Remember that "declines" in this context just means that prices are going up slightly slower than they were before. It doesn't mean anything's getting any cheaper.
Not right after a steep inflationary period like we're living. Some deflation would actually be a concrete sign of things going back to normal. Slightly lower inflation as we see will do little to help families for the next few months or years, and it is clearly inflationary.
Right, but central bankers aren't magicians, they thought this inflation was transitory, it's probably best not to play with fire and start deliberately aiming for deflation, given how dangerous deflation can be. Deflation is bad.
If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future). When everyone slows spending at once, it can lead to severe a recession or depression.
Perhaps for businesses this may be true. It's hard to imagine for a consumer. I'm not going to delay the purchase of groceries, a fridge, a new roof or (if I'm feeling rich) a new car just because they may be 3% cheaper next year.
I'm not saying this conventional wisdom is wrong, but it's not obviously right.
Actually, consumers very much do delay purchases, especially of big ticket items like white goods, cars, and houses in deflationary regimes, just as in periods of hyperinflation they do the opposite. This is easy to look up as there are many examples through history (especially of the latter — Brazil is an excellent and frightening example).
Groceries, sure, but then as a consumer you are still impacted because suppliers are less likely to provide the goods you want.
Deflation is really bad. One of the consequences of the gold standard was the big swings (inflationary after a big gold strike, like California' Yukon, or Victoria; deflationary when the gold supply could not keep up with economic activity) that you can easily see in the second half of the 19th century.
And indeed if consumers didn't delay purchases, we wouldn't see deflation.
Businesses don't collectively decide to reduce prices month after month out of generosity. They do it because the economy is in a position where none of them are selling enough at the current price. If everyone is selling less stuff at lower prices, then sooner or later the problem becomes the employees'...
During Israeli hyperinflation grocery stores had a nice example of picking suitable data representations for write-heavy loads: they would price shelf items in "points", and a big board at the entrance to the store (updated ~daily) carried the current ratio between points and shekels.
It’s not the same situation, but most video games I will wait a year or two to purchase. $70 day one, or $20 on Black Friday a year from now with all the DLC included?
It's extremely rare for inflation/deflation to reach double-digits. Would you actually wait if the price a year from now was $67 (and no extra content)?
Generally speaking, periods of deflation are a symptom of an existing economic malaise. Prices might drop because of solid gains in efficiency, but they generally drop because of a loss of demand. That loss of demand is generally caused by economic hardship. Therefore, deflation is correlated with economic hardship, but I think it's a correlation, not a causation.
So, I'm with you. I've had it explained to me many times, and it still doesn't make much sense to me. I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices (well, except for investments, if I have some magic insight).
From a business perspective, I've been involved in many purchasing decisions and never once was "it might be cheaper or more expensive in the future" a part of the decision making process.
It really feels like "deflation is bad" is an economic theory that should be tested. Yes. We've had deflationary shocks, and those were bad, but that was because a) it was a shock rather than a gradual slope and b) it usually followed a period of marked excess. I'm not convinced that deflation itself was the enemy as much as the other ancillary issues. It's hard to disentangle that, though.
> I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices.
Think about the prevalence of sales, and their impact on moving goods. If you need a TV, but the need is not urgent, you (okay, not you, but most people) might wait for the New Year's sales in a couple of weeks to save a few bucks. Same with cars and other appliances. Or people look for a coupon code to save some money.
If sales and coupons make sense, consumer decision making in deflationary environments should also make sense. If you don't understand why people wait for sales to purchase things, you may want to talk to some working-class people to understand what it is like to not have enough money to buy everything you need immediately when you need it.
> it was a shock
Japan has been in a gradually deflating environment for decades.
This will obviously not mean skipping eating, but will manifest more as fewer "special" meals like steak or lobster or whatever.
> a fridge, a new roof
If you are a homeowner, you know that most equipment failures are a decision to either repair or replace. In a deflationary environment, owners will bias toward patching things as long as they can. (The opposite is true in an inflationary environment.)
> a new car
You may be extremely fortunate. Most people would try to make it through (say) a year of public transit/rideshare/etc. if they could save (say) 8% on a car. Average price of a new car in 2022 is ~$48k; saving 8% on that is something like half a month's pay at the average American salary, which is larger than the annual raises most people get at even good jobs, even in good times. Don't underestimate the sacrifice people will make to earn another few hundred $/mo.
> owners will bias toward patching things as long as they can
So if we live more sustainably, the economic system colapses?
Is that a bug or a feature?
I just had my landlord throw away the dishwasher because replacing the tiny pump was not worth the effort. Myfriend threw away a fridge because replacing a single part, the compressor, was not worth the trouble.
Yeah: heaven forbid anyone save money or resources... we all need to be as rapidly indulgent and wasteful as possible, because that moves the most money around the system the fastest, which is the primary goal of humanity.
