Where will inflation stop?

In reply to z31maniac :

Which is why it is super, super important to have stable economic policy.

Things will level off once we get to the point where people have to go back to work. Right now, we have a unique situation in which many people are not working yet still have disposable income- they are contributing to the demand side of the equation while not contributing to the supply side. This leaves industries short handed, raising the wages of those that choose to work due to the labor shortage. The supply chain is a lot more fragile than most people thought, and it will get worse before it gets better. Flooding the economy with money also drives inflation, and we are doing that/ threatening to do that on an unprecedented scale. And not in the least bit efficient manner either- California has paid out at least $20,000,000,000 in unemployment fraud during the pandemic. That is not counting legitimate claims, that is only the fraud!?! Remember, everything you buy is a competition. Supply Vs. demand. Reduce supply or raise demand, and that item will cost more. 

The current spike is of course most because of current conditions.  Last I heard, the port situation in Los Angeles (%40 of US shipping I think?) is not likely to completely smooth out until next summer! I have no idea about the trucking situation, although a retired friend of mine is thinking making use of his current license for extra money, so that's something.

How much it will "recover" likely is dependent on the sector.  Food, fuel and car prices will almost certainly go back to sane level when the current conditions smooth out.  Other sectors may not recover at all.  Increase in wages to attract workers (while nice) will only add to it (increased labor costs) and could result in lower wage workers being exactly where they started at.

One important "feature" of inflation is that it effectively makes debt go away (maybe this is what MMF is based on).  WWII resulted in MASSIVE debt, that was never paid off.   Where did it go?  Nowhere, it's still there, it was just shrunk to almost insignificance by inflation.

Price increases, as it is sometimes said is "To many dollars looking for too few products".  That being considered, blowing money and spending into an economy that cannot get the products it needs will only make thing worse.  "Stimulus" is really a very bad idea at this time until things have smoothed out and (as pointed out above) is likely a pretty big contributor to the current situation.

A lot of baby boomers retired. A lot of Covid victims died or are too damaged to go back to work. A lot of mothers decided that staying home and not paying for child care is cheaper than working a low paying job. There are a lot of places where rent is so high that you can't afford to live there on a low paying job so the minimum wagers are bugging out to cheaper cities. Some of those people are never going back to work or at least not going back to where they used to work.

Unless you want to open the borders, the labor shortage is here to stay.

I seriously doubt that the people collecting unemployment are the same ones bidding up houses all over the country or going crazy buying Teslas and big pickup trucks.

CrustyRedXpress said:

I'm still on team transitory. The largest driver of inflation right now is the lack of goods because of supply chain issues (used car prices have skyrocketed because there aren't enough microchips). When the supply chain un-borks itself we'll drop back down to roughly what the Fed target is-2%. 

However! The bond market is betting that the average annual inflation over the next 5 years is closer to 3%:

https://www.nytimes.com/2021/10/27/business/long-term-inflation-expectations-in-the-bond-market-have-shot-higher.html

If I'm wrong then the Fed will take progressively harsher steps to reign it in. That could get ugly, especially if we're still not at full employment yet (whatever you take that to mean). 

Instead of asking, "When will it stop" a better question might be, "What can I do to make sure it doesn't harm me if things go nuts?" Having a business with pricing power (ability to raise prices) is a pretty good place to start.

 

Hasn't the Fed publicly said that they'd let inflation rise to the point that it would average "moderately above 2% for some time"? It's been below 2 for quite awhile, so to bring the average moderately above 2, we're very likely going to see 3% or more for quite awhile: 

https://www.forbes.com/sites/rogerhuang/2020/08/28/the-federal-reserve-wants-to-create-more-inflation/

I love inflation. It's the way the current generation sticks it to the previous generation that kicked the can with regards to taking fiscal responsibility and leveraged the world for their children to pay. You make their life savings worthless. It's economic payback for their sins. 

Good point on the retirements.  I do wonder how many of the low wage people are moving or not working anymore, or they are just back in school and/or living off the rather generous (for some) payments of the last year.  It doesn't entirely make sense.  What are they doing if not working?  It really is a bit weird.

The bidding up of house of course is not the stimulus people (unless they got a good chunk of the CA absurdness).  That is, as someone said, likely more the result of real estate being used as an investment by a lot of people (including wealthy foreigners), and importantly, companies.  Do you realize that Zillow is going around buying up houses?  I know someone who's husband works for them to inspect houses.  

Even if you don't resell, or don't rent, houses can make good money on the temporary rental market.  Of course, just holding empty property in the US is generally FAR safer then keeping it in some foreign countries (I believe China is restricting this now?).

captdownshift (Forum Supporter) said:

I love inflation. It's the way the current generation sticks it to the previous generation that kicked the can with regards to taking fiscal responsibility and leveraged the world for their children to pay. You make their life savings worthless. It's economic payback for their sins. 

