It seems like part of the problem is an assumption by some that fixing inflation means going back to 2020 price levels, rather than just bringing the rate of change down to managable levels. My understand is that that is both an unrealistic expectation, as CPI rarely falls in that way and, if it did happen, it would either indicate or cause major economic disaster (possibly both).
The issue with the YoY figure is revealed by this thought experiment: Suppose every single month from now until the end of time the US inflation rate will come in at 0%. History books will write that in 2022 the US entered an era of no inflation. History books will say this era started July, 2022 (reported in August). The YoY figure, though, will take 10-11 months to adjust to this new normal.
But here's the thing. We shifted policy recently to anti-inflationary. So at this moment we care less about the previous year and more about the upcoming year and whether our anti-inflationary policies have done the job, not done the job or did too much.
In other words, we just drove up a steep hill and our car engine strained a lot. We want to avoid another steep hill. Do we look out the rear window or the front window? We look out the front, unfortunately unlike driving a car we don't really have the ability to see the front. We can only tell right now we are driving on level ground and while we'd really like to see down the road, at least for now we are seeing a level road.
What do we want to see for a soft landing that avoids recession? Well if our goal is 2% inflation we probably want to see each month coming in at 0.17% or so. (2 divided by 12). So actually more 0's or negative numbers is an indication we are hitting a bit too hard.
Are supply issues behind us? I don't have more than anecdotal data, but every direction I turn, I hear about carpets that can't be delivered because the manufacturer can't dye the yarn, window frames that are taking longer than expected to fabricate. The list is endless and everyone I ask has a new shortage story. The shortages seem to have multiple reasons: labor shortages, supply shortages, supply chain tangles. We're still seeing high absentee rates due to covid. This has to drive some part of inflation. If you really need something, you just have to pay extra to get it. It seems to me that the combination of the pandemic and the war in Ukraine have added a level of friction to economic transactions that is affecting the economy in novel ways.
Summers and Furman are really annoying, always linked to their neoliberal prejudices and the mistakes they responsible for during the Clinton and Obama administrations
“The fact that the Fed recently predicted that it will end up raising rates only to somewhere around 4% means that they expect inflation to go down.”
This is total nonsense. The fed cannot raise rates higher than 4.0% with 370% debt to GDP... tax receipts will not cover entitlement spending nevermind the carnage in the corporate credit markets and the demand destruction from the wealth effect.
Instead the US will default in real terms, meaning inflation will run hot for a decade and we will monitize the debt. It’s the only path out, and it has happened many times before including right here in the US in the 1940s.
Noah for an economist you’re missing the big picture - we are at the end of the long term debt cycle.
Um, No.... Federal debts’s interest rate is fixed... Increased Fed Rates only effect new debts or debts which is about to mature... So most of the debt will have old interest rates, thus debt servicing costs won’t increase by much... Fed will never let runaway inflation, even if it comes at the cost of recession
I don't know why you use macrobond and not the release from BLS. It shows things clearly.
Month on month ie. June to July is zero. Although you say m-o-m food declined slightly. It didn't as you can see from the linked bls report.
I do think June was the peak but inflation may get back up there before it starts to come down consistently. Other cost price pressures have still to show.
But y-o-y Americans are still paying a lot more than they did last year. Their wages haven't kept up through the usual formula:
real = nominal - prices.
To be fair the US prices seem to be on the way down while the UK and Europe are still on the way up.
Do these numbers account for "shrinkflation"? Because I am seeing it everywhere in food and households items. I was at Target earlier at the Target brand shampoo was still packaged in a 33.8 oz size (1 liter) next to name brand which is down to 31.8 oz. They were equal sizes recently.
It is harder to hide inflation in gallons of gas or per thousand board-foot of lumber as there is unit pricing in those models. But seeing numerous brands shrink a pint of ice-cream down to 14 ounces over the past couple of years (a 13% decrease for the same or slightly elevated prices), leaves me wondering how accurate the measures are. It is similar to how Nissan "decontented" their flagship Maxima sedan from the mid-80s through the late 90s, replacing higher end features with cheaper ones.
I think it's worth noting that the CPI has evolved more into a "cost of living" index in the past few decades. For example, if the price of premium beef goes up 10% from June to July, but the price of mid-grade beef goes up by 2% during the same time period, the BLS records down 2%. i.e. Substitution.
Which is why these numbers don't quite add up to reality. Granted, people are misrepresenting the yoy and mom numbers for political purposes.
