public debt, little growth, and asset bubbles in bitcoin, pokemon cards, and eventually housing.

When Covid hit the money was given to "average" people. Unemployment benefits higher than wages in rural america, tax stimulus checks, child tax credits, etc. These people spent a much larger % of this money than corporate america and the wealthy did in the real economy. This accelerated the velocity of money at the same time as a supply shortage due to covid shutdowns. The result is inflation in the real economy. Corporations are still unwilling to invest to increase supply to meet the demand so the Fed now is trying to destroy demand by causing a global recession.

+1 on everything above; an astute observation, IMO. That, and poking the oil suppliers in the eye didn't help our energy prices. I think we've waaaay overestimated our ability to get by without fossil fuels.

 

[Spock]

If you follow where the money went, we had massive inflation from the 2008 hyper-printing. The 2008 money spree was funneled into the financial system/corporations (vs. Joe Sixpack's consumer pocket) and financial assets zoomed.

 

[marko]

If you follow where the money went, we had massive inflation from the 2008 hyper-printing. The 2008 money spree was funneled into the financial system/corporations (vs. Joe Sixpack's consumer pocket) and financial assets zoomed.

I don't recall "massive inflation" during that time frame. My records show 3.84% inflation in '08 and -0.36% for '09.

But I could be wrong. I often am.

 

[Montecfo]

If you follow where the money went, we had massive inflation from the 2008 hyper-printing. The 2008 money spree was funneled into the financial system/corporations (vs. Joe Sixpack's consumer pocket) and financial assets zoomed.

There was not massive inflation post the Great Financial Crisis, though it was widely predicted.

 

[acronymous]

I don't recall "massive inflation" during that time frame. My records show 3.84% inflation in '08 and -0.36% for '09.



But I could be wrong. I often am.

Asset (equity, bonds, real estate) inflation

 

[marko]

Asset (equity, bonds, real estate) inflation

Well, I suppose one can make any argument when one changes definitions.

 

[milford]

In my mind the velocity of money is a key component to the inflation. Adding money per se does not cause general inflation if no one uses it. For ex. we have free use of the millions/billions? of ben franklins held by drug dealers and black market people.

In 2001 the money was given to airlines in bailouts, in 2008 in was given to banks, 2009 GM, 2016 to all corporations via lower tax and to the wealthiest taxpayers. You can find your own examples, the point being that these companies did not invest in new ventures nor did the economy grow significantly. Companies primarily bought back shares and wealthy people primarily saved/invested or bid up collectibles like art. None of this makes a difference in the "real world" but it did creep into the real estate market via low interest rates. The net result was more concentration of wealth, a ton of public debt, little growth, and asset bubbles in bitcoin, pokemon cards, and eventually housing.

When Covid hit the money was given to "average" people. Unemployment benefits higher than wages in rural america, tax stimulus checks, child tax credits, etc. These people spent a much larger % of this money than corporate america and the wealthy did in the real economy. This accelerated the velocity of money at the same time as a supply shortage due to covid shutdowns. The result is inflation in the real economy. Corporations are still unwilling to invest to increase supply to meet the demand so the Fed now is trying to destroy demand by causing a global recession.

Great summary.... another major contribution in my opinion was the PPP loan which gave away basically 750 billion dollars with minimal verification. There are almost weekly news stories of PPP loan fraud and these are the ones that are being investigated/reported. Simultaneously, don't forget the shutdowns which meant reduced production so we have a supply crunch which is still on-going including labor.

PepsiCo reported today that average prices jumped 17% for the quarter ended Sept. 3 which shows inflation is baked into the economy.

 

[jazz4cash]

When I think of characterizing inflation I think about all those years of near zero inflation. I recall the Fed was trying without success to get inflation up to 2%. COLAs on SS were trivial. A little inflation is actually good in terms of wages and economic growth. Taking a longer view the recent inflationary spikes seem more like regression to the mean. If they persist for more than another 12-18 months it will get painful for me and I’ll be singing a different tune. So far I’m managing fairly well and grateful that I don’t have a growing family to feed and clothe.