Yes, that's exactly why deflation is bad for the average person. You can't afford to save your money (which is increasing in value just sitting there) because you HAVE to spend it on food, rent, etc. People who can afford to, don't spend their money and they get nominally richer. Anything you buy will decrease in value, so people tend to avoid it. This isn't hypothetical, it has happened every time there's deflation in an economy. It widens the gap between the rich and poor.
If anyone's interested, Japan is seen as a cautionary tale for the bad things that low inflation/deflation can bring. They've been fighting it for years[1].
<<If the expectation is that everything will be cheaper next month than this month
This may be the misconception that is driving this. Nothing will be cheaper ( decrease in price ). It will simply not appreciate in price as much ( price will increase less ).
<< When everyone slows spending at once, it can lead to severe a recession or depression.
Agreed, especially in US where consumer spending drives the economy.
Still, in US, for better or worse, a lot of personal wealth is stored in real estate ( which also manages to explain some US idiosyncrasies ). Deflation would 'destroy' equity for owners of that real estate so a lot is regularly being done to keep the housing prices high and even more to keep them from going lower.
It is not bad in itself. Frankly, I personally see deflation as a way of economy correction, but that is one person that has limited exposure to some of those pressures. But deflation is not what is happening here. Deflation would be a negative inflation rate ( and that is not the case ).
Now..there are few other angles to consider. Higher inflation means our debt is 'worth' less; deflation means it is worth 'more'. If you owe a million dollars in an environment, where an average house costs a million dollars, it is likely that it becomes the norm ( and it is technically good for the borrower ). Interestingly, some would argue US was actually trying to inflate their way out of its staggering debt.
There are also import/export considerations for companies that operate in that space ( as you also noted ), but I am hardly an expert ( or even that interested in that subject ).
I strongly recommend you review the definition of deflation.
> Higher inflation means our debt is 'worth' less
Inflation is a huge benefit to the debtor class, which includes most homeowners. The rhetorical tactic of focusing on high gas prices brilliantly misdirects people from asking the relevant question of why their wages aren't increasing at the same rate as inflation. Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened.
<<I strongly recommend you review the definition of deflation.
It is possible I am working with old mental models, but first search result defines it as:
"Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency. It can be driven by an increase in productivity and the abundance of goods and services, by a decrease in total or aggregate demand, or by a decrease in the supply of money and credit."
If prices increase ( albeit at a lower rate ), it is still inflation ( especially if purchasing power stays where it is, which it typically would ).
Can you elaborate on your thought process? It is possible I am misreading something.
<< Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened.
Um.. I think I have to categorize that statement as wishful thinking. Federal minimum wage remains very low and even recent attempts to update it were shot down. I think 'eventually' is doing a lot of heavy lifting here ( it likely is true, but the time horizon on that statement is fairly long ).
I am open to discussion, but I am not convinced at this time.
> "Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency..."
The first part of that sentence says that prices decrease. They do not increase at a lower rate, they actually fall in deflation. Deflation is negative inflation, if you want to think of it that way. Deflation is _not_ small positive inflation.
Since we are on a tech-focused site, the best example is that tech goods are typically deflationary. 1 TB of SSD costs less than it did 3 years ago. Imagine this happening to everything in the economy and you understand deflation.
The second part is maybe confusing you:
> increase in the purchasing power of the currency.
This says that if I have $100 and a good costs $10 today, I can buy 10 of them. If prices decrease (because this is deflation, prices go down) and now the good is $5, I can buy 20 of them with the same $100. The purchasing power of my $100 has increased.
> I think I have to categorize that statement as wishful thinking.
Average US wage in 1970 was about $6,200 (per year!). Then inflation spiked, prices rose on everything. Eventually that filtered back into the labor market because nobody will work if the wage won't buy food at the newly inflated prices. This will happen again, but it will take longer due to labor generally having less power in today's economy vs that of 1970. This will happen whether or not the minimum wage increases, but more of necessity -- laborers will not come to jobs that don't pay their bills.
We may be talking past one another and seem in agreement mostly except for your opening assessment.
The original if clause may be true( "If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future"), but it is not applicable to the current environment as we are not experiencing deflation, but inflation. As in, business are not expecting lower cheaper ( lower prices ). They will be expecting less high prices. If they will curtail spending it is because got prohibitively expensive. If anything, they will save money buy stocking up, while the price is low. I personally think your interpretation model for what is happening is off here.
Hope that makes more sense now.
Let me see if I can sum up the main argument until now:
You post >> If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future).
I post >> [ but ] Nothing will be cheaper ( decrease in price ) [ next month ]
You post >> I strongly recommend you review the definition of deflation.
I post >> "Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency. It can be driven by an increase in productivity and the abundance of goods and services, by a decrease in total or aggregate demand, or by a decrease in the supply of money and credit."
