Inflation

[MChambers]

yeah, for years now we have heard from some quarters that the massive stimulus bills we've seen will lead to large increases in inflation, and economists have been contorting themselves to explain why this hasn't happened.

Maybe when Jeff Bezos owns absolutely everything, prices will skyrocket...until then I just don't see a major problem...we'll see.

That's pretty much how I feel. I know that there are economists, including Larry Summers (who is obviously very smart but very flawed and often wrong), who think that inflation is a real threat. Of course, if inflation is a threat now, why wasn't it a threat three or four years ago, when the economy was very strong and we had a very big tax cut, increasing deficits?

On the other side, you have the economists who follow the Modern Monetary Theory, led by Stephanie Kelton, who think that deficits really aren't that big a deal.

I really don't know who to believe, and haven't seen any analyses that convince me one way or another. If the main source of any inflation is an increase in wages for low-wage workers, I'd be fine with that.

My undergrad degree from Duke was in economics, but I always felt like I understood microeconomics and did not understand macroeconomics.

[budwom]

^ I feel the same way about increasing the wages of very low income people...When suppliers finally catch up to the huge demand for goods out there now (and they will, there's money to be made) we'll see where prices end up...

[rsvman]

Maybe I'm just stupid, and admittedly I don't know much about economics, but I don't see how vastly increasing wages for entry level jobs isn't going to result in increasing the cost of pretty much everything. If it isn't, maybe somebody who understands this stuff better than I do can explain it to me.

[sagegrouse]

^ I feel the same way about increasing the wages of very low income people...When suppliers finally catch up to the huge demand for goods out there now (and they will, there's money to be made) we'll see where prices end up...

First, if the banks and financiers and billionaires are willing to lend money for 30 years at 2.25 percent, then the financial consensus is that inflation will not be terribly much higher in the future than today. If those folks thought that inflation would be rising, then there money would be in "real" as opposed to financial assets (and consequently, long-term interest rates would rise dramatically).

Second, in looking at rising price levels, please separate commodities like oil, gas, agricultural goods, etc., from other kinds of goods and services. Prices of commodities bounce up and down depending on the vicissitudes (whims?) of the market -- not because of underlying inflationary pressure.

Third, deflation is just awful -- because no one has an incentive to spend when prices will be cheaper in a few weeks or months. Therefore, central banks would actually like 1-2 percent inflation as a bulwark against deflation.

[ClemmonsDevil]

Maybe I'm just stupid, and admittedly I don't know much about economics, but I don't see how vastly increasing wages for entry level jobs isn't going to result in increasing the cost of pretty much everything. If it isn't, maybe somebody who understands this stuff better than I do can explain it to me.

It basically boils down to scale. Very modest increases in prices (think less than a penny per transaction) would more than offset large increases in wages for lower earners. I am too lazy to look it up this morning, but the classic look at this is Walmart would need to charge half a cent more per transaction to pay their workers $15/hour. The upshot of this is a dramatic decrease in social programs needed to subsidize low wage workers, fewer people in poverty, and increased purchasing power among low wage workers which is good for people in the middle and top as well.

[OldPhiKap]

Maybe I'm just stupid, and admittedly I don't know much about economics, but I don't see how vastly increasing wages for entry level jobs isn't going to result in increasing the cost of pretty much everything. If it isn't, maybe somebody who understands this stuff better than I do can explain it to me.

As I understand it, the Fed has argued that commodity price inflation is only “transitory” because it does not expect sustained inflation without wage inflation first. So if you bump up the wages, it would seem to me that it fulfills exactly what the Fed says will trigger sustained inflation.

The Fed is fine with 2% annual inflation. What wage raises hit that target, or overtake that target, is my question.

And while Wal-Mart sells in such volume that salary raises may just be a very marginal blip, this is not the case for a small business working on much thinner margins and relying on a larger profit-per-transaction in order to survive and grow. They struggle to compete with the Wal-Marts and Amazons of the world as is. So they either have to raise prices making them even less competitive against mega-retailers, or cut profits-per-sale when the virus shutdown may have them in the red already.

