Inflaaaaaaaation

[dismalist]

There's a classic error which confuses a change in relative prices with a change in the price level. This last is what's called inflation. I know it may be counterintuitive, but one cannot explain any phenomenon by describing its components. [I have a fever. That's because my liver is at 99.7, my stomach is at 103, my throat is at 104, and so on. The insight may even go back to Aristotle.] When one tries to explain inflation with a change in individual prices one is merely confirming the definition of inflation. And this is what's all over the newspapers.

So, why do we have inflation? There are two separate reasons, one from the demand side and one from the supply side.

On the demand side, the government deficit went through the roof on account of Covid. That's not at all bad in and of itself, though one could discuss the size. This big deficit was financed not by borrowing from the public, but by borrowing from the central bank, the guys who print money. Those who received the money have not wanted to hold it in bank accounts, rather they have wanted to spend it. Thus, two channels that added to demand and raised the overall price level.

On the supply side, we've had this thing called Covid, which shut down parts of the economy. We've also had jumps in energy prices, for which there is a world market. Energy is an input to all production and makes all production more expensive. Thus, two channels that reduced supply and raised the overall price level.

We are poorer for all this: There's less stuff left over for us at the moment.

However, it looks like the current monthly inflation rate is coming down: Covid seems to be over and energy prices are always all over the place anyway.

Wage increases have lagged behind price increases and they will continue to do so until demand growth slows or labor productivity increases more rapidly. The first looks like its already happening, though I don't know if sufficiently. Meanwhile, the extra stuff wished for, like was had three years ago, is just not there.

[evil_physics_witchcraft]

I've been experimenting with lowering the thermostat and adding more 'draft dodgers' around the house. Right now, it's at 63 degrees F and it's 45 deg. F outside. How low do you keep your thermostat?

[clean]

I have a 'smarter' thermostat.  At night i let it get to 62. It warms up to 68 in the morning, and then again just before bed.

However, in my area, the average temperatures in my town in February are 57 for the low and 67 for the highs. 

In the summer, I let the afternoon temps cool to 80, but go to 75 by bedtime. 

Anyway, I try not to turn on the heater if I can avoid it! 
In fact, only a few weeks ago when we had some freezing temperatures, I saw that my 'smart' thermostat wasnt set to automatic or heat, but to cool, so I have successfully made it much of winter so far without the heater even being on! 

I admit that i have a small heater in the bathroom that I plug in about 10 minutes before I shower, but My Bride doenst just turn it off, she unplugs it! 

Other than the heater in the bathroom, I find that throwing on a blanket or putting on socks is enough to keep me comfortable. 

[dismalist]

How anybody reacts to changes in relative prices is their business, of course, for they know best about what they want and what they can afford.

My father used to keep the thermostat at 68° in the depths of winter. When my sisters complained, he would retort: Wear a sweater! Clearly, natural gas and wool are substitutes. :-)

Such is all fine and good, but clearly there is something psychological going on with individual prices. Why gasoline? Why heating oil? [Mercy, why eggs?] This stuff is salient at the moment, even though household fuels and utilities takes up under five percent of an average consumer's expenditures. All energy, in other words including gas for the car,  take up a shade under eight per cent of an average consumer's expenditures. [The average consumer's expenditure share on eggs is likely near zero.]

But housing [rent, or imputed rent] takes up a third of an average consumer's expenditure! [That number floored me when I looked it up just now, by the way.] We hear nothing about this except how great it is when house prices rise. So, to be better off in these trying times, live in a smaller abode!

[It's clear why housing is so expensive -- restrictive land use regulations. That's like a supply shock. Here, a stroke of the pen would lead to reduced housing costs after a short while.]

ETA: eggs.

[apl68]

I keep my thermostat mostly around 60 during the winter.  It saves a lot on heat.  In the summer I keep it around 78 when I'm home, and 76 overnight to help me sleep.  And use fans.

The heat in our building at work is running around 60 as well, but that's not intentional.  Our patched-up HVAC system just isn't working any better than that.

[ergative]

We just moved into a new place and experimented putting the thermostat at 63. But Absolutive, who is a frail waif of a thing, objected vehemently to being TOO COLD in his OWN HOME (and, to his credit, he did try for a few months, bundled up with blankets and hats and scarves and gloves), so now we keep it at 66, which he deems barely acceptable. We also have a programmable thermostat, so it goes on in the mornings, and then comes up again at about 5 until we go to bed.

