Yep wages are NOT to blame for the current high inflation in the US. Instead, the current high inflation is the price being paid for the extreme increase in the money supply (driven by enormous federal government deficits and the monetisation of those deficits by the Fed).
Wages are simply desperately trying to play catch up, but as is often the case during periods of high inflation, the working class, and those who can least afford it, are increasingly falling further and further behind. It's a real extra kick in the guts to these people that so many economists and policymakers are effectively using them as a scapegoat for their own failures in fiscal and monetary policy.
Though with the Fed tightening as aggressively as it has, inflation will come down, and is already showing significant signs of doing so. Most importantly the Fed doesn't need to keep raising rates. Current monetary policy settings have already resulted in the M2 money supply flatlining - the hard work has already been done. Durables prices peaked in February, have fallen significantly since, and are set to decelerate further on a YoY basis from October. Oil prices continue to roll over, which will continue to see the nondurables category decelerate. The main issue with inflation as measured by the CPI are shelter costs. Though again, there is reason for optimism here, as market based measures of rents have decelerated in recent months, and during August, were below the rate of growth being recorded by the CPI. Unfortunately the CPI (as well as the PCEPI), measures rental costs with a SIGNIFICANT lag, raising the risk of the CPI overstating inflation and the Fed overtightening. Though on an underlying basis, everything is pointing to a material decline in inflation over the next year - the bigger concern is will the Fed unnecessarily tip the economy into a severe recession by excessively tightening monetary policy, a scenario which I think is quite possible.
The Fed keeps being roughly 1 year behind. The huge stimulus packages as well as supply shocks/snarls led to big inflation a year after they came out. But that also means that inflation will be down in a year even if the Fed did nothing as the stimulus money is spent out. But the Fed seems insistent on forcing a recession and rocketing up unemployment so that they can drop rates to get the country out of recession.
It's an absolutely dumb and crazy strategy.
BTW, I'm on Team Transitory too, but if you look at previous episodes of transitory inflation (like after WWII), transitory inflation lasted 2-3 years, not months.
Economists are ignoring the elephant on the table: over a million unanticipated deaths in the U.S., 6.5 million worldwide, and 12K dead in the last 28 days in the U.S.
This scale of death is new, and the implications are not understood. Workers are withdrawing from the job market and changing their demands. Supply chain issues are quirky but ever-present. Construction is booming, and new cars abound on the road in my area. I don't see anyone with an economist's toolkit seriously examining these phenomena.
Clearly we should be taxing the people who became insanely wealthy during the period of easy money, the top ~10%. This would reduce demand and give us a war chest to fight unemployment and improve infrastructure when recession hits. Is reason we don’t do this is because it’s not politically feasible? Would we rather curb demand by giving those with capital a guaranteed return on high interest government and corporate bonds.
Powell is engineering labor-share suppression. Even as the corp profits portion of unearned income shoots up. The proximate cause of price increases, at least, is just...firms raising prices/margins.
If they share those margin increases with labor (they're not doing that), any imagined problem is just money illusion, right?
I'm not sure I understand the argument that you can "compensate people for the loss of their job".
If you fully compensated people for losing their job, presumably they would continue to consume at roughly the same rate they did previously, so aggregrate demand (I hope I'm using the term correctly, not an economist here), stays the same, and supply would actually decrease (because they're no longer producing the good or service that they were previously paid to do).
Therefore, wouldn't such a (hypothetical) policy actually be inflationary rather than deflationary?
I sort of get the theory of higher interest rates making cost of capital more expensive that reduces employment that reduces demand. But what I don’t get is the lost production from that lost employment.
In particular, the companies I’m seeing shrink employment right now are tech companies slowing their hiring and focusing more on operations and less on innovation. But the products they make are tools to increase worker productivity. The tools that would reduce inflation.
Surely there are better ways to reduce demand? Like higher taxes on consumers that buy a lot of labour and energy?
I know that m/m inflation has caught up to y/y, but I fear that the media's overfocus on y/y has really warped people's sense of how much inflation there actually is. The reporting is always on the y/y number, and then the m/m is just presented as this wierd little extra spin that politicians and pundits are adding, usually with the connotation that the MSM is doing it because they're in the tank for Biden.