At some point, massive cash infusions plus massive spending plus tight commodity markets plus rising wages HAS to equal inflation it seems to me. Whether it is transitory or not, well — opinions seem to differ.

[ClemmonsDevil]

As I understand it, the Fed has argued that commodity price inflation is only “transitory” because it does not expect sustained inflation without wage inflation first. So if you bump up the wages, it would seem to me that it fulfills exactly what the Fed says will trigger sustained inflation.

The Fed is fine with 2% annual inflation. What wage raises hit that target, or overtake that target, is my question.

And while Wal-Mart sells in such volume that salary raises may just be a very marginal blip, this is not the case for a small business working on much thinner margins and relying on a larger profit-per-transaction in order to survive and grow. They struggle to compete with the Wal-Marts and Amazons of the world as is. So they either have to raise prices making them even less competitive against mega-retailers, or cut profits-per-sale when the virus shutdown may have them in the red already.

At some point, massive cash infusions plus massive spending plus tight commodity markets plus rising wages HAS to equal inflation it seems to me. Whether it is transitory or not, well — opinions seem to differ.

I think my answer to this conundrum is that we are already paying for this in the form of a social safety net. This would be a transfer of how we pay for it. Of course I am also a proponent of escalating taxes on high earners (I am one of these), so I have many unpopular beliefs. And the last part of your post is particularly germane...no one KNOWS anything.

[budwom]

I think my answer to this conundrum is that we are already paying for this in the form of a social safety net. This would be a transfer of how we pay for it. Of course I am also a proponent of escalating taxes on high earners (I am one of these), so I have many unpopular beliefs. And the last part of your post is particularly germane...no one KNOWS anything.

without delving too much into politics, I agree with your safety net comment...it's been reported that large numbers of employees at places like Walmart and McDonalds use various government safety net programs such as food stamps, Medicaid, etc...

The current minimum wage is absurdly low, and is becoming less relevant as companies realize they have to pay more to attract workers...and as these people get paid more, they can actually buy more stuff, helping the economy.

[TeacherTom]

These informative posts on inflation are exactly for what I wished when I initiated this thread. Again, I apologize for including how inflation had affected me personally. TT

[budwom]

https://www.nytimes.com/2021/06/01/b...gtype=Homepage

I know it's behind a paywall, but this NY Times story from today details how Just in Time inventory management, wildly popular for decades, has resulted in all sorts of global shortages (as we have discussed here). It's great when it works well, but the practice has become so widespread that many companies are ill prepared to deal with a single problem in delivery, be it a key ingredient, a container, a computer chip, whatever...BusinessWeek got into this a month ago as I think I mentioned, JIT innovator Toyota had a big problem a decade ago with one key chip (I believe) delivery after Fukushima, so ever since they've done a better job of keeping an eye on their entire supply chain, which has helped them avoid many of the delivery issues other automakers are experiencing...

[bundabergdevil]

without delving too much into politics, I agree with your safety net comment...it's been reported that large numbers of employees at places like Walmart and McDonalds use various government safety net programs such as food stamps, Medicaid, etc...

The current minimum wage is absurdly low, and is becoming less relevant as companies realize they have to pay more to attract workers...and as these people get paid more, they can actually buy more stuff, helping the economy.

I assume with the current worker shortage, wages may have to rise to compete for scarce seekers and get some folks off the bench, too.

[JasonEvans]

I assume with the current worker shortage, wages may have to rise to compete for scarce seekers and get some folks off the bench, too.

