Inflation gets pitched as something inherently good the Fed is trying to make sure folks gets enough of. But someone’s paying the price.
This is the transcript from my podcast, THE WOLF STREET REPORT:
OK, this is something new in the already tarnished history of mankind: Governors of the Federal Reserve have been fanning out to explain to folks that inflation is “too low,” and that consumers’ and workers’ expectations of future inflation are too low, and that the Fed, for the first time ever, might use monetary policy, such as cutting interest rates, in order to create more inflation.
In the past, the Fed has used monetary policy, such as raising rates, to tamp down on inflation. And in the past, it used interest rate cuts to stimulate the economy.
Now the economy is humming along at a reasonable pace, the stock market is at all-time highs, and so based on the economy, there is no need to cut rates from the already low levels. But inflation is “too low,” and that’s the reason to cut rates.
They make it sound like inflation is something inherently good, something that we need more of. And that’s how the media, such as the New York Times and NPR and almost all others, pitch inflation to regular folks, as something inherently good that the Fed is heroically trying to make sure regular folks get enough of.
But who benefits from this consumer price inflation, and who are the victims?
Consumer price inflation is when the same thing with the same qualities gets more expensive. In other words, it takes more dollars to buy the same thing with the same qualities.
So when you buy a new product, such as a new car, that car is a lot more expensive than the last car you bought 10 years ago. But today’s car also has more safety features such as an improved crumple zone, improved side-impact protection, more airbags, and the like. It has more convenience features, such as consumer electronics, a backup camera, and the like. It has a seven-speed or eight-speed or perhaps even a 10-speed automatic transmission, instead of a five-speed automatic transmission. It performs better and runs cleaner. The suspension system is improved, and it’s more comfortable and handles better. And so on.
America is a competitive market place full of astute, finicky, disloyal consumers who are experts in comparison-shopping and who educate themselves about products they buy.
Companies have to respond to stay relevant. They always have to improve their products. Consumers demand it. If the products of one manufacturer stagnate, and the products of other manufacturers get better, the laggard will experience falling sales, until it will right the ship – or sink. Those are the two options.
To stay alive, companies are trying hard to constantly improve their products, unless they have a monopoly. And these improvements cost money, and when these costs are added to the cost of the product, this additional price increase due to quality improvements is not considered inflation.
Yes, your costs of living go up because you bought a more expensive product – whether you wanted all these added improvements or not. But inflation means that you spend more for the same unchanged product with the same qualities.
Inflation means that the money that workers earn buys less; and they have to spend a larger slice of the fruits of their labor to buy the same thing.
Consumer price inflation is the loss of purchasing power of the dollar. And thereby, it’s the loss of purchasing power of labor.
And this identifies the victims of consumer price inflation: Americans who work for a living. The fruits of their labor are being eaten up by what the Fed is trying to create more of.
People often say that inflation is a benefit because it helps pay off debt. But whose debt?
When a consumer has to pay more for goods and services because of consumer price inflation, there is less money left over to service debt. In other words, consumer price inflation makes it harder for workers to pay off their debts, not easier.
And this is what the Fed wants to create more of, and what the media are telling consumers is the best thing since sliced bread: making it harder for consumers to make ends meet, and making it harder for them to deal with their debts.
Consumers and workers don’t benefit one iota from inflation. They’re just victims of these policies.
Consumer price inflation is only good for businesses. It means that companies are able to raise prices for the same thing, and that consumers accept these price increases, and that these price increases stick, and that companies get away with them.
This is why, for the Fed, raising inflation expectations is so important. If consumers expect more inflation, that is, if they expect more price increases and accept them as normal, they will try less hard to dodge these price increases by finding alternative products with lower prices, and thereby they’ll make it easier for companies to raise prices.
For companies, being able to increase the price of the same product means increasing revenues and cash flows without having to sell an improved product or more products. Consumer price inflation is the easiest way in the world for a company to grow its revenues and cash flows, and the most rewarding way because jacking up prices doesn’t involve additional costs.
And profits increase too if input costs rise just a tad less than the prices that the company charges. No one on Wall Street looks at inflation-adjusted revenues and profits. No one wants to look at it. They could if they wanted to. But no one wants it known that the revenue increase was due to price increases. Investors want higher sales and profits, no matter how they get there, and if price increases are the cause, that much the better.
And there is another big benefit of consumer price inflation for Corporate America: These higher prices that create higher revenues and higher cash flows allow companies to service their debts more easily.
So let’s keep that straight: Consumer price inflation helps companies service their debts since they benefit from the higher prices; while the same inflation, which eats slice after slice out of the fruits of labor of workers makes it harder for workers to service their debts.
When people say that inflation is good because it reduces the burden of debts, this is exclusively true for businesses that are able to raise their prices. But the opposite is true for consumers; they’re just the victims of this inflation.
There is another type of inflation: wage inflation.
For many companies, the cost of labor is the biggest component of their costs. Even small increases in these labor costs can eat up their profits. Labor costs include insurance, benefits, taxes, and other things. But the primary component are wages.
Companies spend an extraordinary amount of effort on keeping down their costs, including wages. Companies want consumer price inflation but they don’t want wage inflation.
Wage inflation is not when you get paid more as a result of a promotion. And wage inflation is not when you get paid more for producing more. When you get paid twice as much because now you make 4 widgets an hour instead of 2 widgets an hour, you get paid for a productivity gain of 100%. But it means there is no wage inflation involved.
Wage inflation is when you get paid more to make the same 2 widgets per hour, at the same quality. It takes this type of wage inflation to compensate workers for consumer price inflation.
Companies don’t do this voluntarily. This condition arrives when companies have trouble hiring people at the wages they’re offering, and they have to offer higher wages to attract candidates.
But companies fight wage inflation tooth and nail. Companies invest vast sums in automating their production in order to reduce their costs of labor. They offshore work to cheap countries to dodge wage pressures in the US. And they bring in workers to create a larger supply of cheaper labor, even at the skilled levels, that is putting downward pressure on wages in the US. The tech industry is infamous for strategies that include the extensive use of H-1B visas.
It boils down to this: Companies and consumers are lined up at opposite sides of inflation.
And when Fed governors fan out to tell people that they want to cut rates in order to create more inflation, and when the media, including the New York Times and NPR, promote this as a beneficial goal and as something the Fed should do, they’re clearly taking the side of Corporate America, to enhance Corporate America’s revenues and profits, and they’re lining up against American workers and the fruits of their labor.
