20 ms·

Inflation is differential and restructuring (2021)

151 points by szeptik 4y ago

emptysongglass 4y ago
How should tech workers be negotiating yearly raises taking inflation into account and should they even wait a year before approaching HR? What are some counter-arguments I should prepare myself for?
- zarzavat 4y ago
  > How should tech workers be negotiating yearly raises taking inflation into account They shouldn’t. Tech worker compensation doesn’t follow inflation, it follows investment in the tech industry. So in this situation where you have high inflation causing interest rate hikes, you should expect your compensation to stay the same (if you keep your job, due to inelasticity) or to fall (because you were made redundant). If however you work in Wendy’s, then your wages (note that nobody talks about service workers having compensation) are somewhat more determined by inflation because if Wendy’s gives all their workers a real wage cut they will probably quit en mass.
  - emptysongglass 4y ago
    > They shouldn’t. Tech worker compensation doesn’t follow inflation, it follows investment in the tech industry. I disagree as my purchasing power has decreased by the average price of goods. Naturally, when I ask for my yearly raise I want to be certain I am also being compensated for a commensurate loss in purchasing power.
- yxhuvud 4y ago
  You do it by comparing how much more money you would get if you would change jobs. Inflation by itself is quite uninteresting unless you are negotiating for a large group of people.
jschveibinz 4y ago
This is an excellent article. It is well written, relatively easy to follow, and the explanations are well supported by data. Cheers to the author.
- notahacker 4y ago
  "Gell Mann Amnesia" applies here, and it would have been a much better article if it critically examined the genuinely interesting hypothesis that oligopoly power is a major factor in [specific instances of] inflation instead of spending most of it demolishing "silly economists haven't realised that relative prices also change" straw men. (Especially since the silly economists actually have lots of theories about how specific instances of inflation are driven by dynamics of one particular sector like fuel prices to test against the "oligopoly" theory)
schemescape 4y ago
The title makes this sound like another conspiracy theory about the government suppressing inflation in official numbers, but the article is actually a rational dive into the non-uniformity of inflation across various categories. The last section attempts to link "differential" inflation to oligopolies, and I'm not sure I buy their arguments there, but it's thought-provoking nonetheless!
- schemescape 4y ago
  Just a note: I meant the article title ("The Truth About Inflation") and not the (subsequently changed) submission title (which is now "Inflation is differential and restructuring (2021)").
- a3w 4y ago
  Did not have that idea when I read the title. Then again, I accept every view of inflation as just another well-intentioned guess as to what that actually is, since nobody can agree as to why we actually observe it IRL. For me that applied even to the (second?) Zeitgeist movie on monetary theory, which was a very opinionated or even conspiratory view on the financial system, yet that was the model that actually stuck for me: Due to a single interest rate that was once taken higher than zero, there now is never enough money to pay back all debts. AKA there is no money, it just represents some else's debt.
imtringued 4y ago
The author talks about how accounting identifies are weird gotchas but the problem here isn't that there is a weird gotcha, the problem with MV = PT is that pretty much all variables are unknown except the general price level. Nobody knows what the real quantity of money is, nobody knows what the velocity is since it would require marking individual dollars and counting how many times they change hands.
- Proven 4y ago
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- notahacker 4y ago
  The real quantity of money is pretty well known (notwithstanding disputes over which monetary aggregate is the "correct" measure of inflation, which made monetarist monetary aggregate targeting impractical in practice). PT is basically GDP, and obviously we also track the P component so transaction volumes can be inferred The problem with the monetarist version of MV = PT isn't that we can't measure the variables, it's that we have measured the variables and that makes it clear that the monetarist assumption that the residual V is fairly stable in the long run and with respect to monetary policy change is clearly incorrect.
  - js8 4y ago
    Forgetting the money velocity is very apparent for example in discussions about basic income, where people who claim it will cause inflation forget that BI redistribution is a big change of V.
aeternum 4y ago
The non-uniformity of inflation is interesting and has been brought up by many economists recently. I wonder if eventually the Fed will try to track inflation as a vector rather than a single number.
- EdwardDiego 4y ago
  Indeed, it always annoyed me when the CPI a) excludes actual costs of living and b) alongside things like "food" included "flat-screen TVs". Staple foods might cost 25% more, but hey, those TVs are down 20%, so yay! An old company of mine was very proud that everyone's payrise began equivalent to CPI increase, before any other performance related increases. That was nice, but it's a CPI that excludes rent/mortgage payments in a massive property bubble. When your rent that was already 40% of your net income goes up by 25%, CPI is meaningless. When we suggested their base pay raise also consider that aspect, we got a blank stare and "no, no, CPI... <vague hand gestures>" Mind you, it's like the "unemployment rate", for statistical purposes, you're not unemployed if you worked somewhere for one hour plus, paid or unpaid. So the percentage of our population on the unemployment benefit always tracks higher than the official unemployment rate. I mean, I guess that's their measure, and it's useful for statisticians, but it's not meaningful for citizens.
  - littlestymaar 4y ago
    > Staple foods might cost 25% more, but hey, those TVs are down 20%, so yay! It's even worse than that because most of the time the TV price don't really goes down by 20%, but by 3% and hedonic adjustment makes it appear as if it went down by 20% in CPI because some people estimated that going from HD to 4K increased the value by 17% … That's how we get figures saying that computers cost 20 times less than what they used to be when in reality it costs a little less than 2 times less.
    - BirdieNZ 4y ago
      > That's how we get figures saying that computers cost 20 times less than what they used to be when in reality it costs a little less than 2 times less. Can't you buy old PCs for 20 times less than a (second-hand) modern PC? I bet this Pentium 4 desktop cost around NZ$2000 new: https://www.trademe.co.nz/a/marketplace/computers/desktops/no-monitor/listing/3611844377 https://www.trademe.co.nz/a/marketplace/computers/desktops/n... but now it's going for NZ$100.
littlestymaar 4y ago
The biggest argument against inflation as a monetary phenomenon right now is the foreign exchange rate: inflation is higher in the US than in the Eurozone, while a dollar is worth significantly more euros than what it was worth a year ago. In fact, if your salary is labelled in dollar and you live in Europe, your purchasing power increased in that period, which shows that the current level of inflation in the US isn't cause by the intrinsic value of the dollar going down.
- noduerme 4y ago
  This is a good case for why we're looking at a global phenomenon, but as far as relative inflation it's not that much higher in the US, and currency markets are taking into account what they think will happen in the future, i.e. without Russian energy the eurozone will see much more expensive goods. But even Japan went from deflation to 2.5% inflation in the past few months, so the forex markets are considering where those lines will cross over.
- fallingfrog 4y ago
  Wait.. how can that be true? If a dollar last year is worth .5 dollars today, and a Euro last year is worth .8 Euros today, then surely the value of the dollar against the Euro has declined to .5/.8 of what it was last year?
  - tlb 4y ago
    Exchange rates affect inflation for imports, but not for domestic goods. So varying exchange rates by 5% might only change inflation by 1-2% (depending which inflation metric you use). Like many things in macroeconomics, the exchange rate / inflation relationship should be true in equilibrium. But several things are out of equilibrium right now due to supply chain disruptions and a demand surge after the pandemic.
    - littlestymaar 4y ago
      > several things are out of equilibrium right now due to supply chain disruptions and a demand surge after the pandemic. And some things (most of them actually) are never at their equilibrium price for many reasons (but mostly because the characteristic time to reach equilibrium is higher than the frequency of perturbations). A bit like how it's completely fine to still have snow outside even if the temperature is firmly above zero Celsius.
bojangleslover 4y ago
Why can't it be both monetary and non-monetary? Say it's a vector, one element per CPI category. Throw housing in for good measure. The direction of this vector can change due to non-monetary stuff like Russia and oil. But if all of the categories, especially those without clear non-monetary drivers, rise, then it's also monetary. So maybe X = p_monetary + Q_nonmonetaty where p is a scalar and Q is a vector. I think it is both. But the monetary side is controllable by our constituency. Friedman was still right.
- deleted 4y ago
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- orwin 4y ago
  > Friedman was still right. that would made his inflation theory the only theory he was right about. Even in this case, 90+% of the money supply is created by private banks, so wouldn't that make big bank responsible for inflation?
  - incrudible 4y ago
    Banks create this money through lending with the intent to profit, which means they take on risks they would not otherwise take on if so called risk free interest is suppressed by central bank policies like low overnight rates and QE. Of course, the money created in this way is spent mostly on assets, so all the price inflation mostly happens there, not in the CPI. Friedman is still right if we look at these markets as largely disjoint.
- dskloet 4y ago
  They aren't things you can add up, one is a cause of the other. Monetary inflation is an increase in the money supply which happens when more money is borrowed, usually as a result of lower interest rates. Price inflation is in increase in the prices of good and services. Monetary inflation causes price inflation and other things can also cause price inflation. But it's meaningless to add up monetary inflation and price inflation.
