Inflation has become the new Frankenstein monster . They tell us it erodes our buying power. Even with large recent increases in incomes, the rise in the cost of goods and services reduces our buying power. What? I got a big raise this year and even that wasn't enough to overcome that dastardly inflation. Damn that inflation.
Biden says who me? Congress points the finger of shame at Biden. It must be Covid. Supply chains. Greedy corporations. Putin. Green people from Mars.
So let's back up and start with a few simple ideas. Inflation is defined as the percentage change in prices -- usually prices of the typical goods and services that people buy. It's a number. It gets calculated every month. Easy enough. But that easy start causes most of the confusion because it doesn't specify time period.
Time period? Inflation, like many other economic indicators, bounces around from month to month. If February's CPI was 100 and it rises to 150 in March, we say yikes. That's a 50% increase in only one month. While that fits the basic definition of inflation, its only one month. It might fall by 55% the next month if that one month change was a temporary event.
Point -- technically inflation might be a big number from month to month but it doesn't mean squat for the national economy. One month's price rise does not eat away at our incomes. Yes, it can be called inflation -- but its not INFLATION. I used all caps to distinguish macroeconomic inflation from the month to month reported statistic.
INFLATION in a macro sense exists when inflation becomes a macro issue. It becomes a macro issue when it lasts a while. Let's arbitrarily say that "a while" is a minimum of 6 months. Like a big wave hitting the beach, macro inflation becomes recognizable when it has a little time to build. If you learn that prices rose by 10% over the last 6 months then that sounds like it could affect buying power long enough to create a macro impact. It also sounds like it night endure even longer. Crap, the first wave hit us and now comes along a second wave.
Okay -- so a price index might rise or fall for a month, but we get INFLATION when it rises in a sustained way. How do we know the difference?
Here is where cause and effect plays in. If bugs eat the tomatoes in June, we might get a big rise in the price index for a month or two. Fertilizer might solve that problem. But what happens if inflation rises for 6 or more months? That would be a hell of a lot of bugs. Rather we look elsewhere for the source of the inflation.
I doubt Covid has sustained effects and I doubt supply chain issues do either. I doubt greed has such a history. Which gets us back to the usual suspects. You don't have to be an economic wizard to know that inflation is usually the result of expansionary monetary and/or fiscal policy -- The Fed and the Congress have the singular powers to use policy to cause large and sustained changes in national spending. The Fed juices up spending by lowering interest rates and making money easier to find. Congress unleashes spending by its own spending or by motivating us to spend by giving us larger transfer payments and/or lower tax rates.
Only the Fed and Congress can create Frankenstein and engineer wave after wave of higher spending and higher inflation. All the other talk is nonsense. But like your kid who got caught stealing in your neighborhood candy store -- neither the Fed nor the Congress is admitting that they need remediation. Sadly, they do need it. In the meantime say hello to INFLATION.
Dear LSD. To yer fine ‘splanation of the culpritz responsible for ‘FLATION . . . de Fed and Kongrez . . . I add stewpid policies imposed by a feckless, facile, impotent, ‘n stoopid ‘n ignorant administration. Specifically, I refer to its policies resulting in the curtailment of fossil fuel production, which is forecasted to significantly increase energy costs . . . gas, diesel, heat'n oil etc. that go into most all products: industrial, commercial, and consumer. Result: ‘FLATION . . . . until ’24 when/if Rs take the WH ‘cuz even a R-controlled House/Senate this November can’t force sleepy, creepy, lying, plageriz’n Biden to reverse fossil-kill’n policies . . . unless there are sufficient Rs in Congress to overcome a veto. ‘n no amount of kerective axton by current Kongrez and/or Fed can/will have any effect on those policies.
ReplyDeleteOn a ‘appier note, ‘appy ‘our jez a few ‘ourz away! Cheerz!
I like the happier note. Still early here on the left coast. But the clock is ticking. As for technicalities, while your point about energy costs is well taken these policies should have only a one-time lick to inflation...unless they ramp up the energy costs each year. Monetary and fiscal policy impacts have a more durable impact on inflation. Raise money growth by 1% and you get 1% higher inflation for as long as that increase sticks. Yuk
DeleteEBIT is the value of a business x some factor unique to that industry or market. The value plus other factors like scientific breakthroughs dictate market value. Employees of these businesses use low interest loans to buy more stuff such as homes, and pay off college debt or credit card refinancing. Increased demand for money works two ways...more money means it is worthless so more is needed to
ReplyDeletebuy stuff but sellers raise their prices to meet demand and the supply of stocked goods or services. We have it and so does the rest f the world.
Do we stop driving oil using vehicles? Yes because in the end electric cars will replace the oil based cars but you have to follow it out over the next 10 years. The option is to stick with what we got but it has many negatives. Same for other industries in a similar situations. Government spending is similar be $$$ is why the representatives are there. Execution is full of erroneous spending and efficiency ....all part of products and services being worth less but costing more.