Consumer price inflation is the enemy of the people. But it’s a godsend for companies. And the Fed should at least be honest enough to explain this, and to point out that the victims are workers and consumers, and that the beneficiaries are companies, and that this is how it is, because this is what America stands for, and that consumers should just shut up and quit complaining, and that at any rate, the beating will continue until morale improves, or something.
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Inflation?
My favorite bottled iced tea was reduced by 1.5 ounces per bottle about 2 months ago. Noticed some “old stock” vs “new stock” in the fridge. Huh?
This week, the same iced tea with less tea in them, just went up a little more than a buck for a six pack.
Most popular brands just reduced the package volumes at the same or similar prices. This one occurred in rapid succession. Glad there is no inflation.
CreditGB,
BTW, changes in quantity and size are included in the inflation calculus.
It’s consumers’ responsibility to tamp down on inflation because no one else will. Everyone else wants to increase inflation, as pointed out in the article. Consumers are the only force that can keep inflation in check. If the price of a product rises, stop buying it and switch to something else. Then the vendor, as sales dry up, has to cut the price. This principle of demand drying up when prices rise keeps inflation in check. If everyone just keeps buying a product after its price gets jacked up, that’s when inflation really kicks in.
I mean prices are always determined by supply vs demand (unless of course there are anti-free-competition factors). If consumers buy less of a product, there will be pressure to reduce prices to increase sales, revenue. If the juice company can not make a profit at that orice, it will close down.
I don’t get why Wolf is trying to imply inflation is beneficial to companies. After all companies sell less less when product prices are higher. Furthermore many businesses themselves are consumers at one end (raw materials, workers) and sellers on the other (finished goods, services).
GP,
Consumers overall have room left to spend. Savings rate is over 6%; and consumers can (and do) borrow money they don’t have. So there is plenty of wiggle room. There are of course issues “long-term,” but no one is thinking long-term anymore.
Companies love price increases that stick. Wall Street loves them too. That’s part of inflation.
Companies can fix whatever price they want for their products. If consumers like it, they will pay. If not, they will either not buy it or move onto an alternative.
Higher prices don’t automatically mean higher revenue for the business. Netflix jacked up prices and enough consumers decided it is not enough value for their money.
Companies are also forced to raise prices due to rising costs (rent, wages, materials, transport, insurance). In the soda company example above it might be the case of either raise price of the product or go bust.
On the topic of consumers alone tamping down inflation: that would have been true if it wasn’t for the Fed that actively monkeys around with its tools to keep the inflation up.
That all depends on elasticity of demand for the product. If consumers are highly sensitive to price changes and will reduce their consumption due to a price increase and total revenue falls with a price increase, demand is elastic and the company will lose money. In general, elasticity of demand is determined by the number of substitutes available in the market, which explains why government-created pharma monopolies (Fda vetting process price and copyright/IP laws) can jack prices up significantly and do so as often as possible. If price goes up and total revenue increases, then demand is inelastic, i.e. people’s consumption doesnt change much in relation to a change in price.
If demand is elastic, like for iced tea, and we do what wolf suggests and purchase a substitute good, then the demand side of the equation can exert significant prucing power.
But in the case of monopolies or oligopolies, we have little to no power, which explains massive inflation in college tuition (credentialing oligopolies, i.e. WASC), medicine (FFA, medical boards), and housing (NAR).
Econ_teacher,
I disagree with none of that.
Only point I am disputing is “inflation is good for businesses because they can increase the prices”.
Using your terminology,
– in elastic market, increasing prices would mean less sales and possibly less revenue.
– in inelastic market, price increase is detached from inflation level. As in your examples: patented drugs, college tuition etc.
Things to consider: prices of everything rises (incl. labor and raw materials) in inflation. At the same time, purchasing power of money (incl. profits made by businesses) goes down.
It shows the FED through all this QE and large asset purchases, was falling short of inflation, cause retail bank lending was dropped far below pre-crisis level, the US and foreign banks are content with earning interest on excess reserves, rather than interbank lending, or buying market securities. Now inflation is rising up.
The problem is basic necessities for consumers health care, food, housing and energy cost have gone. U.S. consumers are at mercy of those people. We have a stealth inflation that no politician wants to discuss
Yup, Now I am making my own iced tea in 2 gallon batches. Even tastes better. We’ll see what happens to the slightly more convenient commercial product.
Thank you for covering this in detail. The key point to remember is if the central bank banksters were not using inflation to decrease their debts and increase their profits and conveniently, enable their crony politicians’ pork and wasteful spending, the lives of most Americans would have improved or not declined: more purchasing power. Trade and other factors merely obscure this continuing transfer of wealth to crooks.
Shrinkflation haha, gotta love it
I just read that 4 now is 1/2 dozen.
And a baker’s dozen is now 11.
Maybe cars are better than ten years ago but food is not better then ten years ago. In fact food standards have relaxed so much the US has to “convince” other countried into taking “toxic” American food.
So is not only food more expensive but the quality has gone down.
How about land? Like you want to buy a piece of land to build a house? In ten years the land has stayed the same but the price has gone up. That’s not only because inflation but because in ten years a lot of things have changed, for example there is likely to be less land to buy, to that contributes to be price hike.
How about Medicine? The US has some of the most expensive legal drugs in the world and xomoanies hike prices and usually get away with it. We are not talking about something reasonable like the orice going up to compensate inflation but drugs prices goes over 200% just because a drug company has a monopoly and feels like it.
The US has some of the most expensive legal drugs in the world
The US has the most expensive legal drugs in the world. It’s become an extortion racket: your money or your life. Your elected government has decided this is a good thing because the campaign contributions are excellent and people are disposable anyway.
There were 2 recents bills signed into law: “Know the Lowest Price Act” and “Patient’s Right to know Drug Prices Act” which increase transparency in pricing.
There was also “Right to try” law that lets terminally ill patients to try experimental drugs.
There was also an EO on Improving Price and Quality Transparency in American Healthcare to Put Patients First (yeah, I know, mouthful).
There are more proposals in the pipeline:
– forcing drug companies to display the price in their ads (currently being sued and blocked by drug companies).