I've heard from some pretty smart economists who say the worker shortage we are seeing is not folks unwilling to work but an actual shortage brought on by:

1) Less immigration (legal and illegal) both due to crackdowns by the previous administration and less movement across borders due to the pandemic. There are simply fewer low-wage immigrant workers in the US today than in previous years
2) Moms (and some dads) who have been staying home to take care of kids who have been unable to attend schools or other day-care programs
3) Students who have chosen not to take low-paying jobs because it was seen as dangerous during the pandemic

I know there is a belief that enhanced government unemployment benefits have caused the current worker shortage, but what I have read and seen seems to indicate that is not the case. All of the above 3 examples of folks not in the workforce are cases where unemployment benefits would not be available. The immigrants are not eligible, the moms who voluntarily leave a job to take care of kids are not eligible, and the students choosing not to work do not have enough past earned income to qualify for unemployment.

-Jason "I really hope folks don't see this as political... I'm not trying to have a debate about unemployment benefits, just explaining what appears to be the cause of the worker shortage in the US today" Evans

[mkirsh]

I assume with the current worker shortage, wages may have to rise to compete for scarce seekers and get some folks off the bench, too.

NY Times had a Morning Newsletter post on this a few weeks ago (not sure if this is paywalled or not). Might be a little too political, but I thought it was interesting. Key excerpts below:

If anything, wages today are historically low. They have been growing slowly for decades for every income group other than the affluent. As a share of gross domestic product, worker compensation is lower than at any point in the second half of the 20th century. Two main causes are corporate consolidation and shrinking labor unions, which together have given employers more workplace power and employees less of it.

Corporate profits, on the other hand, have been rising rapidly and now make up a larger share of G.D.P. than in previous decades. As a result, most companies can afford to respond to a growing economy by raising wages and continuing to make profits, albeit perhaps not the unusually generous profits they have been enjoying.

This line of thinking would say there is room for wages to grow without pushing up prices and instead just compressing profits, which then theoretically impacts company valuations and spider webs from there. Although I was an econ major, I can't say I have any understanding how all of this will play out.

[bundabergdevil]

I've heard from some pretty smart economists who say the worker shortage we are seeing is not folks unwilling to work but an actual shortage brought on by:

1) Less immigration (legal and illegal) both due to crackdowns by the previous administration and less movement across borders due to the pandemic. There are simply fewer low-wage immigrant workers in the US today than in previous years
2) Moms (and some dads) who have been staying home to take care of kids who have been unable to attend schools or other day-care programs
3) Students who have chosen not to take low-paying jobs because it was seen as dangerous during the pandemic

I know there is a belief that enhanced government unemployment benefits have caused the current worker shortage, but what I have read and seen seems to indicate that is not the case. All of the above 3 examples of folks not in the workforce are cases where unemployment benefits would not be available. The immigrants are not eligible, the moms who voluntarily leave a job to take care of kids are not eligible, and the students choosing not to work do not have enough past earned income to qualify for unemployment.

-Jason "I really hope folks don't see this as political... I'm not trying to have a debate about unemployment benefits, just explaining what appears to be the cause of the worker shortage in the US today" Evans

I don’t think it’s political. Rising wages could eventually get parents who are now at home to afford the cost of childcare and re-enter the workforce, too. With the exception of immigration, rising wages could get at your other two scenarios.

My comment about “off the bench” was meant to include all the various reasons why people are at home.

[CrazyNotCrazie]

I've heard from some pretty smart economists who say the worker shortage we are seeing is not folks unwilling to work but an actual shortage brought on by:

1) Less immigration (legal and illegal) both due to crackdowns by the previous administration and less movement across borders due to the pandemic. There are simply fewer low-wage immigrant workers in the US today than in previous years
2) Moms (and some dads) who have been staying home to take care of kids who have been unable to attend schools or other day-care programs
3) Students who have chosen not to take low-paying jobs because it was seen as dangerous during the pandemic

I know there is a belief that enhanced government unemployment benefits have caused the current worker shortage, but what I have read and seen seems to indicate that is not the case. All of the above 3 examples of folks not in the workforce are cases where unemployment benefits would not be available. The immigrants are not eligible, the moms who voluntarily leave a job to take care of kids are not eligible, and the students choosing not to work do not have enough past earned income to qualify for unemployment.

