> While that might be difficult in the long run, "over the shorter term though, yes," Powell said, dipping tentatively into a debate that may become more pointed over time depending on how inflation, the job market and the economy evolve.
https://www.reuters.com/markets/us/feds-powell-acknowledges-...
"Wages affect prices and prices affect wages," Powell said, associating current earnings growth to the current ultra-low unemployment rate of 3.4%, and suggesting the labor market may need to weaken at least somewhat for inflation to fall.
meaning that in his opinion inflation is driven by high employment, aka people spending money like crazy because they have more money that they know what to do with, and the solution is to make sure more people are out of work and with less funds to spend. Perfectly logical solution to producer-driven inflation I guess.
> The experts were worried about a so-called wage-price spiral. This occurs when workers expect inflation to keep rising, so demand — and achieve — higher salaries to keep up with price rises. Businesses then raise the prices of goods and services to cover higher labor costs, at the same time as workers have more disposable income to increase demand. This creates an inflationary loop, or in the language of economists, “second-round effects.”
> But while concerns this time around aren’t totally gone, what’s being discussed more frequently now is the fact that a wage-price spiral has not occurred in the 18 months or so that inflation has been running red-hot in much of the world.
> “What we’ve seen in the last year is prices rising very rapidly, but wages have not increased nearly as much, and that’s why we have a cost of living crisis,” Gourinchas said, after noting that core inflation remained high in many countries and in some cases was increasing.
> “We should expect wages to catch up eventually and people’s real income to recover,” he said. Real income refers to wages adjusted for inflation, reflecting changes in purchasing power.
> But the increase doesn’t present a risk because “the corporate sector has been sitting on pretty comfortable margins,” Gourinchas continued. Businesses’ revenues “have risen faster than costs, and so margins have room to absorb rising labor costs.”
Tangentially, Powell cannot destroy aggregate demand via the benchmark rate in a way that materially impacts the unemployment rate due to structural demographics. ~2 million people over the age of 55 die every year in the US. ~3 million Baby Boomers retire every year. 55+ workers clinging to the participation rate is holding a lot of this together.
https://www.barrons.com/articles/the-labor-market-bends-towa...
https://seekingalpha.com/article/4531829-older-workers-propp...
EXACTLY. Wages driving inflation my behind. If anything, businesses increasing prices cause other businesses (that purchase their goods) to increase their own prices. While most businesses manage to keep wages low (and increasingly laying off more and more staff). How is increasing unemployment rate supposed to tame the inflation in this scenario????????
Ah, the old wage-price spiral theory of inflation, which is total bunk because it doesn't explain the increase in the money supply.
Inflation follows the increase in the money supply due to money creation by the Fed. It's in Powell's best interest to deny this.
Reducing the supply of goods/materials will have the same effect - even at a constant money supply.
In Europe the ECB/EU gov is hiding behind the War in Ukraine and global supply chain issues to hide what is mostly their own pandemic purchasing program and overspending driving massive inflation.
Then there's also their there's also sanctions, trade wars and over-regulation adding fuel to the fire.
Of course none of these are a "natural effect from market dynamics" - as much as they'd love to make it sound like that.
Here's the actual cause of inflation:
https://www.federalbudgetinpictures.com/federal-spending-per...
This extra spending is paid for with inflation.
If you direct spending towards production it's much harder to have per-unit inflation since there are more goods available; instead, you get more total consumption. The classic "make the pie bigger."
If you don't then yeah, you have more dollars chasing the same number of goods. So we need to be smarter overall in terms of how we look at allocation of money.
It seems like the 2020 admin threw more money at the problem than was necessary, and did it in the second form, but it's probably still much better than having thrown too little at the problem would've been.
Yes, the Covid stimulus was an experiment in "helicopter money", with a predictable response in price, especially in light of concurrent supply-chain issues.
> it's probably still much better than having thrown too little at the problem would've been
No, some interventions leave things worse off than it would have been without. When it comes to the public's money, and truly stupendous amounts of it at 25% of GDP, the bar has to be a lot higher than "eh, probably better". I suppose it's a job for economists and historians in the future to study this, but one wonders if there is some relationship between the amount of Covid stimulus response and the recent inflation, and how persistent it would be in the years to come.
Yes, some interventions leave things worse off than without. But with sudden massive unemployment and low savings, why do you think the default hypothesis is "nothing would be better"? You can have both "persistent lingering inflation for several years" AND "still better than the alternative."
The argument is that something better should have been done.
There are many alternatives and we did one. It’s not like the only options were to drop trillions in cash on people or to do nothing.
This is learning the wrong lesson from broken windows / TANSTAAFLing yourself into thinking "all spending has the same ROI and it's never positive."
Private companies will only do things that accrue economic gains to themselves instead of returning those economic gains across the population as a whole.
Re: "usually" I'm not sure if I disagree with it because I don't know what you mean. "Usually" in practice or "usually" in possibility? By dollar share or by project share or other? And how directly are we measuring ROI, especially in terms of infrastructure or technology development from large projects?
I believe we could certainly get to a point where most government spending was net beneficial without needing to shrink the services provided by the government.
EDIT: and if we're picking on logical errors instead of getting into more details: my claim was that other forms of spending could avoid inflationary problems. I don't see your response that this would usually be mis-allocation or unproductive saying anything directly about my claim.
The inflation is a convenient foil for explaining price hikes. Federal spending certainly contributes to the problem, but is not the whole story.
Suppose ham costs $50 and eggs cost $50. You have $100.
Now Porky Pig gets greedy and raises the price of ham to $60. Now you have only $40 to spend on eggs, and (due to the Law of Supply & Demand) the price of eggs declines.
I.e. this greediness does not put more money in peoples' pockets to pay for it. A general price increase is not possibly caused by greed. Inflation is a general increase, and requires an increase in the supply of money relative to the value of goods and services in the economy.
And that way that happens is the government prints the extra money with no collateral. History is full of examples, including our current inflation.
Pull the other one, it's got bells on. Supply and demand is a nice theory, but calling it a law is magical thinking. If I go to the store and say "please sir I'd like to buy eggs but I don't have enough money" they tell me to piss right off, this isn't candyland.
It’s not magic, and it isn’t candy land. But arguing that the law of supply and demand is pretty silly as there’s massive evidence of its existence.
Don’t mistake your own experience with the entire market.
The market doesn’t care what happens to you. The market cares what happens to everyone. Of course you’ll go hungry. Supply and demand doesn’t determine how much you will pay or if you will eat. It just sets a price and maybe you can afford it and maybe you can’t.
The grocery store can’t jack up the price if people aren’t willing or able to pay that amount. They might stop carrying eggs altogether, but they are more likely to price at whatever the market will bear.
> Now you have only $40 to spend on eggs, and (due to the Law of Supply & Demand) the price of eggs declines.
was utter bollox
Is it now? Most government failures come from denying the LofS+D exists, or trying to repeal it. It works about as well as that state that passed a law defining pi to be equal to 3.0.
Essentially it's a huge transfer of wealth and economic power to those who need it least from those have very little to begin with. I honestly don't understand any of the arguments in favor of it. Like is Johnson & Johnson using the money to make better baby powder (that doesn't give you cancer) or are they pumping their stock price, collecting bonuses, and prepping for another round of share buybacks?
Which causes price declines in those purchases. The Law of Supply & Demand.