It seems to me that if the inflation curve has been remarkbly consistent since Jan 21 to today, arguing that it would have started down without the Ukraine war seems like a heavy lift with facts not in evidence.
Now, if the slope of inflation increase had gone up in February, you could argue that without the war the slope would return to its previous (still high) level, that might be a defensible argument. But just claiming that those of us who predicted high, persistent inflation after all the printed money drops might still have been wrong were it not for the Ukraine war seems pretty much like baseless supposition. We don’t even know if the war has contributed to inflation at all, except with specific goods.
My thinking is that since this round of inflation is not caused by normal economic factors it can not be corrected via normal anti-inflationary measures. Oh, those measures will still have their normal negative consequences, only without the positive effect of ameliorating inflation. It won’t be loss/gain, but loss/loss. The appropriate action, therefore, is to do nothing. I don’t anticipate that happening since “Don’t just do something, stand there.” is not an approach that political types are prone to taking.
Seriously, you know better than to argue that sustained demand for a product has a negative impact on prices as that product grows increasingly scarce.
You are literally discussing the phenomenon of people being priced out of a market as ‘deflationary’. What the hell?!?
As I said, it’s complex. You can have supply shortages that result in some people not being able to buy a product at any price. The effect is then to both raise prices on the small amount of supply available, but to make it impossible to get the product at all for a larger group of people, causing their money to stay out of the economy. It’s complex because of substitution effects and psychology. Nothing is perfectly predictable in economics.
For example, take the semiconductor shortage in autos. That has resulted in actual factory closures and sharp declines in auto sales. Sure, the autos that are available (especially used cars) have gone up in price, but a bigger effect is that peoole who would otherwise buy a car now can’t find one, and so their money stays out of the economy.
There are currently multi-year waiting lists for some of the most in-demand autos. The people with the money to buy them are sitting on that money, waiting. So that money is not currently increasing the quantity of money in circulation.
Auto prices are inflating because of it, but the lack of supply means sales drops in other markets dependent on car sales, such as aftermarket suppliers or intermediate suppliers. And of course all the stuff the car salesmen would have bought had their commissions not dropped 20% or the factory workers would have purchased if they were working.
Another example would be graphics cards. Short supply caused prices to double, but that same short supply also made many cards unavailable at any price. I personally know several people, including me, who have had roughly $1,000 sitting in the bank waiting for a top end card to become available. Money sitting in the bank for two years does not contribute to monetary inflation.
Much depends on the elasticity of demand. Energy is highly inelastic in the short and medium term, so rising prices cause people to just spend more. So energy inflates, and that drives up the price of all products, while reducing the amount of money consumers have to pay for them. Luxury goods on the other hand, are highly elastic in demand and inflation may just cause people to stop buying, which in the right ratio could help to ameliorate inflation to some small degree.
I’m sure you have heard of stagflation. Keynesians used to say it was impossible to have both inflation and low/negative growth. They were wrong. If inflation drives prices up faster than wages can keep up (and wages always lag inflation), you can get decreasing demand along with higher prices, because the inflation is due to monetary expansion by governments. Real wages are down 2.4% in the last year. That has the effect of reducing demand - a negative feedback in the inflation process. It doesn’t stop inflation, but it might slow inflation growth somewhat.
Inflation is complex, and has many causes. There are both positive and negative feedbacks in the process. In my opinion, the primary cause right now is the fact that governments around the world went on a money-printing-and-spending spree, and now we are paying the price. Too many dollars chasing a shrinking basket of goods. We goosed demand while locking people down, constraining supply.
But there are other causes, including supply-chain issues, the price of energy which began spiking long before Putin’s war, and actually started rising sharply as soon as we foolishly began shutting down nuclear and fossil fuel sources without having a viable replacement. Now we’re paying the price for that too.
Oil prices started rising quickly right after Biden’s inauguration, when he cancelled all the drilling on federal land, killed the Keystone pipeline and did other things that were guaranteed to raise the cost of energy.
This was by design, in an attempt to drive renewable adoption. The Democrats bragged about it, before the pain felt by the public and the subsequent cratering of Democrats in the polls caused them to attempt a backtrack. Biden even tried to claim recently that high gas prices were a good thing, as part of a ‘beautiful transition’. He seems to have not thought through what happens if there is nothing to transition to.
In any event, inflation has many causes. In my opinion, the prime cause is monetary expansion without a corresponding increase in GDP. That is always inflationary, and we have been doing that around the world for several years now.