But the crazy thing is that most normies with a high-school understanding of inflation assume that the MSM's y/y data is actually m/m. And they get ANGRY about it like it's m/m, even if it's not! As long as there's something real in their daily life to hook it on - maybe the price of nails jumped, or whatever - normies just love to panic about the inflation bogeyman because it's a big scary thing they don't understand and have zero control over - AND because Americans perpetually feel "nickel-and-dimed" by our economy, so there's never any shortage of normie discontent over "the rent/healthcare/childcare/etc is too damned high".
This ultimately also fuels misperceptions about what to do about it and whether that's working. If m/m goes to zero now and stays there, y/y won't be zero until a year from now. Biden could theoretically get m/m back on target today, get hammered for high y/y over the next six months and lose Congress in the midterms, and yet would still have made the absolute perfect policy move.
I appreciate your critique of the claim that wages are driving inflation. Clearly, the situation is more complex than that, and wage increases play out as both cause and effect here. Honestly, I'm not a macroeconomist and these dynamic theories are a bit abstract for my grasp. Still, you also seem to be claiming that the labor market is not tight right now (adding tons of jobs, employment-pop ratio increasing). I'd like to pick at that a little. The distinction seems crucial because a very tight labor market creates the conditions for a wage-price spiral, even if we didn't arrive here until recently.
RE: employment-population ratio. It is true that small increases have been eked out recently. However, the March figure (80.0) is not much different from the August figure (80.3). There does not seem to be much more room for growth here relative to the pre-pandemic peak of 80.5 in Feb 2020. Indeed, we've not seen a higher ratio since June of 2001, more than 20 years ago. Perhaps the GFC and pandemic have kept the ratio lower than true potential, but it seems you are waving away a historically high ratio, and all that implies, by pointing out that some recent fluctuations were slightly positive.
The current figure (0.5) is very low, lower that at any other point in the 20+ years I see data for. Looks like tightness.
I'd be delighted if you or others here could comment more on these observations.
As an aside, it does feel like this is all getting wildly over-politicized. Inflation seems high enough to justify raising interest rates based on the historical record and some common sense. I am quite confident that the same voices (Warren, Reich, etc.) that are advancing alternative inflation theories and decrying rate increases are creative enough to advance such theories under *any* inflationary scenarios. These are ideologues that seem to have to spin everything always into a justification for more government control of the economy and more redistribution. The whole area is just complex and murky enough to lend itself to that kind of armchair nonsense if you are so predisposed.
There is nothing natural or normal about near-zero interest rates, either historically or theoretically (time value of money). Interest rates around 4% are not some kind of crazy right wing idea. See Taleb, in particular, on this subject recently.
Politicians and pundits have this need to show rhetorical solidarity with labor. Cool. I am glad the fed just coldly looks at inflation, employment, and interest rates, as is their mandate. I am glad that people are finding employment nowadays! It's great. I also think that too much time under free money conditions is leading to prices rising ahead of wages (as firms can always act more quickly within the spiral). Going away from weird, crisis-justified monetary policy doesn't feel extreme. Maybe I'm just extreme.
We are now living in a relatively poor country (compared to other 'advanced' countries) with a few very wealthy people who control a disproportionate amount of financial resources, above and below all the tables, so why is it that when economists discuss the negative aspects of wages and inflation, they speak as if it applies to the whole economy? It doesn't. It seems we are running two parallel economies and penalizing one for the greed of the other. Really, who does the Fed work for and when?
> And falling oil prices and falling freight prices and the end of supply chain snarls haven’t brought down core inflation yet.
Crude oil's prices have only been falling since mid-June, they take multiple months to properly feed through to general CPI (let alone core CPI), and we don't have inflation data for this month yet. And I don't see that the snarls in the supply chain are over? Through the summer I saw weird empty sections at the store and strike-outs on menus.