– “Favored nations clause”
I am optimistic and I understand not everyone shares that sentiment.
I don’t share your sentiment. The evidence suggests you’re indulging in wishful thinking.
The drug-pricing experts will tell you what they’ve told me: it’s window dressing. Azar is a drug company executive and it’s his show, and he’s not about to let his constituency down, but he will put on a nice show.
Unamused, ‘right to try’ is personal and not at all wishful thinking.
Do you or any of the ‘experts’ you mentioned have good metrics to measure the impact?
Pharma component of CPI is flatlining/going down (https://data.bls.gov/timeseries/CUSR0000SEMF01?output_view=pct_3mths). But then as with any other BLS index, I don’t trust it to fully reflect reality.
The Drug companies and Congress have promoted the myth drugs are life saving. The only live saving drugs we have are located in what is known as “crash carts” in hospitals to help us recover you if your heart stops during a code.
Ask any pharmacist how many oral drugs are life saving? But Big Pharma, Medical Associations, and Congress have brainwashed too many thinking if they do not get that “new expensive” oral med their life will be shortened.
The US food labeling law regarding allergens was a life saver for me. It went into effect in 2006, several years ahead of Canada.
Land is a lot more expensive to buy in many places owing to population pressures. But if you are looking for some cheap land, check out property in the City of Detroit. However, I wouldn’t live there even if the property was free.
Prescription drug prices are very high in the US owing to effective drug industry lobbying. But just about everything else in a typical chain drug store in the US is less expensive than in many other industrial countries.
If wage inflation is non-existent, won’t price inflation eventually lead to sales going down?
Companies must realize this?
I was going to post something similar. If wages are essentially static, you can’t generally raise consumer prices because there is no new money to pay for it.
So I take that small exception to Wolf’s overall thesis here. But that money has to end up somewhere. And my guess is in financial businesses: banks, stock and bond brokerages, etc… I also think that these types of enterprises is what the Fed means by business in the first place.
Consumers as a whole are saving a lot of money. Savings rate is over 6% of disposable income. Everyone wants consumers to be forced to spend more via inflation and lower the savings rate.
Also consumers can borrow out the wazoo.
Thing is, there are many consumers who are totally tapped out, and if something goes up in cost by $1, they have to cut $1 out somewhere else.
But many other Americans are doing just fine and have more money to spend, and they can borrow more too. So we’re a long way away from where income overall is the limitation to spending for consumers as a whole (though it is for many consumers).
The Fed is promoting inflation because “deflation” is truly devastating, and we are experiencing dis-inflation at this point in time. This decline is associated with the onset of recessions. That’s why the Fed is humping the idea. And, if enough people believe that inflation will be ticking up, it will tick up. And when people “expect” prices to rise, not only will they rise, but it prompts people to spend before the cost of stuff goes up – just like the inventory build-up prior to tariff increases.
Because yields on bonds and treasuries are so low, the Fed has little room to “cut” if a recession takes hold.
The whole financial system is a con-game anyway. With the national debt blasting into the stratosphere, the wazoo needs a colostomy. The nation’s assets are valued at fantasy figures. Andy Warhol’s fingernail may bring in $50,000.
If the federal government wasn’t running a $1T+ deficit every year, I wonder what the consumer savings rate would be. The “savings” may be a temporary result of tax cuts.
The C-suite conflates itself with the Company. Their wages and stock-based compensations have experienced wild inflation.
If the sales go down, you can always point to the EPS that are up through cute gimmicks like buybacks.
If wage inflation is non-existent, won’t price inflation eventually lead to sales going down?
Your credit’s good, so price is not a problem. Your debt could become a problem, which is why there are plans to make debt heritable and to extend liability to other family members, like those second cousins you’ve never met.
NBay
You have plastered 18 comments here, both published and now in moderation to be deleted. The limit is 5% of all comments can be yours. So that’s about 4 comments in this section. Maybe 5 comments, if more people post comments.
Guideline #3
https://wolfstreet.com/2017/10/07/finally-my-guidelines-for-commenting/
PLEASE READ THE GUIDELINES. This is the second time in a few days that I linked the guidelines for you to peruse.
Is that true? I hadn’t heard of it.
see today’s result of NFLX’s price increases on subscriber growth…
Real wages for the 70% of employed Americans classified as production and nonsupervisory have been flat over the last sixty years.
Yet real per capita PCE expenditures have tripled in that same period.
Many households use debt to fill the gap.
That should read:
“Real wages for the 70% of employed Americans (those classified as production and nonsupervisory) have been flat…
Wage inflation is not non-existent. Check out the stat’s. Lowest unemployment rates in 50 years has been putting pressure on companies to raise pay.
Experts mistake the correlation between FFR and CPI with cause and effect. Inflation is always monetary (in this environment) If Fed believes lowering rates increases inflation (while employment is already off the charts) they are delusional. There is actually no danger of them hyperinflating either, but the move will complement the mistaken notion. The dogs are salivating, let’s ring the bell.
This seems like a good comment on which to ask a general question I have been wanting to:
What is the role of Fractional Banking in all this?
As I recall the Dutch came up with it 300 years ago, correct? Same concept as a restaurant not ever expecting 1000 people to decide they WILL eat there for lunch, period.
Anyway, why do I see this as contradicting an old line, “He who sells what isn’t his’n, pays it back or goes to prison.”?
Is it right for me to suspect that fractional banking is money printing, hidden in “banking accounting principles”? Especially with this Tier 1,2,3 stuff.
And “full employment” means absolutely nothing to any economic model when median taxable (at least what cannot be dodged, yet another problem) income does not fall in the middle of a bell shaped curve like most everything else in the natural world. Human society is not shaped by nature, obviously, and appears at this point to be self destructive, eg, extinction, the only question being when. Perpetual growth on a ball in space is the ideology of a cancer cell.
Increasing credit only implies expanding the money supply if that debt becomes real economic activity. Unsubstantiated credit in macro terms means you are going to come up against (lower bound) limits on money velocity. Credit is misdirected to savings, an investor takes out a loan and puts it in the bank. For a very small spread that investor controls a whole lot of collateral. Short term rates rise and the fixed rate loan is an asset. Rinse and repeat. So rates must always go lower.
