It looks like inflation is here

[Jason Harvestdancer]

I got these links from CNN, since people around here think CNN is unbiased.

Have Americans forgotten the ghosts of inflation past? By Charles Riley, CNN Business

Inflation is not something we're used to worrying about.
In fact, the only Americans with real memories of runaway inflation and its effect on household finances are likely to be those over the age of 60.
Remember (or don't): US inflation peaked at 14.7% in March and April 1980, with the economy experiencing "stagflation," a nightmare scenario characterized by weak growth and rising prices.

The Federal Reserve finally got inflation under control when former Chair Paul Volcker constricted the money supply and sent interest rates higher. Rates on conventional 30-year mortgages peaked at 18.45%, but prices moderated and people dependent on fixed incomes breathed a sigh a relief.
...
Right, so. Back to the big question: Is inflation here to stay? The truth is that nobody really knows.

"Either the US inflation uptick is temporary, or the Fed is dangerously complacent. Either way, we're going to see tolerance of higher inflation tested further in the months ahead," said Societe Generale analyst Kit Juckes.

Paul Krugman, the Nobel Prize-winning economist who writes a column for the New York Times, argues that US inflation figures are being bloated by temporary factors including supply bottlenecks caused by the pandemic.

He wrote last week that policymakers should "keep their cool."

"This doesn't look at all like 1970s stagflation redux; it looks like a temporary blip, reflecting transitory disruptions as the economy struggles to recover from pandemic disruptions," he wrote.

Who are you going to believe, Krugman or your lying eyes?

Beware the Fed's asset price 'monsters' By Charles Riley, CNN Business

Remember: Ultra low interest rates and massive bond purchases by the Fed have helped accelerate the recovery from the pandemic. But they have also spurred a huge stock market rally, plus spikes in real estate prices and other assets.

Now, investors are worried that accelerating inflation will force the central bank to pull back stimulus sooner than anticipated. Fed officials have largely waved off these fears, saying they expect price hikes to be fleeting.

Ah, but it is only the investors talking, only people who actually work in the economy. Pay no attention to them and listen to government economists instead.

The Fed needs to get real about inflation Analysis by Paul R. La Monica, CNN Business

Federal Reserve chairman Jerome Powell loves to use the word "transitory" to describe the threat of inflation. But with each passing day, it looks more and more like inflation pressures are mounting in a much more significant manner than the Fed would like.

The use of the word "transitory" could very well turn out to be transitory. Powell may need a new catchphrase to describe how inflation might be a bit stickier and thornier problem.

Wages are rising and so are bond yields. The housing market is still chugging along. The prices of many retail goods are going up, partly because of supply shortages but also because of real demand.

It is true that the US economy (especially the job market) still hasn't fully recovered from the depths of the coronavirus recession. But the Fed may be underestimating the recent rebound and the potential for sky-high inflation like in the late 1970s and early 1980s.

"The Fed is putting out the message that inflation is transitory and that there are still 8 million unemployed. The problem is that price expectations in various markets from wood to labor and company pricing strategies are running ahead of economic reality," said Sebastien Galy, senior macro strategist at Nordea Asset Management, in a report Wednesday.

Okay, so they can't deny it outright, so they're calling it "transitory".

Inflation worries spook US stocks By CNN Business

US stocks finished lower on Wednesday even after paring some of their earlier losses.

Worries over rapidly increasing inflation were spurred on by inflation reports from Canada and out of Europe, dragging shares down.

Meanwhile, the Federal Reserve’s meeting minutes suggested that while a temporary increase in inflation is part of its plan, the central bank might need to begin discussing what’s next if the economy continues to make strong progress.

So worrying about inflation is the cause of inflation.

I don't know how bad it will get, I think we're in for something like the 1970s. Some are actually predicting hyperinflation, but as long as the dollar is the world's reserve currency that is unlikely. Either way, I think we're in for a bumpy ride.

 

[funinspace]

Personally, I'm not sure if this inflation spike is a longer trend, or transitory...but it is certainly a concern.

A short article by a guy who I find interesting, pointing out that the Case-Shiller National Home Price Index year-over-year has spiked almost as high as it did in 2005:
https://asiatimes.com/2021/05/home-prices-show-inflation-self-fulfilling-prophecy/

The whole leadership of the US Federal Reserve System has the same mantra: “Inflation is transitory.” Vice-Chairman Richard Clarida repeated it again Tuesday. Indeed, some price pressures might be transitory.

