I still think it seems like all the consternation over inflation is kind of upper-class driven. The fact that most working class jobs have seen huge pay increases seems like a really good thing to me. Maybe that is short sighted, but it seems like raising the lowest wages while keeping the labor market hot is an awesome way to reduce inequality, and also make a lot of growth from automation possible, without the fear associated with it. So media publishes stories on how bad inflation is, even though compared to wages, the working class is doing great, while the middle class and upper class are taking a bit of a cut.
We often talk about how much that one wage-productivity graph results from a bunch of new high productivity workers, namely tech. Now we're seeing a bit of a bubble burst as the tech industry seems to get more realistic about their growth opportunities. So overall it just feels like a class of people that were being fed by the "Everything Bubble" are being adjusted back down to normal by inflation.
This is weird to read as it seems to overrate the annual measure. Inflation over the last six months is below the 2% target on an annualised basis. We know the house price calculations are going to weigh that down further in the coming months. Interest rates operate on a lag through several mechanisms and will only just be starting to bite. Why risk hiking?
I’m certain it will be conventional wisdom that any further rate hikes from here were too much (if they go ahead) within 6-8 months.
"Beckworth told me that there was a good case for a 3% target, but failing to get back down to 2% might look like the Fed folding to political pressure, setting a bad precedent and undermining long-term expectations of inflation stability."
In every war that settles into stalemate, the older comfortable men in power continue to send young men to their deaths in order to maintain credibility and to justify all the costs that have been sunk. Is the Fed so pathetic that it can't explain to the world why 3% is a justifiable target now, and preferable to 2%? Would they be "folding"? I don't see that much political pressure on them -- the can just do it because it's the right thing to do!
Milan rightly notes that in the abstract 3% is actually a better target than 2% (and Summers argument in WaPo that 3% would push toward a "stagflationary decade" is a dictum, not an argument. Spoiler alert: he's wrong).
Churchill put it best: "When the facts change, I change my mind. What do you do?"
Does that mean you reject the argument of some economists that it's relatively easy to overcome the zero bound (just print money, or do quantatativy easing...plus you can charge negative interest on fed deposits)? I always found those arguments pretty convincing.
I mean, if the government can literally manufacture money out of thin air how could it ever be out of tools to increase inflation?
Re: Japan, they've been unwilling to either print money or engage in the market transactions those economists reccomend at the zero bound. This may be because they have an almost 2x the debt to GDP ratio of the US and are concerned about increasing the interest on that debt or, perhaps more likely, because the major conglomerates in Japan have a bunch of political power and fear the decrease in exports inflation might cause.
But, for whatever reason, my understanding is that many economists have been puzzled by Japan's unwillingness to use other tools.
Of course, this is only about the ability of the central bank to keep the economy near full production. Of course, you can't change fundamentals and you can't avoid the fact that a declining ageing population means you have fewer ppl making things per consumer.
Wage increases have not kept up with inflation. So, wasn't the inflationary stimulus a backhanded way of increasing labor demand by lowering wages?
In other words, to use a highly technical term I saw when browsing through my son's economics textbook, wages were "sticky" and it took inflation to "un-stick" real wages.
I was going to get all nerdy, but instead I'll quote Dave Muccigrosso:
>>So, instead, the headlines report high y/y inflation for a whole year-plus, everybody spends the entire year-plus freaking the fuck out over a price spike that’s already subsided, and then it magically disappears when we get to a year out from when the spike leveled out.
I will make a bold prediction: Inflation will subside. It will be down 2% on the January numbers, then another 2.5% the following month. Why? Because that's how much it went up 12 months ago.
I'm a bit of a hawk just because inflation can wreak so much havoc with the economy. I strongly disagree with Sahm's quote as stated, but I am glad that at full employment more people are building skills and track records and hopefully moving up the ladder. The financial crisis in particular and the Covid crisis have really messed up a lot of people's careers, and a little bit of a hot job market will help make up for that.