Good question. Fractional banking is a good solution; the ratio of capital held and lent is the difficult part. If it weren’t for fractional banking (or something else?), there would be no “credit”. Even if capital lent was equal to the money borrowed, on a one-to-one ratio, the depositor could withdraw money from their account whereas the borrower would still have a longer period of time to repay. That would crash the system. So, the expansion of the monetary base is inevitable if you have fractional banking. Faith that the system could maintain itself is what makes the wheels turn. Without the deposits, and the faith, growth of credit to make capital investments would be extremely limited…not a bad idea.
Wolf,
you are exactly correct with this analysis! The FED is terrfied of having to raise interest rates and cause a major correction in the Stock markets, AND, to cause a further huge increase in debt payments and deficits!
In light of the strong economy and Asset price inflation, that you have written about extensively, the FED ought to be raising NOT cutting interest rates. Let’s face it….these policies are purely meant to preserve the status quo of the wealthy and powerful….and the ultimate irony is that a huge swath of the republican supporters are implicitly endorsing an approach that hurts them the most.
Unfortuntaely The day of reckoning is not too far away and the greater the FED repression, the greater will be the fall..
Saying the Fed ought to raise interest rates sounded very ignorant of me, so I’m really pleased I’m not the only one. I just can’t stop thinking Greenspan who was right so often until he was very drastically wrong. I must live in Orwell’s 1984 or something.
Greenspan was never right, he was lucky and overrated.
He was right when he immediately inherited the Savings & Loan crisis and did a good job remedying it with the Resolution Trust Corp which, incidentally, may be one of the only government entities that “sun-setted” itself and disappeared. And he was right until he was wrong. He had too much faith in the “free market”.
The savings & loan crisis was the genesis of the explosion of the out of control lending that followed. Had the crisis been allowed to be “resolved” in the courts, through bankruptcy and prosecutions, there would have been no GFC, because the major perpetrators would have still been in jail.
Greenspan was definitely overrated. But I think he was right about some things.
I generally agree that he should have done things differently even when he was “right”, e.g. from the beginning of his term until about 1996.
However from 1996 on he was wrong big time. He was obviously confused about what was happening, and remains confused to this day.
The economy cycles, and these supposed geniuses in the economic and finance world rarely get that right.
Agree
Greenspan was lucky, was a kiss-a.., and his double speak made everyone thing he was a genius. He was a fraud. At least with Musk, you know he is all BS. No double speak allowed.
Intentionally trying to create inflation is attempted larceny. The Fed’s actions ought to be seen as criminal.
Stable prices actually means NO movement up or down, not 2% INFLATION that causes prices to quadruple in the average person’s lifetime. Criminal!
A long time ago in a post far, far away….
I predicted the Fed would cut interest rates because of the inflation reports they say they use to measure inflation and thus determine interest rates.
Until the Fed rejects the inflation reports as and sees they for what they are – fraud/wrong/fake/propaganda/whatever….
…..they must cut.
It’s like that chat used at the O.J. Simpson trial: “If the glove doesn’t fit/You must acquit.”
But, but, those different size packages are bought with dollars that fluctuate in value and can be discounted and marked-up by stores that manage their inventory and profit margin, adjusting prices on-the-fly …
Furthermore, “ERS results are sensitive to the prices adopted for analysis. Because two different stores may sell the same food for different prices, the farm share of a consumer’s dollar would not likely be the same at both stores.’
https://www.ers.usda.gov/data-products/price-spreads-from-farm-to-consumer/documentation/
Also note from Forbes 2014: “… according to the USDA, beef prices have increased 26 percent over the past five years. I asked a statistician at the BLS about this discrepancy and he said “I would expect those numbers to be a little closer together.”
otherbrother,
No one ever said estimating consumer price inflation was simple. There are all kinds of complications that have come to the forefront, including variable pricing for online purchases, where one minute you get this price, and then a few minutes later you get a cheaper price (as companies are bidding for your business). Happens to me all the time, and I use this aggressively to my benefit, including by manipulating what browsing data is cached in my browser.
It’s all very complex, and one-liners just don’t capture it.
Yes on shopping for same thing multiple places and times, and then wait a bit. there is online competition. Wolf is correct. Play with the algos…
Thanks for all you Mr R.
Well done mr. Richter. Nailed it again. One thing you forgot to mention is that most workers form of debt is credit cards. They are led to believe that a rate cut is good for them because they will have a lower interest expense. Unfortunately it’s a rounding error relative to the real costs of inflation you articulate so well, but that is a hidden cost so they dont connect the dots.
Funny watching the FED come up with reasons for a rate cut, especially with inflation trending higher.
My theory is the FED has a nervous eye on the Deutsche Bank disaster and wants to grease that with easy money … but they can’t say that for fear of making it worse.
I think the FED is willing to live with even more inflation from a rate cut for insurance of a Deutsche Bank crackup.
Does the rate cut(s) and the liquidity cure INSOLVENCY and give zombie companies more years for being walking dead?
I’d guess yes.
What I’d really like to know is how long was this can kicked down the road, and how much longer can it be kicked without some (hopefully) peaceful reshuffle of our existing society.
“Consumer price inflation is only good for businesses. It means that companies are able to raise prices for the same thing, and that consumers accept these price increases, and that these price increases stick, and that companies get away with them.”
Companies are always trying to get as high a price as possible for their products – inflation doesn’t change that. With inflation, raw materials cost higher, labor costs higher and to make a profit companies are forced to raise the prices or go out of business. Unless there is lack of competition (monopoly) or there is a cartel of businesses that collude to fix prices, one company can not get away with big price hike.
Certainly is a lack of competition in any industry that requires physical and tech skills.
Gave up on looking for employees.
Jacked prices. Calls don’t quit coming.
Demand is crazy. At some point the economy will slow, or younger generation will step up.
I see the high schools in my area putting trade classes back in their schools.
May take time….but at least there is hope
Maybe it’s because everyone sees the big money in a desk job, especially financial engineering. Trades don’t pay much unless you are working for yourself, personally and for profit.
Additionally, one might ponder that a lot of the CPI data is based on crap.
On the Accuracy of Nielsen
Homescan Data (December 2008)
The
most concerning issue we find relates to the way that prices are recorded by Nielsen for stores from which Nielsen uses its store-level data as an estimate of what households actually paid. This poses additional challenges
when those stores have multiple possible prices in a given time period due to loyalty card or other shopper-specific price promotions.
https://web.stanford.edu/~leinav/pubs/QME2010_ERS.pdf
Again, think global….take your inflated USD and invest it in a country with even higher inflation. Winning!
