Many will be shocked to learn that inflation expectations are irrelevant to future inflation. I can show this with data and explain why it is logically so.
Chart Notes
- The Median Point inflation prediction and the median look ahead prediction are from the New York Fed Survey of Consumer Expectations.
- The Consumer Price Inflation (CPI) is measured by the BLS.
- The Personal Consumption Expenditures (PCE) price index is as measured by the BEA.
- The Median Point Question is “What do you expect the rate of [inflation/deflation] to be over the next 12 months?”
Inflation Expectations Inflation expectations are elicited using the following two-stage format. Respondents are first asked: “Over the next 12 months, do you think that there will be inflation or deflation? (Note: deflation is the opposite of inflation)”. Depending on their response to this, they are next asked for a point estimate: “What do you expect the rate of [inflation/deflation] to be over the next 12 months? Please give your best guess”.
We prefer asking respondents for “inflation” because our prior research in the HIEP suggests that the way the Michigan Survey question is phrased induces mixed interpretations, with some respondents thinking about specific prices they pay and others thinking about the overall rate of inflation.
We found that asking about the rate of inflation directly reduces ambiguity in question interpretation and yields, we believe, more reliable, more inter-personally comparable responses. Moreover, it is consistent with the concept of forward inflation expectations of interest to central banks.
The survey of consumer expectations is monthly. It covers expected wages, expected inflation, home buying intent, job intent, home price expectations, etc. The focus in this post regards inflation expectations.
PCE vs CPI
The PCE price index is the Fed’s preferred inflation index. PCE includes items paid for on behalf of consumers, notably Medicare and Medicaid.
The CPI counts only items paid directly by the consumer.
Neither counts home prices and this is very important as explained later.
What is Inflation?
Some people view inflation as an increase in money supply. For those who cling to that view, we are in a period of deflation now because money supply has been shrinking at the fastest pace in history.
Others define inflation and deflation as who much the dollar buys. This logically includes home prices.
The Fed views inflation through the eyes of PCE and CPI. In other words, the Fed thinks consumer prices are what constitutes inflation.
I disagree, and you probably disagree too. However, economists in general do agree with this misguided idea.
A Difference of Opinion
My opinion of what constitutes inflation does not matter, nor does yours, unless you are part or the Fed.
The Fed believes inflation expectations matter, as noted above, and so do a surprising number of people who I thought would know better.
This post is in response to views of two people on Twitter that I highly respect. The first is Bob Elliott, Co-Founder, CEO & CIO of Unlimited Funds and Head of Ray Dalio’s Research Team at Bridgewater Associates. The second is Bill Fleckenstein at Fleckenstein Capital. I follow both on Twitter.
I bring them into the discussion because of a long Tweet thread discussion over the past few days that is the reason for this post. Here is a Twitter Recap to discuss.
Again, I respect both Elliott and Fleckenstein but I strongly disagree with them on this topic.
Elevated Expectations and My Response
Mish: “Seriously @BobEUnlimited please tell me how inflation expectations can possibly matter.”
Bob Elliott: “Why wouldn’t inflation expectations matter? Think there are lots of common sense planning activities where it would have an effect. For instance do you think it’s relevant for wage negotiations? Or contract negotiations that include annual step ups?”
Mish: “Demographics and labor shortages explain bargaining power of workers now, not belief in expectations! Workers want wages to match PRIOR rises in expenses, not predictions of where things are headed.“
UAW President Shawn Fain made this comment in October: “In the past four years, the average price of a new car is up by 30% and more. Those profits are not passed on to the workers. Instead, they went straight to the pockets of shareholders and corporate executives.”
In general, Fain’s comments refer to past inflation, how much prices have risen and how little share union members received.
I certainly agree with Bob Elliott regarding future inflation. The UAW got an enormous wage hike, spread out over several years. And this is happening at other unions all over the country. Unless productivity rises to match, these are huge inflationary pressures.
But actual inflation is the cause of wages increases, not expectations.
Fleckenstein Chimes In
Fleck dismissed the study without reading it.
Fleck: “The fed study? like they know anything. expectations impact behavior, it’s human nature, and it causes double ordering and ” buy in advance” at times.“
Me: “Bill, do you double up on rent? Food? Gasoline? Clothes? Natural Gas? Stoves, Refrigerators? What!”