You post >> "Deflation is negative inflation, if you want to think of it that way. Deflation is _not_ small positive inflation."
I post >> this post since we seem to saying the same thing so I revisit initial assumptions
You are correct, this entire thread is a response to a question specifically about deflation (not inflation). So the discussion in the thread is about decreasing prices. Which, as you point out, is not what we have now.
You may want to join the top-level thread, which is about the current inflationary environment.
Interestingly enough, prices don't even need to become cheaper month to month for there to be an incentive to delay spending. Having access to a positive (real) interest bearing account does the same thing: why spend $1000 today when you can spend $1000 a year from now and keep the $30 in interest (assuming a 3% real interest rate).
Why do people stand on line to buy the new iPhone every year when they know the price will drop significantly for that model in the next year? In fact all technology has steep depreciation (last year's TV model is significantly cheaper than when it first came out, even in absolute terms). But for some reason these are the hottest selling products
I think you have to put every scenario in context with what came before. Yes, traditionally, widespread deflation can sometimes lead to recession. But when the economy has been running overheated for years, it's more of a correction to cool things off.
If you're driving at 120 mph and tap the brakes, that's different than driving the speed limit and braking, the latter is much more likely to cause a traffic jam.
Any evidence for your claim that deflation following a period of inflation has fewer (or none) of the harms associated with deflation? Any reason to believe that central bankers are in a good position to fine tune to get just the right amount of deflation and not overdo it, given that they already struggle with the same for inflation? Any reason to believe that the dynamics of a car diving in a line are comparable to the dynamics of the global economy?
I don't understand the magical thinking often demonstrated in these threads. Just because it sounds plausible, that doesn't necessarily mean its true.
If you're waiting for undisputable hard evidence of any macroeconomic theory, you'll be waiting a long time. The global economy is constantly changing and evolving and nations interact and trade in different ways over time.
I have no faith in central banks to engineer a perfect landing, that's not the argument, it's simply that the concept of "deflation = bad" is not necessarily a universal truth.
So you have no evidence or reasoning whatsoever, just an analogy involving a car and vibes. That macroeconomics is difficult is no reason to just start doing random shit. I'm not asking for "indisputable hard evidence", but definitely something more than ~vibes~.
I just gave you the reasoning. Coming off a "normal" economic period, deflation might have the negative effects everyone is claiming. (Might. I'll leave all the evidence gathering to those claiming it's so awful).
But we aren't in normal economic times. We're coming off (or, at 7+%, still experiencing) a period of ultra-high inflation (for the US) where prices seem to be rising out of control, where credit card debt is increasing rapidly. If prices were to fall, say 2% in 2023, I think that would be preferable for almost every consumer than prices continuing to rise even further. And the idea that the economy would grind to a halt and sink into recession as people delay purchases hoping for another 1% drop in prices, is pretty absurd.
We've been below the target inflation rate for 15 years. We haven't had CPI consistently above 2% in the US since the 1980s. I don't see how this can be a "correction"
The 15-year average temperature of a building could easily be within a normal, safe range, but if it is currently on fire, the past 15 years don't really matter, do they?
1. The inflation situation is not "on fire." It's bad for sure but let's not catastrophize here.
2. If a building is on fire, the goal is not to make the building a meat locker for a few months/years to "compensate" for the fire. The goal is to put the fire out and return to a normal temperature.
> the goal is not to make the building a meat locker
Well, you do put out fires with a CO2 file extinguisher blasting at 50 or 60 below zero.
> let's not catastrophize here.
Minus 2 percent inflation would be closer to the "Fed target" than the recent 7-8% we have been experiencing. The idea that many of you are trying to push, that deflation of any kind is a guaranteed financial disaster, that's the hyperbole that ought to be suppressed.
Conversely, if someone is tailgating you then tapping the breaks at 120 mph is much more dangerous than at low speeds, as they have less time to react. Likewise the sudden shock of going straight from inflation to deflation could be much worse than deflation after a long period of stagnancy, as not only do you suffer all the issues of deflation but you also have the delayed response of things adapting to the inflation.
I'm not sure I buy (heh) into this. I usually buy things because I need them, or want them in the moment. I'm not gonna postpone buying a washing machine because it might be cheaper next month. I'm not gonna pass on getting wasted because drinks are cheaper next month. I'm not gonna starve myself because food might be cheaper next week.
> I'm not sure I buy (heh) into this. I usually buy things because I need them, or want them in the moment. I'm not gonna postpone buying a washing machine because it might be cheaper next month.
There’s a reason n=1 samples aren't usually the basis for general descriptions of behavioral trends.
Yeah but this is small potatoes. Imagine you're managing a $300 million family fortune. If your money is going to be worth more next month, why invest now?