But sustained, intractable inflation follows a fundamental shift in expectations among businesses and households. When everyone piles into inflation hedges in anticipation of worse to come, the result is a self-fulfilling prophecy.
<snip>
As a matter of arithmetic, double-digit inflation in home prices translates into future increases in the Consumer Price Index with a 12- to 24-month lag

 

[Gospel]

Can we delay this discussion for one month? Yellen might be lurking. After June I can refinance without having to pay back the FHA loan. I'm so close! If the FRS increases interest rates before then I'm quitting this forum and returning a day later with an apology.

 

[Jimmy Higgins]

Isn't it a supply shortage? Demand is re-establishing to normal, but supply is slow to catch up, not enough supply means higher prices on things. I know libertarians and gold bugs ejaculate in their pants whenever inflation is mentioned, but price increases at the moment appear to be due to supply issues in light of the pandemic messing up production.

 

[Swammerdami]

Isn't it a supply shortage? Demand is re-establishing to normal, but supply is slow to catch up, not enough supply means higher prices on things. I know libertarians and gold bugs ejaculate in their pants whenever inflation is mentioned, but price increases at the moment appear to be due to supply issues in light of the pandemic messing up production.

Yes. Given the seriousness of the pandemic it would be surprising not to see short-lived price hikes. And big stimulus pay-outs increase demand in the short-term and also push prices up.

It is key to distinguish PAST inflation, i.e. price hikes of last month, from FUTURE inflation, i.e. predicted price hikes over the next few years. Past price hikes are almost irrelevant: they just show the economy having already adapted to changing conditions. It is expected future inflation that affects interest rates and business and consumer confidence. Ever since Paul Volcker brought inflation under control in the 1980's there has been faith — rightly or wrongly — that the U.S. Central Bank would not permit inflation to run out of control again.

Adding further confusion, asset prices follow a completely different trajectory from consumer prices. AFAICT, big players are more worried about asset price DEFLATION than about inflation of consumer or producer prices.

Presumably, financiers' and businessmen's expectations of future inflation can be inferred from indicators like interest rates. I don't know the most important or most interesting indicators so I've cluttered up this graph with lots of almost-redundant indicators. (Click 'Edit Graph' and drag undesired data to the trashcan.) The purple line (10-year Treasury yield) is just 1.64%, higher than in 2020 but still lower than anytime before 2020. I didn't read OP, but anyone predicting inflation is pitting their wits against the billionaires who influence financial markets.

To this layman, the modern monetary situation does seem quite paradoxical; but I have developed a perspective which I think explains much. Inflation would generally be disastrous for banks and other top financial players. Authorities like the U.S. central bank are known to be very accommodating to these big financial players so will not allow inflation that would hurt them.

Contrariwise it might seem that governments heavily in debt would have incentive to inflate away their debt, assuming it is in their own sovereign fiat currency. But that argument has no merit if governments serve financiers rather than their own citizens and taxpayers.

 

[funinspace]

Isn't it a supply shortage? Demand is re-establishing to normal, but supply is slow to catch up, not enough supply means higher prices on things. I know libertarians and gold bugs ejaculate in their pants whenever inflation is mentioned, but price increases at the moment appear to be due to supply issues in light of the pandemic messing up production.

Sure, at least some of the spike is due to re-establishing back to 'normal'. However, on housing I think we are also seeing increased demand from the millennial generation that is starting to buy more houses after a decade of sluggish housing demand.

I didn't realize that Larry Summer was either a libertarian or a gold bug...

https://www.cnn.com/2021/05/26/economy/inflation-larry-summers-biden-fed/index.html

"I think policy is rather overdoing it," Summers said in recorded comments at a CoinDesk conference that were released Wednesday. "The sense of serenity and complacency being projected by the economic policymakers, that this is all something that can easily be managed, is misplaced."
The former Clinton and Obama official took issue with how the Federal Reserve and fiscal powers continue to turbo-charge the economy even though the once-real risk of a catastrophic deflationary spiral has since faded.......