-Jason "I really hope folks don't see this as political... I'm not trying to have a debate about unemployment benefits, just explaining what appears to be the cause of the worker shortage in the US today" Evans

My assumption (and I think you likely agree to some extent) is that there is a greater than zero number of people who are sitting out due to unemployment benefits. For example, some of the parents who are staying home are those who lost jobs, are getting unemployment, and are not looking for a new job quite as hard as if they weren't getting the unemployment because the jobs they can find don't pay too much more than unemployment, child care options are limited now, and once they pay for that, they are better off financially just staying home. So they are being more picky.

However, I think this group is not huge. And I think that once schools hopefully return largely to normal in the fall, this group will decline. Also, I'm not clear on how long enhanced benefits will last. As things continue to pick up, the elimination or tapering of these additional benefits will hopefully not be a political issue but one driven by non-partisan analysis.

So enhanced unemployment benefits are having some impact on the number of people actively seeking jobs, but it is not a huge impact. And I think that your other causes are not discussed a lot but are very important to consider.

[budwom]

good discussion. Yes, noted that there are some meat supply shortages, lack of workers at meatpacking plants which rely to a yooooge extent on immigrant labor...and the number of people sitting on the sidelines due to enhanced unemployment benefits (it's definitely a real issue here, too, though to what extent one can argue) continue, but probably (as mentioned) for not too much longer.

Lots of readjustments going on now...

[Neals384]

I assume with the current worker shortage, wages may have to rise to compete for scarce seekers and get some folks off the bench, too.

In my area, many fast food outlets have signs up listing their starting wage, typically $13 - $15, which is great for this generally depressed area. Just one data point that wages are rising.

[duke79]

In my area, many fast food outlets have signs up listing their starting wage, typically $13 - $15, which is great for this generally depressed area. Just one data point that wages are rising.

Yea, the local Dunkin Donuts shop near me (Western Massachusetts) is advertising starting pay of $15 per hour. And a large hotel close by is offering new workers a $1,000 bonus ($500 paid upfront and $500 paid after six months of continuous employment). Of course, I also read a story yesterday that many restaurants have begun to raise their prices to diners to pay for the rising food costs and employee costs. Rule no. 1 of economics: "There is NO free lunch". We're beginning to see "cost-push" inflation (as was the case in the 1970's) when businesses are forced to raise prices on what they sell to take into account rising input costs. Let's hope this does not turn out as bad as the 1970's.

[dudog84]

It basically boils down to scale. Very modest increases in prices (think less than a penny per transaction) would more than offset large increases in wages for lower earners. I am too lazy to look it up this morning, but the classic look at this is Walmart would need to charge half a cent more per transaction to pay their workers $15/hour. The upshot of this is a dramatic decrease in social programs needed to subsidize low wage workers, fewer people in poverty, and increased purchasing power among low wage workers which is good for people in the middle and top as well.

If you think Walmart is only going to raise prices half a penny when (if?) they eventually have to pay their employees a living wage, I have some land in Florida to sell you. Cheap! And yes CD, I know this is not what you were saying.

They (and McDonalds, etc.) are going to stick it to us. Luckily for me I guess, I very rarely patronize either. I just get agitated when teachers, nurses, etc. are chronically underpaid while one American is approaching a "worth" of $200 Billion. No one is worth that much, I don't care what they produce.

[ClemmonsDevil]

If you think Walmart is only going to raise prices half a penny when (if?) they eventually have to pay their employees a living wage, I have some land in Florida to sell you. Cheap! And yes CD, I know this is not what you were saying.

They (and McDonalds, etc.) are going to stick it to us. Luckily for me I guess, I very rarely patronize either. I just get agitated when teachers, nurses, etc. are chronically underpaid while one American is approaching a "worth" of $200 Billion. No one is worth that much, I don't care what they produce.

Walmart is based on lower prices and low margins because of an economies of scale advantage. This is how they undercut mom and pop stores. They have to keep prices low in order to have the business model they do. And I don't want any land in Florida. Too hot. If you have something near Asheville or Charleston we can talk.