In spite of wage growth and an increasing money supply, inflation has not reached the target of 2% per year. Could it be that the destruction of value is keeping inflation low? Examples: Toys ‘R’ Us bankruptcy, business write-offs, bad debt, Enron.
Inflation as measured by CPI was about zero a few years ago and has recently climbed to about 2%. Wage hikes have been running about 1% more than CPI, I think, so are now about 3%. But these small numbers are almost noise compared with other pieces of the equation. The Producer Price Index is just where it was two years ago, and hasn’t yet risen past its high of 2008. A sharp drop in crude oil prices during 2014-15 is one reason the PPI remains low.
As for why the high money supply hasn’t led to inflation, the main reason is that the Federal Reserve uses its levers to limit inflation. We have a monetary expert who may offer a more informed comment; but my cynical view is that the excess money has been used more to prop up asset values (e.g. stock prices) rather than in inflating consumer costs and wages.
I do NOT think “destruction of value” keeps inflation in check directly, but there is a sense in which the Toys ‘R’ Us bankruptcy may signal falling consumer prices: that bankruptcy reflects the rise of more efficient retailers like Amazon and Walmart.
The classic explanation for inflation is more money chasing the same or fewer goods.
There is a lot more money. But it is in far, far fewer hands. People who already are at their limits on what they can spend it on in terms of the consumer goods that go into the CPI.
Note that the prices of luxury stuff has gone up. E.g., one thing to watch is the price of big time paintings sold at auction. The cost of a Monet isn’t figured into inflation stats. Ditto luxury real estate. (But there seems to be a peak in NY high end real estate now.)
When art sale records are being broken by wide margins and pricey real estate starts loosing its appeal, it is a sign. Time to sell you tulip bulbs.
“Value” is kind of a spooky concept, but household and nonprofit net worth has been increasing:
Right, if you just measure ‘value’ by market price, not get into each person’s subjective impression of value, it’s the other way around from OP’s hypothesis. Total net worth is rising at a healthy rate compared to either prices or wages, wealth is being created net not destroyed yet inflation tends to decline. Though as was noted in the last few years in the US (the default place usually being referred to) wages have outpaced inflation noticeably more than most of the 21st century prior to last few years*. So it isn’t just asset prices rising with wages and inflation falling but lately more like asset prices and wages rising and inflation falling. Which doesn’t seem so bad at least at first glance (same disclaimer, *).
On distribution of wealth it’s actually debatable if that’s a lot greater now than some decades ago. Some academic work says it is, some says it’s not (The Economist had a good article on the two sides of that debate a few weeks ago sorry don’t remember the exact issue). Anyway just concentration of money in ‘far far fewer hands’ doesn’t itself have a predictable effect on growth, inflation, etc. It depends in part whether the people with a lot of money have much more propensity to save v. consume (it used to be standard to assume so, but that’s no longer as clear) and correspondingly whether the economy could optimally use more savings/investment or more consumption than now. It’s particularly non-obvious for example that what the US economy needs is more consumption and less savings/investment, while running a consistent fairly big current account deficit (ie foreign capital fills the gap between attractive investment opportunities in the US and what Americans, including the private, corporate and govt sector, are willing to save).
The safe assumption would probably be that income/wealth inequality has nothing much to do with inflation.
*which carries no implication from me as to how that relates to the policies or skills of politicians currently v recently in office; it’s just a fact that real wage growth has tended to pick up in very recent years compared to the 21st century prior to that, although it was faster at times in the more distant past.