Not sure the will work out that way for most.  The "current generation" generally has very little (historically) in investments (from what I hear), meaning they get hit directly by inflation and get pummeled by any delay in wage increases.

The "previous" generation is generally more invested (e.g. real estate) which tends to compensate for inflation (depending on how you are invested of course).  E.g. housing prices go up, that makes houses less affordable for the "current", acts as inflation compensation for the "previous", so basically, no effect on them.

captdownshift (Forum Supporter) said:

I love inflation. It's the way the current generation sticks it to the previous generation that kicked the can with regards to taking fiscal responsibility and leveraged the world for their children to pay. You make their life savings worthless. It's economic payback for their sins. 

First, everyone gets an "internet awesome badge" for not sending this thread down a political rat hole.

To captdownshift's good point, I'm in my master bedroom right now (a place I've been spending much more time in since COVID broke out) and I can't help but notice how much the things I see, I've owned for a long time.

I'm 57 years old and it's apparent that I'm not buying anywhere near as much stuff as I used to.

Looking around...I bought those seven things in my twenties...I bought those five things in my thirties...I bought those three things in my forties...the only thing I've bought in my fifties is that one thing over there.

Bottom line, inflation is OK if your wages are increasing proportionally or if you're done buying stuff...the people that get $crewed are those that aren't in critical demand and / or haven't yet bought all their stuff.

It would be vulgar to say what my net worth is so I'll just say that increasing valuations on my property, equities, etc. are wildly outpacing my increasing costs so I'm benefiting from this inflation...I didn't ask for it but I'm benefiting from it.

One easy way to halt inflation.

mtn said:

It will never stop, unless we change the way that global commerce works. 

Right now, we're in a situation that can't be compared to anything except possible a world war. We can't stop it, the government can't stop it, though they (and the fed) have some levers that they can (and have) pulled to impact it in one direction or another, ultimately there are far too many variables to control. 

One of the problems is that any actions that seem like they're doing anything are going to be too catastrophic in the short term; long term options take too long to see. The blatant mismanagement of the pandemic here and around the world necessitated the stimulus checks, but too many people didn't actually need them, which caused the price of everything to go up - and that doesn't even mention the idea of just throwing free money at people to see what it does. Meanwhile supply for everything has dropped like a rock due to the pandemic and other causes (insert Evergreen Suez Canal meme here), demand has mostly stayed the same or gone up, so... prices go up, but we can't go back in time. 

So, we have to see if it really is out of control or not... In the short term, yeah, it is. On a more macro sense, it isn't. It will eventually balance out, though I expect it will take longer this time around*.

And to look at the big picture... On the long term, the rate of inflation is actually decreasing. Through September, the annualized rates of inflation since:

• 1950: 3.45% to 3.5%
• 1960: 3.7% to 3.75%
• 1970: 3.9%
• 1975: 3.55%
• 1980: 2.9% to 2.95%
• 1985: 2.6% to 2.65%
• 1990: 2.35% to 2.4%
• 1995: 2.15% to 2.2%
• 2000: 2.2%
• 2005: 2.05%
• 2010: 2.1% to 2.15%
• 2015: 2.4%
• 2016: 2.65% to 2.7%
• 2017: 2.65% to 2.7%
• 2018: 2.9% to 3.05%
• 2019: 3.35% to 3.65%
• 2020: 4.5% to 5.45%

Now, the things that have me concerned about this are C-suite wages compared to worker wages, the enormous transfer of wealth TO the wealthy over the past year and a half, and health insurance/medical costs - I think that nurses are going to be demanding more and more money; they can't fill overtime slots paying 3x their base rate. Something is going to break here, and this is what makes me think that the "system" is going to break and that could break inflation in the short to mid term.

Talk about cherry picking data(the problem with taking a sample every 5 years is that it it has an 80% chance of ignoring anomalous years, though that isn't really cherry picking, just bad sampling), what about 1974 as an example...inflation was running away at over 11% when the US went off of the gold standard internationally, only curbed with extreme increases in interest rates.

To believe that the U.S. is different than every other country and is somehow immune to hyperinflation is naive. Money as all about a perceived store of value based on trust in a given currency. Inflation will never stop though.

As for the OP saying not to make it political...it is going to be political simply because political decisions directly affect it, no way to ignore the tens of trillions of dollars being spent over the last decade that we simply do not have and had to borrow to pay for whatever. Trying to discuss inflation without politics is just like saying not to discuss inflation.