> if the price of premium beef goes up 10% from June to July, but the price of mid-grade beef goes up by 2% during the same time period, the BLS records down 2%
That is not what the BLS does with CPI. In 1999 it switched from a Laspeyres formula to a gemoetric mean formula for sub-indexes (i.e. "beef and veal"). That means they assume the market basket weights vary based on the relative price changes. They don't simply mark down 2% and assume 100% of consumption switched to the cheaper thing.
0% inflation MoM just means prices have stabilized at a particular recent level. But if that’s coupled with 8.5% YoY, the level they’ve stabilized at is still really high! There’s a difference between “no inflation” and Inflation not further accelerating but prices still maintaining a level much higher than they were a year earlier.
I think the Greenspan/Fed Put Era has meant a lot of people have forgotten that the Fed has only two official mandates: inflation and employment while also have a role as a bank regulator.
Greenspan/Bernanke et al started using ZIRP/QE to pump up assets like stock market, 10-year bond market, mortgage backed securities to try to get a wealth effect to push up employment. They could do that while inflation was tame - for many years it seemed like they were pushing on a rope where inflation would not go above 2% no matter what they did and Fed and Wall Street got complacent about this.
I think the Fed board is not going to want to go down in history as Arthur Burns. Volcker is the guy that most people point to as a Fed hero.
I think this Fed board will push the Fed Fund rate up steadily unless employment breaks or inflation is reliably down at less than 3%. As long as there are headline inflation numbers of 4% or more, I don't think they will be focused on asset values if unemployment is still less than 5%. I don't believe Wall Street is factoring this into their thinking - I think they have become accustomed to ZIRP and QE and assume that the Fed's job is to maintain their asset values. It has been 40 years since the Fed had to pull out Thor's hammer, so almost nobody on Wall Street today has that in their frame of reference given that many of them have only worked while there was a Fed put.
So far the "tightening" has the Fed Fund rate about 6% below the YoY inflation rate. That would not be regarded as "tight money" historically. Also, their balance sheet (before 2010 they didn't really have a balance sheet worth paying attention to), has stopped growing but is not dropping yet. That is not "tightening"; that is just neutral. They could easily push up mortgage interest rates another 1%-2% just by starting to actively sell some of their treasury bonds and MBS bonds instead of letting them roll-off as they mature.
A big question is if the Fed is focused on yield inversion at all. A sustained multi-month inversion is generally a harbinger of recession a year later. Right now, we are seeing significant inversion of the 2 yr -10 yr over the past month. A 4% Fed Fund rate with current T-bond yields would be a major inversion along the entire yield curve from overnight rates to 30 year. If inflation is persistent, we may see them rolling off bonds from their balance sheet to reduce yield curve inversion by pushing up longer term interest rates while short term interest rates are going up. They need to be cautious about bank stability and long sustained yield curve inversions are not helpful for banks.
I think there are long-term deflationary pressures in most or all of the OECD countries, so 3% 30-year bond yields make sense. But right now there are serious short-term inflationary pressures everywhere. The next two years are going to be very interesting to see if they can navigate this without a hard landing with recession and substantial rise in unemployment.
I note that corporate margins are effectively at all time highs around 12% and some Wall Street earnings estimates indicate they think those margins could go to 14% over the next couple of years indicating complacency. Historically, 8% profit margin was at the upper range for the S&P 500. We could have a 50% down bear market without a recession or high unemployment if corporate earnings simply drop back to a historic 6%-8% range. Increased interest and wage costs could be a major driver in doing that. Laying people off would probably reduce revenue which could be almost as bad for stock prices as reduced profit margins as EPS would still drop. During the big inflation period of the 70s and 80s, profit margins were typically 4%-6% and PE ratios were below 15 (Shiller CAPE was less than 10 in late 70s-early 80s, currently @ 28).
Our host could do with writing a post on inflation, disinflation and deflation and the sectoral effects showing one can be up one down and overall the rate inflationary, deflationary or disinflation.
The overall effects of deflation are meant to be dangerous to an economy.
Even though our host clearly knows all these things it would be worth a dedicated post.
Noah, did you read Alf’s post? He talked about the job market being misrepresented (for example, a huge amount of growth came from the government. A strong economy would expect to see more private sector growth). Curious to hear your thoughts on that.
So Noah, are you denying an unemployment below NAIRU adds to core inflation pressure? Are you denying that wage gains running at 6.7% (Atlanta wage tracker) when 5 year BE inflation expectations are at 2.69% is not inflationary?