Fleck : “First of all you cannot double up on rent”.
The irony of his comment is that it proves the point I was making.
Components of the CPI
By my calculation, at least 80 percent of the CPI is inelastic.
People will not double up on rent in advance if they think rent will go up. Similarly they will not double up on gasoline, medical operations, etc.
People can stock up on food, if they have a freezer, as I recommend. If so, they stock up on sales prices (i.e. the price has come down). People do not generally stock up at the highest prices expecting still higher prices. And where would they store it anyway? A freezer only holds so much.
Do people buy two cars if the price is going up? Take out extra prescriptions?
Everything Else
Please think about “Everything Else”.
That category includes refrigerators, TV,s, landscaping, vacations, etc., some of which are elastic demand items and some not. For example, you buy a refrigerator when you need one and then don’t ever double up no matter what your expectations.
Among elastic items, do people take two vacations this year and none the next if the cost will be higher next year?
So, expectation proponents, please tell me what the hell people will stock up on at high prices simply because they expect higher prices next year. Then tell me what percent of the CPI that is.
The answer, of course, is something very close to nothing.
The Lead Chart
I created that chart yesterday with the new release of the PCE price data.
I have used a similar chart before but I made a key improvement by shifting expectations to match what happened.
For ease in reading, here is the chart again.
Inflation Expectation Key Ideas
- From 2014 until 2021, point inflation expectations were mainly around three percent with highs approaching five percent.
- The whole time, the Fed was trying to produce inflation and even wanted inflation above two percent and could not get it.
- Yet, despite massive QE and expectations of 3 precent or higher, not even the Fed could get CPI and PCE inflation up.
Inflation Expectations are a Lagging Indicator
For the second key idea, please look at the right side of the chart. It shows inflation expectations are a lagging indicator!
When year-over-year inflation hit 9.1 percent, the point expectation was 5.5 percent. Then, despite falling year-over-year inflation, expectations kept rising, topping at 8.5 percent eight months after year-over-year inflation really did peak. With the expectation at 8.5 percent, year-over-year the CPI was 5.0 percent and PCE 4.4 percent.
You might object that the PCE and CPI are not good measures of inflation. Bill replied to Bob Elliott with “Don’t get me started on hedonics.”
I agree on both counts. But the Fed is making decisions using the PCE and CPI which do not include housing. Housing is far more important than hedonics.
Home Prices Hit a New Record High According to Case-Shiller
Existing home prices hit a new record high in September. Please than the Fed.
The chart is a direct result of Fed QE policy, suppressing interest rates and creating asset bubbles.
For discussion, please see Home Prices Hit a New Record High According to Case-Shiller, Thank the Fed
If the chart does not represent inflation, then what is it? An egg salad sandwich? Well, no, not that, because an egg salad sandwich would be in the CPI.
Index Change Since 2020
- National: 47.01%
- 10-City: 42.34%
- OER: 19.18%
- CPI: 19.31%
- Rent: 19.75%
The important point is home prices have risen nearly 28 percentage points more than OER and rent. Supposedly that does not count because homes are a capital expense, not a consumer expense.
My rebuttal is simple: Inflation matters, not just consumer inflation.
Home price inflation does not show up anywhere because it is not counted anywhere. But ask the guy on the street struggling to buy a house if he views home prices as inflation.
The Fed and economists in general are in serious disconnect here about what matters and what inflation is.
Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
I mentioned a Fed study and Fleck dismissed it out of hand immediately without reading. It is very much worth a look.
Please consider Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
Citation: Please cite this paper as: Rudd, Jeremy B. (2021). “Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?),” Finance and Economics Discussion Series 2021-062. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2021.062.
The introduction alone tells you what you need to know.
Introduction
Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense.
Body
Two of the earliest theoretical arguments for assigning an explicit role for inflation expectations in a Phillips curve relation are found in Phelps (1967) and Friedman (1968).
Specifically, Friedman posited that workers entered the wage bargain with a concern over anticipated real wages (the concern with real wages is of course a reasonable one if money illusion is absent) while firms’ hiring decisions were based on actual real wages (no distinction was made between the consumption and product wage).
