Not in the article: a common sense explanation why rising interest rates, which haven’t been combating inflation, are supposed to reduce the price of food and gas (CPI) and clothes, furniture, cars, toys, electronics, and other junk (core CPI).
To combat this, the interest rate is raised to the point where you could put your $1000 to the bank, get $1200 in a year, and still buy that gadget. Fewer people are competing for it right now, so if the seller raises the asking price for $1100, many people would rather overpay right away.
In reality, we have been printing money like crazy ever since 2008 [0], but rather than immediately raising the price of bread and beef, it went into speculative investments (VC bubble, crypto), assets (housing), bullshit jobs (exponentially growing number of bureaucrat jobs), etc. Now the Ukrainian war and Chinese COVID policies have disrupted some supply chain mechanisms that worked out of inertia, and it turns out we might have killed the mechanisms that would otherwise kick in and redistribute the weight. Nobody wants to step up and produce more stuff - we got too used that we can just print more money and have someone else accept is for payment. Except now we are running out of eager participants, so more and more money is being pulled out of that hip dog spa startup and is bidding up the prices of bread and rice.
I don't think the rates will fix the inflation overnight, but they may start a long and painful process of incentivizing more productive work, rather than asking for a bailout in the loudest way. And we desperately need to do this because just printing more money without "printing" more oil, chips, foods and everything else will inevitably result in Venezuela-style hyperinflation, destroying the rest of the economy. You do not want to live through it, really.
[0] https://tradingeconomics.com/united-states/money-supply-m0
Except they are, at least in North America. The onshoring, reshoring, and nearshoring of production is absolutely massive in size and scope. [1]
1. https://www.nytimes.com/2022/09/26/business/factory-jobs-wor...
(Also, it's the NYT, which famously has been criticized, lost readership, and responded recently by replacing editorial staff, for trending towards conspicuous Democratic Party propaganda, in the same way Fox News correlates with Republican Party propaganda. Both situations quite sad.)
No it doesn’t. Firstly, it’s not just the US but Mexico and Canada also which is another roughly 170 million people. Secondly, the North American system only needs to produce enough for itself and perhaps its allies. Supporting the whole globe in the way China does is not going to happen, i.e. in a (even by US standards) hyper-financed fashion while ignoring profit and basic sustainability.
To remove money supply from circulation; saving that money must be more beneficial than borrowing it.
At this point in the cycle, it is still cheaper to borrow money vs save it. Inflation is... 8.2% let say, so... I can save that money at get 4-5% return for instance, so I'm still losing 3-4% per year in that simple scenario. Or, I can continue to spend, and borrow at a rate less than the 8.2% inflation rate.
It's a bit dishonest that many economists, and experts suggest that interest rates will peak soon. Truth is, they will not until they are higher than the real inflation rate.
Yes, but it’s not the interest rate today that needs to be higher than today’s inflation rate, it’s the expected interest that needs be higher than the expected inflation over the typical loan period. As interest rates increase the inflation rate will come down and the two will cross somewhere in the middle.
The thesis is that there is more demand than supply of basically everything (not least oil) causing a positive feedback loop on prices.
Crush asset prices, reduce labor bargaining power, induce layoffs - this all reduces demand for everything back to what we can supply today, which will cause lower prices in time. Prices have already stopped going up month over month in aggregate.
They don’t say it because it sucks.
Focusing on the supply side would have been far more palatable but there fed was backed into a corner where it needed to be seen to be acting, and they only have one tool to use. The fed can’t build oil wells.
I believe this is even more true in Australia and Canada than it is in the USA.
(1) many folks have convinced themselves housing can be both a good investment and affordable when these are antithetical goals and...
(2) they've also convinced themselves that this is the one market in the history of time where supply and demand magically don't exist, and that increasing supply simply won't reduce prices for some reason.
There are two fundamental components to inflation. Supply and demand. The mere fact that we have inflation means that either supply is too low or demand is too high.
Your statement seems to be saying, "there is evidence that 100% of the inflation we are experiencing is from supply side".
That obviously isn't true.
Meanwhile, real wages, which have been fairly stagnant compared to profits over the last decades, are now down.
In the U.S., this is meaningless because at the low-salary end we had direct stimulus and tax rebates. In the mid salary end we had direct stimulus, tax rebates and modest asset (home/stock) appreciation. In the high salary end we had PPP loans (direct stimulus on steroids) and huge asset appreciation.
All of this leads to more money available which increases demand.