A few comments or questions on the recent responses:
[ul][li] If an old painting sold for $1 million last year and then $2 million this year, has $1 million of new wealth been created? Or do we just have a new value placed on the same wealth? I’d tend toward the latter description.[/li][li] Prices of stocks, bonds, and real estate have all been rising — and thus pleasing the upper middle class — but such “asset-price inflation” is not what people mean by “inflation” nor is it what policy-makers track. (Perhaps it should be considered: the last two recessions were each provoked by asset-price bubbles.) [/li][li] We’ll definitely need a cite to accept that wage growth is significantly outpacing inflation, let alone inflation-plus-productivity_growth. A cite that covers years, not just the latest monthly blip. Looking at data from fred.stlouisfed.org, I see that median wages tracked the CPI quite closely throughout the Bush-43 years. Wages outperformed inflation during the 2009 deflation of course, but only briefly, and only by 2 or 3%. After another period of neutral or negative wage growth, median wage minus CPI rate went positive in 2015 and has averaged about 1% since. One percent. Just the same as I claimed upthread for mean wages.[/li][li] But neither mean nor median wages (and certainly not home values) reflect the destitution of the lower class. AFAIK wealth and income inequality continue to rise. We will definitely need a cite for any claim to the contrary.[/li][/ul]
Thread drift is OK, but everyone doesn’t have to play on a given thread and those points are increasingly far from ‘value destruction’ as explanation for lower inflation.
- I think this was covered implicitly in Ruken’s statement and explicitly in mine. If ‘value’ or ‘wealth’ is left to the subjective impression of each person there’s no way to nail down when it’s increasing or not, now or ever in the past or future. The only way to have a sensible economic discussion related to ‘value’ or ‘wealth’ is go by market value. So yes, the fact that my slightly improved but basically same house, on 100% exactly the same plot of land, has increased in market value much more than inflation since I’ve owned it is an increase in my real wealth in objective $ terms, the only terms relevant to relationship of wealth to other objective economic measures like inflation, wages, etc.
Maybe in retrospect the word ‘creation’ is the problem there, triggering a debate about ‘who created it?’, ‘what do they deserve?’, ‘what is society’s “fair share” in taxes?’ but that’s also off point. The point here is simply that wealth measured in $'s corrected for CPI inflation has grown prettily healthily as inflation as tended to decrease. On this simple top level comparison there isn’t much apparent validity to OP’s suggestion that lower inflation is related to value destruction.
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The OP question was whether lower (consumable goods and services) price inflation was related to ‘value destruction’ (of assets). The basic question of the thread is the relationship of those two things if any. I think everyone understands they are not the same thing.
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Anyone can look up the relevant data easily and see that is matches my statement, real wage growth notably higher last few years than it’s been in 21st century, though has been higher further back. Nobody said anything about it compared to productivity growth, likewise nobody characterized 1%-real wage growth as absolutely a large number. But again back to OP’s hypothesis, it’s consistent ‘trouble’ getting inflation to 2% but not reflected in asset value destruction or weaker and weaker wage growth.
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This is pretty much 100% off point of the question, though it’s a completely different topic one could discuss.
I’ll try a list rather than parsing:
[ul][li]Per the measure I linked to, yes. That’s why I called it spooky. Whether we need a different measure is not something I can address in GQ.[/li][li]Please let us know where anyone made this claim about inflation[/li][li]Real wages increased 9.7 percent over the last 22 recorded quarters, since the post-recession minimum in Q2 2014. That quarter was lower than Q1 2000. So before that date, on average, we see a decrease in wages.[/li]
Of course, average or median wages are not individual wages (masked by demographic changes) are not compensation (masked by increasing benefits) are not income (your income can go up even if your wage goes down) are not well-being (we don’t have BLS data on this). But that doesn’t really address the origins of inflation, per the OP.
No, we don’t definitely need a cite about productivity growth, because you’re the one who brought it up, not OP or anyone else. No, we don’t need a cite about “significantly”, because that’s your word, not anyone else’s.[/ul]
The supply of money is determined by the quantity and the velocity (the rate at which money is exchanged in the economy). And while the fed has pumped a lot of money into the economy, the velocity of money continues to fall. Have a look at this chart:
In particular, you can see the velocity spike upwards during the dot-com boom of the 90’s, then a smaller boom during the real estate bubble, and since the recession in 2007 it fell off a cliff, and it’s still falling, way below historical levels.