It is an irony of history (or perhaps a testimony to the power of pure thought) that, when Phelps and Friedman sought to justify their proposed theoretical specifications, they were faced with the uncomfortable fact that empirical Phillips curves appeared to be remarkably stable.
The direct evidence for an expected inflation channel was never very strong. Most empirical tests concerned themselves with the proposition that there was no permanent Phillips curve tradeoff, in the sense that the coefficients on lagged inflation in an inflation equation summed to one.
Finally, even if one is willing to entertain the idea that in some vague, mushy sense concern over costs and demand by individual firms facing fixed prices leads to a dependence of aggregate inflation on expected inflation, we are still left with the conclusion that short-run expectations should be the ones that are most important.
An important policy implication would be that it is far more useful to ensure that inflation remains off of people’s radar screens than it would be to attempt to “reanchor” expected inflation at some level that policymakers viewed as being more consistent with their stated inflation goal.
One might also be uneasy about policymakers’ relying too heavily on the assumption that inflation’s long-run trend will remain stable going forward so long as measured long-run inflation expectations do. Even if every one of my preceding arguments is judged by the reader to be completely unconvincing, it nevertheless remains the case that we have nothing better than circumstantial evidence for a relationship between long-run expected inflation and inflation’s longrun trend, and no evidence at all about what might be required to keep that trend fixed (beyond that it might involve keeping actual inflation from moving up too much above two percent on a sustained basis).
[Mish note: The last two paragraphs are a direct criticism of Fed policy as practiced by every Fed chair and people dismiss these reports without reading. The next paragraph is a hoot as well.]
Or would you justify the view that expectations “matter” by pointing to the inflation experience of the 1960s and 1970s, even though that period provides no actual evidence that workers or firms tried to boost their wages or raise their prices in anticipation of future price or cost changes?
Why Do People Believe in Nonsense?
The answer is that it is hyped everywhere so much that hardly anyone ever bothers to question it.
Those who don’t like Fed studies simply because they were written by the Fed, might prefer this view by Brookings. The article is copy protected so consider this snip.
The essence of that nonsensical clip is that if people believe the Fed will deliver 2 percent inflation then they will not react when prices go higher.
I agree with one thing: “It is the “conventional story, dominant in central banks around the world.“
Those who don’t like Fed studies might also prefer this view by the IMF, written May, 15, 2023.
The poor performance of the static Phillips Curve during The Great Inflation period generated interest in other explanations. Contrary to earlier beliefs, there was no permanent tradeoff between inflation and unemployment.
What is striking is that observed inflation fell much more quickly than long-run inflation expectations, as proxied by long-term bond yields. [Mish comment: long-term bond yield are a poor predictor of inflation as well … YET …]
To this day, central banks remain very attentive to ensuring that measures of long-run inflation expectations (market and survey-based) remain near their targets, and for good reasons. [Mish: No good reasons were given]
[And for added humor] The use of survey expectations improves the New Keynesian Phillips Curve’s empirical performance, but also introduces a theoretical inconsistency. The curve’s specific form rests on the assumption of rational expectations, which does not hold with survey data. If you drop the rational expectations component, you also lose the microfoundations of the New Keynesian Phillips Curve. [Mish comment: if you tinker with the theory to explain what went wrong, you break something else in the theory.]
Specifically, in the period following the Great Financial Crisis, central banks were very concerned that a fall in long-run inflation expectations would reduce current inflation and compress policy space. But the recent inflation surge has put at least a temporary stop to such worries. [Mish comment: No doubt about that]
Currently, long-run inflation expectations seem to have remained fairly well anchored. But should expectations de-anchor, bringing down inflation could be much more painful. Therefore, central banks also need to consider the impact of shorter-term expectations on inflation dynamics.
The Phillips Curve is Not Dead Yet – Janet Yellen
On January 15, 2019: I wrote Yet Another Fed Study Concludes Phillips Curve is Nonsense
The Phillips Curve, an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship.
This has been a fundamental guiding economic theory used by the Fed for decades to set interest rates. Various studies have proven the theory is bogus, yet proponents keep believing.
For example, in March of 2017, Janet Yellen commented the “Phillips Curve is Alive“.
Cato noted the Phillips Curve Is Dead (except in Federal Reserve and CBO models).