> are you denying an unemployment below NAIRU adds to core inflation pressure
Unemployment below NAIRU is by definition inflationary. But what's the NAIRU? There's no celestial truth that fixes NAIRU at any specific figure; we can only argue about the level suggested by hopefully-calibrated economic models.
Based on historical trends the current US unemployment rate is near pre-pandemic lows. However, the pre-pandemic period was not one of high (expected) inflation; this suggests that the current unemployment rate is compatible with low inflation, if the Fed can navigate those delicate waters.
> Are you denying that wage gains running at 6.7% (Atlanta wage tracker) when 5 year BE inflation expectations are at 2.69% is not inflationary?
I think it's an error to compare a retrospective statistic (wage gains) to a lookahead expectation. If you imagine that there was a one-time shock to the price level with no impact on inflation expectations (e.g. a redenomination of retail prices), then you'd also see large retrospective wage increases.
You (and Noah!) seem to be assuming a one time level catch-up of wages to past inflation and then a convergence back to some equilibrium seady-state (driven by fully credible inflation target on which expectations converge). Taking to its limit such a view of the world implies the Fed really dows have to do anything ever (one can treat rate hikes as a signaling device to re-enforce credibility). All inflation shocks are transitory...the problem with this view is that large enough shocks raise the steady-state level of nominal growth in the economy due to a variety of inertia effects, and if labor markets are sufficiently tight there is no obvious factor that will bring the trend rate of nominal growth back to target. Its kot an accident most disinflation episodes end up in recessions. Its not becaythe Fed “made mistakes”, its because the recession was necessary to the re-anchoring process.
My main worry isn't inflation itself. I worry companies are trying to de-risk and are slowing down investments now, starting to let people go to make sure they don't get caught in a potential down turn. They won't wait for confirmation, they will act.
It seems like part of the problem is an assumption by some that fixing inflation means going back to 2020 price levels, rather than just bringing the rate of change down to managable levels. My understand is that that is both an unrealistic expectation, as CPI rarely falls in that way and, if it did happen, it would either indicate or cause major economic disaster (possibly both).
Right.
Fed funds is 2.25/2.5 right? Not 1.68?
Ahh, thank you, was using the July number from FRED. Fixed.
The issue with the YoY figure is revealed by this thought experiment: Suppose every single month from now until the end of time the US inflation rate will come in at 0%. History books will write that in 2022 the US entered an era of no inflation. History books will say this era started July, 2022 (reported in August). The YoY figure, though, will take 10-11 months to adjust to this new normal.
But here's the thing. We shifted policy recently to anti-inflationary. So at this moment we care less about the previous year and more about the upcoming year and whether our anti-inflationary policies have done the job, not done the job or did too much.
In other words, we just drove up a steep hill and our car engine strained a lot. We want to avoid another steep hill. Do we look out the rear window or the front window? We look out the front, unfortunately unlike driving a car we don't really have the ability to see the front. We can only tell right now we are driving on level ground and while we'd really like to see down the road, at least for now we are seeing a level road.
What do we want to see for a soft landing that avoids recession? Well if our goal is 2% inflation we probably want to see each month coming in at 0.17% or so. (2 divided by 12). So actually more 0's or negative numbers is an indication we are hitting a bit too hard.
Monthly vs. yearly is pretty straightforward if you pay attention to terminology.
Inflation was 0% in July.
Inflation was 8.5% in the year ending in July.
The Twitter "correction" was just flat wrong.
The median inflation you give is a lot higher than the Cleveland Fed's 6.3%. What gives?
https://www.clevelandfed.org/our-research/indicators-and-data/median-cpi.aspx
Are supply issues behind us? I don't have more than anecdotal data, but every direction I turn, I hear about carpets that can't be delivered because the manufacturer can't dye the yarn, window frames that are taking longer than expected to fabricate. The list is endless and everyone I ask has a new shortage story. The shortages seem to have multiple reasons: labor shortages, supply shortages, supply chain tangles. We're still seeing high absentee rates due to covid. This has to drive some part of inflation. If you really need something, you just have to pay extra to get it. It seems to me that the combination of the pandemic and the war in Ukraine have added a level of friction to economic transactions that is affecting the economy in novel ways.
Summers and Furman are really annoying, always linked to their neoliberal prejudices and the mistakes they responsible for during the Clinton and Obama administrations
They seem to enjoy unemployment
Thanks for your analysis Noah
Furman in his Twitter feed wants a more agressive hike by the fed next time up. He also writes for the WSJ.
“The fact that the Fed recently predicted that it will end up raising rates only to somewhere around 4% means that they expect inflation to go down.”