Also think about how tricky itd be to manage a business. Your supply is getting less expensive in $ terms monthly, but also the value of your goods in the market is going down each month. Weird situation.
These are market trends, not individual behavioral trends. We know that people do spend money during periods of inflation, because they understand that the relative purchasing power of their money is decreasing. The contrapositive of that is that they don't spend as much during periods of deflation, because their relative purchasing power is going up.
(There's also an error in assigning unit purchases like washing machines as a proxy for consumer behavior: consumers select within a purchasing category more frequently that then opt out of categories. In other words: deflation and inflation can determine how much you're willing to spend on a washing machine, rather than breaking your commitment to already purchase one.)
The simplest answer is that it discourages spending because people don’t want to buy anything today if it will be cheaper tomorrow. People not buying things is a quick way to stall the economy.
Rich people won’t be getting as rich, they’ve spent a lot of money and time convincing people that that would be bad for everyone. Also they pay for the media and politicians who decide which economists get attention. As far as they’re concerned inflations is only a problem when wages are going up (their input cost) at which point the media and establishment screams bloody murder.
Lets say I buy a house for $500,000. I put $25,000 down and get a mortgage for $475,000. Then deflation hits. It's not just that my house becomes worth less in dollar terms (though it does), but also that I'm paying my mortgage with more expensive dollars. (In a real deflation, your salary can decrease.) That hurts. Some people lose their houses. The mortgage holders sell the houses for what they can get, which does two things. It drives down the price of houses. Also, it decreases the amount of dollars that are theoretically in the economy, so dollars become more valuable, and the deflation continues. Historically, this has caused enormous amounts of damage, wiping out businesses and families.
Now, 1% deflation this month won't do any of that. The problem is that the deflation can gain momentum and be very difficult to stop (similar to inflation in fact, but deflation can happen faster). So the Fed prefers to stay away from deflation, preferring something like 2% inflation to give them a bit of margin to work with. And they've been nervous since 2008 because they couldn't get back up to 2% inflation.
If people expect deflation then they will defer buying things because their money will buy more in the future than it will right now. This should reduce aggregate demand and also feedback on itself as falling demand should put further downward pressure on prices, causing more deflation. It sounds nice if you are only a buyer but almost everyone in the economy is both a buyer and a seller.
Beyond that it's an issue for investors. Interest rates have a nominal lower bound at 0% (because you can always just hold money instead of lending it) so the minimum real interest rate becomes effectively the rate of deflation. So imagine that deflation is 4% and I have a use of capital with a real rate of return of 3%. It won't get funded because investors can achieve a higher real return (4%) by just sitting on capital instead of investing it.
In a healthy economy deflation isn't possible because the money supply naturally grows with the economy. This was true even when we were on the gold standard because banks will be more aggressive with lending, which effectively creates more credit money. The deflation has historically only occurred when a large quantity of credit money gets destroyed in defaults.
The purpose of money is to facilitate mutually beneficial transactions. When the money supply contracts, the "price" of money goes up. People are incentivized to hoard money for the sake of hoarding money, which adds friction to mutually beneficial transactions. This causes a feedback loop, which leads to even more deflation and even less economic activity.
Prices on most goods, services and wages are fairly sticky for psychological reasons. So suboptimal prices are likely to persist longer than they should. Inflation provides a mechanism for price movement by making the real price of a "constant" price continuously decrease. If that's the right direction it's an invisible helper, if it's the wrong direction it forces the increase to happen more regularly.
A consumer based society requires people to consume, or buy things. Because of this you want a low level of inflation so that people buy things now rather than next year and keep the money in the system moving around (ironically this theory of money also makes people that have more money than they can spend unhealthy to the system). You want the money constantly moving through the system instead of pooling up.
people always consume and buy things.. the situation in the USA is that there has been money printing, asset inflation, cheap products from China and cheap gas for decades.. the system is exhausted in some parts, yet money isnt being exchanged the way it used to be, at small retail, among individuals.. some intermediaries have made so much money in the last two decades that they go into "castle" mode, while people who tried to work for a living, saw their income drop, wages actually go down in many industries due to "illegal" workers and "gig work" setups .. and essential costs of living like medical, housing and some others.. costs are much higher now. This is well documented.
Since covid, whole industries in retail, food and travel have shut down almost completely.
I don't think what you've said counters the idea that money needs to move hands and be exchanged. That's the root idea of inflation under a consumer based economy. Like I said, it is similarly bad when people (or large corporations) pool money and are not spending it. It is true for any type of actor, that we'd want to encourage them to spend the majority of their wealth and save very little (for the median person a retirement savings would be inconsequential and that money is just delayed anyways, so wouldn't affect the system much. Especially since it is staggered).
People, entities and states with debts benefit from the money they borrowed last year being worth less than it is today in terms of paying things back, debt to income, etc.