On August 29, 2017 I noted that a Fed Study Shows Phillips Curve Is Useless. Yet, economists keep trying.
Solving the Inflation Puzzle
Ten Things That Increase Consumer Inflation
- Exorbitant union wage hikes without any increase in productivity
- Free money: In the pandemic we paid people more to not work than they made working
- Eviction moratoriums: Eviction moratoriums put extra money in people’s pockets every month with no fear of consequences. So millions did not pay rent.
- Minimum Wage Hikes: The push for $15 is now a push for $20 or more and many state piled on.
- Supply chain disruptions: Covid greatly disrupted supply of parts and services.
- Boomer retirements: A huge wave of skilled boomers retired and are still retiring. They are replaced by Zoomers without the same work ethic and skill levels.
- Biden’s energy mandates and regulations. Biden wants to end fossil fuels so there is little investment in producing fossil fuels or increasing refining capacity.
- The Inflation Reduction Act: Biden is sloshing around massive amounts of money on failed wind and solar projects. The wind projects in particular now need extra money or rate hikes on the energy produced.
- Tariffs: Trump and Biden are two peas in the same pod. Biden is worse. Tariffs are a tax on consumers.
- The end of Just-in-Time manufacturing: Prior to Covid, manufacturers ran very tight schedules. Now they cannot. manufacturers have to order more stuff than they want to ensure they have the parts that they need. This has nothing to do with expectations of price. Rather, manufacturers and merchants have to guess further in advance what consumer expectations will be and they can guess wrong.
Please expand the above list with as many items you can think of. For grins, add inflation expectations, then order the list in terms of importance.
Two Things That Don’t Increase Consumer Inflation
- Inflation expectations
- QE
I am sure to get objections on QE.
But look at reported CPI and PCE inflation. There is no reasonable case to be made that QE increased consumer inflation. The Fed was struggling for a decade to get inflation to 2 percent.
I hope you caught the key word “consumer”. QE created monster housing and asset bubbles. But as chastised above, the Fed and economists in general do not view obvious housing bubbles as inflation.
The Fed is only focused on “consumer inflation” as measured by the CPI and PCE. Inflation expectations are based on New York Fed and University of Michigan surveys.
Fed Minutes March 15-16 2022
Please consider this snip from the Fed Minutes of the FOMC Meeting March 15-16 2022
A few participants commented that both survey- and market-based measures of short term inflation expectations were at historically high levels. Several other participants noted that longer-term measures of inflation expectations from households, professional forecasters, and market participants still appeared to remain well anchored, which—together with appropriate monetary policy and an eventual easing of supply constraints—would support a return of inflation over time to levels consistent with the Committee’s longer-run goal.
On March 9th, 2022 the Federal Reserve conducted their final open market purchase effectively ending the Covid QE program started in March 2020.
CPI Inflation was running at 5.0 percent, the Fed was still conducting QE, and these clowns had belief that “inflation expectations” would save the day.
Fed Minutes: “Longer-term measures of inflation expectations from households, professional forecasters, and market participants still appeared to remain well anchored.”
Stupidity is what’s well anchored.
Inflation Expectation Irony
From the Fed study: An important policy implication would be that it is far more useful to ensure that inflation remains off of people’s radar screens than it would be to attempt to “re-anchor” expected inflation at some level that policymakers viewed as being more consistent with their stated inflation goal.
But let’s not consider that idea because it is from a useless Fed study.
On the nonsensical ideas that “inflation expectations were well anchored” and would thus take care of themselves, the Fed did not start hiking until inflation was already a hot 5.0 percent.
The massive irony is that inflation expectations do not matter at all to consumer price inflation. However, the Fed’s ignorant belief in inflation expectations does matter.
On belief that expectations matter, the Fed time and time again found reasons to continue QE and not hike rates. The Fed kept QE going, fueling asset bubbles until the bitter end on the basis that inflation expectations were “well anchored”.
The Fed study was not only accurate, it was funny, replete with humorous quotes. Here are some of the quotes in the article.