Why isn’t a fiscal measure like a temporary special tax on the top quarter of income earners part of the toolkit? Too politically fraught? Or does it not target the best-off as well as I’m thinking it might?
My financial advisor says put off buying or repairing anything you can until the Congress manages to raise the debt ceiling. Markets will drop as the real deadline gets closer and who knows what will happen if the crazies prevail. So keep on hand as much cash as possible so you don’t have to dip into a depleted retirement fund. As this realization spreads, demand will go down. Meanwhile, I’m dropping my catalogs into the trash without reading them.
Milan - you write a real good take. This is as good as anything I've read on the current state of inflation. And I've read a fair amount. Congratulations and keep up the great work. For what it's worth my take is that there should be a soft landing, unless the Fed becomes needlessly sadistic. Among other things, there's this piece by Connor Sen in Bloomberg from 10 days ago:
Anecdotally, the apartment building where my wife and I live while we're looking for a new house is now offering $1,000 bonuses for new renters. When we rented in July, there were only 4 vacancies out of 340 units. Quite the reversal. No one asked but I think by July-Sept core PCE will be in the threes YOY and the fed will be looking at rate decreases by year end. Anyway, your piece was a real pleasure to read. Best regards.
Right? This is not the first time I've been two-thirds of the way through a SB post before realizing that Matt didn't write it. If Milan wanted to quit school tomorrow and start a full-time career in the take-slinging business I'm pretty sure he'd get away with it—a fact which fills my middle-aged-and-still-unsuccessful heart with some ambivalence, but what are ya gonna do?
I still think it seems like all the consternation over inflation is kind of upper-class driven. The fact that most working class jobs have seen huge pay increases seems like a really good thing to me. Maybe that is short sighted, but it seems like raising the lowest wages while keeping the labor market hot is an awesome way to reduce inequality, and also make a lot of growth from automation possible, without the fear associated with it. So media publishes stories on how bad inflation is, even though compared to wages, the working class is doing great, while the middle class and upper class are taking a bit of a cut.
We often talk about how much that one wage-productivity graph results from a bunch of new high productivity workers, namely tech. Now we're seeing a bit of a bubble burst as the tech industry seems to get more realistic about their growth opportunities. So overall it just feels like a class of people that were being fed by the "Everything Bubble" are being adjusted back down to normal by inflation.
Wow, Milan, you got to talk to Claudia Sahm on the phone?!? So cool
Impressive work for a freshman.
Now I'm trying to work up a "Weird Al"-esque parody of the Verve Pipe's "Freshmen" that revises it to be about how awesome Milan is.
This is weird to read as it seems to overrate the annual measure. Inflation over the last six months is below the 2% target on an annualised basis. We know the house price calculations are going to weigh that down further in the coming months. Interest rates operate on a lag through several mechanisms and will only just be starting to bite. Why risk hiking?
I’m certain it will be conventional wisdom that any further rate hikes from here were too much (if they go ahead) within 6-8 months.
Dude, I seriously didn't realize Matt hadn't written this until the comment about being in college which really confused me. Very good job Milan!
“ I would pick 3.5% unemployment and 10% inflation over a worse labor market”. For how long would you make this choice?
How are you only a college freshman?
Because I took a gap year
Oh I just meant you're so impressive for your age
"Beckworth told me that there was a good case for a 3% target, but failing to get back down to 2% might look like the Fed folding to political pressure, setting a bad precedent and undermining long-term expectations of inflation stability."
In every war that settles into stalemate, the older comfortable men in power continue to send young men to their deaths in order to maintain credibility and to justify all the costs that have been sunk. Is the Fed so pathetic that it can't explain to the world why 3% is a justifiable target now, and preferable to 2%? Would they be "folding"? I don't see that much political pressure on them -- the can just do it because it's the right thing to do!
Milan rightly notes that in the abstract 3% is actually a better target than 2% (and Summers argument in WaPo that 3% would push toward a "stagflationary decade" is a dictum, not an argument. Spoiler alert: he's wrong).