  - 4y ago
roenxi 4y ago
If this perspective carries the day - which is plausible - then all it will reveal is that basically nobody in the voting public should care about inflation: 1) Inflation is not a useful metric for financial planning. If your investments are keeping pace with inflation then you have completely failed to position yourself correctly relative to the massive money creation going on. The gold price trend is posting consistent real returns vs the CPI - which is stupid (if you believe the CPI measures inflation, anyway). 2) Inflation isn't a fair metric for referencing on wage raises. Again, we can see that wage earners are slowly getting crushed as a % of the economy [0]. If they are focusing on keeping up with the CPI then they'll get distracted from the fact that they could be doing a lot better if they could re-link wages with productivity. 3) Nobody knows how the CPI is calculated. If someone can find out the actual methods, weights and inputs then report back you get a virtual gold star. I did it once and it is a labyrinth to work out what they are actually measuring - I don't believe more than a small fraction of the people debating inflation understand or care about the details of what it measures. To cap off a mild rant; it is not obvious why we care about what the truth about inflation is. Few people understand the number and it is unclear what use it is for decision making. The more concerning factor is that the government is creating money on a grand and accelerating scale and that is going to end badly, like it always does. Cite some examples where it has led to a golden age? Printing money literally does not and cannot plausibly solve real problems. [0] https://www.weforum.org/agenda/2020/11/productivity-workforce-america-united-states-wages-stagnate/ https://www.weforum.org/agenda/2020/11/productivity-workforc...
- pjc50 4y ago
  > Inflation isn't a fair metric for referencing if wage raises Arguably this is the only one that the voting public really do care about - the relation between wages and the cost of living is one that historically produces unrest, and that's because it's not related to abstract figures but to each individual's cash flow which they experience directly. It's also one where decades of political effort have gone into making sure there's no mechanism for people to demand higher wages. The alternative to printing money would be to raise money through taxation, which is also politically infeasible.
  - 4y ago
j7ake 4y ago
Inflation can be thought of as a high dimensional vector with dimensions equal to the number of objects you buy with money. Each person is affected by this inflation differently because they buy different things. To “solve” this problem, the government has decided to collapse this high dimensional object into a scalar number. And now we are seeing a divergence between this scalar number and the actual high dimensional object. Today with digitised transaction records, there is a ripe opportunity to convert these records back into a person-specific , high-dimensional object with pretty visualisations to aid with understanding.
- em500 4y ago
  The government already publishes separate indices for a few hundred separate spending categories, ranging from pet food to parking tickets[1]. The reason nobody bothers to do what you suggest is that it's a ton of work for pretty much zero return: the resulting numbers are not actionable and won't change anybody's opinions from what they already believed to be true. Granted, the BLS indices are not raw prices. But using actual raw prices is a few orders of magnitude more work, and the results are rather unspectacular (if you summarize the price changes into lower dimensions you get similar results as what the good folks at the BLS already did for you) [2] [1] https://download.bls.gov/pub/time.series/cu/cu.txt https://download.bls.gov/pub/time.series/cu/cu.txt, https://download.bls.gov/pub/time.series/cu/cu.series https://download.bls.gov/pub/time.series/cu/cu.series, https://data.bls.gov/cgi-bin/srgate https://data.bls.gov/cgi-bin/srgate [2] http://www.thebillionpricesproject.com/ http://www.thebillionpricesproject.com/
- quickthrower2 4y ago
  You need a model of all brains. I don’t care that tomatoes have doubled in price in 24 months because I can eat something else. But if all fruit and veg doubles then now we are talking inflation! I can no longer get a nutritional diet at the same cost. But my neighbour eats only McDonalds burgers and is largely unaffected. So I am not a matrix to apply to the vector. Maybe more like a neutal net.
  - FabHK 4y ago
    You're a vector.
kkfx 4y ago
The "monetary phenomenon" is a symptom the illness is private money: money MUST BE an unit of measure of many substrate (work, time, resources) we all agree, so MUST BE generated out of thin air (as it is) by STATES not by some privates that loan to the States generating the meaningless "public debt", a concept that simply CAN'T EXISTS. If State's treasury generate money and all Citizens behind them exchange that money, taxes act for their own purpose witch is not financing States out of Citizens pockets but to redistribute richness to ensure a fair enough society where those who do more/are lucky get rewarded but still NOT being able to assume so much economical power to endanger the society at a whole. Than inflation will not exists, or at least it's a kind of marginal concept almost non one is interested in. If we are, like we are now, than inflation, mostly artificial, is a mean to cyclically made people poor to push a change against peoples and peoples will, like war or a new society built not to serve us humans but to serve very few of us who happen to be a human cancer, human as any cancer is part of the ill person, equally dangerous and lethal, to be cured by all means to try to survive... If people do not understand that in sufficient enough mass, well a modern society is not possible and that means those who understand can only do their best to survive AGAINST other citizens-subjects waiting for a cyclic collapse and when this collapse happen, since there is no Democracy so no human rights try to get the hardest and inhuman revenge against those who happen to have, again, provoked the mess. Hoping that again in the history such big mess have made enough people understand who is the enemy. If you think a separate society can work, like Indian's casts... Well... Try to look at history, yes for a certain time it work, but only for a certain time, so here the choice is moral in the sense: did we live ONLY for us or also for leaving an heritage?
Terry_Roll 4y ago
Inflation, in all theories, doesnt measure the change in quality of the product either. Planned obsolescence is a stealth and legal form of product destruction that the buyer doesnt know about until after they have purchased something which is why the saying exists "buyer beware".
- quickthrower2 4y ago
  The big lie is the cost of housing. I bet for many people rent / mortgage is as much as “the rest”.
  - Terry_Roll 4y ago
    Well the mortgage lenders aka banksters decide whether you can afford housing. A stealth form of birth control is high house prices unless those parents put their kids out to work....
- throw0101a 4y ago
  > Inflation, in all theories, doesnt measure the change in quality of the product either. Actually it does. See The Canadian Consumer Price Index Reference Paper by StatCan, chapter seven, "Quality Change and Adjustment": * https://www150.statcan.gc.ca/n1/pub/62-553-x/2014001/chap/chap-7-eng.htm https://www150.statcan.gc.ca/n1/pub/62-553-x/2014001/chap/ch...
  - Terry_Roll 4y ago
    Oh goodie we have an outlier of a country which we can hold as an example of the majority of the world. So if Canada is so good at testing and knowing the change in quality they must be able to predict when something is going to fail. Right? So why do things pack up in Canada then?
    - throw0101a 4y ago
      > Oh goodie we have an outlier of a country which we can hold as an example of the majority of the world. "Addressing the Quality Change Issue in the ConsumerPrice Index" by US BLS (1997): * https://www.brookings.edu/bpea-articles/addressing-the-quality-change-issue-in-the-consumer-price-index/ https://www.brookings.edu/bpea-articles/addressing-the-quali... "On quality bias and inflation targets" in Journal of Monetary Economics (2014): * http://www.columbia.edu/~mu2166/quality_bias/quality_bias.pdf http://www.columbia.edu/~mu2166/quality_bias/quality_bias.pd... I'm sure all these peer-reviewed folks are wrong about calculating the CPI and measuring inflation, and you're right. That the academic researchers, pension funds, futures traders, bond traders, union negotiators… all those folks missed this. But you… you've blown the whole thing right open. The other possibility is that perhaps the professionals know what they're measuring and the pros-and-cons of various metrics.
lordnacho 4y ago
Wow, this was the article I was looking for, it summarizes a number of thoughts about economics that I'd been having since the undergraduate days: - There's an authority about the field that really isn't deserved. The models are not made properly, and there's a lot of hand-waiving. I studied economics with a class of engineers and everyone pointed this out. - The pop-sci version of economics is a bunch of easy quips. Friedman's "everywhere a monetary phenomenon", Keynes "In the long run". - The econ 101 version of economics is dominant in popular thought. You see it everywhere in newspapers. A more nuanced version of economics does exist, but the appeal to authority is strong in the field, because there's no real reasonable arguments, it's actually politics. - Inflation is more interesting in a disaggregated view, for reasons mentioned. You can't look at it as a single figure. - Relative price changes are what matter in society, because they represent changes in negotiation terms between different actors. Post-pandemic and Ukraine, we should expect to see more shortages as well as more strike action. Various groups like the RMT union will decide they need to flex their muscles. Chip shortages will cause negotiation positions to change across a wide variety of affected sectors like cars, meaning push will come to shove for certain lines of business.
- frankfrankfrank 4y ago
  The thing that has nagged at you as it has me, is the simple fact that not only was “economics” conjured and molded by and for the interests of the upper echelon of society, to control the language and thoughts about its terms; but that at the core of it, it’s nothing more than fraud, deception, con artistry. That’s all inflation is too, fraud that if you would commit it, e.g., you added filler to some product you delivered or forged signatures on delivery paperwork, you would be punished for. You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service.