And forget about the potential currency devaluation or the geo-political risk?
Amen! You nailed the international business scene. Perception of the US$ is so Valued outside USA.
Hi Wolf:
Off topic question: What are your thoughts on the Consolidated Audit Trail (CAT)? Will this ever really happen? I see on the website that it is supposed to go live in April 2020, but obviously there are a lot of people willing to spend a lot of money to drown CAT in the bathtub.
Oh brixton77…allow me to ask you…if you are a politician or CEO or Chairman of the Board, wouldn’t you protect your dirty pork belly payolas, love child financial support from several mistresses around the world, hand shake deals turned sour over time, collussion with mafia, triad, dictators or dubious characters, fortunes made on Bitcoin due to inside trading info and much more?
CAT is Public Shaming of and Exposing the above characters…who will continue to hide or hoard their wealth. Out of Guilt and IRS guidelines, money is thrown in the kettle labelled ‘Foundation’.
That CAT “going live 2020” is a new one to me. Is it like blockchain? And most importantly, who manages/controls it?
Who are the winners? Isn’t it time they loose a bit? After all it’s just paper.
Great comment and good laugh, too.
The companies that benefit from a lower U.S. dollar. Trump is basically trying to get re-elected so interest rates are being cut to pump up the rigged fraud U.S. stock market and then Trump can tell everyone if you don’t vote for me the stock market will crash and burn.
It’s not even paper, which is real in a small way. It’s a fleeting digital mirage.
Concerning the comments on “hedonic benefits”, I would maintain that many of these are pretty useless and superfluous to the real value of a product. As an expert in automobiles, I suspect that Wolf might agree. Yes, it’s fun to have all these added gizmos (if you’re into that sort of thing), but they add little if anything to the actual transportation function of a car. Very few newer “features” add to its safety. So, they are simply a way to jack up the price. Kinda like the “rustproofing package” of yore.
Or fins.
LOL! I didn’t say I was expecting CAT to materialize in its promised form. I’m sure something will be delivered, but I’m curious what disasters will befall the infant along the way. It should be a Perils of Pauline voyage — Oh the privacy concerns! Oh the unfair burdens! Etc, etc.
The April 2020 deadline was set by the SEC and has not, to my knowledge, been changed. Easy to find with a google search.
@Elissa3,
There was an article the other day about screaming increases in auto insurance rates due to the high price of auto body repairs and parts replacement. Examples cited were $1100 (yes, eleven hundred dollars) for a self-dimming/brightening LED headlight unit, and $1200 dollars fenders, etc.
I can buy seal beam spares for my vehicles for $13 Cdn. New fenders/quarter panels, $112 new and primered, ready for paint. I know because I have bought them…..and probably even cheaper online.
There’s a sea of spares out there if you don’t mind doing a little of your own work, or paying a paint shop a little to shoot some matching paint onto the part. Ebay, “the river”, Rock Auto, etc., this is something like a golden age for parts.
I just bought a new Mustang with a lot of the new ‘features’–rear park, assist, side view warnings, hill assist, etc. If the car sits in the hot California sun for a couple hours the ‘features’ become unavailable until I drive the car a few miles for it to cool off.
I held off buying a new car for years because, having worked in computers and tech for decades I knew the more complexity, the more failure modes. I was right.
CalBob-to repeat the old engineering joke: “…if something works REALLY well, it doesn’t have enough ‘features’, yet…”.
A better day to all.
President Nixon took us off the gold standard. It has been inflation ever since. Even when the US was on the gold standard, the government found occasional ways to shift the ratio of paper currency to gold in inflationary ways. Corporations do not benefit from inflation as it causes input and labor costs to go up. If they do not give raises, their workers may leave for better paying jobs at other businesses as corporations had to compete for skilled labor.
Politicians got complaints about inflation. President Gerald Ford called for a “Whip Inflation Now,” campaign (1974). There was double digit US inflation in 1980. Billionaire Ross Perot ran for president as an independent demanding a balanced budget. Bill Clinton won the election (1992) and balanced the budget. Today total CPI inflation rate is low.
Technology may have increased worker productivity. That was what some economists said was supporting the Dotcom tech stock boom of the late 1990’s. They later learned speculation was to blame for the bubble.
Germany has negative interest rates. It is not attractive to savers. There is a bank run at Deutsche Bank. Banking customers have withdrawn hundreds of millions of their money from Deutsche Bank (Rigged Game Blog 7/16/19).
The logical conclusion of companies benefitting from inflation while consumers do not is more and more wealth concentrated in companies. And since companies are disproportionately controlled by very few people , then inflation leads to greater wealth inequality.
We are already close to the highest levels of inequality in the history of the country. The Fed pushing for more inflation seems to be creating a “ French Revolution “ social revolution in the near future
Rcohn, may I please Growl at you on your panicked tone?
Grab your passport, book a humble economy flight to Manila, Shanghai, Penang, Jakarta and Singapore. Rub elbows with the corporate working class (Act as you are a single man by location, flirt wildly). Draw your own heart based assessment and common denominator with US working class.
Human exploitation, unrealistic quotas and job expectations, no real formal training (new hires are thrown into swim or sink), distraction of every consumer convenience including $5 cappuccino, and much more.
We have been Mislead. We have become Indentured Slaves (every.culture and age group)
I have been to all these cities except Jakarta (can’t find a reason to go there). Thank you buy I prefer to be in my US city. Except for the (street) food, life is so much better and easier here. Inflation is EVERYWHERE. Doubt you can escape it.
Great articles lately on inflation. I remember the early 70’s when inflation as we know it now began. A Coke had been a dime for at least forty years to finish the 1960’s but from 1970 until 1979 the price rose to forty-five cents.
Goods went from making a decent margin on production and retail mark-up to pushing up prices to see what the market could take. In other words, today most products and goods are shoved in price up to the consumer to see their limit. For example, most retail is controlled by corporations who will mark-up items 500% if they can do it, NOT look for a decent 25-40% mark-up like the old day’s. Plus, since most business is corporate, they must look to increase the quarterly report, constantly squeezing labor and inflating price of goods sold–or the stock dies.
