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What’s worth noting right now is that, contra most inflation scenarios, current inflation seems to be at least substantially driven by supply chain constraints,

What’s worth noting right now is that, contra most inflation scenarios, current inflation seems to be at least substantially driven by supply chain constraints, not money supply or any of the other traditional villains. A lot of this is COVID related - shutdowns in factories and logistics centers, radically changed demand profiles, etc. have caused supply chain constraints in ways we haven’t seen in a long time, and that seem much more likely to be transitory (on the ~2-3 year timescale) than other inflationary moments. All that’s to say it’s a weird scenario right now and a lot of the conventional wisdom about inflation (such as it is) is even less useful than normal.

nine_zeros 5y ago
Solving this supply chain inflation by raising interest rate quite literally translates to - we will make people earn less so that they reduce demand for goods and services, thus controlling the inflation. Raising too fast will cause a recession, solving the inflation problem. But then unemployment would be a problem and interest rates would go back down. All this is to say, while it is imperative to raise rates now to control inflation, this solution comes at the expense of average people. The real solution to supply side problems is for the government to fix - by making structural changes that enable supply to increase. E.g. reducing import tariffs in the short term, reducing production taxes (increase taxes on $500k+ earners and billionaires if you must) and making healthcare cheaper via open competition of providers (not of insurance)
jameslk 5y ago
Inflation is not "transitory" anymore according to the Fed chairman [0]. It's now just inflation and will be permanently affecting prices (i.e. higher prices today and the future will be staying higher, unless an unlikely deflationary event were to push them back down) [1]. So if the average price of CPI goods and services for your average American has gone up 7%, then they've effectively lost 7% of their purchasing power permanently. I'm not sure why this "transitory" meme about supply chains and covid keeps persisting on HN. 0. https://finance.yahoo.com/news/fed-chairman-jerome-powell-retires-the-word-transitory-in-describing-inflation-162510896.html https://finance.yahoo.com/news/fed-chairman-jerome-powell-re... 1. https://www.lynalden.com/inflation/#transitory https://www.lynalden.com/inflation/#transitory
- roughly 5y ago
  > unless an unlikely deflationary event were to push them back down Would you consider a large increase in supply-chain capacity to be a deflationary event?
  - jameslk 5y ago
    It's debated whether current inflation is predominantly caused by supply-chain issues in the first place, so assuming that as the base case isn't stable ground. But let's not focus on the cause of our predicament for a moment. Here's a chart of the Consumer Price Index: https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPIAUCSL Rolling 12 month average % changes to CPI is what's reported by the media when talking about inflation, such as "a 7% increase to inflation". Notice how CPI rarely ever goes down. This is by design. In fact, deflation is usually worse for everyone versus inflation. Nobody wants big swings of either, so it's typical for central banks such as the Federal Reserve to control either direction, and they usually hedge on the side of inflation as their target. So that's why I said it's a very unlikely event to have deflation.
    - roughly 5y ago
      > But let's not focus on the cause of our predicament for a moment That’s my point, though - if we’re not focusing on the Cause of the predicament, we’re extremely unlikely to be able to handle it correctly. > they usually hedge on the side of inflation as their target. So that's why I said it's a very unlikely event to have deflation Yes, but, again, this is not a normal inflationary event. I agree that there are other factors affecting the situation, but the supply chain issues are clearly a substantial component, even if they’re only debatably the predominant factor. That component is being influenced from outside normal monetary policy and can clearly shift pretty quickly. Given that, the dangers of deflationary pressure, and the frankly appallingly shallow general understanding and zeitgeist around inflation, I’ll say again that I think it’s worth keeping in clear view the degree to which the current situation is being driven by factors outside the traditional monetary model, lest we decide to do something rash that we later find was stupid in the middle of what’s still actually a pandemic and not a normal business cycle.
anfilt 5y ago
The thing is if business raises their prices because of these reasons do you think they will lower them once the problem goes away? Maybe in some industries/categories where there is a lot of equivalent goods and is competitive. However that is not the case for everything.
champagnois 5y ago
The money supply issues, coupled with financial system competition from BRIC, will lead to a worse future than the present. The western world is never going back to the post-USSR high it was enjoying. Ever. The competitors have awakened and are making their moves globally. Most westerners are asleep.
- FormerBandmate 5y ago
  BRIC is an out of date meme from the 2000s that isn't used anymore by any serious economists. B and R were dominant off of the commodity boom and have receded substantially, I has potential but is held back by poor governance, and C is legitimately an economic power (although too unstable politically to hold financial control) but is causing pretty much all the supply chain issues with their stubborn zero-covid strategy and is sabotaging their own economy. Geopolitically, you're right, but economically, there's more threat from crypto than BRICs to the current order
  - champagnois 5y ago
    >economically, there's more threat from crypto than BRICs to the current order I am blown away by this belief of yours. Crypto is basically a scam.