  - lordnacho 4y ago
    > The thing that has nagged at you as it has me, is the simple fact that not only was “economics” conjured and molded by and for the interests of the upper echelon of society, to control the language and thoughts about its terms; but that at the core of it, it’s nothing more than fraud, deception, con artistry. Yeah this true, but I wonder if it's as straightforwardly sinister as that. I'm sure there are a lot of economists, esp in the mid 20th century, who would have liked to turn economics into physics. Some of those ideas are of no real merit after further inspection, but are kept alive by political interests. You do come across a lot of thought pieces by think tanks, which seem to be more political than science. > You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service. The problem with that is there are legitimate reasons for printing more coupons, they're just mixed in with less legit reasons. If people want to exchange more, they need more coupons. Otherwise everyone would have to wait for their income to arrive before sending it on, and while they wait some of the opportunities will vanish. A little bit of creation isn't so bad.
dataflow 4y ago
At the risk of going off-topic: I'd also like someone to write a similar blog post providing a convincing explanation of why the national debt supposedly isn't wrecking the US's future big time. To me it absolutely is, because you can only keep borrowing money and paying the (increasingly large) interest on it for so long. Eventually it'll exceed your revenue and you have no choice but to print money and hyperinflate your currency... right? Yet modern economists keep arguing it's... fine? "It's not like your household debt" or whatever the argument is.
- neilwilson 4y ago
  They say that Economics is the science on mistaking stocks for flows, and this is a very good example. Interest is denominated in $/month. Loans are denominated in $. Mixing those up is like mixing up miles per hour and miles. They are different units of measurement - the first is a flow, the second is a stock. Remember that bankers are people too, and they eat just like you do. Therefore interest is nothing more than the wages of bankers. They take those wages and they spend them back with firms in return for food and shelter. The firms then pay the banks with the money they earn from bankers. Round and round the money goes. Bankers earn on the turn as they say. The same applies to government interest. It is paid on bonds and reserves to financial institutions who pay people a pension from them. Those pensioners then spend that income, which generates additional taxation (because that's how percentages work), which will then balance the amount government paid in the first place. Therefore the tax that offsets the government interest payments comes from paying the interest payments. It's just a way of stimulating output, or redistributing it away from the producers to pensioners and other people with money. In fact all government spending creates the additional tax that offsets it - to the last cent for any positive tax rate. It's a simple geometric progression. The only question is when. If somebody doesn't spend all their income, then taxes are not collected from the spending, earning and re-spending process that would otherwise occur. And that's what creates the 'deficit' - people deciding not to spend all they earn. Also known as saving for a rainy day. There is no need for government to pay interest at all. It's entirely a policy choice. People can then choose to continue to save for no reward, or they can spend the money, which will stimulate economic output.
lottin 4y ago
Inflation is a change in the price level, i.e. an average. TFA argues that inflation is misleading because prices don't change uniformly, and therefore inflation doesn't fully explain every change in the price of every possible commodity and service. I think it's a straw man argument, because nobody claims that inflation fully explains changes in the prices of commodities. Instead, measuring inflation allows us to decompose these changes into a general component (i.e. inflation) and an idiosyncratic component (i.e. a change in relative prices), which is useful because it gives us more information about the causes of price changes. Inflation is only misleading if you're willingly misinterpreting it.
- vertere 4y ago
  Indeed. Any suggestion that economists (neo-classical or otherwise) don't care enough about relative price changes is utterly ridiculous. They just don't call them inflation.
- lucozade 4y ago
  That's not what he's arguing. He's saying that restricting money supply as a solution to inflation only makes sense if the average price inflation represented price movements well. His contention is that it doesn't so restricting money supply isn't a solution. I find that argument reasonably persuasive. His other point about inflation indices themselves being effectively useless, because of the inter price variability, I find less so. He skirts over the weightings which are key to the meaning of the index. They are weighted in such a way as to approximate the relative spending on each commodity. So the net effect of the index should be the inflation rate that you feel. So average measures of inflation are valuable. The standard cures likely less so.
  - yxhuvud 4y ago
    The points made about variance being a measure of structural change in society, and that it is what actually is painful about inflation, was also very interesting.
  - pakitan 4y ago
    > His contention is that it doesn't so restricting money supply isn't a solution. Restricting money supply may not be the solution. I don't think the author claims that restricting money supply can't be a part of the solution and a major part even. If he does, we have evidence to the contrary - 1980s in US. The inflation variation was even bigger then.
Straw 4y ago
This article makes a number of misleading claims I think stemming from a misunderstanding of inflation- which does not mean "price increase" but rather "a general increase in the prices of goods and services in an economy"- that's right, we define it as an average. Okay, what about the variation? Definitely, prices for different goods change differently, and the NYT even has a calculator that estimates it for you based on your consumption: https://www.nytimes.com/interactive/2022/05/08/business/economy/inflation-calculator.html https://www.nytimes.com/interactive/2022/05/08/business/econ... Try it out with a few different choices- you'll see that pretty much everyone experiences significant price increases, out of line with the previous decade- so the CPI while not perfect definitely tells us something. The fact that the standard deviation is greater than the mean does not tell us its not meaningful- for example, if I give you 1 million samples from a normal distribution with mean 0.1 and std 1.0, you can meaningfully tell me the mean is greater than 0. Individual components of the price index don't give a useful item to take the variance of, because very few people have all their expenses in one component. We'd actually like the dispersion of the change in expenses for each person/company to understand how much expenses rise in general. I suspect this will be significantly smaller since most people have 'similar' spending profiles, at least compared to the hypothetical consumers which only buy one component of the price index. Okay so why do prices change differentially more during inflation? This is a tough one, and recently there are obvious confounding factors (covid) that make it difficult to dissect. But I think even Friedman would expect this, because he claims that quantity of money leads inflation by 6 months-2 years, and we wouldn't expect it to propagate through all supply chains at equal speed. This also means that the standard theory is predictive and can't just be an accounting identity- the prediction (which we can make after the huge increase in M2 in 2020) is that prices will rise, with some delay but eventually about 30%. I'm not counting any change in the output of the economy here, so with covid disruption I wouldn't expect this to have particularly good accuracy. Let's see how it pans out! Finally, we can look at things like the price of gold: it rose significantly pretty much in line with the M2 money supply. I don't know of anything that would significantly affect gold supply recently, so it would seem the demand comes from devaluation of the dollar or fear of it.
cm2187 4y ago
Inflation isn’t measured on an average, it is measured on a basket. They are the same mathematically but the intention matters. If meat goes up 50% and fruits down 50% and the average is unchanged, that means the price of the basket that you will pay at the till is also unchanged, and you aren’t poorer. Now you can argue that CPI baskets aren’t representative, and I think they often underweight real estate. But that doesn’t mean that you are measuring the wrong thing by using a basket. It does explain though why the money printing 2008-2019 didn’t translate into CPI inflation, because that money was injected in the financial system, asset prices shot up, asset managers and VC investors got rich, but that didn’t affect main street. In 2020-2022, the pace of money printing massively accelerated and was directly introduced in everyone’s pockets through furlough schemes.
js8 4y ago
If economists accept that there are winners and losers in society, they will never agree on a single theory. Therefore, the most successful economic theory, neoclassical economics, rejects that assumption, despite it being factually wrong. It is successful precisely because it can be agreed by all economists.
kklisura 4y ago
As an absolute layman to this field, the Friedman’s "inflation is ‘always and everywhere a monetary phenomenon’" has appeal to me in that it offers a (simple?) solution: "government austerity" as noted in the article. Whenever I read other views on inflation and even this article, they fail on providing any solution for either fixing or taming the inflation.
- pjc50 4y ago
  Simple, easy to understand, and ineffective solutions are always popular. The classic policy lever works just fine for the past 30 years or so in the west: whenever inflation goes up, put up interest rates. That raises the cost of credit, puts people out of work and closes marginal businesses, thereby reducing demand. If you look at https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi https://www.macrotrends.net/countries/USA/united-states/infl... it's been kept perfectly in the 0-4% range by this process.
- throw0101a 4y ago