Amusing Quotes
- I’m always a little dubious about an appeal to expectations as a causal factor; expectations are by definition a force that that you intuitively feel must be ever present and very important but which somehow you are never allowed to observe directly: R. M. Solow (1979)
- Pure economics has a remarkable way of pulling rabbits out of a hat—apparently a priori propositions which apparently refer to reality. It is fascinating to try to discover how the rabbits got in; for those of us who do not believe in magic must be convinced that they got in somehow: J. R. Hicks (1946)
- Don’t interfere with fairy tales if you want to live happily ever after: F. M. Fisher (1984)
Did My Examples Change Anyone’s Mind?
Few things are harder to put up with than the annoyance of a good example: Mark Twain, The Tragedy of Pudd’nhead Wilson (1894)
I am going to have to read that book to see what else I am missing.
However, I suspect I changed very few minds, and certainly none of the minds of the Fed Presidents, even if by some miracle they read this post.
It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought. John Kenneth Galbraith (1958)
Podcast With Peter Grandich
On Tuesday, November 28, Peter Grandich interviewed me. The interview was scheduled weeks ago. There was no discussion of topics, just a request.
On Tuesday, it went like this.
Peter: What do you want to talk about, Mish?
Me: Inflation expectations.
A week ago, I had no idea that would even be on my mind. I thought I had thoroughly debunked the idea many times. But clearly I hadn’t.
We also discussed other aspects of inflation, Fed policy, housing, Bitcoin, and other topics that were on Peter’s mind.
Finally, please consider Hoot of the Day: Biden Creates a New Economic Council on Supply Chains
Nearly everything Biden does raises my expectation of inflation. If so, it’s Biden’s actions that will increase inflation, not my expectation.
For those in doubt please read the Fed study and go over my charts.
Thanks
The message behind expectations theory is that inflation is a psychological phenomenon. It reduces policymakers’ culpability when it doesn’t go their way.
“Some people view inflation as an increase in money supply. For those who cling to that view, we are in a period of deflation now because money supply has been shrinking at the fastest pace in history.”
You seem more clingy than those who state what inflation is, and see no reason to change it, just because of a faddish attempt to redefine the word as something else.
For those who aren’t clinging to the definition you cling to…
Inflation is not and never has been”price rises”.
Inflation is and always has been specifically about the dilution of currency units.
Currency units are tiny slices of the economy.
When commercial banks issue more currency units at a rate that is greater than the actual growth of the economy, then the value of those individual currency units is reduced because there are more of them available to bid nominal prices up, and hence PPP – how much stuff your currency units buy – changes.
Inflation is a mechanism or process rather than a state or outcome.
How much stuff your dollar buys can change due to policy-driven scarcity as well as government debt-financed handouts, and as well as inflation.
So yes, we are in deflation. The global eurodollar supply is contracting along with trade, and in some places employment and salaries are in real terms contracting too.
No amount of QE or QT changes that, because bank reserves aren’t money, and central bank barely determines anything.
It matters that we understand what inflation is and isn’t, because it is the ocean we swim in, and can affect our purchasing and credit decisions.
The Fed doesn’t matter that much to people outside the USA, who aren’t always affected by the Fed, but who are more affected by global bond markets driving rates and hinting at where the economy is heading, eurodollar credit issuance for trade that affects jobs.
“expectations”, i.e.: conjecture or guesses are only a consideration for a relatively big purchase that you don’t need to make, but might want to time it right to get a good price. E.g.: gold price expectations, house price expectations, boat price expectations. You might guess that the price is going to be at a particular level within a particular timeframe, and wait.
The point is, people expect the prices of goods and services to increase faster than their wages. Real wages to decline in relation to inelastic goods and services forever. Case closed.
“In the past four years, the average price of a new car is up by 30% and more.” – When Yellen became Chairman in 2014, she tanked rates below their historical minimum. Then, the average price of a midsize automobile increased 6 percent per year. And the BLS distorted measure of inflation remained at 2 percent, which kept wage increases stagnate at 3 percent. (Pay raises are 1.5 percent of inflation). The pandemic just accelerated the Fed’s progressive timetable. The total fiat dumped into the economy was to take place over several liberal administrations. Except with the pandemic, it happened in 2 years. The boiled frog was microwaved.