The fact is, putting aside everything COVID and supply-chain related, inflation is not a measure of the value of money so much as its a measure of LACK OF FAITH in a given currency. When people(both domestic and internationally) see more money entering circulation, they see more money chasing fewer goods and as such there is more pressure on them to spend that money before it loses its value...or trade that money for something that retains value regardless of currency...IE:Gold, land, houses, other currencies, stocks, crypto, cars, or even something as questionable as Pokemon cards....all of which you see going up in price...because the lack of confidence in the dollar is plummeting and people don't want to be caught without a seat when the musical chairs music stops. It is after all, better to buy a $500 part now than it is to wait till significant inflation takes hold and have to spend $1000 for the same thing next year...or in the cast of hyperinflation $10,000. Of course int he case of hyper inflation, no one is going to be spending money on car parts anyway, they will restrict themselves only to the things needed for survival, because regardless of what happens to the value of money, their wages are not going to keep up at the same rate.

There are ways to actually have a stable currency that is neither inflationary or deflationary(such as basing the money in circulation on the population count) but doing it that way does not allow interested parties in stealing from people through the hidden tax than inflation really is. So if you see inflation peak 10% then you know that the faith in the USD is in real danger and that hyperinlfation becomes a real possibility.

I actually just read an interesting book on this a couple of weeks ago called The Price of Tomorrow. The author argues that embracing deflation is the correct action because of the rising cost input required to falsely inflate gdp for marginal inflation. Very interesting book that makes good points and makes you think some. 

In reply to STM317 :

Good article-I knew that there was a change in the Fed's approach to balancing employment/inflation but didn't realize it was stated so plainly. It sounds like they are still targeting 2% but willing to hit 3% to drive unemployment as low as possible.

If you're betting that what you're seeing is transitory, then you're also betting that the supply chain issues resolve themselves sooner, rather than later, i.e. before people start to expect inflation and change their spending habits. Articles like this aren't what you want to see: 

https://arstechnica.com/gadgets/2021/10/no-end-in-sight-for-chip-shortage-as-supply-chain-problems-pile-up/ 

“The shortages are going to continue indefinitely,” Brandon Kulik, head of Deloitte’s semiconductor industry practice, told Ars. “Maybe that doesn’t mean 10 years, but certainly we’re not talking about quarters. We’re talking about years.”

In reply to grover :

I just bought that book. Haven't started it yet though

2 pages of no politics shows we can have a civilized economics discussion. Good to know.

In reply to bearmtnmartin (Forum Supporter) :

Economics, nor its theories should ever be political. It only becomes so when policies are attached to political ideology, which is ashame as it can poison a theory regarding economics that can be absolutely 100% on point. 

The primary issue with economics is not the theories, it's the economists.  Some of whom think they can predict the future, and are very commonly shown to be well off base.  They are the ones that are not only easily corrupted by taking the theories too seriously, but the the pressures of politics and media. 

Realistically it's more likely the result of media outlets shopping around to find someone to tell the story they want to hear, then a general issue with economists.  As with many things, if you look hard enough for something, whether it realistically exists or not, you will find it.  And those are the people most people end up hearing from.

CrustyRedXpress said:

In reply to STM317 :

....Articles like this aren't what you want to see: 

https://arstechnica.com/gadgets/2021/10/no-end-in-sight-for-chip-shortage-as-supply-chain-problems-pile-up/ 

While I think the article makes some good points this one...

While demand is up, whether or not it will persist beyond the pandemic is unclear. Companies are loath to invest in a new fab if there’s a strong possibility that it won’t be running 70 percent of the time. Fabs are just too expensive.

...seems highly suspect.  Yes, shipping out the product you produce at this point is an issue.  Yes, there is very much a bubble of demand now.

But, can you honestly say you don't know if the demand will go up in the future, for computer chips!!! 

 What exactly do they think will replace them?!?  Unless they are predicting such an economic collapse that while demand will be wider, the overall market will be so much smaller it will compensate.  I don't see this as a realistic prediction.  (keep in mind, I know nothing )

In reply to aircooled :

What they think and want to replace them are newer chips. I'm paraphrasing here, but a big problem with the automobile sector is the time it takes to get things through approval. They're using hardware a couple of generations old because it's been approved for safety, while the production facilities are trying to move on to the newer faster better. So trying to keep the old production methods and hardware going while pumping out the new stuff for other industries is its own challenge. 

It's not so much that computer chip demand would go down, but demand for a particular variation and type of chip that is almost exclusive to one industry could go down. 

Ah, OK, that makes more sense (see, I told you I know nothing )

I was thinking more generic "chips",  not just the automotive industry.  I am pretty confident though, for non-automotive stuff, future production should not be an issue. 