I remain basically happy with my June guesses at the biggest inflation contributors (https://noahpinion.substack.com/p/how-are-milton-friedmans-ideas-holding/comment/7259612). Not just oil prices (already elevated before Russia kicked Ukraine's door in), but also the war's impact on gas, wheat, and neon; the pandemic shock of consumer demand bouncing from services to goods and back, and office workers' demand for housing; a noisier and reduced supply of workers; and probably climate change too. Since I wrote that June comment, for instance, a third of Pakistan (a country bigger than Texas) went underwater. That might have some impact!
You can compensate for the financial loss of income because of unemployment to some extent but unemployment has all kinds of social and health costs the government can't directly compensate for. People generally see themselves as a 'worker' that contributes to society but unemployment makes you dependent on the state and changes your relative status and position in society (and the way people talk about you). Unemployment, especially when longer lasting, is terrible for health. Even when adjusting for social class and other factors that negatively impact health, such as alcohol consumption/smoking amongst others, unemployed people have poorer health (and a higher risk of dying) than people with jobs and the effects can be longlasting. The story is similar for mental health and increased deaths of despair. A strong social safety net can attenuate these effects to some extent but i'm not sure that is being considered sufficiently at the moment.
Hopefully we will not enter a period of long-lasting higher levels of unemployment but I feel like causing increased unemployment (for the sake of fighting inflation) is talked about with too much levity on twitter and elsewhere sometimes for the devastating effect it can have on people's lives.
Unemployment programs are also inflationary, which isn't a problem in a deflationary environment but it is self-contradictory. Why sacrifice workers for the sake of inflation, but then immediately try to undo it?
If you care about unemployment, it's better not to create it so aggressively for the sake to inflation to begin with!
I think we should be permanently targeting a higher number than 2% (let's say 4%).
I think it's important to push back against this idea:
"people are slowly working through their pent-up savings from the pandemic"
The last one ($1,400) was 18 months ago. Really??
https://twitter.com/asymptosis/status/1537461695903281152/photo/1
Thread: https://twitter.com/asymptosis/status/1537461695903281152
Yep wages are NOT to blame for the current high inflation in the US. Instead, the current high inflation is the price being paid for the extreme increase in the money supply (driven by enormous federal government deficits and the monetisation of those deficits by the Fed).
Wages are simply desperately trying to play catch up, but as is often the case during periods of high inflation, the working class, and those who can least afford it, are increasingly falling further and further behind. It's a real extra kick in the guts to these people that so many economists and policymakers are effectively using them as a scapegoat for their own failures in fiscal and monetary policy.
Though with the Fed tightening as aggressively as it has, inflation will come down, and is already showing significant signs of doing so. Most importantly the Fed doesn't need to keep raising rates. Current monetary policy settings have already resulted in the M2 money supply flatlining - the hard work has already been done. Durables prices peaked in February, have fallen significantly since, and are set to decelerate further on a YoY basis from October. Oil prices continue to roll over, which will continue to see the nondurables category decelerate. The main issue with inflation as measured by the CPI are shelter costs. Though again, there is reason for optimism here, as market based measures of rents have decelerated in recent months, and during August, were below the rate of growth being recorded by the CPI. Unfortunately the CPI (as well as the PCEPI), measures rental costs with a SIGNIFICANT lag, raising the risk of the CPI overstating inflation and the Fed overtightening. Though on an underlying basis, everything is pointing to a material decline in inflation over the next year - the bigger concern is will the Fed unnecessarily tip the economy into a severe recession by excessively tightening monetary policy, a scenario which I think is quite possible.
The Fed keeps being roughly 1 year behind. The huge stimulus packages as well as supply shocks/snarls led to big inflation a year after they came out. But that also means that inflation will be down in a year even if the Fed did nothing as the stimulus money is spent out. But the Fed seems insistent on forcing a recession and rocketing up unemployment so that they can drop rates to get the country out of recession.
It's an absolutely dumb and crazy strategy.
BTW, I'm on Team Transitory too, but if you look at previous episodes of transitory inflation (like after WWII), transitory inflation lasted 2-3 years, not months.
Economists are ignoring the elephant on the table: over a million unanticipated deaths in the U.S., 6.5 million worldwide, and 12K dead in the last 28 days in the U.S.