  > As an absolute layman to this field, the Friedman’s "inflation is ‘always and everywhere a monetary phenomenon’" has appeal to me in that it offers a (simple?) solution: "government austerity" as noted in the article. Government austerity is bad policy and has been for just about all of its history: * https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Dangerous_Idea https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da... (Of course this doesn't mean spending should be done without thought.)
nathias 4y ago
great article > Price-change variation rises and falls with the average rate of inflation. I think we can see it as a decay of money as a tool, its main function of being a unit of account becomes disrupted because its self-referential aspect increases.
twic 4y ago
I'd be interested to see plots of median or upper-quartile inflation across the CPI categories in there too. In periods of high inflation, is the high variation really random variation about an increased centre, or does it reflect the departure of an extreme from an unchanged centre? In the article and my suggestion, there's also an unexamined assumption here that the CPI categories are peers, on which it's valid to do statistics. It's not clear to me that "medical care commodities" and "shelter" are really things it makes sense to take an arithmetic mean of.
yyy888sss 4y ago
Inflation is an expansion in the money supply, such as new discoveries of gold or or printing paper money or creating credit. A baker would say he will 'raise' or 'lower' the price of his bread, not 'inflate' it. Defining inflation by the CPI or a similar measure is like defining the rain as a "increase in height of a river". It is the rain that CAUSES the rise in the river, and inflation CAUSES a general rise in prices.
sudden_dystopia 4y ago
Seemed like a long winded persuasion that monetary policy doesn’t matter all that much and that at the end of the day, the disaggregated inflation we experience in the real world is the result of oligopolies, which to me, seems like a subtle plug for MMT. I don’t buy it. I have heard plenty of economists and economically savvy people call BS on CPI as a metric for the very same reasons outlined here. CPI is a fallacy, mostly pushed by the the govt since it tends to generally be favorable to them and disguise the disaggregated nature of inflation. But that doesn’t mean that the underlying economic principles are false.
lbriner 4y ago
The problem is that politicians and armchair critics prefer simple sound-bites like "government spending caused this problem" or perhaps "a lack of government spending caused this problem", I can't imagine how many frowns you would get in parliament/congress if your explanation of why inflation is so high was as long as the article, even if it was much more accurate than a sound bite. People don't like the fact that the world is complicated and more inter-dependent than ever. I guess that's why some people go and live in the wilderness.
- helen___keller 4y ago
  This is why political discussion, and partisan discussion in particular, is almost universally worthless. Such discourse can be compared to memes, in the literal sense of the word. One sentence digs that seem to ring true get shared and thrown at political opponents. Nothing of value is created in such discourse, but the more effective memes proliferate through society and give advantage in voting season.
- kqr 4y ago
  This is why I dislike the popularity contests we call "democracy" today. If you so much as hint at the complexity of questions, if you happen to admit that something is a trade-off, or that there are risks with a policy, you're out of the system in seconds. Not that I have a better suggestion, mind you. Maybe sortition with an advisory panel of experts? But how would the experts be chosen? It would be easy to draw from the top ranks of some guild system -- but probably also highly inequitable, as guilds tend to restrict the profession to their likes.
I_am_tiberius 4y ago
I think Friedman's general idea is correct. For me inflation is not about individual price levels but about the potential of increased/decreased price levels. If money supply increases, it makes room for increased price levels. Without increased money supply, it would only be possible for a product price to increase if another product price decreases. In reality I think inflation already occurs when money supply is increased - it's just not priced in as it takes time for prices to adjust. However, the period of time in which the increase happens, cannot be predicted - e.g. it can be 1 year or 100 years.
zeckalpha 4y ago
> To understand inflation as it actually exists, we must look not to economics textbooks, but to real-world data. That’s what political economist Jonathan Nitzan did during his PhD research in the early 1990s. His work culminated in a dissertation called Inflation As Restructuring. The real world of PhD dissertations isn’t that different from that of economics textbooks.
hackeraccount 4y ago
I can sort of see the point the writer is trying to make. Certainly inflation is not evenly distributed - see healthcare, see post-K-12 education, see housing - but all that said they don't seem to grapple with the recent history of inflation. I'm thinking of Volkher putting a stop to inflation by raising interest rates - cutting off the money supply. As for the idea that oligopolies are behind inflation, it seems a cry too much the reverse of saying it's all Governments fault.
beloch 4y ago
At it's most basic level, inflation tries to measure of the affordability of living. Mango prices go down and avocado prices go up, so I buy more mangos and fewer avocados. However, what really impacts my life is how much of my income I need to spend, overall, on groceries to eat well. Inflation doesn't capture the choices I must make to optimize my grocery bill, but it does do a decent job of representing how the all-important total on my grocery bill changes. What inflation doesn't necessarily do is capture how my grocery bill changes relative to my paycheck. If you look at the historical inflation rate, it does a semi-decent job of indicating when weird stuff happens. Wars tend to be accompanied by spikes in inflation. Things get scarce. Supply chains get disrupted. There's less stuff to be had so, on average, people can afford less stuff. Everybody is making the same salary but things cost more. Pandemics can have similar effects. (We just happen to have gone from one directly into the other.) Deflation coincides with recessions (e.g. 1929). You'd think things getting cheaper would be indicate people can afford more stuff, but it's just the opposite. People are making less, so they buy less, and prices come down as supply exceeds demand. Inflation does need the context of average earnings to be useful, but it is useful given that context.
perryizgr8 4y ago
That's a lot of words and complicated statistics to argue against a simple graph showing M1+M2 supply since 2020 overlaid on a graph of inflation in the same time period. I think the lady doth protest too much... https://thefreethoughtproject.com/80-of-all-us-dollars-in-existence-have-been-printed-in-just-the-last-two-years/ https://thefreethoughtproject.com/80-of-all-us-dollars-in-ex...
FuriouslyAdrift 4y ago
This article conflates monetary inflation with the EFFECTs of monetary inflation... Inflation within the context of state level economics is the reduction in relative value of current monetary holdings. That's it. There's nothing magical, hidden, or complicated about it. How it arrives, how it is dealt with, and how much is desirable for specific effects is all up for debate and the article has some great info and analysis there. The most common reasons are monetary expansion and scarcity changes in resources. The most common methods of adjustment are monetary contraction and increases in resources.
sylware 4y ago
Prices increase because some human beings do increase prices. It is not "mother nature": there are moneraty/economic "rules" made/enforced by a few humans to organise(oppress?) others humans. Don't be fooled. To deal with inflation is to deal with those humans who are increasing prices.
sorokod 4y ago
Related: "Vimes Boots Index" https://en.m.wikipedia.org/wiki/Boots_theory https://en.m.wikipedia.org/wiki/Boots_theory
vectorfrog 4y ago
I found this analysis wildly off-base. No classical economist would suggest that increasing the money supply raises all prices uniformly, but the author seems to think that by showing that different goods' price changes are not uniform, that some how proves inflation is not a monetary phenomenon. What? From Thomas Sowell's Basic Economics - "Inflation is a _general_ rise in prices. The national price level rises for the same reason that prices of particular goods and services rise - namely, that there is more demanded than supplied at a given price. When people have more money, they tend to spend more. Without a corresponding increase in the volume of output, the prices of existing goods and services simply rise because the quantity demanded exceeds the quantity supplied at current prices and either people bid against each other during the shortage or sellers realize the increased demand for their products at existing prices and raise their prices accordingly." Note the emphasis on general. There is no reason to expect that the outcome of customers bidding against each other, or producers increasing prices to meet new demand levels would be uniform across all goods and services, furthermore, you would expect that the existing climate of the time would wildly swing the actors' actions involved in these bidding & pricing exercises.
- Guest42 4y ago
  It feels as though nowadays people feel entitled to make stuff up and have it be real through sheer force of repetition and words with multiple syllables. It's concerning that there are degrees in qualitative economics and non-programming computer science.
  - nomel 4y ago
    Well, everyone is entitled to write their thoughts/opinions. There's nothing wrong with that. It's a wonderful exercise that everyone should do! The real questions is why do people go to these thoughts/opinions rather than the "expert" thoughts/opinions?
dang 4y ago
I changed the linkbait title* to something that the article actually says, but it's a bit obscure. If there's a different phrase in the article that gives a clearer summary of what it actually says, we can change it again. * "Please use the original title, unless it is misleading or linkbait" - https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
adammarples 4y ago
Bafflingly long article which I read all the way to the end waiting for a point. The first point was interesting, inflation is an average, maybe its variance can tell us something. The current inflationary spike is evidently driven by used car prices. Then a long ramble to conclude that it's caused by large corporations. Driving up used car prices? OK

