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Ask HN: How much of inflation is caused by supply rather than demand issues?

• PaulHoule 4y ago
  The supply problems were a lot worse 1-2 years ago.
  • some_banker_guy 4y ago
    https://ycharts.com/indicators/us_monthly_inflation_rate https://ycharts.com/indicators/us_monthly_inflation_rate which is partly why inflation is so much better recently. Services inflation ex OER (i.e. excluding housing which for legacy reasons is extremely slow moving average) remains too high, however.
• david927 4y ago
  Supply issues are a bit of red herring. Compare industries with more and fewer supply issues and you'll find that it doesn't play an oversized role. The main catalyst, and by that I mean essentially the only catalyst, is monetary policy.
  • uoaei 4y ago
    Well, that and the obvious price-gouging tactics.
    • bradDonniger 4y ago
      [dead]
• kneebonian 4y ago
  I am just going to take a minute to point out that 18 months ago I said the inflation wasn't transitory, it was long term, and everyone told me I was crazy when I said the government was lying about it being transitory.
  • ellisv 4y ago
    I don’t think the Fed anticipated the war in Ukraine.
    • kneebonian 4y ago
      This was during the war in the Ukraine, which was one of the excuses people gave for inflation being "tranistory" and that things would be sorted out soon.
      • ellisv 4y ago
        Sorry, I thought you made your prediction 18 months ago – the generally accepted start of the invasion is 2022-02-24. If your prediction was after, then yes I agree the Fed should have accounted better for the global landscape.
    • rqtwteye 4y ago
      Blaming the current situation on the Ukraine War reminds me of the crash in 2001. Things were going downhill already long before but when 9/11 happened, suddenly everybody blamed the crash on 9/11. I am pretty sure the current situation would have happened without the Ukraine war. Maybe a little different but the writing was on the wall long before.
      • KingOfCoders 4y ago
        "Things were going downhill already long before" Inflation in Germany stayed <5% since the beginning of the 90s, most of the time <2% for 30 years (should be even smaller because Germany doesn't use chained dollars), then spiked to 10% with the invasion of Ukraine. So it's not clear what you have been referring to.
• refurb 4y ago
  Fuel prices have skyrocketed in the past with little impact on inflation. I think one could argue they exacerbate inflation - rising prices can trigger more price increases, but in the end its money supply that drives an erosion of the value of currency.
  • KingOfCoders 4y ago
    When fuel prices in the 70s skyrocketed, so did inflation (talking about Germany where the Vietnam war/gold standard was not a factor).
    • refurb 4y ago
      When oil prices went from $86/bbl in 2007 to $176/bbl in 2008, inflation went from 2.5% (2007) to 3.7% (2008), which was within "target" for the fed. Oil peaked at $108/bbl during Covid, and that's not inflation adjust. You can't tell me that when oil prices doubled in in 2008 and no inflation happened, that oil prices drove inflation now when it went up far less. Like I said, supply constraints can drive inflation when there is excess money supply. But without excess money supple, the inflation impact of supply constraints is muted because, well, there isn't the money to feed demand - consumption just drops.
      • KingOfCoders 4y ago
        I don't know about the US. In Europe inflation was driven by oil prices in the 70s because industry production was based on oil energy. Europe switched to natural gas for industrial production. Because natural gas costs were driven by long term contracts, not the spot market, it did not increas in 2008. When because of the invasion natural gas costs spiked, despite long term contracts with Russia because companies needed to get out of them and buy natural gas on the market, inflation spiked.
• kome 4y ago
  This inflation is not created by a lack of supply (not anymore at least), or by an excess of demand... it's an inflation created by excess of profits. and the fed decided to fight it by fighting workers. it makes no sense, really.
  • rybosworld 4y ago
    It's because central banks can't do much more than adjust rates. This problem needs to be addressed by policy makers in the form of tax increases (primarily on corporations). Tax increases are unpopular and so they only tend to happen when shit really hits the fan. And policy makers always wait for shit to hit the fan before doing what's necessary.
  • rqtwteye 4y ago
    It makes a lot of sense depending on what side you are. The Fed never was a friend of the working class and unfortunately politics has been paralyzed to a degree that they defer most of economic policy to the Fed.
  • ellisv 4y ago
    > and the fed decided to fight it by fighting workers. I don't really understand this view (and certainly wouldn't attribute this sort of intent to the Fed). What did the Fed do? What should they have done?
    • deleted 4y ago
      [deleted]
• mariodiana 4y ago
  Full disclosure: My understanding of economics is heavily influenced from what's called the Austrian School. On that understanding, we have two main factors that are contributing to the rise in prices. Only one of them is, properly speaking, inflation. Putting the subject of inflation aside for the moment, the first cause is the destruction of capital. Capital destruction, which broadly speaking includes our ability to transport goods, has curbed the economy's productive capacity. We produce less, and so what we are able to produce becomes more dear. This is the supply issue, but it's not inflation. The second cause is inflation. The definition of inflation I'm using is the increase in the money supply. Until very recently, this is what the Fed (and other central banks) have been doing. More money chasing the same amount of goods—all else being equal—causes a rise in prices. This is the demand issue. I realize that this understanding and use of the term inflation isn't mainstream. But I think it makes it easier to understand what is going on.
  • voldacar 4y ago
    Can you elaborate on capital destruction? Who is destroying capital and why?