This is total nonsense. The fed cannot raise rates higher than 4.0% with 370% debt to GDP... tax receipts will not cover entitlement spending nevermind the carnage in the corporate credit markets and the demand destruction from the wealth effect.
Instead the US will default in real terms, meaning inflation will run hot for a decade and we will monitize the debt. It’s the only path out, and it has happened many times before including right here in the US in the 1940s.
Noah for an economist you’re missing the big picture - we are at the end of the long term debt cycle.
Um, No.... Federal debts’s interest rate is fixed... Increased Fed Rates only effect new debts or debts which is about to mature... So most of the debt will have old interest rates, thus debt servicing costs won’t increase by much... Fed will never let runaway inflation, even if it comes at the cost of recession
Yep, increased rates will increase borrowing costs but not that much because only a portion gets rolled over. 4% should be fine.
https://www.bls.gov/news.release/cpi.nr0.htm
I don't know why you use macrobond and not the release from BLS. It shows things clearly.
Month on month ie. June to July is zero. Although you say m-o-m food declined slightly. It didn't as you can see from the linked bls report.
I do think June was the peak but inflation may get back up there before it starts to come down consistently. Other cost price pressures have still to show.
But y-o-y Americans are still paying a lot more than they did last year. Their wages haven't kept up through the usual formula:
real = nominal - prices.
To be fair the US prices seem to be on the way down while the UK and Europe are still on the way up.
Do these numbers account for "shrinkflation"? Because I am seeing it everywhere in food and households items. I was at Target earlier at the Target brand shampoo was still packaged in a 33.8 oz size (1 liter) next to name brand which is down to 31.8 oz. They were equal sizes recently.
It is harder to hide inflation in gallons of gas or per thousand board-foot of lumber as there is unit pricing in those models. But seeing numerous brands shrink a pint of ice-cream down to 14 ounces over the past couple of years (a 13% decrease for the same or slightly elevated prices), leaves me wondering how accurate the measures are. It is similar to how Nissan "decontented" their flagship Maxima sedan from the mid-80s through the late 90s, replacing higher end features with cheaper ones.
See https://www.autonews.com/article/19960122/ANA/601220731/decontenting-when-there-s-no-costs-left-to-cut-japan-wrestles-with-what-to-take-out-of-cars-trucks
They try to account for it, not sure if they always manage to.
I think it's worth noting that the CPI has evolved more into a "cost of living" index in the past few decades. For example, if the price of premium beef goes up 10% from June to July, but the price of mid-grade beef goes up by 2% during the same time period, the BLS records down 2%. i.e. Substitution.
Which is why these numbers don't quite add up to reality. Granted, people are misrepresenting the yoy and mom numbers for political purposes.
> if the price of premium beef goes up 10% from June to July, but the price of mid-grade beef goes up by 2% during the same time period, the BLS records down 2%
That is not what the BLS does with CPI. In 1999 it switched from a Laspeyres formula to a gemoetric mean formula for sub-indexes (i.e. "beef and veal"). That means they assume the market basket weights vary based on the relative price changes. They don't simply mark down 2% and assume 100% of consumption switched to the cheaper thing.
Yes this is accounted for
0% inflation MoM just means prices have stabilized at a particular recent level. But if that’s coupled with 8.5% YoY, the level they’ve stabilized at is still really high! There’s a difference between “no inflation” and Inflation not further accelerating but prices still maintaining a level much higher than they were a year earlier.
I think the Greenspan/Fed Put Era has meant a lot of people have forgotten that the Fed has only two official mandates: inflation and employment while also have a role as a bank regulator.
Greenspan/Bernanke et al started using ZIRP/QE to pump up assets like stock market, 10-year bond market, mortgage backed securities to try to get a wealth effect to push up employment. They could do that while inflation was tame - for many years it seemed like they were pushing on a rope where inflation would not go above 2% no matter what they did and Fed and Wall Street got complacent about this.
I think the Fed board is not going to want to go down in history as Arthur Burns. Volcker is the guy that most people point to as a Fed hero.
I think this Fed board will push the Fed Fund rate up steadily unless employment breaks or inflation is reliably down at less than 3%. As long as there are headline inflation numbers of 4% or more, I don't think they will be focused on asset values if unemployment is still less than 5%. I don't believe Wall Street is factoring this into their thinking - I think they have become accustomed to ZIRP and QE and assume that the Fed's job is to maintain their asset values. It has been 40 years since the Fed had to pull out Thor's hammer, so almost nobody on Wall Street today has that in their frame of reference given that many of them have only worked while there was a Fed put.