Our area never gets all that cold (we had a cold snap in December with temperatures topping out at about 33 for several weeks in a row), but usually it's in the 40s, dropping into the 30s overnight. But then, the housing stock is--well, let's say 'venerable'--and rarely has good insulation, so the central heating bills can go quite high.

[Langue_doc]

Aah, eggs! Down to $4.39 a dozen for extra large from $4.89 a week ago.

Why eggs cost so much, according to the NYT: https://www.nytimes.com/2023/02/03/briefing/why-eggs-cost-so-much.html?searchResultPosition=2

Here's the link to another article on eggs: https://www.nytimes.com/2023/02/06/well/eggs-health-misinformation.html?searchResultPosition=1

[Parasaurolophus]

Eggs here are 7.99.

[Langue_doc]

They were over $7 just ten days ago.

[Hibush]

With supply disruptions that have high information, is the price bump really reflective of inflationalry pressure in the broader economy?

With egg prices, the cost went up because many of the layers had to be culled due to disease. That created a gap. But we have high information because we know new layer will be in their place, we know how quickly new layers can be produced and how long it takes for them to begin laying after hatching. So economists could model the end of the price bump quite precisely even before the shortage began to be felt.

Eggs are also really easy to substitute for a little while, at least in households that cook their own food and are price sensitive.

We has a similar situation with lettuce in November as the last Salinas plantings failed to yield, but everyone in the business knew that the desert supply would come on as scheduled in November and prices would be back. That situation differs from the pathogen outbreaks where the cause can't be found leading to low information, as well as recalls that affect demand regardless of price.

In jabbing the proverbial thermometer in these places, which jabs tell us about inflation?

[kaysixteen]

Inflation is as has been said here a complex thing.   But random comments might well include:

1) move to a smaller abode?   Really?
2) Get worker productivity up higher?  It is at least twice as high now as it was in the 60s, whilst real wages are a fraction of what they were by 1970, esp for lower-income workers, and the minimum wage has been frozen at the federal level since 2007.
3) Air conditioning is a recent phenomenon in most of the country, esp for the non-rich, but heat is different.   Most people will not do at all well in a 60 degree house, or even a 66 degree one.  Especially older folks (and I do not mean superannuated-- I mind the cold much more at 55 than I did even at 40, whereas I do not miss the a/c I have almost never had (and not in 15 years, when living with family who had it).
4) Shrinkflation and skimpflation not withstanding, it is also true that increased monopolization and centralization of many aspects of our economy have allowed many firms to raise prices inordinately, thinking (often correctly) that most people would just ultimately suck it up and deal with it.

[dismalist]

Inflation is not that complex a phenomenon. Explaining the myriad of relative price changes that occur might get a bit trying.

1. If rent goes up, why not consider moving to a smaller place? Smaller eggs, smaller houses. I know there are transactions cost that make this the last package whose size one wants to change.

2a. The true relationship between the evolution of wages and labor productivity is consistently misreported. First, one must look at total compensation, which includes benefits, and not hourly wages, which do not. Second, one must use the same deflator for the two series. When one undertakes both adjustments, the evolution of productivity and real compensation is the same. Put differently, one also sees references to falling labor's share. Adjusting GDP  for what people actually spend, i.e. subtracting taxes and depreciation, to get Gross Domestic Income,  labor's share is in its historical range.

2b. Increasing the minimum wage must induce something to offset the increased labor costs. It could reduce employment, reduce hours, reduce benefits, reduce amenities, what have you, all of the above.

4.  Increased monopolization is hard to see with globalization. There are world markets for many things.  More firms, not fewer. And how does one get to be a monopoly? Innovate, reduce costs, reduce prices. And we cannot merely absorb inflation -- we have budget constraints.

[ciao_yall]

Inflation is not that complex a phenomenon. Explaining the myriad of relative price changes that occur might get a bit trying.

1. If rent goes up, why not consider moving to a smaller place? Smaller eggs, smaller houses. I know there are transactions cost that make this the last package whose size one wants to change.

Because moving is also expensive.

2a. The true relationship between the evolution of wages and labor productivity is consistently misreported. First, one must look at total compensation, which includes benefits, and not hourly wages, which do not. Second, one must use the same deflator for the two series. When one undertakes both adjustments, the evolution of productivity and real compensation is the same. Put differently, one also sees references to falling labor's share. Adjusting GDP  for what people actually spend, i.e. subtracting taxes and depreciation, to get Gross Domestic Income,  labor's share is in its historical range.