 

[funinspace]

Presumably, financiers' and businessmen's expectations of future inflation can be inferred from indicators like interest rates. I don't know the most important or most interesting indicators so I've cluttered up this graph with lots of almost-redundant indicators. (Click 'Edit Graph' and drag undesired data to the trashcan.) The purple line (10-year Treasury yield) is just 1.64%, higher than in 2020 but still lower than anytime before 2020. I didn't read OP, but anyone predicting inflation is pitting their wits against the billionaires who influence financial markets.

Do you realize that the Federal Reserve is the single largest buyer of US Treasury notes lately, buying roughly $2.5 trillion worth over the last year? The FR is by far the biggest financier in the pool...
FRED Ref:
https://fred.stlouisfed.org/series/TREAST

Where the bonds are held in general:
https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

The Treasury breaks down who holds how much of the public debt in the monthly Treasury Bulletin. Here are highlights from the March 2021 report (September 2020 data unless indicated otherwise):

Foreign: $7.07 trillion (in September 2020, Japan owned $1.28 trillion and China owned $1.06 trillion of U.S. debt, which is more than a third of foreign holdings)3

Federal Reserve and government: $10.81 trillion (December 2020)
Mutual funds: $3.5 trillion
State and local governments, including their pension funds: $1.09 trillion
Private pension funds: $784 billion
Insurance companies: $253 billion
U.S. savings bonds: $147 billion (December 2020)
Other holders, including individuals, government-sponsored enterprises, brokers and dealers, banks, bank personal trusts and estates, corporate and non-corporate businesses, and other investors: $2.28 trillion

 

[Jimmy Higgins]

I agree that inflation needs to be watched, but I think there is a hodgepodge of things going on right now. There are several supply shortages impacting things, even regarding labor! When the Libertarians and Gold Bugs start doing their inflation dance, I lose interest immediately, as their "sky is falling" routine is almost as tired as Jehovah Witness proclamations of the End Times. Trump put tremendous pressure on the Fed, which ceded to him on interest rates, which I think was a problem. That pressure no longer exists. The Dow certainly is pressuring the Fed though... oddly enough both to inflation and the solution to dealing with it. This is also a consideration that big business and little business (ie our economy) has become accustom to very low rates. When those rates go up, the cost of business or expansion will increase.

If done right, this adjustment period can be not as painful. And the Fed should act on it before the Fascists in the GOP regain control of the Government. The expected growth that is to come with the reopening, might possibly work well with rate hikes as the demand is going to be there, if the anti-vaxxers don't fuck us over royally, to offset it.

 

[Canard DuJour]

It'd be amazing if there weren't supply bottlenecks and some price volatility, given the disruption to the real economy.

Meanwhile the actual price level is about where it would have been with 2% inflation during pandemic.

The good news is that Larry Summers says there'll be inflation. So there probably won't be.

 

[Loren Pechtel]

Isn't it a supply shortage? Demand is re-establishing to normal, but supply is slow to catch up, not enough supply means higher prices on things. I know libertarians and gold bugs ejaculate in their pants whenever inflation is mentioned, but price increases at the moment appear to be due to supply issues in light of the pandemic messing up production.

Exactly. It's basically impossible to come out of a situation like we have been facing without triggering some inflation due to the inherent lag of the system. Manufacturers won't ramp up production until they are confident the increased demand will continue. (Same reason we see ammunition prices skyrocket every time there's shit in the same ballpark as a fan--the manufacturers know the spike is temporary and not worth investing in increasing their production capacity for. There are times I've wondered at the practicality of investing in ammunition.)

 

[funinspace]

The good news is that Larry Summers says there'll be inflation. So there probably won't be.

That is definitely a good point...poor Larryboy...

 

[Jason Harvestdancer]

It is not just the supply lines being in disarray due to the covid overreaction, although that is certainly a complicating factor. You can't simply turn off an economy and then turn it back on again.

 

[Canard DuJour]

It works when computers crash.

 

[ZiprHead]

It is not just the supply lines being in disarray due to the covid overreaction, although that is certainly a complicating factor. You can't simply turn off an economy and then turn it back on again.

Why not?

 

[RVonse]

Isn't it a supply shortage? Demand is re-establishing to normal, but supply is slow to catch up, not enough supply means higher prices on things. I know libertarians and gold bugs ejaculate in their pants whenever inflation is mentioned, but price increases at the moment appear to be due to supply issues in light of the pandemic messing up production.