Near me, beach rentals have gotten up to $25,000 per week for a house. A ridiculous sum of money to stay at a house for a week! But if you're "making" $25,000 per month in the stock market? Doesn't seem so crazy anymore and it's why rentals have gotten up that high.
But then to completely switch gears and get even more technical about how raising interest rates results in a slowdown--the higher interest rates immediately raises borrowing costs for stuff like cars and houses and makes them more expensive. But at the same time there's a lot of bad business investment on the margins that rolls over their loans on a 1-2 year period (similar to an ARM on a house). Those loans are going to start refinancing at higher rates. When you look at stuff like the vacancy rate of commercial real estate in SF and Portland, those are going to have loans like this behind them which are only being propped up by low rates. As rates rise, the firms behind those properties risk going bankrupt and the ones at the margins will, which turns into losses for the creditor banks, tightening all kinds of appetite for risk and availability of credit. Those effects wash over the system creating layoffs and reducing demand for goods in a positive feedback loop--things like advertising spends also decline, hitting companies like Google and Meta.
That's the actual cause-and-effect that creates the slowdown going from raising the cost of borrowing to financial problems at FAANGs. Of course the current round of layoffs is mostly anticipatory. They aren't really hurting yet, although they're certainly seeing their growth numbers start to turn down.
That's a myth. Inflation is caused by a river of money poured into the economy. Supply&Demand forces then devalue the money, i.e. inflation.
There is no feedback loop. Stop pouring the money in, and inflation will stop.
Inflation isn't a purely monetary phenomenon. You can have price increases resulting in inflation due to supply and demand issues in various products, and especially more so when the issues in question are a pandemic that disrupted supply lines and a war impacting energy and food exporters and thus prices. Combine that with the increased monetary supply and you have problems.
The proof of this is prices under inflation ratchet upwards - they don't come back down after the crisis is over.
Yes it does. If the supply lines impacted are critical (e.g. food or energy) every other product and service's prices will also increase because they're based on it.
> The proof of this is prices under inflation ratchet upwards - they don't come back down after the crisis is over.
That is usually true, but usually there is a general price readjustment - inflation ends at a certain place, but deflation isn't welcome so it never gets to that, monetary value and prices just stay at the new, stabilised normal.
What? Did you somehow miss that huge climate bill, which drastically increased the subsidies for solar and other forms of energy independence?
It seems like the bickering is over the form of "BTUs". I myself would have been happier if the climate bill didn't prematurely end the consumer biomass subsidies (eg for wood stoves, etc). But your blanket characterization is a bit ridiculous.
What we're bickering about is the timeline.
Yes, there are definitely fundamental engineering constraints when it comes to renewable energy sources. Which is exactly why it makes sense to encourage tackling all of the low hanging fruit we can, rather than continuing to waste limited dinosaur juice out of convenience or inertia.
Politically, it's awfully hard to separate past government action and actions by mutually-acting companies, from current government policies. Biden got politically pinned with the price inflation that happened due to all the monetary inflation of the Trump administration. The brazen consumer price inflation that started happening a year+ ago seems to have been kicked off by a bunch of news articles announcing it, etc. The narrative about approving new drilling leases seems like it has nothing to do with current extraction rates, and everything to do with fossil fuel companies wanting to title up the public commons now, for use in the future.
Will. One day. Doesn’t today. Inflation is happening today.
Second, what immediate energy sources are you referring to, specifically? The main thing I've heard about is not approving new drilling permits on public land, which also won't have much immediate effect.
Well, I guess there is the bit that businesses striving to be efficient will try and trim the fat and lay off a bunch of employees, and those now unemployed will therefore be poorer and won't be able to afford to buy much. That, and making people give much more of their incomes to banks to service home loans will mean they don't have as much to spend. Funny how that works really, really well for bank shareholders...
Furthermore, interest rate policy is basically a single lever with "up" or "down" positions. There's not a lot of room for nuance in the policy, regardless of whether the theory that recommends that policy is simple or nuanced.
In a hypothetical scenario where the Fed does QE and raising the interest rate it is actually possible for runaway (hyper)inflation to occur if the interest payments are made with borrowed money. That is how some hyperinflations happened in poorer countries.
I have seen a paper where higher interest rates actually cause inflation under a variety of mathematic economic models which is kind of weird.
Businesses can only successfully pass on the higher cost of inputs if there are more dollars available to bid after the higher prices. Each economic good is different in this regard but if capital is made more expensive then fewer dollars are chasing after those goods which is deflationary.
That aside, rent has always made up a larger portion of normal inflation well before 2020. It only makes sense that this holds true now as well.