So far the "tightening" has the Fed Fund rate about 6% below the YoY inflation rate. That would not be regarded as "tight money" historically. Also, their balance sheet (before 2010 they didn't really have a balance sheet worth paying attention to), has stopped growing but is not dropping yet. That is not "tightening"; that is just neutral. They could easily push up mortgage interest rates another 1%-2% just by starting to actively sell some of their treasury bonds and MBS bonds instead of letting them roll-off as they mature.
A big question is if the Fed is focused on yield inversion at all. A sustained multi-month inversion is generally a harbinger of recession a year later. Right now, we are seeing significant inversion of the 2 yr -10 yr over the past month. A 4% Fed Fund rate with current T-bond yields would be a major inversion along the entire yield curve from overnight rates to 30 year. If inflation is persistent, we may see them rolling off bonds from their balance sheet to reduce yield curve inversion by pushing up longer term interest rates while short term interest rates are going up. They need to be cautious about bank stability and long sustained yield curve inversions are not helpful for banks.
I think there are long-term deflationary pressures in most or all of the OECD countries, so 3% 30-year bond yields make sense. But right now there are serious short-term inflationary pressures everywhere. The next two years are going to be very interesting to see if they can navigate this without a hard landing with recession and substantial rise in unemployment.
I note that corporate margins are effectively at all time highs around 12% and some Wall Street earnings estimates indicate they think those margins could go to 14% over the next couple of years indicating complacency. Historically, 8% profit margin was at the upper range for the S&P 500. We could have a 50% down bear market without a recession or high unemployment if corporate earnings simply drop back to a historic 6%-8% range. Increased interest and wage costs could be a major driver in doing that. Laying people off would probably reduce revenue which could be almost as bad for stock prices as reduced profit margins as EPS would still drop. During the big inflation period of the 70s and 80s, profit margins were typically 4%-6% and PE ratios were below 15 (Shiller CAPE was less than 10 in late 70s-early 80s, currently @ 28).
Our host could do with writing a post on inflation, disinflation and deflation and the sectoral effects showing one can be up one down and overall the rate inflationary, deflationary or disinflation.
The overall effects of deflation are meant to be dangerous to an economy.
Even though our host clearly knows all these things it would be worth a dedicated post.
Noah, did you read Alf’s post? He talked about the job market being misrepresented (for example, a huge amount of growth came from the government. A strong economy would expect to see more private sector growth). Curious to hear your thoughts on that.
So Noah, are you denying an unemployment below NAIRU adds to core inflation pressure? Are you denying that wage gains running at 6.7% (Atlanta wage tracker) when 5 year BE inflation expectations are at 2.69% is not inflationary?
> are you denying an unemployment below NAIRU adds to core inflation pressure
Unemployment below NAIRU is by definition inflationary. But what's the NAIRU? There's no celestial truth that fixes NAIRU at any specific figure; we can only argue about the level suggested by hopefully-calibrated economic models.
Based on historical trends the current US unemployment rate is near pre-pandemic lows. However, the pre-pandemic period was not one of high (expected) inflation; this suggests that the current unemployment rate is compatible with low inflation, if the Fed can navigate those delicate waters.
> Are you denying that wage gains running at 6.7% (Atlanta wage tracker) when 5 year BE inflation expectations are at 2.69% is not inflationary?
I think it's an error to compare a retrospective statistic (wage gains) to a lookahead expectation. If you imagine that there was a one-time shock to the price level with no impact on inflation expectations (e.g. a redenomination of retail prices), then you'd also see large retrospective wage increases.
You (and Noah!) seem to be assuming a one time level catch-up of wages to past inflation and then a convergence back to some equilibrium seady-state (driven by fully credible inflation target on which expectations converge). Taking to its limit such a view of the world implies the Fed really dows have to do anything ever (one can treat rate hikes as a signaling device to re-enforce credibility). All inflation shocks are transitory...the problem with this view is that large enough shocks raise the steady-state level of nominal growth in the economy due to a variety of inertia effects, and if labor markets are sufficiently tight there is no obvious factor that will bring the trend rate of nominal growth back to target. Its kot an accident most disinflation episodes end up in recessions. Its not becaythe Fed “made mistakes”, its because the recession was necessary to the re-anchoring process.
My main worry isn't inflation itself. I worry companies are trying to de-risk and are slowing down investments now, starting to let people go to make sure they don't get caught in a potential down turn. They won't wait for confirmation, they will act.