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The other day I got one of those insightful hedge fund newsletters with a deep dive in inflation and unemployment. The dynamics are really complicated but one t

The other day I got one of those insightful hedge fund newsletters with a deep dive in inflation and unemployment. The dynamics are really complicated but one thing is unequivocal, the moment real wages go up the inflation catches up and those at the bottom suffer the most (due to Cantillon effect, negotiating power and other queuing phenomena). Higher wages as a platform is meaningless. Perhaps the best measure that matters is the U6 underemployment which cleverly captures the utilisation of education and skill. It looks like this is as good as it gets as of right now in the US. There are 15+ measures of inflation indeed, varying from 0 to 20%. Inflation is further segmented by demographics, younger people suffer far more inflation than older people (mostly due to housing, education and legacy cheaper medical plan expenses). Poor people also suffer higher inflation than the others. The rabbit hole is deep and confusing. You can make just about any claim and it will be accurate for some definition of unemployment or inflation. And it's very easy to find contradictions. I'm sure somebody understands all this stuff, but this privilege is probably reserved for the top finance gurus.

ikeboy 7y ago
>one thing is unequivocal, the moment real wages go up the inflation catches up Hard disagree. Inflation is affected by wages, but it's not a 1:1 relation and I'm not aware of anyone seriously making that claim. Of course there's https://en.wikipedia.org/wiki/Iron_law_of_wages https://en.wikipedia.org/wiki/Iron_law_of_wages, but not seriously advocated today as far as I know. >Inflation is further segmented by demographics This is actually a really interesting point. Elizabeth Warren made exactly this point in her 2004 book The Two Income Trap, with regard to middle class families with kids having higher housing costs due to competition over school districts.
- vladimirralev 7y ago
  > Hard disagree. Inflation is affected by wages, but it's not a 1:1 relation I am talking about "real wages" to avoid the gotchas associated with nominal wage and inflation definitions. I think this makes the controversy go away. When you extend the nominal wage growth beyond the productivity gains in real terms, any extra purchasing power from a nominal wage gain will have no real basis and thus instantly triggering inflation as defined for your specific personal definition by demographic and income. Say if you are really rich, your personal consumer basket that defines your personal purchasing power (and your personal inflation) will be dominated by expensive luxury items and investments while regular food/medical price increases will not impact you at all because they are a small part of the basket. However if your "demographic" (that has similar personal consumer basket) wage increases there is nothing to stop the price increase on such goods. There are small exceptions, but we can ignore them for the most part. When you break down the demographics into small enough micro-groups you can get rid of the guesswork about what is inflation and how it affects everybody on average. This way you should be able to see how the relationship between wages and inflation is really 1:1. It's indeed not 1:1 when you mix dissimilar baskets and work with averages.
  - ikeboy 7y ago
    Now you're changing your claim. You're not talking about real wage increases, you're talking about an increase that's bigger than the productivity increase. Even that doesn't necessarily increase inflation 1:1. Your models are off. You can't talk about a single demographic because multiple demos buy the same products. The demand curves have multiple customers.
    - vladimirralev 7y ago
      Real wage increase is the same as nominal wage, bigger than productivity increase. Real wages already have productivity and inflation factored in, so any extra nominal increase would be beyond productivity. > Even that doesn't necessarily increase inflation 1:1. Your models are off. Assuming you use the example rich demographic I gave, what would be an example scenario that systemically breaks the 1:1 ratio? > You can't talk about a single demographic because multiple demos buy the same products. I know what you mean here but you can bypass the dependencies between demos by letting the system play itself out and taking the numbers when you have access to them. You can pick any demographic or a person and you can get their personal basket, calculate inflation, calculate their purchasing power and how it changes every single tick just from their credit card statements. It doesn't matter what other people buy when you can see the actual purchases for each individual. What other demos buy is already taken into account in the numbers you see in the credit card statements so to speak.
      - ikeboy 7y ago
        >Real wages already have productivity and inflation factored in What source are you using that adjusts for productivity when reporting real wages? Real is defined as inflation adjusted only. >Assuming you use the example rich demographic I gave, what would be an example scenario that systemically breaks the 1:1 ratio? >Say if you are really rich, your personal consumer basket that defines your personal purchasing power (and your personal inflation) will be dominated by expensive luxury items and investments while regular food/medical price increases will not impact you at all because they are a small part of the basket. However if your "demographic" (that has similar personal consumer basket) wage increases there is nothing to stop the price increase on such goods. You're assuming perfectly inelastic supply, among other things. If there's elasticity, then additional money will result in some additional supply of luxury goods and greater quantity demanded. Also, investments != purchases. Investments are a decision to defer consumption to the future.