151 points by szeptik 4y ago

How should tech workers be negotiating yearly raises taking inflation into account and should they even wait a year before approaching HR? What are some counter-arguments I should prepare myself for?

zarzavat 4y ago
> How should tech workers be negotiating yearly raises taking inflation into account They shouldn’t. Tech worker compensation doesn’t follow inflation, it follows investment in the tech industry. So in this situation where you have high inflation causing interest rate hikes, you should expect your compensation to stay the same (if you keep your job, due to inelasticity) or to fall (because you were made redundant). If however you work in Wendy’s, then your wages (note that nobody talks about service workers having compensation) are somewhat more determined by inflation because if Wendy’s gives all their workers a real wage cut they will probably quit en mass.
- emptysongglass 4y ago
  > They shouldn’t. Tech worker compensation doesn’t follow inflation, it follows investment in the tech industry. I disagree as my purchasing power has decreased by the average price of goods. Naturally, when I ask for my yearly raise I want to be certain I am also being compensated for a commensurate loss in purchasing power.
yxhuvud 4y ago
You do it by comparing how much more money you would get if you would change jobs. Inflation by itself is quite uninteresting unless you are negotiating for a large group of people.

jschveibinz 4y ago

This is an excellent article. It is well written, relatively easy to follow, and the explanations are well supported by data. Cheers to the author.

notahacker 4y ago
"Gell Mann Amnesia" applies here, and it would have been a much better article if it critically examined the genuinely interesting hypothesis that oligopoly power is a major factor in [specific instances of] inflation instead of spending most of it demolishing "silly economists haven't realised that relative prices also change" straw men. (Especially since the silly economists actually have lots of theories about how specific instances of inflation are driven by dynamics of one particular sector like fuel prices to test against the "oligopoly" theory)

schemescape 4y ago

The title makes this sound like another conspiracy theory about the government suppressing inflation in official numbers, but the article is actually a rational dive into the non-uniformity of inflation across various categories. The last section attempts to link "differential" inflation to oligopolies, and I'm not sure I buy their arguments there, but it's thought-provoking nonetheless!

schemescape 4y ago
Just a note: I meant the article title ("The Truth About Inflation") and not the (subsequently changed) submission title (which is now "Inflation is differential and restructuring (2021)").
a3w 4y ago
Did not have that idea when I read the title. Then again, I accept every view of inflation as just another well-intentioned guess as to what that actually is, since nobody can agree as to why we actually observe it IRL. For me that applied even to the (second?) Zeitgeist movie on monetary theory, which was a very opinionated or even conspiratory view on the financial system, yet that was the model that actually stuck for me: Due to a single interest rate that was once taken higher than zero, there now is never enough money to pay back all debts. AKA there is no money, it just represents some else's debt.

imtringued 4y ago

The author talks about how accounting identifies are weird gotchas but the problem here isn't that there is a weird gotcha, the problem with MV = PT is that pretty much all variables are unknown except the general price level. Nobody knows what the real quantity of money is, nobody knows what the velocity is since it would require marking individual dollars and counting how many times they change hands.

Proven 4y ago
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notahacker 4y ago
The real quantity of money is pretty well known (notwithstanding disputes over which monetary aggregate is the "correct" measure of inflation, which made monetarist monetary aggregate targeting impractical in practice). PT is basically GDP, and obviously we also track the P component so transaction volumes can be inferred The problem with the monetarist version of MV = PT isn't that we can't measure the variables, it's that we have measured the variables and that makes it clear that the monetarist assumption that the residual V is fairly stable in the long run and with respect to monetary policy change is clearly incorrect.
- js8 4y ago
  Forgetting the money velocity is very apparent for example in discussions about basic income, where people who claim it will cause inflation forget that BI redistribution is a big change of V.

aeternum 4y ago

The non-uniformity of inflation is interesting and has been brought up by many economists recently. I wonder if eventually the Fed will try to track inflation as a vector rather than a single number.

EdwardDiego 4y ago
Indeed, it always annoyed me when the CPI a) excludes actual costs of living and b) alongside things like "food" included "flat-screen TVs". Staple foods might cost 25% more, but hey, those TVs are down 20%, so yay! An old company of mine was very proud that everyone's payrise began equivalent to CPI increase, before any other performance related increases. That was nice, but it's a CPI that excludes rent/mortgage payments in a massive property bubble. When your rent that was already 40% of your net income goes up by 25%, CPI is meaningless. When we suggested their base pay raise also consider that aspect, we got a blank stare and "no, no, CPI... <vague hand gestures>" Mind you, it's like the "unemployment rate", for statistical purposes, you're not unemployed if you worked somewhere for one hour plus, paid or unpaid. So the percentage of our population on the unemployment benefit always tracks higher than the official unemployment rate. I mean, I guess that's their measure, and it's useful for statisticians, but it's not meaningful for citizens.
- littlestymaar 4y ago
  > Staple foods might cost 25% more, but hey, those TVs are down 20%, so yay! It's even worse than that because most of the time the TV price don't really goes down by 20%, but by 3% and hedonic adjustment makes it appear as if it went down by 20% in CPI because some people estimated that going from HD to 4K increased the value by 17% … That's how we get figures saying that computers cost 20 times less than what they used to be when in reality it costs a little less than 2 times less.
  - BirdieNZ 4y ago
    > That's how we get figures saying that computers cost 20 times less than what they used to be when in reality it costs a little less than 2 times less. Can't you buy old PCs for 20 times less than a (second-hand) modern PC? I bet this Pentium 4 desktop cost around NZ$2000 new: https://www.trademe.co.nz/a/marketplace/computers/desktops/no-monitor/listing/3611844377 https://www.trademe.co.nz/a/marketplace/computers/desktops/n... but now it's going for NZ$100.

littlestymaar 4y ago

The biggest argument against inflation as a monetary phenomenon right now is the foreign exchange rate: inflation is higher in the US than in the Eurozone, while a dollar is worth significantly more euros than what it was worth a year ago. In fact, if your salary is labelled in dollar and you live in Europe, your purchasing power increased in that period, which shows that the current level of inflation in the US isn't cause by the intrinsic value of the dollar going down.

noduerme 4y ago
This is a good case for why we're looking at a global phenomenon, but as far as relative inflation it's not that much higher in the US, and currency markets are taking into account what they think will happen in the future, i.e. without Russian energy the eurozone will see much more expensive goods. But even Japan went from deflation to 2.5% inflation in the past few months, so the forex markets are considering where those lines will cross over.
fallingfrog 4y ago
Wait.. how can that be true? If a dollar last year is worth .5 dollars today, and a Euro last year is worth .8 Euros today, then surely the value of the dollar against the Euro has declined to .5/.8 of what it was last year?
- tlb 4y ago
  Exchange rates affect inflation for imports, but not for domestic goods. So varying exchange rates by 5% might only change inflation by 1-2% (depending which inflation metric you use). Like many things in macroeconomics, the exchange rate / inflation relationship should be true in equilibrium. But several things are out of equilibrium right now due to supply chain disruptions and a demand surge after the pandemic.
  - littlestymaar 4y ago
    > several things are out of equilibrium right now due to supply chain disruptions and a demand surge after the pandemic. And some things (most of them actually) are never at their equilibrium price for many reasons (but mostly because the characteristic time to reach equilibrium is higher than the frequency of perturbations). A bit like how it's completely fine to still have snow outside even if the temperature is firmly above zero Celsius.

bojangleslover 4y ago

Why can't it be both monetary and non-monetary? Say it's a vector, one element per CPI category. Throw housing in for good measure. The direction of this vector can change due to non-monetary stuff like Russia and oil. But if all of the categories, especially those without clear non-monetary drivers, rise, then it's also monetary. So maybe X = p_monetary + Q_nonmonetaty where p is a scalar and Q is a vector. I think it is both. But the monetary side is controllable by our constituency. Friedman was still right.