In 1965 we did away with 90% silver dimes, and it took a few years for the low value of the new “sandwich coins” to be realized.
A dime for a Coke was …. the melt value of a silver dime, or about $1.25 – $1.50, I haven’t checked it lately, so in the early part of this period a Coke was actually kind of expensive. Which made sense as it was considered a tonic, not a beverage to drink in place of water.
That 25c loaf of bread way back when was the same as $3 or $4 now.
“That 25c loaf of bread way back when was the same as $3 or $4 now.”
Alex,
25 cent loaf of bread? Way back in the ’60’s? You speculate. When l matriculated into San Jose State College in 1964, bread at the local supermarket (Lucky’s, as I recall) was 10 loaves for a dollar. I rarely had a dollar.
Good article, Wolf. Some have suggested that the Fed is primarily concerned with keeping the S&P 500 propped up and is only using the 2% inflation target as a ruse to hoodwink the masses into thinking it is about the health of the economy. Perhaps there is some overlap here as, obviously, the Fed believes the stock market is an important driver of the economy as they’ve promoted the wealth effects doctrine in the past.
Though lately, it seems the Fed doesn’t want to admit that they’re targeting stock prices as they may have to admit their role in creating the shocking level of inequality that has developed in the country and all the social and political consequences that go along with it. So they’re back peddling the absurd claim that there’s insufficient inflation in the economy even as housing, healthcare, tuition, quality food and other items have risen sharply in price. Come on Fed, have we all just fallen off the pumpkin truck?
Whatever their motivations, the Fed should get off this ridiculous message of there being inadequate inflation. Even Paul Volcker called them out on this nonsense.
https://www.bloomberg.com/opinion/articles/2018-10-24/what-s-wrong-with-the-2-percent-inflation-target
“How did central bankers fall into the trap of assigning such weight to tiny changes in a single statistic, with all of its inherent weakness?”
How does ‘wealth’ effect trickle down, when bottom 50% own just 1% wealth of the wall ST? really?
Top 1% own 47%, top 5% – 71% and the top 10% own 80-90%!
MSM doesn’t challenge Fed’s statements that ‘Lower/Middle class Amereica’ is benefited by their ‘easy-peasy’ money policies! Their financial repression policy is hurting the elderly, those retired and those on fixed income!
Fed is a cartel for Banksters, top1% and for keeping the status quo!
Yes, sunny, you’ve identified the important issue. Due to Fed policy, too much wealth is flowing to the top and it isn’t trickling down very well. And as Paul Volcker points out, false precision in their statistics can lead to bad policies. Hopefully, at some point, there will be some reforms put in place that doesn’t just focus on the short-term rise in asset prices.
Thanks, JRM. Good article from Volcker. Everyone should read it
As near as I can tell the magic 2% number the Fed, ECB and BoJ hold as the proper inflation rate was created by the Bank of New Zealand circa 1990. It was created out of whole cloth then and was adopted globally not because of any new economic theory or research. It just seemed to be good number because Central Banks could declare ‘victory’ at this level and not have to worry about reducing it further even if ‘price stability’ implies a zero inflation rate.
There seems to be a lot of archaic ideas in economics that either no longer apply ( if they ever did ) or have been shown empirically to be false. The Phillips Curve, Comparative Advantage, The Triffin dilemma, etc.
Wage push inflation, e.g., seems to have been a problem of the 1950’s and 60’s when big industrial unions in the West could extort higher wages for their members in the same way that monopolies could extract higher prices through their economic power. With the demise of big unions and globalization workers no longer have very little power to demand a share of company profits.
Wait, you think comparative advantage doesnt exist? Why do you work then?
I’m trying to figure out which is eventually going to be more cost-effective: a roll of stamps or a roll of toilet paper. The prices and the widths are converging. ;-)
You must have a tiny butt, just a thought.
Looking for a resurgence of cash and under the table sales whenever possible.
I just bought (today) about $1,000 worth of yellow cedar, aka cypress. I have always paid approx $700 cdn for 1,000 fbm (foot board measure)….sometimes $1000. Today I bought one lot for $2,000/per. This is direct from the mill and for cash. About 10 minutes ago I discovered the same ‘official’ and listed price is 5X. 500% more!!!! for the privilege of buying from a warehouse and middleman.
The point of this comment are the tax implications for Govt, and the survival of many businesses. It’s all very good to talk about acceptable inflation levels, but when the numbers tweak the psychology of the buyer into saying “no”, then watch out. I just won’t buy stuff I don’t absolutely have to.
A consumer has to know their prices and have a basis for comparison. I’ve noticed many stores like WalMart have gotten away from selling meat by the Kg and/or pound. Now, they say, “blah blah for $10”. Or, $4.98 for a ‘clamshell’ of blueberries, and you have to search the fine print to find the price per pound. If I can’t compare prices and understand what I am buying, I don’t buy anything.
In 2011-2012 updated my auto knowledge at local JC. Took Perf/Tune-up/Auto Elect (renewed ASE lisc, had friends with legit garage previously lie about years employed) and got Smog L1,L2 lisc (allowing me to run BAR test equipment (dyno type then) for diagnostics only. Not used for test anymore (except on older cars?, don’t know cutoff) , it’s just OBD-2 plug in for most now.
Anyway, point is I met people planning to W-2 it, and a lot planning to work out of home garage, and even a guy setting up a mobile van for diagnostics, so you could go to his list of home garages, or a legit one and not get BS’d. Black market living is forced on poorer folks.
PS: Keep that 22RE rig alive, plenty people here doing it, plenty aftermarket parts, plenty people can fix them. Best PU ever made, even with all the pesky vac controls. Would sell like hotcakes today, with new electronic controls, and very cheap…which as WR pants out, not so good for transport biz.
WR points out…although pretty good Wolf pun, maybe?
1) Inflation in the 1970’s drove WWII vet crazy.
When the front line soldiers came back, young women who
produced tanks & bombers stayed home and the
Baby Boomers were born.
2) In the 50’s the stock market rocked.
3) Prior to JFK election, from Aug 1959 til 1960, stocks moved
lower and the bottom, on Oct 1960 was 564.23.
This low was very important number, it became Oct & Dec 1974
lows support !!