Exactly. It's basically impossible to come out of a situation like we have been facing without triggering some inflation due to the inherent lag of the system. Manufacturers won't ramp up production until they are confident the increased demand will continue. (Same reason we see ammunition prices skyrocket every time there's shit in the same ballpark as a fan--the manufacturers know the spike is temporary and not worth investing in increasing their production capacity for. There are times I've wondered at the practicality of investing in ammunition.)

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy. So that is the real question going forward. Can government actually stop giving out stimulus checks now? Can government actually stop giving out $ trillion stimulus infrastructure bills going forward? Can government not help pay down student debt and continue with the other entitlements? I don't think they can stop doing any of this anymore. Not without major cratering of the economy and even more political upheaval. All of this amounts to more money in the system with less people actually producing goods and services.

And don't get me wrong, I am much more in favor of putting the liquidity into the middle class instead of the banksters like in 2008. I just don't see how you can keep doing a stimulus injection and NOT expect a huge amount of inflation! Because a stimulus check not only causes inflation by injecting more money for the same amount of goods...but it actually reduces supply of goods at the same time! Why would people want to work when they can sit home with a check? The answer is they don't and that is why McDonalds can not hire any help right now.

We are going to see inflation the only question is how much longer the government has to stimulate and otherwise inject liquidity directly into the consumer economy. I'm betting this keeps going on forever just like the lower interest and monetary easing did before this. And for all you folks who think inflation is some rare event that is only temporary I ask you this. How many penny's have you seen on the sidewalk NOT get picked up by someone? Our money is already become so worthless its not even worth the time for the typical middle class person to bend over. A millionaire used to be a term for rich people...but no longer is that true today.

 

[Elixir]

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy.

Hear here. Stop oil subsidies. Let gas go to $5+/gal.
Let airfares double.
Let the oil companies, airlines, shipping Companies etc collect the difference directly from their customers without putting the government in the middle. The same people are going to end up with that money in any event and this just saves taxpayers money.

Most importantly, stop giving people money to pay for (now more expensive) consumer products. They're going to buy bread and pay rent anyhow. Sure, some will have a hard time... Maybe they can borrow from their once-middle-class grandparents to keep from starving on the streets. Let the g'parents take a bank loan on the old house. Keep ownership flowing up from the middle class toward the uber-rich until the middle class completely dries up and there is nothing anyone else owns that the uber-rich could possibly want. Then they can start attacking each other when they want to add more zeroes to their balance sheets.

"Normal" is the new utopian Camelot, and similarly, is not gonna re-establish. "Normal" is dynamic - in the USA it has been a story of increasing wealth gaps and accelerating rates of increase in income disparity. If it takes eliminating all government services and privatizing everything down to the air you breathe to keep that ball rolling, that's what will be done. The goal is a return to Colonial times, when a good old boy could own a plantation and be served hand and foot by people whose very lives he holds in his hand.
This is the Republican "plan" for the economy.
Democracy stands in the way, but they're making a lot of headway toward eliminating that hurdle.

 

[Gospel]

While the stimulus payments gave me a boner called inflation, I'm also fixing to get $750 a month from July to December and then still get 3k when filing my 2021 taxes for the child tax credit. That makes me one very happy negro. IN YO FACE!!!!

 

[funinspace]

On the non-inflationary side of the fence, seems to be John Mauldlin and Lacy Hunt, with a quote from a regular email I get John Mauldin:

Lacy also explained why he isn’t worried about the increased money supply. It gets back to his point on debt. The amount of money is less important than the speed with which it circulates, or “velocity,” which is at the lowest level ever.
<snip>
At least 10 years ago Lacy and I were talking about what it would take to get the velocity of money lower than during the Great Depression or post-World War II. We were both watching velocity slow significantly and I was curious as to when that would end.

Lacy explained at the SIC:

We have to take into account what's happening to the speed at which money turns over and the velocity of money hitting an all-time low. And what is causing velocity to decline is that we're taking on too much debt, it's triggering diminishing returns and non-linear relationship and this pulls the marginal revenue product of debt down and it also takes the banks out of the process and that pulls velocity lower.