I wonder if this will be a bit of a kick start to more electric?  I assume they use more modern chips?  If so, easier to produce, might bring prices down, purchasers have fewer other options...   (There of course are many other practical issues with electrics for many people)

In reply to CrustyRedXpress :

FYI

The chip shortage for cars is not something that I buy into. The leading edge chips are built with a 5 nanometer technology. TWMW in Taiwan  with technology from ASML in the Netherlands owns a huge part of that market.  Thing is, automotive is 3-4 generations back  around the 7 namometer technology.  Difference is like old school chevy small-block and LS technology today.

TSMW is one of the very few that can make the bleeding edge chips and they do so for hyper-competitive markets like phones and maybe some military applications. But automotive is using "yesterday" technology for their chips; this is due to both cost and reliability of a proven technology. So why there would be a believable shortage, I do not know.

RevRico said:

In reply to aircooled :

What they think and want to replace them are newer chips. I'm paraphrasing here, but a big problem with the automobile sector is the time it takes to get things through approval. They're using hardware a couple of generations old because it's been approved for safety, while the production facilities are trying to move on to the newer faster better. So trying to keep the old production methods and hardware going while pumping out the new stuff for other industries is its own challenge. 

It's not so much that computer chip demand would go down, but demand for a particular variation and type of chip that is almost exclusive to one industry could go down. 

The way I understand it, the fabs that make automotive-grade chips are wearing out, and to make new fabs would require an investment that would take maybe 50 years to recoup because of how specialized the application is.  Ain't nobody going to do that, especially in an environment where people are more concerned about the next quarter rather than the next quarter century.

"Just make new chips that work like the old ones" doesn't really work either, because of all of the supporting hardware that needs to be redesigned.

Really, if the timing was a little different, this all would be a non issue.  I have been hearing for years about the switch to 42 volt systems (3x current voltage), which would require a completely new electronics ecosystem.  Allegedly it is happening Real Soon Now.  If Real Soon Now was a couple years ago, none of this would be an issue...

NOHOME said:  Thing is, automotive is 3-4 generations back  around the 7 namometer technology.  Difference is like old school chevy small-block and LS technology today.

Not a bad analogy, really.  I have heard from people in the know that the SBC really should have been killed off ten to fifteen years earlier, because the heavy-investment machinery (block broaches, gang drills, etc) were heavily worn out and patched together with spit and bubble gum. 

Kind of like, say, how the CJ7s started to get "Jeep" on the sides as stickers, because the stamping dies could no longer reliably make the "e"s.  ("Jeeps" vs "Joops")  Or how 1992 Camaros had the chassis panels bonded as well as spot welded, because the stamping dies were so worn out that spot welding alone wasn't going to make a very strong tub.

NOHOME said:

In reply to CrustyRedXpress :

But automotive is using "yesterday" technology for their chips; this is due to both cost and reliability of a proven technology. So why there would be a believable shortage, I do not know.

Pete covered it-there is a chip shortage for older chips for the same reason I can't buy a new ECU for my '92 NSX. The technology is old but the market is both not big enough and shrinking too quickly for the manufacturer to spin up an assembly line (or, in this case, a chip factory). 

Another way to look at it is that somebody has to bear the cost of a borked supply chain and some factories going up in smoke. Car manufacturers could eat it by redesigning their systems to widely available 5nm technology. Chip manufacturers could eat it by creating 7nm chip fabs that will probably be money losers. Or consumers could eat it by paying more for cars, or  having to wait to get them. Guess what is happening =)

Here is an article from "another channel" that covers it pretty well: https://jalopnik.com/i-asked-experts-why-carmakers-cant-just-transition-to-n-1847739665 

Here's a question I've pondered:

Are wealthy people shifting their spending habits from discretionary stuff like cars and consumer good and restaurants to housing? People basically saying "With COVID I don't want to go out, the chip shortage with cars has car prices too high, I've got everything I need, lets buy another house?" 

pheller said:

Here's a question I've pondered:

 

Are wealthy people shifting their spending habits from discretionary stuff like cars and consumer good and restaurants to housing? People basically saying "With COVID I don't want to go out, the chip shortage with cars has car prices too high, I've got everything I need, lets buy another house?" 

The only potential change that I would expect is an increase in vacation home purchases, because other vacation options were off the table for a long time, and for many, still are. But I think that is likely more an acceleration due to retiring Baby Boomers, and the result of the pause on foreclosures and evictions. 

Now, you also need to define "wealthy" in your question. Because many, if not most, people buying vacation homes are probably not going to just buy a car without discretion. At least the ones I'm familiar with.