Also, someone buying a property might choose to live there instead of renting it out. Not sure how it all shakes out.
If it were arbitrary, the landlord would exceed the price the market would bear and the home would sit vacant.
Otherwise, if you think the price is "too high" then the demand exceeds the supply. If you want the practice to fall, either demand must shrink, or supply must increase. Demand can shrink if more people live with roommates or family, or the local population declines.
Supply can increase if we build more houses.
Inflation means the landlord has to pay more for repairs and upkeep (both in labor and supplies). So, if the deal was "fair" before the increase in expenses, it sounds fair after the increase.
https://www.propublica.org/article/yieldstar-rent-increase-r...
(If I recall correctly, there is still plenty of inflation outside of rent in the current mix.
The Fed is fighting last year's war on the other inflations now because for some reason inflation wasn't a trouble until Powell's reconfirmation hearing this year.
The old saying of a stitch in time saves nine comes to mind...
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There doesn't seem to be any easy solution other than raising rates and then getting over the hill.
There is an argument that what the Fed does is mostly irrelevant anyway until the supply chain problems are fixed. Volcker may have done the right thing back in 1981, and he may have been aided greatly by The oil shock being completely absorbed by higher efficiency and more production
Rising interest rates strongly support the currency, as you might see now with the USD and have far it has outperformed every other because bond rates are great in the US so all the cash starts flooding in.
The prices of all those things you mentioned (sans food for the US) are mostly valued in other currencies.
A valuation is a prediction of a (possibly very short term) future price, as such it does influence the price, but it isn't the same thing as the price.
A drop in valuations might have happened but I don't think there's good data on that and doesn't seem to align with the prices things are actually selling for very well if MSPUS is still going up.
You may find this interesting: https://en.wikipedia.org/wiki/Price_discovery
Anyhow, as far as I can see, inflation mainly benefits those who own assets, and disadvantages those who don't (ie people hoarding cash or the young & working poor who have few assets). Deflation is the opposite. It advantages those who hoard cash and those who have few assets, and disadvantages people who own many assets.
The inflation is a side effect of the benefit they get by printing money to spend. In effect, the value that others see as inflation is the value the printer gets by printing it.
Counterfeiting works the same way.
Inflation benefits people who have borrowed money at fixed rates. Owning assets does not inure one against inflation, because one gets to pay capital gains tax on the inflated value of the asset. (Another reason the government loves inflation, as we get to pay taxes on illusory "capital gains".)
This is why the government tries so hard to blame inflation on Putin, greedy corporations, supply chain disruptions, anything but the real cause. It always does this, remember Gerald Ford with his WIN buttons (Whip Inflation Now), where he pushed the complete nonsense that inflation could be stopped if merchants would just stop raising prices?
But sure, the people at the Fed also pay themselves a nice wage which they spend in exchange for personal goods and services and to live and stuff, but to the extent they do is not anything like you think it is. Heck, there are people elsewhere which make more money. And considering it takes work to manufacture dollars, and lend it to other in need of having some stable metric to do trade with, do they not deserve a wage in exchange for the work involved for doing such a service?
> Inflation benefits people who have borrowed money at fixed rates
Agreed, such as everyone who has borrowed money from the Fed, and almost all money is borrowed from the Fed. (Now do you see why they might push the argument that inflation is good for the economy?)
> Owning assets does not inure one against inflation, because one gets to pay capital gains tax on the inflated value of the asset
The problem with this argument, is twofold. One is in assuming taxes completely negate gains on capital. Obviously taxes are a drag on gains, but it is a fractional amount of the gains. Meaning, you still make some gains. So in this sense, it still does insure you from inflation, just not completely. But the second and real issue, is that you don't have to realize gains and incur taxes to benefit from owning assets during inflation. If you already own and still need, say a truck, and inflation has caused trucks to appreciate in value, you simply benefit from not needing to purchase another truck at now inflated prices.
Inflationary gains on capital assets are NOT gains in real value. Capital gains taxes from inflation are a wealth tax, not an income tax.
The theory you're espousing there, the 'cantillon effect' has to my knowledge never once been quantified. Nobody seems to have any idea to what extent it actually exists, and if it exists, what the magnitude of its impact is. If you have a peer-reviewed study I'd love to see it but I sure haven't found one.
Inflation happens when banks create money with no collateral, which is our fiat money system.
[1] Contracting supply happens when the loans are paid off.
The first part is correct but only part of the story. Demand for loans and repayment is controlled by interest rate which is how central banks control the supply and hence inflation.