Also by using inflation to deteriorate savings and cash on hand, it encourages people to invest their money into something that won't lose value over time.
The times we've experienced deflation have been horrible periods in history.
We're fairly convinced that deflation is an effect rather than the cause, but nobody's really 100% sure that it's 100% effect and that deflation doesn't make things worse, so we try and avoid it.
It's not so much that deflation is bad, it's that inflation and employment are very correlated. Given the choice between 0% inflation and high unemployment or 2% inflation and low unemployment, we choose to have low unemployment along with a little bit of inflation.
Because your paycheck is someone else's "spending money."
Edit: Meaning that, presumably, you like being paid. So you probably don't want to incentivize being paid less, or not at all. Deflation does both of those things.
It may not be bad, economics involves a lot of unfounded speculation IMO. It's true that deflation would encourage delaying certain types of spending but that is already the case with electronics and some other types of goods. But that has not led to the downfall of society.
A deflationary economy would be a drastic change from the system we operate under now but I don't think it would be all bad. Maybe in a deflationary economy people would feel like they could actually save money. Or it could put an end to the 40 hour work week. I doubt demand of necessities would change much in a deflationary environment: food, medicine, shelter, etc.
I think I agree. A lot of it is models that don't predict things ( but that is waved away by saying those are not complex enough to reflect real life ), psychology and opinions.
Personally, long term I am perfectly willing to accept that deflation is a bad thing for society, but at this time? We should welcome deflation with open arms. Things are way out of whack already and decent price correction is needed for just about everything.
You only have to look at Japan for the last few decades to see what the long term effects of deflation look like. Negative economic growth, few job opportunities for young people, investment and lending are de-incentivized so innovation and industry growth moves to other countries, while owning property becomes a liability, etc. Managed decline is about the best case scenario for a deflationary economy.
When considered logically the correct amount of inflation should be 0% - neither inflation nor deflation. This would give us stable prices and make it much easier to calculate what is increasing or decreasing in price without this other fuzzy “inflation” metric affecting it. However governments / central banks have convinced us that 2% is “correct” despite no evidence or research. It does help them print money and bail out governments, however!
You may not agree with the conclusions, or dislike the quality of the research, but of course there's research. There's always research with things like this.
0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of in savings accounts, CDs, bonds, and the like is bad for the economy. That is why economists generally prefer a small positive rate of inflation. It adds more incentive to both spend and invest.
There should not be a penalty for saving money. Furthermore you can give your money to the bank as a deposit (loan) and the bank will pay you some rate based upon what they can invest it on. Nowhere here does this require any level of inflation.
>0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of
This is an absurd claim. Nobody seriously considering mattress vs CD (or bonds in a low rate environment like we had 2008-2020) is swayed by a return of less than a couple percent. It is a security vs liquidity vs trust calculation, not a return based one.
Furthermore, as the other commenter points out, rates are correlated but not necessarily in lock step with inflation. The rate on your savings account is probably still sub 1% (although bonds have gone up).
Maybe not for you. Maybe not in the short term. But there are all sorts of people involved in the economy with all sorts of risk tolerances. Lots of people don't like losing their money. Putting their money some place with zero risk is attractive for people.
It isn't the most up-to-date data and survey results are always a little questionable, but here is some data from 2015[1]:
>A new survey of more than 1,800 people from the American Express Spending and Savings Tracker, however, found that 43% of Americans keep their savings in cash. An alarming 53% of those cash-hoarders "plan to hide bills in a secret location at home."
Those numbers are big enough that even if they are way off, there is still a sizable number of people who are holding onto their savings in physical cash. That would go up if there was no inflation.
Can you explain why you think this disputes my point?
The real interest rate is the nominal interest rate minus inflation. When there is inflation, the real interest rate for holding cash is negative. When there is no inflation, that real interest rate is 0%. The disincentive to holding cash disappears and therefore more people hold cash.
You’re right, I didn't read your question accurately. By cash I assumed interest collecting back accounts. The missing out of the opportunity to make risk free money is punishment enough. If people elect to do this then they don’t think it’s risk free and thus are paying a premium to reduce risk.
Ok, glad we are on the same page now. "Holding cash" is vague enough that it could still be in a bank. I thought it was clear what I was talking about since I made the distinction between savings accounts and storing cash under a mattress in my first comment. Savings accounts are risk-free in the same sense that US bonds are risk-free. There is technically some level of risk, but there would have to be a pretty unlikely turn of events to actually lose money. However, there are a whole lot of people out there that don't trust banks and don't trust the government.
Deflation is good for those who prudently saved. Deflation makes saving work better, rather than push everyone into speculation to outpace loss of purchasing power (inflation).
Assuming that those savers put the vast majority of their money in deflation-resistant assets like cash, bonds, or gold, instead of stocks or real estate (including single-family homes); this assumes further that deflation doesn’t increase unemployment and harm business by disincentivizing marginal spending, which many believe to be the case.