ikeboy 7y ago

>one thing is unequivocal, the moment real wages go up the inflation catches up Hard disagree. Inflation is affected by wages, but it's not a 1:1 relation and I'm not aware of anyone seriously making that claim. Of course there's https://en.wikipedia.org/wiki/Iron_law_of_wages https://en.wikipedia.org/wiki/Iron_law_of_wages, but not seriously advocated today as far as I know. >Inflation is further segmented by demographics This is actually a really interesting point. Elizabeth Warren made exactly this point in her 2004 book The Two Income Trap, with regard to middle class families with kids having higher housing costs due to competition over school districts.

vladimirralev 7y ago
> Hard disagree. Inflation is affected by wages, but it's not a 1:1 relation I am talking about "real wages" to avoid the gotchas associated with nominal wage and inflation definitions. I think this makes the controversy go away. When you extend the nominal wage growth beyond the productivity gains in real terms, any extra purchasing power from a nominal wage gain will have no real basis and thus instantly triggering inflation as defined for your specific personal definition by demographic and income. Say if you are really rich, your personal consumer basket that defines your personal purchasing power (and your personal inflation) will be dominated by expensive luxury items and investments while regular food/medical price increases will not impact you at all because they are a small part of the basket. However if your "demographic" (that has similar personal consumer basket) wage increases there is nothing to stop the price increase on such goods. There are small exceptions, but we can ignore them for the most part. When you break down the demographics into small enough micro-groups you can get rid of the guesswork about what is inflation and how it affects everybody on average. This way you should be able to see how the relationship between wages and inflation is really 1:1. It's indeed not 1:1 when you mix dissimilar baskets and work with averages.
- ikeboy 7y ago
  Now you're changing your claim. You're not talking about real wage increases, you're talking about an increase that's bigger than the productivity increase. Even that doesn't necessarily increase inflation 1:1. Your models are off. You can't talk about a single demographic because multiple demos buy the same products. The demand curves have multiple customers.
  - vladimirralev 7y ago
    Real wage increase is the same as nominal wage, bigger than productivity increase. Real wages already have productivity and inflation factored in, so any extra nominal increase would be beyond productivity. > Even that doesn't necessarily increase inflation 1:1. Your models are off. Assuming you use the example rich demographic I gave, what would be an example scenario that systemically breaks the 1:1 ratio? > You can't talk about a single demographic because multiple demos buy the same products. I know what you mean here but you can bypass the dependencies between demos by letting the system play itself out and taking the numbers when you have access to them. You can pick any demographic or a person and you can get their personal basket, calculate inflation, calculate their purchasing power and how it changes every single tick just from their credit card statements. It doesn't matter what other people buy when you can see the actual purchases for each individual. What other demos buy is already taken into account in the numbers you see in the credit card statements so to speak.
    - ikeboy 7y ago
      >Real wages already have productivity and inflation factored in What source are you using that adjusts for productivity when reporting real wages? Real is defined as inflation adjusted only. >Assuming you use the example rich demographic I gave, what would be an example scenario that systemically breaks the 1:1 ratio? >Say if you are really rich, your personal consumer basket that defines your personal purchasing power (and your personal inflation) will be dominated by expensive luxury items and investments while regular food/medical price increases will not impact you at all because they are a small part of the basket. However if your "demographic" (that has similar personal consumer basket) wage increases there is nothing to stop the price increase on such goods. You're assuming perfectly inelastic supply, among other things. If there's elasticity, then additional money will result in some additional supply of luxury goods and greater quantity demanded. Also, investments != purchases. Investments are a decision to defer consumption to the future.