This scale of death is new, and the implications are not understood. Workers are withdrawing from the job market and changing their demands. Supply chain issues are quirky but ever-present. Construction is booming, and new cars abound on the road in my area. I don't see anyone with an economist's toolkit seriously examining these phenomena.
Clearly we should be taxing the people who became insanely wealthy during the period of easy money, the top ~10%. This would reduce demand and give us a war chest to fight unemployment and improve infrastructure when recession hits. Is reason we don’t do this is because it’s not politically feasible? Would we rather curb demand by giving those with capital a guaranteed return on high interest government and corporate bonds.
Is Jason Furman personally refusing any pay offer above 2.5% ? Or is that just for other ppl?
Surprised that labor share isn't mentioned here. Per Josh Mason et al et al, it's where the "sacrifice" shows itself quite clearly in the #s.
Earned labor compensation = employment (hours worked) * hourly wages
Labor share = earned income/(earned+unearned income)
Powell is engineering labor-share suppression. Even as the corp profits portion of unearned income shoots up. The proximate cause of price increases, at least, is just...firms raising prices/margins.
If they share those margin increases with labor (they're not doing that), any imagined problem is just money illusion, right?
While wages are a component of inflation that could be produced, aren't profits also a component? Would it make sense to cut profits instead?
I'm not sure I understand the argument that you can "compensate people for the loss of their job".
If you fully compensated people for losing their job, presumably they would continue to consume at roughly the same rate they did previously, so aggregrate demand (I hope I'm using the term correctly, not an economist here), stays the same, and supply would actually decrease (because they're no longer producing the good or service that they were previously paid to do).
Therefore, wouldn't such a (hypothetical) policy actually be inflationary rather than deflationary?
I sort of get the theory of higher interest rates making cost of capital more expensive that reduces employment that reduces demand. But what I don’t get is the lost production from that lost employment.
In particular, the companies I’m seeing shrink employment right now are tech companies slowing their hiring and focusing more on operations and less on innovation. But the products they make are tools to increase worker productivity. The tools that would reduce inflation.
Surely there are better ways to reduce demand? Like higher taxes on consumers that buy a lot of labour and energy?
I know that m/m inflation has caught up to y/y, but I fear that the media's overfocus on y/y has really warped people's sense of how much inflation there actually is. The reporting is always on the y/y number, and then the m/m is just presented as this wierd little extra spin that politicians and pundits are adding, usually with the connotation that the MSM is doing it because they're in the tank for Biden.
But the crazy thing is that most normies with a high-school understanding of inflation assume that the MSM's y/y data is actually m/m. And they get ANGRY about it like it's m/m, even if it's not! As long as there's something real in their daily life to hook it on - maybe the price of nails jumped, or whatever - normies just love to panic about the inflation bogeyman because it's a big scary thing they don't understand and have zero control over - AND because Americans perpetually feel "nickel-and-dimed" by our economy, so there's never any shortage of normie discontent over "the rent/healthcare/childcare/etc is too damned high".
This ultimately also fuels misperceptions about what to do about it and whether that's working. If m/m goes to zero now and stays there, y/y won't be zero until a year from now. Biden could theoretically get m/m back on target today, get hammered for high y/y over the next six months and lose Congress in the midterms, and yet would still have made the absolute perfect policy move.
Noah,
I appreciate your critique of the claim that wages are driving inflation. Clearly, the situation is more complex than that, and wage increases play out as both cause and effect here. Honestly, I'm not a macroeconomist and these dynamic theories are a bit abstract for my grasp. Still, you also seem to be claiming that the labor market is not tight right now (adding tons of jobs, employment-pop ratio increasing). I'd like to pick at that a little. The distinction seems crucial because a very tight labor market creates the conditions for a wage-price spiral, even if we didn't arrive here until recently.
RE: employment-population ratio. It is true that small increases have been eked out recently. However, the March figure (80.0) is not much different from the August figure (80.3). There does not seem to be much more room for growth here relative to the pre-pandemic peak of 80.5 in Feb 2020. Indeed, we've not seen a higher ratio since June of 2001, more than 20 years ago. Perhaps the GFC and pandemic have kept the ratio lower than true potential, but it seems you are waving away a historically high ratio, and all that implies, by pointing out that some recent fluctuations were slightly positive.