deleted 4y ago
[deleted]
orwin 4y ago
> Friedman was still right. that would made his inflation theory the only theory he was right about. Even in this case, 90+% of the money supply is created by private banks, so wouldn't that make big bank responsible for inflation?
- incrudible 4y ago
  Banks create this money through lending with the intent to profit, which means they take on risks they would not otherwise take on if so called risk free interest is suppressed by central bank policies like low overnight rates and QE. Of course, the money created in this way is spent mostly on assets, so all the price inflation mostly happens there, not in the CPI. Friedman is still right if we look at these markets as largely disjoint.
dskloet 4y ago
They aren't things you can add up, one is a cause of the other. Monetary inflation is an increase in the money supply which happens when more money is borrowed, usually as a result of lower interest rates. Price inflation is in increase in the prices of good and services. Monetary inflation causes price inflation and other things can also cause price inflation. But it's meaningless to add up monetary inflation and price inflation.
- 4y ago

roenxi 4y ago

If this perspective carries the day - which is plausible - then all it will reveal is that basically nobody in the voting public should care about inflation: 1) Inflation is not a useful metric for financial planning. If your investments are keeping pace with inflation then you have completely failed to position yourself correctly relative to the massive money creation going on. The gold price trend is posting consistent real returns vs the CPI - which is stupid (if you believe the CPI measures inflation, anyway). 2) Inflation isn't a fair metric for referencing on wage raises. Again, we can see that wage earners are slowly getting crushed as a % of the economy [0]. If they are focusing on keeping up with the CPI then they'll get distracted from the fact that they could be doing a lot better if they could re-link wages with productivity. 3) Nobody knows how the CPI is calculated. If someone can find out the actual methods, weights and inputs then report back you get a virtual gold star. I did it once and it is a labyrinth to work out what they are actually measuring - I don't believe more than a small fraction of the people debating inflation understand or care about the details of what it measures. To cap off a mild rant; it is not obvious why we care about what the truth about inflation is. Few people understand the number and it is unclear what use it is for decision making. The more concerning factor is that the government is creating money on a grand and accelerating scale and that is going to end badly, like it always does. Cite some examples where it has led to a golden age? Printing money literally does not and cannot plausibly solve real problems. [0] https://www.weforum.org/agenda/2020/11/productivity-workforce-america-united-states-wages-stagnate/ https://www.weforum.org/agenda/2020/11/productivity-workforc...

pjc50 4y ago
> Inflation isn't a fair metric for referencing if wage raises Arguably this is the only one that the voting public really do care about - the relation between wages and the cost of living is one that historically produces unrest, and that's because it's not related to abstract figures but to each individual's cash flow which they experience directly. It's also one where decades of political effort have gone into making sure there's no mechanism for people to demand higher wages. The alternative to printing money would be to raise money through taxation, which is also politically infeasible.
- 4y ago

j7ake 4y ago

Inflation can be thought of as a high dimensional vector with dimensions equal to the number of objects you buy with money. Each person is affected by this inflation differently because they buy different things. To “solve” this problem, the government has decided to collapse this high dimensional object into a scalar number. And now we are seeing a divergence between this scalar number and the actual high dimensional object. Today with digitised transaction records, there is a ripe opportunity to convert these records back into a person-specific , high-dimensional object with pretty visualisations to aid with understanding.

em500 4y ago
The government already publishes separate indices for a few hundred separate spending categories, ranging from pet food to parking tickets[1]. The reason nobody bothers to do what you suggest is that it's a ton of work for pretty much zero return: the resulting numbers are not actionable and won't change anybody's opinions from what they already believed to be true. Granted, the BLS indices are not raw prices. But using actual raw prices is a few orders of magnitude more work, and the results are rather unspectacular (if you summarize the price changes into lower dimensions you get similar results as what the good folks at the BLS already did for you) [2] [1] https://download.bls.gov/pub/time.series/cu/cu.txt https://download.bls.gov/pub/time.series/cu/cu.txt, https://download.bls.gov/pub/time.series/cu/cu.series https://download.bls.gov/pub/time.series/cu/cu.series, https://data.bls.gov/cgi-bin/srgate https://data.bls.gov/cgi-bin/srgate [2] http://www.thebillionpricesproject.com/ http://www.thebillionpricesproject.com/
quickthrower2 4y ago
You need a model of all brains. I don’t care that tomatoes have doubled in price in 24 months because I can eat something else. But if all fruit and veg doubles then now we are talking inflation! I can no longer get a nutritional diet at the same cost. But my neighbour eats only McDonalds burgers and is largely unaffected. So I am not a matrix to apply to the vector. Maybe more like a neutal net.
- FabHK 4y ago
  You're a vector.

kkfx 4y ago

The "monetary phenomenon" is a symptom the illness is private money: money MUST BE an unit of measure of many substrate (work, time, resources) we all agree, so MUST BE generated out of thin air (as it is) by STATES not by some privates that loan to the States generating the meaningless "public debt", a concept that simply CAN'T EXISTS. If State's treasury generate money and all Citizens behind them exchange that money, taxes act for their own purpose witch is not financing States out of Citizens pockets but to redistribute richness to ensure a fair enough society where those who do more/are lucky get rewarded but still NOT being able to assume so much economical power to endanger the society at a whole. Than inflation will not exists, or at least it's a kind of marginal concept almost non one is interested in. If we are, like we are now, than inflation, mostly artificial, is a mean to cyclically made people poor to push a change against peoples and peoples will, like war or a new society built not to serve us humans but to serve very few of us who happen to be a human cancer, human as any cancer is part of the ill person, equally dangerous and lethal, to be cured by all means to try to survive... If people do not understand that in sufficient enough mass, well a modern society is not possible and that means those who understand can only do their best to survive AGAINST other citizens-subjects waiting for a cyclic collapse and when this collapse happen, since there is no Democracy so no human rights try to get the hardest and inhuman revenge against those who happen to have, again, provoked the mess. Hoping that again in the history such big mess have made enough people understand who is the enemy. If you think a separate society can work, like Indian's casts... Well... Try to look at history, yes for a certain time it work, but only for a certain time, so here the choice is moral in the sense: did we live ONLY for us or also for leaving an heritage?

Terry_Roll 4y ago

Inflation, in all theories, doesnt measure the change in quality of the product either. Planned obsolescence is a stealth and legal form of product destruction that the buyer doesnt know about until after they have purchased something which is why the saying exists "buyer beware".

quickthrower2 4y ago
The big lie is the cost of housing. I bet for many people rent / mortgage is as much as “the rest”.
- Terry_Roll 4y ago
  Well the mortgage lenders aka banksters decide whether you can afford housing. A stealth form of birth control is high house prices unless those parents put their kids out to work....
throw0101a 4y ago
> Inflation, in all theories, doesnt measure the change in quality of the product either. Actually it does. See The Canadian Consumer Price Index Reference Paper by StatCan, chapter seven, "Quality Change and Adjustment": * https://www150.statcan.gc.ca/n1/pub/62-553-x/2014001/chap/chap-7-eng.htm https://www150.statcan.gc.ca/n1/pub/62-553-x/2014001/chap/ch...
- Terry_Roll 4y ago
  Oh goodie we have an outlier of a country which we can hold as an example of the majority of the world. So if Canada is so good at testing and knowing the change in quality they must be able to predict when something is going to fail. Right? So why do things pack up in Canada then?
  - throw0101a 4y ago
    > Oh goodie we have an outlier of a country which we can hold as an example of the majority of the world. "Addressing the Quality Change Issue in the ConsumerPrice Index" by US BLS (1997): * https://www.brookings.edu/bpea-articles/addressing-the-quality-change-issue-in-the-consumer-price-index/ https://www.brookings.edu/bpea-articles/addressing-the-quali... "On quality bias and inflation targets" in Journal of Monetary Economics (2014): * http://www.columbia.edu/~mu2166/quality_bias/quality_bias.pdf http://www.columbia.edu/~mu2166/quality_bias/quality_bias.pd... I'm sure all these peer-reviewed folks are wrong about calculating the CPI and measuring inflation, and you're right. That the academic researchers, pension funds, futures traders, bond traders, union negotiators… all those folks missed this. But you… you've blown the whole thing right open. The other possibility is that perhaps the professionals know what they're measuring and the pros-and-cons of various metrics.

lordnacho 4y ago

Wow, this was the article I was looking for, it summarizes a number of thoughts about economics that I'd been having since the undergraduate days: - There's an authority about the field that really isn't deserved. The models are not made properly, and there's a lot of hand-waiving. I studied economics with a class of engineers and everyone pointed this out. - The pop-sci version of economics is a bunch of easy quips. Friedman's "everywhere a monetary phenomenon", Keynes "In the long run". - The econ 101 version of economics is dominant in popular thought. You see it everywhere in newspapers. A more nuanced version of economics does exist, but the appeal to authority is strong in the field, because there's no real reasonable arguments, it's actually politics. - Inflation is more interesting in a disaggregated view, for reasons mentioned. You can't look at it as a single figure. - Relative price changes are what matter in society, because they represent changes in negotiation terms between different actors. Post-pandemic and Ukraine, we should expect to see more shortages as well as more strike action. Various groups like the RMT union will decide they need to flex their muscles. Chip shortages will cause negotiation positions to change across a wide variety of affected sectors like cars, meaning push will come to shove for certain lines of business.