Churchill put it best: "When the facts change, I change my mind. What do you do?"
Finally: excellent post, Milan!
Does that mean you reject the argument of some economists that it's relatively easy to overcome the zero bound (just print money, or do quantatativy easing...plus you can charge negative interest on fed deposits)? I always found those arguments pretty convincing.
I mean, if the government can literally manufacture money out of thin air how could it ever be out of tools to increase inflation?
I think looking at what’s going on in Japan illustrates the limitations of monetary policy and the power of demographics
Re: Japan, they've been unwilling to either print money or engage in the market transactions those economists reccomend at the zero bound. This may be because they have an almost 2x the debt to GDP ratio of the US and are concerned about increasing the interest on that debt or, perhaps more likely, because the major conglomerates in Japan have a bunch of political power and fear the decrease in exports inflation might cause.
But, for whatever reason, my understanding is that many economists have been puzzled by Japan's unwillingness to use other tools.
Of course, this is only about the ability of the central bank to keep the economy near full production. Of course, you can't change fundamentals and you can't avoid the fact that a declining ageing population means you have fewer ppl making things per consumer.
Wage increases have not kept up with inflation. So, wasn't the inflationary stimulus a backhanded way of increasing labor demand by lowering wages?
In other words, to use a highly technical term I saw when browsing through my son's economics textbook, wages were "sticky" and it took inflation to "un-stick" real wages.
I was going to get all nerdy, but instead I'll quote Dave Muccigrosso:
>>So, instead, the headlines report high y/y inflation for a whole year-plus, everybody spends the entire year-plus freaking the fuck out over a price spike that’s already subsided, and then it magically disappears when we get to a year out from when the spike leveled out.
I will make a bold prediction: Inflation will subside. It will be down 2% on the January numbers, then another 2.5% the following month. Why? Because that's how much it went up 12 months ago.
I'm a bit of a hawk just because inflation can wreak so much havoc with the economy. I strongly disagree with Sahm's quote as stated, but I am glad that at full employment more people are building skills and track records and hopefully moving up the ladder. The financial crisis in particular and the Covid crisis have really messed up a lot of people's careers, and a little bit of a hot job market will help make up for that.
Why isn’t a fiscal measure like a temporary special tax on the top quarter of income earners part of the toolkit? Too politically fraught? Or does it not target the best-off as well as I’m thinking it might?
House Republicans
My financial advisor says put off buying or repairing anything you can until the Congress manages to raise the debt ceiling. Markets will drop as the real deadline gets closer and who knows what will happen if the crazies prevail. So keep on hand as much cash as possible so you don’t have to dip into a depleted retirement fund. As this realization spreads, demand will go down. Meanwhile, I’m dropping my catalogs into the trash without reading them.
Milan - you write a real good take. This is as good as anything I've read on the current state of inflation. And I've read a fair amount. Congratulations and keep up the great work. For what it's worth my take is that there should be a soft landing, unless the Fed becomes needlessly sadistic. Among other things, there's this piece by Connor Sen in Bloomberg from 10 days ago:
https://www.bloomberg.com/opinion/articles/2023-01-09/rental-housing-is-suddenly-headed-toward-a-hard-landing
Anecdotally, the apartment building where my wife and I live while we're looking for a new house is now offering $1,000 bonuses for new renters. When we rented in July, there were only 4 vacancies out of 340 units. Quite the reversal. No one asked but I think by July-Sept core PCE will be in the threes YOY and the fed will be looking at rate decreases by year end. Anyway, your piece was a real pleasure to read. Best regards.
>Milan - you write a real good take.
Right? This is not the first time I've been two-thirds of the way through a SB post before realizing that Matt didn't write it. If Milan wanted to quit school tomorrow and start a full-time career in the take-slinging business I'm pretty sure he'd get away with it—a fact which fills my middle-aged-and-still-unsuccessful heart with some ambivalence, but what are ya gonna do?
Starting at 1:00 is Milan in 15-20 years.
https://youtu.be/ApEr96H2jVU