nine_zeros 5y ago

Solving this supply chain inflation by raising interest rate quite literally translates to - we will make people earn less so that they reduce demand for goods and services, thus controlling the inflation. Raising too fast will cause a recession, solving the inflation problem. But then unemployment would be a problem and interest rates would go back down. All this is to say, while it is imperative to raise rates now to control inflation, this solution comes at the expense of average people. The real solution to supply side problems is for the government to fix - by making structural changes that enable supply to increase. E.g. reducing import tariffs in the short term, reducing production taxes (increase taxes on $500k+ earners and billionaires if you must) and making healthcare cheaper via open competition of providers (not of insurance)

jameslk 5y ago

Inflation is not "transitory" anymore according to the Fed chairman [0]. It's now just inflation and will be permanently affecting prices (i.e. higher prices today and the future will be staying higher, unless an unlikely deflationary event were to push them back down) [1]. So if the average price of CPI goods and services for your average American has gone up 7%, then they've effectively lost 7% of their purchasing power permanently. I'm not sure why this "transitory" meme about supply chains and covid keeps persisting on HN. 0. https://finance.yahoo.com/news/fed-chairman-jerome-powell-retires-the-word-transitory-in-describing-inflation-162510896.html https://finance.yahoo.com/news/fed-chairman-jerome-powell-re... 1. https://www.lynalden.com/inflation/#transitory https://www.lynalden.com/inflation/#transitory

roughly 5y ago
> unless an unlikely deflationary event were to push them back down Would you consider a large increase in supply-chain capacity to be a deflationary event?
- jameslk 5y ago
  It's debated whether current inflation is predominantly caused by supply-chain issues in the first place, so assuming that as the base case isn't stable ground. But let's not focus on the cause of our predicament for a moment. Here's a chart of the Consumer Price Index: https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPIAUCSL Rolling 12 month average % changes to CPI is what's reported by the media when talking about inflation, such as "a 7% increase to inflation". Notice how CPI rarely ever goes down. This is by design. In fact, deflation is usually worse for everyone versus inflation. Nobody wants big swings of either, so it's typical for central banks such as the Federal Reserve to control either direction, and they usually hedge on the side of inflation as their target. So that's why I said it's a very unlikely event to have deflation.
  - roughly 5y ago
    > But let's not focus on the cause of our predicament for a moment That’s my point, though - if we’re not focusing on the Cause of the predicament, we’re extremely unlikely to be able to handle it correctly. > they usually hedge on the side of inflation as their target. So that's why I said it's a very unlikely event to have deflation Yes, but, again, this is not a normal inflationary event. I agree that there are other factors affecting the situation, but the supply chain issues are clearly a substantial component, even if they’re only debatably the predominant factor. That component is being influenced from outside normal monetary policy and can clearly shift pretty quickly. Given that, the dangers of deflationary pressure, and the frankly appallingly shallow general understanding and zeitgeist around inflation, I’ll say again that I think it’s worth keeping in clear view the degree to which the current situation is being driven by factors outside the traditional monetary model, lest we decide to do something rash that we later find was stupid in the middle of what’s still actually a pandemic and not a normal business cycle.

anfilt 5y ago

The thing is if business raises their prices because of these reasons do you think they will lower them once the problem goes away? Maybe in some industries/categories where there is a lot of equivalent goods and is competitive. However that is not the case for everything.

champagnois 5y ago

The money supply issues, coupled with financial system competition from BRIC, will lead to a worse future than the present. The western world is never going back to the post-USSR high it was enjoying. Ever. The competitors have awakened and are making their moves globally. Most westerners are asleep.

FormerBandmate 5y ago
BRIC is an out of date meme from the 2000s that isn't used anymore by any serious economists. B and R were dominant off of the commodity boom and have receded substantially, I has potential but is held back by poor governance, and C is legitimately an economic power (although too unstable politically to hold financial control) but is causing pretty much all the supply chain issues with their stubborn zero-covid strategy and is sabotaging their own economy. Geopolitically, you're right, but economically, there's more threat from crypto than BRICs to the current order
- champagnois 5y ago
  >economically, there's more threat from crypto than BRICs to the current order I am blown away by this belief of yours. Crypto is basically a scam.