I disagree that people have to speculate to keep up with inflation. Maybe this is true in the short term (although individual savers in America can purchase inflation-protected savings bonds in exchange for their capital being locked up for a year), but over terms of several years stock markets are incredibly durable in the face of even high inflation. Investing your ample savings in a portfolio of index funds and owning the house you occupy should keep you well ahead of inflation over your lifetime.
This is a privileged perspective, typical of the HN crowd. Good for you.
There is a segment in USA who are basically permanent renters and don't have the luxury of extra money to put in to stocks and bonds. They might "own" a car as their asset, and it rapidly loses value. If they have extra money in their checking account, the ex and child support enforcement go after it.
I am privileged in many ways, and I agree that such a class exists and is growing. I’m in my twenties and almost everyone I know is a flat-broke renter.
I did not mean to imply that everyone can easily save and invest their way to wealth regardless of their economic situation - this is ludicrous and anyone suggesting otherwise is out of touch.
My clarified points are as follows:
1) Prudent savers, who by definition have extra money at the end of the month, are not better off due to deflation because the prudent thing to do with spare money is not to leave all of it in cash. Most non-cash non-fixed-income assets do terribly under deflationary conditions.
2) Homeowners, who are still a majority of American adults, definitely do not benefit from deflation. Homes are one of the assets that do terribly in deflation.
3) Many people, including me, believe that deflation drives up unemployment by chilling consumption. This is another argument why deflation is not good for savers - many of them lose the ability to save when their income evaporates.
4) Speculation is not necessarily to make any money left over keep up inflation in the long run. In the short run, outside of Series I bonds, good luck.
Part of our disagreement might be in the definition of the term “saver”. To me, this is someone with both the inclination and means to have a surplus each month. Others might include someone with the inclination who might not have the means. Among that group, some folks might be better off if their income is flat but their cost of living decreases as that allows a budget surplus.
Not exactly. It is year-over-year, so it is possible that prices are lower in November than October, but still higher than they were last November. In reality, prices rose by .1%. We will probably see negative month over month here soon, though YoY will still be positive.
Though I'm also pretty sure the prior inflation on both of those was way higher than the overall, official inflation rate.
Earlier this year we were getting offers from dealerships (so, they'd still expect a profit margin on top) to buy a car that was used when we bought it, and that we've driven for a further three years, for like 10% more than we paid for it back when it had way fewer miles and a few less years on it. I've never seen a car appreciate, even in unadjusted dollars, before.
> Remember that “declines” in this context just means that prices are going up slightly slower than they were before.
Also remember that this is a 12-month trailing figure that’s been falling for several months because monthly inflation has been low since Jul (it was actually 0.0 in July, with seasonable adjustments, and below 0.4% [4.9% annualized] every month since, with the November figure 0.1% [1.2% anuualized.])
> It doesn’t mean anything’s getting any cheaper.
Actually, it is a result of lots of things getting cheaper: energy (all the major components, both commodities and services), used cars and trucks, transportation, and medical care services.
for anybody "out of the loop", that would be deflation and it's pretty unlikely (unless I'm wrong)
we as consumers would have to "stand up to" the corporations who are setting the prices, stop buying their products so much to the point where they have to conclude "our prices are too high, we're losing sales, let's lower them"
I could be wrong but I'm pretty sure the chances of that happening are low? would love to hear from somebody more in the know
The actual way this happens is that there is a severe recession or depression, there is no more discretionary income for most families, and all savings has been depleted.
Then, people start working for less money because they have to. Prices drop, and it creates a positive feedback loop because anybody that does have money is going to hold onto it while its buying power increases daily.
> The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 percent in November on a seasonally adjusted basis, after increasing 0.4 percent in October, the U.S. Bureau of Labor Statistics reported today.
two tenths of a percent decline is barely a remarkable, let alone laudable achievement.
This might be a sobering sentiment but US inflation is still out of control. ideal inflation is 2% and policy handbrakes like increases in the prime rate are too little too late as we should have sought percentage point increases a year ago as opposed to the fractional increments we saw last november. Arguably the half-percent model of increase was a dismal failure even when it was rolled out four months early in March to market and all we're left with is chest-thumping from the federal reserve each time it undertakes a half-percent increase and razes the castle of free money it built up over a decade in response to the 2008 collapse.
This inflation concern is interesting in light of recent statements: “In August 2020, after undershooting its 2% inflation target for years, the Fed announced it would be allowing inflation to temporarily rise higher, in order to target an average of 2% over the longer term.” https://en.wikipedia.org/wiki/History_of_monetary_policy_in_...
Anyway, these numbers are appropriately 4 to 5% closer to the target than expected assuming they can be calculated this precisely it’s a meaningful difference.