 

[Lsbcal]

This FRED data does not support the idea of a velocity of money increase:

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money. There are several components of the money supply,: M1, M2, and MZM (M3 is no longer tracked by the Federal Reserve); these components are arranged on a spectrum of narrowest to broadest. Consider M1, the narrowest component. M1 is the money supply of currency in circulation (notes and coins, traveler's checks [non-bank issuers], demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.

Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs.

Link: https://fred.stlouisfed.org/series/M2V

 

[Lsbcal]

...

It is so surprising to me how wrong everyone has been about inflation, both the political extremists and the professional economists!

I don't think I'll do any better understanding future inflation then all the experts out there on inflation. To me what counts is how I structure investments to weather storms such as this. In particular how I feed and water our fixed income investments. For me that is inflation indexed individual bonds with short term nominals.

I think (hope) stocks will *eventually* adjust to whatever is coming. Right now I am trying to focus on whether large cap value index is better to hold then the SP500 for part of the portfolio. Already have a big holding in small/mid value funds which have done a bit better then the growth funds.

 

[DJRR]

This FRED data does not support the idea of a velocity of money increase:

Well, a different take is that even though we have pumped trillions and trillions into the market since the internet bubble in 2000 we did not experience significant inflation since the velocity significantly decreased. That process has now bottomed and reversed so the current trillions are inflationary.

If I did a PHd thesis that would be it - Why have we not had rampant inflation during the 21st century despite all the monetary pumping and what changed in 2021/22?

 

[daylatedollarshort]

If I did a PHd thesis that would be it - Why have we not had rampant inflation during the 21st century despite all the monetary pumping and what changed in 2021/22?

Our first pandemic in awhile? After the Black Plague, there was a labor shortage and peasants had more bargaining power and could demand higher wages, like what you can see on Reddit's antiwork forum now.

 

[Mr._Graybeard]

In my mind the velocity of money is a key component to the inflation. Adding money per se does not cause general inflation if no one uses it. For ex. we have free use of the millions/billions? of ben franklins held by drug dealers and black market people.

In 2001 the money was given to airlines in bailouts, in 2008 in was given to banks, 2009 GM, 2016 to all corporations via lower tax and to the wealthiest taxpayers. You can find your own examples, the point being that these companies did not invest in new ventures nor did the economy grow significantly. Companies primarily bought back shares and wealthy people primarily saved/invested or bid up collectibles like art. None of this makes a difference in the "real world" but it did creep into the real estate market via low interest rates. The net result was more concentration of wealth, a ton of public debt, little growth, and asset bubbles in bitcoin, pokemon cards, and eventually housing.

When Covid hit the money was given to "average" people. Unemployment benefits higher than wages in rural america, tax stimulus checks, child tax credits, etc. These people spent a much larger % of this money than corporate america and the wealthy did in the real economy. This accelerated the velocity of money at the same time as a supply shortage due to covid shutdowns. The result is inflation in the real economy. Corporations are still unwilling to invest to increase supply to meet the demand so the Fed now is trying to destroy demand by causing a global recession.

I'll add my hosannas re this post, and add that oil prices historically have been a major if not the primary driver of inflation. When oil was cheap, we went along for years with remarkably minimal inflation on staples while capital stuff like real estate and equities soared. Then we got a spike in crude prices and inflation jumped on the basics. That awakened the great inflation fear.

To me, 8.2% inflation YtoY (actually down a bit from the previous month)isn't anything to panic about, especially after years in the 2% range. When it hits double digits, as in the rest of the world, I might start to worry.

BTW, a wise observer of monetary trends once told me that month-to-month statistics are largely meaningless since they're almost always "adjusted" in the next month or two. The quarterly numbers are more significant.