frankfrankfrank 4y ago
The thing that has nagged at you as it has me, is the simple fact that not only was “economics” conjured and molded by and for the interests of the upper echelon of society, to control the language and thoughts about its terms; but that at the core of it, it’s nothing more than fraud, deception, con artistry. That’s all inflation is too, fraud that if you would commit it, e.g., you added filler to some product you delivered or forged signatures on delivery paperwork, you would be punished for. You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service.
- lordnacho 4y ago
  > The thing that has nagged at you as it has me, is the simple fact that not only was “economics” conjured and molded by and for the interests of the upper echelon of society, to control the language and thoughts about its terms; but that at the core of it, it’s nothing more than fraud, deception, con artistry. Yeah this true, but I wonder if it's as straightforwardly sinister as that. I'm sure there are a lot of economists, esp in the mid 20th century, who would have liked to turn economics into physics. Some of those ideas are of no real merit after further inspection, but are kept alive by political interests. You do come across a lot of thought pieces by think tanks, which seem to be more political than science. > You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service. The problem with that is there are legitimate reasons for printing more coupons, they're just mixed in with less legit reasons. If people want to exchange more, they need more coupons. Otherwise everyone would have to wait for their income to arrive before sending it on, and while they wait some of the opportunities will vanish. A little bit of creation isn't so bad.

dataflow 4y ago

At the risk of going off-topic: I'd also like someone to write a similar blog post providing a convincing explanation of why the national debt supposedly isn't wrecking the US's future big time. To me it absolutely is, because you can only keep borrowing money and paying the (increasingly large) interest on it for so long. Eventually it'll exceed your revenue and you have no choice but to print money and hyperinflate your currency... right? Yet modern economists keep arguing it's... fine? "It's not like your household debt" or whatever the argument is.

neilwilson 4y ago
They say that Economics is the science on mistaking stocks for flows, and this is a very good example. Interest is denominated in $/month. Loans are denominated in $. Mixing those up is like mixing up miles per hour and miles. They are different units of measurement - the first is a flow, the second is a stock. Remember that bankers are people too, and they eat just like you do. Therefore interest is nothing more than the wages of bankers. They take those wages and they spend them back with firms in return for food and shelter. The firms then pay the banks with the money they earn from bankers. Round and round the money goes. Bankers earn on the turn as they say. The same applies to government interest. It is paid on bonds and reserves to financial institutions who pay people a pension from them. Those pensioners then spend that income, which generates additional taxation (because that's how percentages work), which will then balance the amount government paid in the first place. Therefore the tax that offsets the government interest payments comes from paying the interest payments. It's just a way of stimulating output, or redistributing it away from the producers to pensioners and other people with money. In fact all government spending creates the additional tax that offsets it - to the last cent for any positive tax rate. It's a simple geometric progression. The only question is when. If somebody doesn't spend all their income, then taxes are not collected from the spending, earning and re-spending process that would otherwise occur. And that's what creates the 'deficit' - people deciding not to spend all they earn. Also known as saving for a rainy day. There is no need for government to pay interest at all. It's entirely a policy choice. People can then choose to continue to save for no reward, or they can spend the money, which will stimulate economic output.

lottin 4y ago

Inflation is a change in the price level, i.e. an average. TFA argues that inflation is misleading because prices don't change uniformly, and therefore inflation doesn't fully explain every change in the price of every possible commodity and service. I think it's a straw man argument, because nobody claims that inflation fully explains changes in the prices of commodities. Instead, measuring inflation allows us to decompose these changes into a general component (i.e. inflation) and an idiosyncratic component (i.e. a change in relative prices), which is useful because it gives us more information about the causes of price changes. Inflation is only misleading if you're willingly misinterpreting it.

vertere 4y ago
Indeed. Any suggestion that economists (neo-classical or otherwise) don't care enough about relative price changes is utterly ridiculous. They just don't call them inflation.
lucozade 4y ago
That's not what he's arguing. He's saying that restricting money supply as a solution to inflation only makes sense if the average price inflation represented price movements well. His contention is that it doesn't so restricting money supply isn't a solution. I find that argument reasonably persuasive. His other point about inflation indices themselves being effectively useless, because of the inter price variability, I find less so. He skirts over the weightings which are key to the meaning of the index. They are weighted in such a way as to approximate the relative spending on each commodity. So the net effect of the index should be the inflation rate that you feel. So average measures of inflation are valuable. The standard cures likely less so.
- yxhuvud 4y ago
  The points made about variance being a measure of structural change in society, and that it is what actually is painful about inflation, was also very interesting.
- pakitan 4y ago
  > His contention is that it doesn't so restricting money supply isn't a solution. Restricting money supply may not be the solution. I don't think the author claims that restricting money supply can't be a part of the solution and a major part even. If he does, we have evidence to the contrary - 1980s in US. The inflation variation was even bigger then.

Straw 4y ago

This article makes a number of misleading claims I think stemming from a misunderstanding of inflation- which does not mean "price increase" but rather "a general increase in the prices of goods and services in an economy"- that's right, we define it as an average. Okay, what about the variation? Definitely, prices for different goods change differently, and the NYT even has a calculator that estimates it for you based on your consumption: https://www.nytimes.com/interactive/2022/05/08/business/economy/inflation-calculator.html https://www.nytimes.com/interactive/2022/05/08/business/econ... Try it out with a few different choices- you'll see that pretty much everyone experiences significant price increases, out of line with the previous decade- so the CPI while not perfect definitely tells us something. The fact that the standard deviation is greater than the mean does not tell us its not meaningful- for example, if I give you 1 million samples from a normal distribution with mean 0.1 and std 1.0, you can meaningfully tell me the mean is greater than 0. Individual components of the price index don't give a useful item to take the variance of, because very few people have all their expenses in one component. We'd actually like the dispersion of the change in expenses for each person/company to understand how much expenses rise in general. I suspect this will be significantly smaller since most people have 'similar' spending profiles, at least compared to the hypothetical consumers which only buy one component of the price index. Okay so why do prices change differentially more during inflation? This is a tough one, and recently there are obvious confounding factors (covid) that make it difficult to dissect. But I think even Friedman would expect this, because he claims that quantity of money leads inflation by 6 months-2 years, and we wouldn't expect it to propagate through all supply chains at equal speed. This also means that the standard theory is predictive and can't just be an accounting identity- the prediction (which we can make after the huge increase in M2 in 2020) is that prices will rise, with some delay but eventually about 30%. I'm not counting any change in the output of the economy here, so with covid disruption I wouldn't expect this to have particularly good accuracy. Let's see how it pans out! Finally, we can look at things like the price of gold: it rose significantly pretty much in line with the M2 money supply. I don't know of anything that would significantly affect gold supply recently, so it would seem the demand comes from devaluation of the dollar or fear of it.

cm2187 4y ago

Inflation isn’t measured on an average, it is measured on a basket. They are the same mathematically but the intention matters. If meat goes up 50% and fruits down 50% and the average is unchanged, that means the price of the basket that you will pay at the till is also unchanged, and you aren’t poorer. Now you can argue that CPI baskets aren’t representative, and I think they often underweight real estate. But that doesn’t mean that you are measuring the wrong thing by using a basket. It does explain though why the money printing 2008-2019 didn’t translate into CPI inflation, because that money was injected in the financial system, asset prices shot up, asset managers and VC investors got rich, but that didn’t affect main street. In 2020-2022, the pace of money printing massively accelerated and was directly introduced in everyone’s pockets through furlough schemes.

js8 4y ago

If economists accept that there are winners and losers in society, they will never agree on a single theory. Therefore, the most successful economic theory, neoclassical economics, rejects that assumption, despite it being factually wrong. It is successful precisely because it can be agreed by all economists.

kklisura 4y ago

As an absolute layman to this field, the Friedman’s "inflation is ‘always and everywhere a monetary phenomenon’" has appeal to me in that it offers a (simple?) solution: "government austerity" as noted in the article. Whenever I read other views on inflation and even this article, they fail on providing any solution for either fixing or taming the inflation.

pjc50 4y ago
Simple, easy to understand, and ineffective solutions are always popular. The classic policy lever works just fine for the past 30 years or so in the west: whenever inflation goes up, put up interest rates. That raises the cost of credit, puts people out of work and closes marginal businesses, thereby reducing demand. If you look at https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi https://www.macrotrends.net/countries/USA/united-states/infl... it's been kept perfectly in the 0-4% range by this process.
throw0101a 4y ago
> As an absolute layman to this field, the Friedman’s "inflation is ‘always and everywhere a monetary phenomenon’" has appeal to me in that it offers a (simple?) solution: "government austerity" as noted in the article. Government austerity is bad policy and has been for just about all of its history: * https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Dangerous_Idea https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da... (Of course this doesn't mean spending should be done without thought.)