Demand-pull inflation from excessive ‘stimulus’, coupled with cost-push from Biden’s policies driving up energy costs and increases in regulations contribute as well as lack of supply from lockdown effects, the war in Ukraine, and a number of other issues going on in the world. But inflation started rising the minute the lockdowns started to end as all that saved benefit money started to be spent.
As a reminder, here’s where we were before the Ukraine war even started:
When Biden was elected, Brent crude was $43/bbl. By January of this year, before the war started and when most analysts still didn’t think there would be one, it had already risen to $87. More than double. So much for Biden’s ‘Putinflation’.
Of all supply chain issues so far, gas prices are most affected by the war, to the tune of about 30%. The other 70% is directly the result of bad government policy in the US and Europe. Trump is to blame as well, but inflation really kicked off after the last round of Covid relief which was excessive, leading to a demand spike and monetary inflation when the lockdowns ended and demand surged.
The ‘infrastructure’ bill didn’t help, but probably isn’t a huge factor right now as the increased resource demands have yet to materialize and very little of the money has been spent. Unlike the Covid bill, which was essentially a Friedmanesque ‘helicopter drop’ of money directly to consumers. But as another 1.9 trillion of printed money makes its way into the economy and all these projects compete with scarce labor and material resources, it will certainly make the problem more difficult to manage.
Inflation may decline a bit or increase from here, but in my opinion it won’t go away until we have serious Fed tightening coupled with a dramatic reduction in deficits. An almost impossible task when the government carries 100% of GDP in debt, as increased interest rates drive up debt servicing costs. We will need to see dramatic reductions in government spending, and possibly dramatic increases in taxes to get out of this. Expect a deep recession, and hope we get lucky and manage some kind of increasingly unlikely ‘soft landing’.
Yes, I’m sure being fiscally responsible by having tens of millions unable to make rent and kicked out on to the street would have been much better for the economy.
All things considered, given what we faced, I’m pretty surprised we are doing as well as we are.
You are assuming that this all won’t still get worse. Next up: job losses and recession. And after that, a possible 2007-style mortgage meltdown. Only this time there is no money for bailouts. Cascade failures are possible.
The saying, which dates back to 1896, is a ludicrously oversized fabrication of the adage that poverty breeds crime, applied to a nation as a whole. You might notice that Larry Niven and Jerry Pournelle are quoted on that page. Libertarians are fond of alternate world economics.
Make no mistake, this bumper sticker does not apply to our world. Normal inflation does not breed poverty. The poverty rate did not soar in the 1970s, during a period of far worse inflation. See this government report pdf, starting at Figure 4. Poverty did rise a bit from 1972 to 1984, but has stayed at that level ever since despite the cumulative inflation increases. Nor has any western nation to my knowledge descended into anarchy after a period of even hyperinflation, although the consequences of that can be dire. One major reason why anarchy doesn’t happen is that the state (you know, the thing that libertarians hate) takes steps to alleviate conditions and return the economy to normal.
I used that saying to say that it’s tough to get people to care about institutions and the rule of law when they’re more worried about how they’re going to feed themselves.
Didn’t I say exactly that in my first sentence? And didn’t I continue to say that result is so distant that it can be spotted only by libertarians in the rest of my sentences?
Past performance does not equal future performance. There is a world of difference between 1980 and today. For example, total government debt as a percentage of GDP in 1980 was 31%. Today it’s 137%. If interest rates were raised to the level required to beat inflation in the 80s, it would bankrupt the government. So that tool is not available.
Also, in 1980 the country wasn’t awash in sketchy debt instruments like Mortgage-Backed Securities. Private debt has exploded just like public debt.
Also, in 1980 the U.S. was still the economic collossus of the world, and the impact of an inflating dollar was likely very different than it would be now.
There are lots of reasons to believe we are headed for a disaster much worse than what happened in the 70’s and 80s. It may not happen, because no one can predict the future, but looking to the past to determine what today’s outcome might look like is not reasonable, because so much is different.
Poverty rates are not the only measure of damage. Inflation can devastate businesses, wealthy people, poor people, etc. If you are middle class and lose your house, you still may be middle class because you have your job. That’s not very reassuring. Neither is saying “don’t worry - we won’t descend i to anarchy”. Really bad stuff can happen and not be anywhere close to anarchy or complete societal breakdown.
Whacking the fuel taxes and eliminating student loan debt as a means to ease the burden of inflation will only increase demand for other goods and services due to the increased cash flow of individuals, and thus cause increased inflation. It’s like no one in the administration ever took an economics class.
I realize that these positions are meant to garner favor and votes in the Fall, but they will not help the inflation problem at all.
If you notice Treasury Sec. Yellen never says that she supports these policy changes, only that they should be considered, because she doesn’t want to break completely with the White House.