"The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 percent in November on a seasonally adjusted basis, after increasing 0.4 percent in October, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 7.1 percent before seasonal adjustment."
I feel like the rise of only 0.1% October->November is more significant than the 7.1% YOY headline number, which is taking into account a lot of inflation that has already happened months ago. Of course, back in July we had a 0.0% MoM CPI increase that looked promising, but that didn't last long: https://www.bls.gov/news.release/cpi.nr0.htm
The MoM numbers are important, but the breakdown is also important. The breakdown is worrisome - MoM declines were almost entirely driven by gas and other oil-related commodities, and we're still seeing very significant inflation in food (0.5% MoM) and shelter (0.6% MoM). Food and energy are transient (prices can go down as easily as they go up), but shelter and wages are sticky (they very rarely go down, and usually only in severe recessions.
The anatomy of the 1970s recession was similar - inflation in oil had stopped by 1975, but the worst of the inflation was carried through 1977-1981 by mortgage rates, rents, and wages.
That's the problem - aside from only being sampled every 6 months, shelter reflects what people are actually paying, which includes a large number of people who haven't renewed their rents or who paid a lot less for their home and have no idea what it'd rent for now. As these people renew their leases or seek new housing, they're going to have to pay market rents, which in many cases have gone up a lot more than the measured CPI component. That bakes in a large future increase in the CPI, simply from price increases that have already happened.
Great detail, thanks. Any suggestions for further analysis/reading on the 70s recessionary environment?
Didn’t you have the black swan of the US going off the Gold Standard as a major inflationary driver at that time? Is there a similar looming inflationary pressure you see now?
My (limited) model is we’re seeing some supply-side disruptions and a some hot demand from Covid stimulus, but it’s not clear to me if these drivers are likely to continue through 2023 and beyond. (I assume mostly not, with Ukraine being the big problem, but mostly for EU rather than US.)
I'd also encourage you to look at actual numeric data from the time period - measured CPI [1] across different categories, fed funds rate [2], money supply, etc.
The data tells a very different story from the story - for one, it was neither caused by oil shocks, nor limited to the 1970s. It actually started in 1968, and the 1973 oil shock happened when the U.S. was already in recession from a Fed tightening that began in 1972 to deal with 1970's high inflation. Personally I'd attribute the cause as a series of poor decisions that were papered away by low interest rates, but which eventually compounded to devalue the currency. Vietnam took many young Americans out of the workforce and redirected production to war, Nixon pressured his Fed chief to lower interest rates, Nixon took us off the gold standard, Nixon introduced price controls (which further compounded supply issues), the oil shock hit, banks raised interest rates to compensate for inflation, which raised the cost of housing, which caused more inflation, until Volcker finally caused a massive recession and got it under control.
Note also that there were multiple waves of inflation (6.2% @ 1969, 12.3% @ 1974, 13.3% @ 1979) + Fed tightening (9% @ 1970, 11% @ 1972, 13% @ 1972, 18% @ 1980, 19% @ 1981). These were effective but not persistent - in between inflation fell to 3.3% @ 1971 and 4.9% @ 1976. Even in very high-inflation years you had some months with virtually no inflation - for example July 1973 (0.1% MoM), March 1974 (0.2% MoM), July 1980 (0%).
History doesn't repeat itself, but it rhymes. IMHO this was caused by having an economy that's very tightly optimized for ZIRP & globalization; introducing a pandemic that killed a million Americans, took another ~4.5M out of the workforce, and closed borders; and adding on some geopolitical black swans like the Ukraine war. Now workers need to reallocate from speculative high-margin activities like tech startups back to fundamentals like growing food and hauling trucks, and that is unlikely to happen unless the wages for truck drivers in the future exceed those of software developers now. We'll get cycles in between as the Fed tightens and loosens and causes recessions, but we don't fix the root problem until average income is ~$200K/year.
The YoY that they report is definitely not useful during slight inflation like we're having. I wish the headlines were more about the month to month because I think people see the number and freak out that prices just went up 7.1 percent.
> I feel like the rise of only 0.1% October->November is more significant than the 7.1% YOY headline number
You are correct.
They always report the much more meaningless headline number. The current inflation rate is around 1.2%, well below Powell's target.
Of course we've already overshot, and are still at risk of a manufactured recession. Which was the goal, workers were getting uppity and We Can't Have That.
Look at that hockey stick curve - up and to the right! It looks like the step in inflation from 2020 onwards was quite large but over the longer time horizon it looks back to a more reasonable rate. Funny to look at rising prices over the long term.
Zoom out to its earliest recorded data around 1945 on that chart, and the CPI inflation in the past couple of years is still clearly the fastest and steepest slope compared to all previous decades, including the 70s when overall inflation got up to 12% and the early 80s when Fed interest rates went up to over 20% to combat that inflation.