4) From Oct 1960(L) @ 564.23 the DOW had a bull run, creating a Lazer up, aiming at 1965 & 1966 peaks
5) The Nov 1961, the Lazer peak, was 741.30. It was another very important support line that stopped :
Oct 1966(L) @ 735.74, Mar 1978(L) @ 736.75 and Mar 1980(L)
@ 729.95 the 1980 recession low.
6) These lows including 1974 lows, were produced by inflation.
7) WWII vet had to wait until Aug 1982(L) @ 769.98,
that started the jump.
8) Currently the Baby Boomers are senior citizens, their parents had a very difficult life, from birth during the depression, to the front line of the war, and the 1970’s inflation that ambushed them, when they became senior citizens.
9) The accumulation period started on the eve of JFK election,
from the bottoms of Oct 1960(L) @ 564.23 til 1982, that 22 years. Many WWII vet were dead by that time.
1) JFK peaked on Nov 1961 @ 741.30, a major support
line for the 70’s lows, and a lazer aiming at 1965, 66 peaks ==> might look like Jan 2018, Oct 2018 and July 2019 peaks,
on the current DOW.
2) When JFK was assassinated, on Nov 1963, the DOW was slightly
above 741 30.
JFK assassination was a tiny blip, on the way to May 1965(H) and 1966 peak @ 1.001. Many horrible/ great days are just a blip on the chart.
3) American WWII vet had a very difficult life, but those in Europe,
USSR, China, Japan and the rest of the globe were worse off.
4) Nicolas Darvas, a Hungarian refugee, was 1950’s best trader.
He turned zero capital to over 2,000,000 in 5y.
His book : “How I made $2,000,000 in the stock market”
still available on AMZN for 9.96.
Just got back from the home depot. Two gallons of liquid chlorine for the pool is now north of $6. Just last summer, mid $4. That is a big jump.
Also, the recent price hikes for small old single family homes in good areas in LA is stunning. What rented for 3500 in 2014 are now running 5500 to 6000 per month. We are talking 3bd 1.5ba from the 50s. Most of the price jump has happened in the last 18 months and seemed to accelerate when the housing sales slowed.
Interesting. We are looking at homes in Palm Springs. Prices there seem to have jumped 25-30% in the last 18 months. Many people trying to cash out of what they bought in 2017 with minimal or no upgrades. Easy to see the price history.
TownNorth, I am talking about rent price hikes. Sales price increases have stalled and only select zip codes near the beach and on LA’s west side are seeing strong sellers markets. But, it looks like rental prices are jumping most places.
Zero and negative interest rates sure as hell didn’t increase inflation in Europe and Japan. It only made people and businesses poorer a lot faster.
I’m paying the price and I’m pissed.
I’ve been paying the price since Bernanke instituted his free lunch (for some but not others) policy.
I work but I live in a van because basic housing has been inflated to a discretionary, luxury item.
Needless to say, I spend money on nothing but food as I desperately try to keep up with the Fed’s inflation. I’m supposed to retire soon, how am I supposed to do that now that investments no longer provide a real (inflation adjusted) income?
You’re not supposed to retire. You’re supposed to keep contributing to GDP and expire on your Best By date to avoid incurring profit-depleting costs on The System.
The poor will always be with us. It’s federal policy, and the rentier class insists on it.
I’m sorry Van. I’ve cased a thousand variations of your story but I can only do so much, for so many. I’m sure its no consolation to know that teeming hordes are far worse off. At least you have investments. Billions live out their lives with next to nothing, and their numbers increase.
Never mind. Forget I said anything. Carry on.
in another fantasy parallel universe, i just want to ride shotgun with you around Australia or wherever you are and hang out and listen to you respond to Wolf site comments as i read them aloud to you.
Van, you whine a lot. Honestly, you got it good, no debt, no attachments… move to Thailand and find a good woman. (Only half joking – Thailand is actually becoming expensive). At least treat yourself to a nice restaurant. You only live once.
Van, i was born in a ghetto and we lived on welfare. Now, I live on the east and west coast. You know something? Life is good no matter if rich or poor. I know this because I lived both sides as well as in-between. All you have to do is live off government subsidies. Move to a decent town that is affordable. There are a lot of those. Then live frugal and don’t worry about it. You gave it a run and were unlucky. So, collect government subsidies and hold your head high. Nothing wrong with that. Just remember to smile.
If you work for a company that does not give you a yearly cost of living increase, then yes, you are correct. Otherwise inflation is “good” for you if you have debt (mortgage, car payments,…) The problem with the fed cutting rates though is when you have saved some money and you get barely any interest on it.
Private sector COLAs went out the window decades ago. Some government employees still get them. Federal minimum wage hasn’t been raised in a decade. Etc.
Banking oversight committees in Congress need to question why a 2% inflation target makes sense. Nobody has bothered to explain or justify it.
….because they can’t.
I think the reason is that deflation is so feared by the bankers that it is better to declare some low inflation target, say 2%, just enough above zero to prevent tipping below zero. It’s not perfect, but good enough to do the job. Hovering at zero is ideal for us, but is too dangerous since there is no margin of safety, and it requires more effort to balance at that level. 2% allows you to swing up or down a percentage point without having the Fed react beyond jawboning with “forward guidance”. Hyperinflation is the other worry, but that can be reined in by adjusting interest rates, and central bankers are not as stupid as we like to portray them here.
The 2% inflation target is bad theory because it causes financial instability. The only way to hit the 2% inflation target is by growing debts faster than GDP. Over time, this obviously causes a financial bubble, followed by a bust. The ultimate price of inflation is severe financial instability.
Other than a few brief periods of time, such as the late 70s, the inflation rate in the US has been about 2 to 3% for well over a half century. This is the beauty of a low but persistent inflation rate. It’s how you boil a frog. As long as it doesn’t morph into hyperinflation, it can go on beyond our lifetimes. I’m not saying it’s right, it’s just a good way to dissipate debt, and keep the banks happy. 97% of the purchasing power of the dollar has been eroded by this silent method.
There are only three ways to lower the deficit/debt:
1. Increase taxes
2. Decrease spending
3. Mild to moderate inflation.
Politicians running for re-election have only one choice.
Wendy I dont think debts are decreased via inflation. The only way to create recurring inflation is to grow debts faster than nominal GDP, so the debts don’t decrease. Existing debt may be easier to service as a result of inflation, but the new debts that are needed to create the inflation make the debt load worse all things considered.