Whether Mish labels it a default or a koi pond, the federal government is broke and is guaranteed to default. Taxes cannot be raised high enough (without cratering the economy) to make the federal government viable. Higher than “historical norm” inflation for the next few decades is a requirement, not a choice.
Even large democrat donors are now admitting that Biden has no chance, and Trump is almost certain to be president again in 2024…. but will he drain the swap this time? Will he try, and will enough voters support his efforts if he does try?
Will the US government go the way of IBM and GE, with **MASSIVE** downsizing? Obviously the public employees are going to lie, cheat and steal to avoid this — if they can. Three million bureaucrats are “needed” to support Washington’s interests, but voters/tax payers interests could be supported with a headcount a quarter of that.
Or will it go the way of Bethlehem Steel and Kodak, and cease to be? The employees of those companies (both management and labor) procrastinated on and delayed downsizing until it was too late.
There is no entity big enough to do a bailout. The General Motors to Government Motors scenario is not an option for the US government.
According to the Social Security Trustees, benefits are going to be cut by 70% starting in 2033. Read my lips and take advantage of your intern – but the money isn’t there and thus will not be paid. I am certain they will put a fancy spin on whatever restructuring they do, but retirees are not going to get money that isn’t there.
Dozens of global powers throughout history have tried paying their debts by printing more currency. That was an old idea back when the Roman empire did it. Rome had corrupt bureaucrats (sound familiar?), wealthy people buying judges and college entrance to avoid military conscription, military generals using their rank for personal gains (any of this sounding familiar? SecDef Raytheon Austin is just repeating history).
There is nothing new under the sun, even if the names and some of the terminology (labeling) changes.
“Covid greatly disrupted supply of parts and services.”
Covid only disrupted supply of parts and services to the degree of the number of people who were sick and unable to work at any particular time, thus reducing productivity. Government greatly disrupted, as a result of forcibly shutting down businesses altogether. Disneyland was shut down for a year, as Governor Newsom would not allow it to reopen till April 2021. There was a business in Los Angeles which remained open. Mayor Garcetti threatened to cut off their water and power if they didn’t comply with the lockdown order.
Well we see the results of shutting everything down. Know one ponders where we would be if everything remained open. Hospitals over flowing/ social unrest / higher death rate/ economic disruptions. Guess we would be complaining how the government didnt do enough.
Imo we would probably ended up roughly where were at now.
The The Diamond Princess had 3,600 people. Only 700 got sick and of them, only 7 died. They didn’t have access to antiviral drugs which worked against Covid. Dr.s Fareed and Tyson used them to treat some 15,000 Covid patients without a single death. They kept people out of the hospital. The CDC wasn’t interested in how they did it. The outcome could have been a lot different if the CDC treated Covid as public health issue, rather than as a mass vaccination agenda. They let their agenda get in the way of public health.
Since all this inflation my base salary went up 33% year 1 and about 15% year 2. I think so far I’m out ahead.
Winners and losers.
HT Sumner: Good example.
Implications for MP Frameworks_Charles_Evans.pdf (dropbox.com)
“in the1970s, inflation expectations were unstable”
Not even the bond market gets everything right.
Wages and profits depend upon the value you can produce for society.
of course I’m sure workers have factored in the new HIGHER TAX BRACKETS they’ll be in
Just imagine how much value the deadweights sitting on their couches must have produced for society, in order to have “made” all those millions off of their “home.” Not to mention the billions upon billions produced for society, in a matter of hours, by those who had their bankrupt Lehman shares and jobs bailed out. And can you imagine anything more value producing than dragging otherwise productive people into kangaroo courts? And taking cuts off of picking random numbers, by idiots genuinely stupid enough to not even recognize that is all that they are doing?
We live in a purely totalitarian, 100% redistributive country now. There is virtually NO, none whatsoever, correlation anymore, between value producing productive work and renumeration. Eevery penny obtained over the past decades, have been obtained solely by way of theft perpetrated by the 100% totalitarian state and its organs. None have been “earned” by producing value. That is America. It may make unusually vain and vapid Fed wellfare recipients feel better about their uterly useless selves pretending that things are somehow different; that they somehow “earned” their bailouts and “home appreciations.” But they are, nor did, no such thing. Houses depreciate, just like any other manufactured good, and just like any other good whose production technology is improving. While bailing out a proven failure, in no way makes a failure not a failure.