Might not look as bad as when it's super zoomed in, but that still seems pretty bad (and definitely historic).
Not sure we've ever had a supply shock quite like this one? The OPEC/energy crisis played a big role in the 70s, but that doesn't seem nearly as broad as the last two years...
As expected. As interest rates rise more capital that would otherwise be allocated on businesses, real estate, stocks, etcetera is redirected into safer and now more attractive bets like bonds and interest rates tied instruments
People have been "delusional" in a sense since the late 90's when inflation slowed to a crawl and everyone got used to stable prices. If inflation had been ~1% higher over these last decades, prices wouldn't be far off from where they are now and people wouldn't have flipped out so dramatically over the sudden adjustment.
Similarly, I find myself laughing when people describe this as a high-rate environment. Or when they blame the relatively brief Covid ZIRP for wide ills. The ZIRP of the 2010s is still confusing people.
There are 35 year olds now that were only just graduating college in 2009 (I'd argue before then most people are largely oblivious to economics) and don't know anything other than ZIRP plus the pandemic.
Unrelated to this exactly, but on perception: There was some sort of tax break that was going to be repealed around 2014 or 2015 that had been in place for around 10 years, and I got into a conversation with someone who didn't understand why so many were against it. Honestly I thought it was pretty obvious: Roughly school to retirement is 40-50 years, so for around 20-25% of the workforce that repeal wasn't a return to normal, it was a straight tax increase. They were actually surprised and had never considered that viewpoint before.
> The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 3.2 percent on December 9, down from 3.4 percent on December 6.
You can't slow inflation by raising interest rates without slowing the economy. There are no rainbow unicorns here. The best outcome here is a so-called "soft-landing" in which growth slows but we don't have a recession or spike in unemployment. Taking the recent jobs report and this CPI report, we might just get that soft landing we need.
Also, fyi, while wages overall did not keep up with inflation, they did in the service sector and largely for lower paying jobs. I see that as correcting an imbalance in the economy, and as a stabilizer for American society as a whole.
We're not going to get a soft landing. They're going to push unemployment up to 6-8% to accomplish their policy goals of containing wage inflation and breaking the back of unionization drives (probably closer to 8% after something like CMBS detonates in about a year or so). That wage inflation in lower paying jobs is actually what concerns policymakers.
Reminder: Inflation is a vector, not a scalar. Ignore the abstraction at your own risk.
Inflation is the rise in price of every single item for sale across a market, not just the "basket" of goods selected to be a good example, and subject to adjustment and correction over time.
It is entirely possible that inflation that averages out to 10% for a year may double the cost of living for some people, and actually make things cheaper for others.
I believe the point is that the price of each individual good or service is a dimension. They all can move independently of one another, CPI is just an estimate of the total effect of inflation by using a weighted sample of particular items.
If the price of tacos doubles, and the price of toilet paper halves, in a universe with only those two commodities, what is inflation?
It's (2, 0.5).
You could turn this into a scalar if you want to. But you have to throw away information to do so. Or, to put it another way, you have to select a subset of the information.
You can't interpret the inflation vector as a direction, because inflation space is not a metric space (or something - the particular genre of vector spaces where geometric concepts are meaningful).
Realistically, if there are goods that are deeply important to somebody, they will already be tracking that price. For most people that will be housing.
It’s another way of saying that inflation has many components and that the reported number is just a mean of those, with the additional benefit that it makes you look smart.
As an example, look at table A in the bls.gov release. Each column is a roughly 20-dimensional vector, with both positive and negative components. Positive components (those which had price increases in the past month) include food and shelter, while negative components include energy/gasoline, used cars, and medical care.
what do you mean “profit”? The prices won’t stay suppressed once the SPR drain stops, OPEC has no interest in keeping prices low and the current admin has been cutting US output.
this is comparable to the admin trying to take credit for all the jobs that were furloughed and lost due to covid shutdowns coming back. This is supply returning to a pre-pandemic state.
The admin has been against net new output and using many tools to push their ‘green new deal’ agenda.
Indeed, we have seen a ~35% reduction is SPR this year and are not far from 1980s level. I'm also not sure how the US is planning to restore these values given our refinery capacity and poor relationships with other top suppliers.
Not the mention, CPI is one thing, and how the average American feels is another. If you poll random people on the street, this "slowdown" in inflation is not perceived by individuals' wallets. This means consumer behavior is not necessarily reflected in CPI prints.
That's the point. Fewer dollars chasing the same basket of goods. This slows the acceleration of price increases.
Once a certain threshold in the cost of money is reached, malinvestment will dwindle. In many cases, it already has. You're left with a system of dollars chasing legitimate investments.
US has benefited, no doubt, at least in the short term. But Europeans complain that we are price gouging... and in any case the whole situation encouraging an acceleration of Europe's transition to renewables.