Consider that wealth inequality is the highest it has been in a century. That wealth rising to the top came from somewhere. All the homeless people, those who are stuck renting at a high percentage of their wages but unable to afford a home, those working at minimum wage, going without healthcare...

2b. Increasing the minimum wage must induce something to offset the increased labor costs. It could reduce employment, reduce hours, reduce benefits, reduce amenities, what have you, all of the above.

Apple did not have layoffs but the CEO took a pay cut. Facebook had layoffs, the executives did not take pay cuts AND they did a stock buyback to juice up the share price and enrich the shareholders.

Something tells me higher wages for the lowest paid will come out of profits and returns for the wealthiest people. Or they should. Be nice if labor laws supported a high minimum wage, stable working schedules, and we had Medicare For All to ensure a broad healthy economy.

4.  Increased monopolization is hard to see with globalization. There are world markets for many things.  More firms, not fewer. And how does one get to be a monopoly? Innovate, reduce costs, reduce prices. And we cannot merely absorb inflation -- we have budget constraints.

Also - buy up your competitors and squeeze your suppliers by becoming a monopsony (Wal-Mart). Have a high barrier to entry for competitors and nudge up prices while reducing services (Cable TV). Use the profits to continue to build market power.

[dismalist]

Of course moving is expensive! That's what "high transactions cost" means. :-)

Raising inequality changes the subject. And the most misguided interpretation of all, the most pernicious to our thinking, is that

That wealth rising to the top came from somewhere.

Nay, technological advance, higher productivity, luck, lower energy prices, anything, but it wasn't stolen. This is the classic "zero sum" fallacy. Two people voluntarily trading improve both their well being. We are most of the world, voluntarily trading with each other. World poverty has fallen dramatically.

How about those not working at all because there's a minimum wage: The minimum wage constitutes structural racism. The victims are unskilled Black teenage boys and young men. Make the wage high enough, and the unskilled will not be hired.

Health care -- the share of people covered by health insurance in the US has never been higher. Homelessness may be due to restrictive laws in favor of -- homeowners! A more encompassing explanation might be: One gets the number of homeless one pays for.

Wal-mart is probably the greatest contributor to poor people's welfare, ahead of Microsoft! Low, low prices. Otherwise they wouldn't have customers.

As I noted above, the wage share has been remarkably stable. No reason to count on anything coming out of profits.

All details aside, it's not a zero sum game. That some of us cling to zero-sum explanations of this world is likely a product of biological evolution. When we lived in bands of 40 forty thousand years ago, with no technical progress, with team production known as hunting, if somebody had more than somebody else, s/he must have stolen it! But that's not our world. It's an anachronism.

[ciao_yall]

Of course moving is expensive! That's what "high transactions cost" means. :-)

Raising inequality changes the subject. And the most misguided interpretation of all, the most pernicious to our thinking, is that

That wealth rising to the top came from somewhere.

Nay, technological advance, higher productivity, luck, lower energy prices, anything, but it wasn't stolen. This is the classic "zero sum" fallacy. Two people voluntarily trading improve both their well being. We are most of the world, voluntarily trading with each other. World poverty has fallen dramatically.

How about those not working at all because there's a minimum wage: The minimum wage constitutes structural racism. The victims are unskilled Black teenage boys and young men. Make the wage high enough, and the unskilled will not be hired.

Health care -- the share of people covered by health insurance in the US has never been higher. Homelessness may be due to restrictive laws in favor of -- homeowners! A more encompassing explanation might be: One gets the number of homeless one pays for.

Wal-mart is probably the greatest contributor to poor people's welfare, ahead of Microsoft! Low, low prices. Otherwise they wouldn't have customers.

As I noted above, the wage share has been remarkably stable. No reason to count on anything coming out of profits.

All details aside, it's not a zero sum game. That some of us cling to zero-sum explanations of this world is likely a product of biological evolution. When we lived in bands of 40 forty thousand years ago, with no technical progress, with team production known as hunting, if somebody had more than somebody else, s/he must have stolen it! But that's not our world. It's an anachronism.

I never said it was a zero-sum game. Still, wages (and wealth) are set by power, not by productivity.