Another problem, Lacy believes, is that debt reduces savings.
Associated chart:

 

[Loren Pechtel]

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy. So that is the real question going forward. Can government actually stop giving out stimulus checks now? Can government actually stop giving out $ trillion stimulus infrastructure bills going forward? Can government not help pay down student debt and continue with the other entitlements? I don't think they can stop doing any of this anymore. Not without major cratering of the economy and even more political upheaval. All of this amounts to more money in the system with less people actually producing goods and services.

Prices will not reestablish to "normal" because that causes more harm than benefit.

 

[Swammerdami]

Isn't it a supply shortage? Demand is re-establishing to normal, but supply is slow to catch up, not enough supply means higher prices on things. I know libertarians and gold bugs ejaculate in their pants whenever inflation is mentioned, but price increases at the moment appear to be due to supply issues in light of the pandemic messing up production.

Exactly. It's basically impossible to come out of a situation like we have been facing without triggering some inflation due to the inherent lag of the system. Manufacturers won't ramp up production until they are confident the increased demand will continue. (Same reason we see ammunition prices skyrocket every time there's shit in the same ballpark as a fan--the manufacturers know the spike is temporary and not worth investing in increasing their production capacity for. There are times I've wondered at the practicality of investing in ammunition.)

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy. So that is the real question going forward. Can government actually stop giving out stimulus checks now? Can government actually stop giving out $ trillion stimulus infrastructure bills going forward? Can government not help pay down student debt and continue with the other entitlements? I don't think they can stop doing any of this anymore. Not without major cratering of the economy and even more political upheaval. All of this amounts to more money in the system with less people actually producing goods and services.

And don't get me wrong, I am much more in favor of putting the liquidity into the middle class instead of the banksters like in 2008. I just don't see how you can keep doing a stimulus injection and NOT expect a huge amount of inflation! Because a stimulus check not only causes inflation by injecting more money for the same amount of goods...but it actually reduces supply of goods at the same time! Why would people want to work when they can sit home with a check? The answer is they don't and that is why McDonalds can not hire any help right now.

We are going to see inflation the only question is how much longer the government has to stimulate and otherwise inject liquidity directly into the consumer economy. I'm betting this keeps going on forever just like the lower interest and monetary easing did before this. And for all you folks who think inflation is some rare event that is only temporary I ask you this. How many penny's have you seen on the sidewalk NOT get picked up by someone? Our money is already become so worthless its not even worth the time for the typical middle class person to bend over. A millionaire used to be a term for rich people...but no longer is that true today.

The future you predict — with highish inflation of consumer prices, rising wages, and an economy depressed by people not working — is not dissimilar from conditions in the 1970's and early 80's where the Fed made drastic interest rate hikes to curtail inflation. The question is: Would today's Fed in the conjectured scenario raise interest rates vigorously as Volcker did? (Volcker raised overnight Fed money to 17% or thereabouts. Today's more enlightened Fed might kill the inflation before it progressed that far.) Note that

• As RVonse implies, a one-time $2 trillion infusion won't directly cause bad inflation: it's the threat of continued infusions and deficits that might worry us.
• The unprecedented(?) combination of a "seller's market" for unskilled labor and high voluntary unemployment is quite unlikely I should think.
• I think many regulators would be happyish to see a long-term 3% rate of inflation, rather than the nominal 2% target. Higher inflation gives more flexibility should negative real interest rates be needed. Frankly I think some regulators might prefer a 3% or 3.5% target over a 2% target, but find it impolitic to say so explicitly. But whether the target is 2% or 4%, the Fed WILL act to prevent dangerously high inflation. (Can we at least agree that persistent predictable inflation of 3.5% or 4% annually is NOT dangerous?)
• Yes, much USG debt is sold to foreign banks that need to hold dollars and to agencies of USG itself. However, low interest rates are not seen just in Treasury paper. Junk bond yields are quite low right now, IIUC. The market is betting that the Fed WILL step in to prevent serious levels of inflation, should they arise.
• Devaluation of the dollar on foreign exchange markets is unlikely, at least in the near to medium-term. Other countries are also running high deficits. If there is a shock in financial markets I think it will be another credit crisis, possibly brought on by Wall St excesses.
• Despite this sanguine view, wise investors are making hedging bets, e.g. on real estate, novel financial instruments, and cryptocurrency.

TL;DR: Maybe. Maybe not.