I agree with you, Mish. When inflation rose quickly higher in 1974, and I was in College driving a gas hog around (souped up Chevy V8): all that I cared about was how much I had LEFT of each College Paycheck (I worked for a Teacher at SF State) was COULD I GAS UP or go 1/4 of a tank and be dried cash wise for FOOD. I resorted to 5 pounds each: bags of RICE AND BEANS which I lived on with Lucky Lager Beer – – 69 cent Six packs – – on BIG DAYS where I had some leftover wads of Cash in my wallet. I looked at my CURRENT ability to pay, NOT into the Future where I would project what inflation MIGHT BE.
while I agree that inflation expectations have no impact on CPI, I would take issue with your characterization of the Phillips curve. Phillips measured the relationship between wages and unemployment, not inflation and unemployment. essentially, it was a supply/demand story and it still holds. however, the mistake that has been made, in my view, has been the effort to generalize wage inflation to general inflation, where there is really only a lagging relationship as you point out. after all, if there really was a wage-price spiral, we would all be ecstatic because our wages would rise ahead of prices. of course, that is not the case, is it?
I always assumed wage price spiral is when nominal wages go up, but real wages continually fall.
“Accounting for inflation, house prices have soared by 118% since 1965, despite the fact that income has only increased by 15%.”
U.S. House Prices Are Rising Exponentially Faster Than Income (2021 Data) (realestatewitch.com)
Asset valuation prices are driven from the appraisal of loan collateral which depends upon Gresham’s law: “a statement of the least cost “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable (most widely viewed as promising), that a statement of the principle of substitution: “the bad money drives out good”.
Bernanke: “Lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending,”
Real Personal Income, less transfer payment, y/y is rising bc the annual inflation is falling. The growing “disinflation pressure” increases Real Personal Income.
The “disinflation pressure” might cont to rise, but the Fed will not cut rate, waiting for more data.
When this whole inflation cycle started over a couple years ago, I told everyone on this website they’re better off owning stocks and homes.
KISS – keep it simple silly.
Isn’t everything higher now than it was in the 70’s, 80’s and 90’s? Everything in 2033 will cost more than it does today in 2023, that’s not rocket science and I do know some rocket science.
Those houses are pretty illiquid.
Still higher
…..difference being that in the 70s 80s and 90s one got at least decent interest rates on savings making up for inflation, higher mortgage rates keeping housing prices at a normal level too ….till the FED and other ‘western’ CBs started messing up things, interrupting healthy economic cycles leading to, over the eyeballs endebted, de facto bankrupt ‘western’ nations living on borrowed time thanks to the, so far anyway, unlimited printing press! Makes me wonder how this outright disaster will pan out in the future, the near future rather. ‘You will own nussing and you will be happy’ some bastard said…
You forgot one major event: the near total collapse of the financial system, an event without peacetime precedent, comparable to the invasion by Genghis Khan.
No I didn t forget, it is part of the FED’s ‘messing up things’ after the dot com bubble and, last but not least, post 9/11, leading to the ‘a house for ANYONE with a pulse’ policy. I still don t understand why and how the US went berserk at the time, indeed causing the BFC during the utterly insane process, laying the foundations even for the collapse of the financial system at one point in the future. Well, maybe WW3 will sort things out, they are definitely working on it…
I think the Austrians are right. Inflation is an increase in the money supply. The prices increase in those areas of the economy where the money flows (the Cantillon effect). This explain the bubbles in bond, stocks and housing and the recent CPI increase.
More specifically, its when commercial bank money supply growth exceeds real GDI growth.
Expectations affect the business cycle, but not consumer CPI. Businesses might stockpile inputs when prices are low, but that can actually tamp down prices for the consumer, because businesses then have a choice of whether or not to charge consumers more when future inflation actually arrives. Expectations might matter for stategic decision making about the future, for businesses, but they have little to do with consumer CPI.
Mish,
What are your thoughts on available disposable income in relation to inflation / deflation? A chart I looked at yesterday (accurate?) had the US average at 3.5% disposable income. Spain was the highest at around 5. Australia however was the worse, something like -5%. Not sure what this means….
It’s interesting when economics like those are so different, yet still developed.