nathias 4y ago

great article > Price-change variation rises and falls with the average rate of inflation. I think we can see it as a decay of money as a tool, its main function of being a unit of account becomes disrupted because its self-referential aspect increases.

twic 4y ago

I'd be interested to see plots of median or upper-quartile inflation across the CPI categories in there too. In periods of high inflation, is the high variation really random variation about an increased centre, or does it reflect the departure of an extreme from an unchanged centre? In the article and my suggestion, there's also an unexamined assumption here that the CPI categories are peers, on which it's valid to do statistics. It's not clear to me that "medical care commodities" and "shelter" are really things it makes sense to take an arithmetic mean of.

yyy888sss 4y ago

Inflation is an expansion in the money supply, such as new discoveries of gold or or printing paper money or creating credit. A baker would say he will 'raise' or 'lower' the price of his bread, not 'inflate' it. Defining inflation by the CPI or a similar measure is like defining the rain as a "increase in height of a river". It is the rain that CAUSES the rise in the river, and inflation CAUSES a general rise in prices.

sudden_dystopia 4y ago

Seemed like a long winded persuasion that monetary policy doesn’t matter all that much and that at the end of the day, the disaggregated inflation we experience in the real world is the result of oligopolies, which to me, seems like a subtle plug for MMT. I don’t buy it. I have heard plenty of economists and economically savvy people call BS on CPI as a metric for the very same reasons outlined here. CPI is a fallacy, mostly pushed by the the govt since it tends to generally be favorable to them and disguise the disaggregated nature of inflation. But that doesn’t mean that the underlying economic principles are false.

lbriner 4y ago

The problem is that politicians and armchair critics prefer simple sound-bites like "government spending caused this problem" or perhaps "a lack of government spending caused this problem", I can't imagine how many frowns you would get in parliament/congress if your explanation of why inflation is so high was as long as the article, even if it was much more accurate than a sound bite. People don't like the fact that the world is complicated and more inter-dependent than ever. I guess that's why some people go and live in the wilderness.

helen___keller 4y ago
This is why political discussion, and partisan discussion in particular, is almost universally worthless. Such discourse can be compared to memes, in the literal sense of the word. One sentence digs that seem to ring true get shared and thrown at political opponents. Nothing of value is created in such discourse, but the more effective memes proliferate through society and give advantage in voting season.
kqr 4y ago
This is why I dislike the popularity contests we call "democracy" today. If you so much as hint at the complexity of questions, if you happen to admit that something is a trade-off, or that there are risks with a policy, you're out of the system in seconds. Not that I have a better suggestion, mind you. Maybe sortition with an advisory panel of experts? But how would the experts be chosen? It would be easy to draw from the top ranks of some guild system -- but probably also highly inequitable, as guilds tend to restrict the profession to their likes.

I_am_tiberius 4y ago

I think Friedman's general idea is correct. For me inflation is not about individual price levels but about the potential of increased/decreased price levels. If money supply increases, it makes room for increased price levels. Without increased money supply, it would only be possible for a product price to increase if another product price decreases. In reality I think inflation already occurs when money supply is increased - it's just not priced in as it takes time for prices to adjust. However, the period of time in which the increase happens, cannot be predicted - e.g. it can be 1 year or 100 years.

zeckalpha 4y ago

> To understand inflation as it actually exists, we must look not to economics textbooks, but to real-world data. That’s what political economist Jonathan Nitzan did during his PhD research in the early 1990s. His work culminated in a dissertation called Inflation As Restructuring. The real world of PhD dissertations isn’t that different from that of economics textbooks.

hackeraccount 4y ago

I can sort of see the point the writer is trying to make. Certainly inflation is not evenly distributed - see healthcare, see post-K-12 education, see housing - but all that said they don't seem to grapple with the recent history of inflation. I'm thinking of Volkher putting a stop to inflation by raising interest rates - cutting off the money supply. As for the idea that oligopolies are behind inflation, it seems a cry too much the reverse of saying it's all Governments fault.

beloch 4y ago

At it's most basic level, inflation tries to measure of the affordability of living. Mango prices go down and avocado prices go up, so I buy more mangos and fewer avocados. However, what really impacts my life is how much of my income I need to spend, overall, on groceries to eat well. Inflation doesn't capture the choices I must make to optimize my grocery bill, but it does do a decent job of representing how the all-important total on my grocery bill changes. What inflation doesn't necessarily do is capture how my grocery bill changes relative to my paycheck. If you look at the historical inflation rate, it does a semi-decent job of indicating when weird stuff happens. Wars tend to be accompanied by spikes in inflation. Things get scarce. Supply chains get disrupted. There's less stuff to be had so, on average, people can afford less stuff. Everybody is making the same salary but things cost more. Pandemics can have similar effects. (We just happen to have gone from one directly into the other.) Deflation coincides with recessions (e.g. 1929). You'd think things getting cheaper would be indicate people can afford more stuff, but it's just the opposite. People are making less, so they buy less, and prices come down as supply exceeds demand. Inflation does need the context of average earnings to be useful, but it is useful given that context.

perryizgr8 4y ago

That's a lot of words and complicated statistics to argue against a simple graph showing M1+M2 supply since 2020 overlaid on a graph of inflation in the same time period. I think the lady doth protest too much... https://thefreethoughtproject.com/80-of-all-us-dollars-in-existence-have-been-printed-in-just-the-last-two-years/ https://thefreethoughtproject.com/80-of-all-us-dollars-in-ex...

FuriouslyAdrift 4y ago

This article conflates monetary inflation with the EFFECTs of monetary inflation... Inflation within the context of state level economics is the reduction in relative value of current monetary holdings. That's it. There's nothing magical, hidden, or complicated about it. How it arrives, how it is dealt with, and how much is desirable for specific effects is all up for debate and the article has some great info and analysis there. The most common reasons are monetary expansion and scarcity changes in resources. The most common methods of adjustment are monetary contraction and increases in resources.

sylware 4y ago

Prices increase because some human beings do increase prices. It is not "mother nature": there are moneraty/economic "rules" made/enforced by a few humans to organise(oppress?) others humans. Don't be fooled. To deal with inflation is to deal with those humans who are increasing prices.

sorokod 4y ago

Related: "Vimes Boots Index" https://en.m.wikipedia.org/wiki/Boots_theory https://en.m.wikipedia.org/wiki/Boots_theory

vectorfrog 4y ago

I found this analysis wildly off-base. No classical economist would suggest that increasing the money supply raises all prices uniformly, but the author seems to think that by showing that different goods' price changes are not uniform, that some how proves inflation is not a monetary phenomenon. What? From Thomas Sowell's Basic Economics - "Inflation is a _general_ rise in prices. The national price level rises for the same reason that prices of particular goods and services rise - namely, that there is more demanded than supplied at a given price. When people have more money, they tend to spend more. Without a corresponding increase in the volume of output, the prices of existing goods and services simply rise because the quantity demanded exceeds the quantity supplied at current prices and either people bid against each other during the shortage or sellers realize the increased demand for their products at existing prices and raise their prices accordingly." Note the emphasis on general. There is no reason to expect that the outcome of customers bidding against each other, or producers increasing prices to meet new demand levels would be uniform across all goods and services, furthermore, you would expect that the existing climate of the time would wildly swing the actors' actions involved in these bidding & pricing exercises.

Guest42 4y ago
It feels as though nowadays people feel entitled to make stuff up and have it be real through sheer force of repetition and words with multiple syllables. It's concerning that there are degrees in qualitative economics and non-programming computer science.
- nomel 4y ago
  Well, everyone is entitled to write their thoughts/opinions. There's nothing wrong with that. It's a wonderful exercise that everyone should do! The real questions is why do people go to these thoughts/opinions rather than the "expert" thoughts/opinions?

dang 4y ago

I changed the linkbait title* to something that the article actually says, but it's a bit obscure. If there's a different phrase in the article that gives a clearer summary of what it actually says, we can change it again. * "Please use the original title, unless it is misleading or linkbait" - https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html

adammarples 4y ago

Bafflingly long article which I read all the way to the end waiting for a point. The first point was interesting, inflation is an average, maybe its variance can tell us something. The current inflationary spike is evidently driven by used car prices. Then a long ramble to conclude that it's caused by large corporations. Driving up used car prices? OK