Another piece of data that (if I recall) Summers has pointed to is the ratio of job seekers to unemployed. See https://dol.ny.gov/unemployed-job-seekers-opening
The current figure (0.5) is very low, lower that at any other point in the 20+ years I see data for. Looks like tightness.
I'd be delighted if you or others here could comment more on these observations.
As an aside, it does feel like this is all getting wildly over-politicized. Inflation seems high enough to justify raising interest rates based on the historical record and some common sense. I am quite confident that the same voices (Warren, Reich, etc.) that are advancing alternative inflation theories and decrying rate increases are creative enough to advance such theories under *any* inflationary scenarios. These are ideologues that seem to have to spin everything always into a justification for more government control of the economy and more redistribution. The whole area is just complex and murky enough to lend itself to that kind of armchair nonsense if you are so predisposed.
There is nothing natural or normal about near-zero interest rates, either historically or theoretically (time value of money). Interest rates around 4% are not some kind of crazy right wing idea. See Taleb, in particular, on this subject recently.
Politicians and pundits have this need to show rhetorical solidarity with labor. Cool. I am glad the fed just coldly looks at inflation, employment, and interest rates, as is their mandate. I am glad that people are finding employment nowadays! It's great. I also think that too much time under free money conditions is leading to prices rising ahead of wages (as firms can always act more quickly within the spiral). Going away from weird, crisis-justified monetary policy doesn't feel extreme. Maybe I'm just extreme.
We are now living in a relatively poor country (compared to other 'advanced' countries) with a few very wealthy people who control a disproportionate amount of financial resources, above and below all the tables, so why is it that when economists discuss the negative aspects of wages and inflation, they speak as if it applies to the whole economy? It doesn't. It seems we are running two parallel economies and penalizing one for the greed of the other. Really, who does the Fed work for and when?
> And falling oil prices and falling freight prices and the end of supply chain snarls haven’t brought down core inflation yet.
Crude oil's prices have only been falling since mid-June, they take multiple months to properly feed through to general CPI (let alone core CPI), and we don't have inflation data for this month yet. And I don't see that the snarls in the supply chain are over? Through the summer I saw weird empty sections at the store and strike-outs on menus.
I remain basically happy with my June guesses at the biggest inflation contributors (https://noahpinion.substack.com/p/how-are-milton-friedmans-ideas-holding/comment/7259612). Not just oil prices (already elevated before Russia kicked Ukraine's door in), but also the war's impact on gas, wheat, and neon; the pandemic shock of consumer demand bouncing from services to goods and back, and office workers' demand for housing; a noisier and reduced supply of workers; and probably climate change too. Since I wrote that June comment, for instance, a third of Pakistan (a country bigger than Texas) went underwater. That might have some impact!
You can compensate for the financial loss of income because of unemployment to some extent but unemployment has all kinds of social and health costs the government can't directly compensate for. People generally see themselves as a 'worker' that contributes to society but unemployment makes you dependent on the state and changes your relative status and position in society (and the way people talk about you). Unemployment, especially when longer lasting, is terrible for health. Even when adjusting for social class and other factors that negatively impact health, such as alcohol consumption/smoking amongst others, unemployed people have poorer health (and a higher risk of dying) than people with jobs and the effects can be longlasting. The story is similar for mental health and increased deaths of despair. A strong social safety net can attenuate these effects to some extent but i'm not sure that is being considered sufficiently at the moment.
Hopefully we will not enter a period of long-lasting higher levels of unemployment but I feel like causing increased unemployment (for the sake of fighting inflation) is talked about with too much levity on twitter and elsewhere sometimes for the devastating effect it can have on people's lives.
Unemployment programs are also inflationary, which isn't a problem in a deflationary environment but it is self-contradictory. Why sacrifice workers for the sake of inflation, but then immediately try to undo it?
If you care about unemployment, it's better not to create it so aggressively for the sake to inflation to begin with!
I think we should be permanently targeting a higher number than 2% (let's say 4%).