.
I know debts can be decreased by inflation. Here is how it’s done:
https://fortune.com/2016/04/12/bernanke-helicopter-money/
2% inflation, aggregated and compounded over ten years gives you circa 25% increase in prices.
How does that fit with the Fed’s “Stable Prices” mandate?
It is difficult to find a chart of the cumulative and compounded inflation. Once found, it turns the “not enough inflation” argument on its head.
The funny thing is that there seems to be a general backlash against business today. A lot of it is aided and abetted by the media, you can’t go a day without hearing how Amazon is underpaying workers, or the wealth gap, or something similar.
On the other hand, the same media seem to be pushing the things that help to keep the same workers down. Seems a little schizophrenic to me. Or may be people are pushing to make news happen… so weird.
A majority of MSM in the USA is owned or controlled by just six families. That answers your question.
I don’t really see business wringing their hands over inflation. When the government mandates wage increases, raises taxes and legislates new taxes, what choice do they have but to increase prices? Want more inflation, demand higher wages and watch as prices soar.
I would love Wolfstreet to lay out possible scenarios how this next round of (quantitative) easing may unfold. After all we are looking at unchartered territory and some kind of game plan is crucial. Thanks.
Andre,
Go pray for it if you’re so inclined. Maybe they’ll listen. For now, quantitative tightening is still going on.
https://wolfstreet.com/2019/07/06/fed-sheds-38-billion-in-treasuries-and-mbs-dumps-mbs-at-record-pace-exceeding-cap-for-first-time/
I pray for discipline, transparency, authenticity and sustainability. I don’t think it will heard though ;)
IMF just came out yesterday and declared the dollar is over valued, while the euro is undervalued. … In addition, many emerging markets are complaining of overly strong dollar… the writing’s on the wall.
Well, the ECB should raise its policy rates well into positive territory, apologize for the destruction it has wreaked with its NIRP policies, promise to never ever do it again, and then start unloading its balance sheet, and voilà, the strong-dollar issue would be resolved as far as the euro is concerned at least.
That’s usually a sign the euro will fall a lot further instead of appreciating against the U.S. dollar.
I am disappointed my favorite one ounce Canadian gold coin has had a price increase over the last year. At least it is new and improved, stamped 2019, compared to last years outdated model. :)
The seeds of destruction are planted at bubble peak.
SF hippies of the sixties.
SF tent city when FB is under max pressure of a waterfall.
Since the eighties the Nasdaq weekly EMA(45) & EMA(100)
never crossed even once.
If there will be NDX change of trend, blame the squad.
From H.8 Bank Assets & Liabilities:
June 2018 to June 2019.
Bank Credit increased 5.6%
Loan & Leases increased 4.9%
Treasury & Agency Securities increased 11% ($279.2B)
MBS (agency) increased 9.2% ($167.9B)
Cash Assets (think excess reserves) decreased -21.5% (about $461.5B) but Total Assets increased 3.4%
So all the decrease in Cash (excess reserves) went to buying Treasuries and Agency MBS. Can you see the switch?
You begin to wonder who’s clamoring for lowered rates.
Inflation destroys debt. That is why I believe it is so popular. When everyone is so leveraged up after this decade of extremely low interest rates, the solution obviously is more inflation. If you can go through a period of low interest rates and high inflation you effectively reduce your outstanding debt “painlessly”. As all the major players: governments, corporations etc have signed on to this game this will be the playbook moving forward. Lots of inflation and the stealthier the better.
There is one obvious problem. The ability to kick the can down the road depends on CREDITORS willing to rollover the debt at presumably lower interest rates assuming they think you have the ability to pay both the interest and the principal.
But even a linear projection easily shows that there is an END to this unless you either make more money or pay down the debt. You Central Bank’s ability to make money is dependent on others willing to lend you.
Being nasty to others certainly does not help. Chinese and Japanese are under no obligation to help you from starving.
A lot of the developed world is already into negative nominal yields courtesy of the central banks. There would appear to be few places to go for those wishing to avoid risk assets. Preservation of capital at this point becomes losing as little as possible.
Unless you wish to embrace inflation enhancing risk assets and inflation destroyed debt as the model which has worked very well for quite some time. As this appears to be the only game in town it may have some legs yet.
But deflation boosts incomes. Last year I was paying $100/month for my basic cable and ISP service. Suddenly, mirabile dictu, it was $49/month for the same service. My cellphone service costs the same but I get two and half times the data.
Wolf rightly points out that COLAS no longer exist for most save for social security but the government rigs that to CPI inflation which doesn’t factor in real rents or taxes and fees imposed by state and local government. Nor does inflation benefit middle and lower income people who must finance major purchases like a car, house, education or medical care.
Zero percent inflation or a mild deflation is the average man’s friend. His savings are not eroded and he can buy or sell a home without the worry of ‘timing’ the interest rate environment his sale or purchase will take place in.
Iamafan, you are exactly right. In fact, the big banks know this. The loan growth rates for the top 4 banks are virtually stagnant over the last two years. Meanwhile the regional and community banks continue to grow loans in the extra innings of this cycle without too much concern. The top 4 banks are no dummies. They have tightened their underwriting standards, allowing some customers to go find another lender. But when we have a downturn, then there are no other lenders, and then here we go…
As an individual if you have a broad range of choices you can beat the inflation game. You have to look at the categories in a broad and creative way. Shelter. Can mean a lot of things and in a lot of places. Transportation. Got to look at all alternatives. Some categories that are highly regulated are tougher like health care. The big 3 categories to master are food, shelter and transportation as that is about 2/3 of your cost basket.
I am not so sure that inflation doesn’t reduce the burden of debt.
I believe that consumer price inflation, to be sustainable, has to be feeded by some wages inflation. Otherwise if prices rise and wages don’t, the volume of sales fall as the total amount available for consumption is more or less unchanged, living standards fall and inflation just stops.
Otherwise when there is some wage inflation then it may become easier to pay mortgages and debts.
History told us that when a major adjustment was needed in the economy, people reacted quite strongly to cuts to wages and pensions or unemployment and accepted a lot more easily the loss of purchasing power due to depreciation. This fact put very high pressure on the Gold Standard in Europe before WW2. People were not entirely irrational in my opinion, it was easier than otherwise for them to service debt in a somehow inflationary environment.