    • thwayunion 4y ago
      > Who is destroying capital and why? Capital destruction doesn't have to be intentional. Hurricanes, fires, floods, wars, and pandemics can destroy capital. A bunch of chickens being killed due to bird flu is an example of capital destruction. Your house being destroyed due to a flood is capital destruction. Bananas rotting in a warehouse because the truck driver decided to take a vacation day is capital destruction. Of course, arson and war can also destroy capital, and those are intentional. Policy can also destroy capital; e.g., a tariff that decreases international trade reduces the value of shipping containers; that destroys capital even if the shipping containers still get used (at a lower rate). Rant: No one cares about pushing around definitions of words; what they want to know is why they have to pay more for stuff! For this reason, the Austrian definition of inflation is kind of idiotic and imo often used in bad faith. Why? Because most people understand inflation to mean "things are getting more expensive". That's the normal definition not only in mainstream economics but also in the lay vernacular. So then an Austrian tells you that "inflation is monetary" and you infer that "the reason for increasing prices must be money printing". But that's an errant deduction! The Austrian is simply axiomatically defining a term in a non-standard way. In particular: the "inflation is monetary" is literally just choosing a weird way to define inflation, NOT making an actual empirical claim about the reason that e.g. egg prices have increased! If you accept the definitional slight of hand and don't realize the silly game of axioms you've been recruited into, then you conclude that money printing is always the reason for increasing prices, even though not even the most staunch Austrian has the balls to make such a wildly broad claim ("oh, no, those prices increased because of capital destruction, not inflation!"). So far we just have a silly confusion. The pernicious thing is that the conclusions that you draw due to this stupid definitional game happen to support the often entirely self-interested policy preferences of (usually wealthy, and in a particular way) Austrians. To your parent post's credit, they explain what they mean when they say that inflation is monetary; ie, that you cannot conclude from their assertion that inflation is the reason that prices are increasing. But generally I find the game that gets played with the definition of inflation (it's always monetary!!1!) extremely aggravating, since literally everyone else in the conversation understands that inflation means a general increase in prices. It's the same sort of pernicious definition game that people play when they say that that US is a republic and not a democracy. And, in fact, you'll find that most Austrians themselves don't even understand that "inflation is monetary" is just a definitional choice, not an actual empirical claim about why prices increase. Or, when they do, they will freely move between the two definitions in a way that is -- even if not in bad faith -- an actively misleading use of rhetoric.
• jmoak3 4y ago
  Internationally aging populations are a systemic source of inflation in the cost of producing goods. I recommend Manoj Pradhan & Charles Goodhart’s, “The Great Demographic Reversal” (2019) for more on the topic. Covid occurring since then has exacerbated the international debt issues, as well as plucked more of the valuable remaining years away from our labor force’s working years. See the number of early retirements that occurred during the pandemic. That we’re also seeing a hot war, a trade war, and the ripples of a goosed economic system during covid at the same time? Can’t make it up. Edit: I wouldn’t hold my breath waiting for the fed to resolve this, they’d have to crush assets to oblivion to keep pricing of labor the same as it dries up due to retirements. AI on the other hand has a lot of potential to bail us out here
  • censor_me 4y ago
    [dead]
• ellisv 4y ago
  The Fed has monetary policy powers – they can essentially modify the supply of money. Their primary tools are that they can raise/lower the Federal Funds Rate and can purchase/sell financial assets (quantitative easing/tightening). These tools primarily influence demand (e.g., raising rates makes borrowing money more expensive, quantitative tightening decreases liquidity). Congress controls fiscal policy which can take more targeted action to address supply-side issues.
• comte7092 4y ago
  Keep in mind that this forum is very competent when it comes to software discussions, while tending to overstate its economic knowledge. To your question: what it comes down to is that the fed is charged with managing inflation and unemployment. Regardless of the effectiveness of their tools, they are required to do what they are able to do. With that in mind, it’s possible that there is a better course of action. Personally I find the arguments of MMT to be strong. This forum has charactered the theory as an excuse for profligate spending, however, the actual proponents simply state that budget deficit are ok so long as inflation is under control. Therefore, the theory would posit that the actual resolution to this would be to shrink the deficit spend in order to properly tame inflation. Take that for what you will.
  • jerf 4y ago
    Politicians have a long track record of picking out the conclusions they like from an economic theory and doing some combination of ignoring the preconditions, being unaware of the preconditions, and being too mathematically illiterate to understand the concept of preconditions. I'll leave the exact balance as an exercise for the reader. If our governments ever ran true Keynesianism, they didn't do it for long before they started spending more when Keynesianism said they should spend more and spending more when Keynesianism said they should spend less, and whatever the academic merits of MMT it has in practice simply removed whatever faint limits the old theories imposed on our politicians because it has been translated to them as "MMT says the government can spend whatever it likes forever, especially if it has the reserve currency, and nothing bad is even possible, let alone going to happen". In a sane world economists would recognize that explaining new theories to politicians is just handing a lit match to a toddler, but, well, you live in the world you live in, you know, not the world you wish you lived in.
    • comte7092 4y ago
      MMT has never gained mainstream acceptance amount politicians, outside of a handful of left wingers. Your argument lacks empirical evidence. Politicians spend because it’s popular, they cut taxes because it’s popular. In reality they don’t need a theory to justify their behavior. The budget deficit has been ballooning for decades before MMT even became a faint part of the public consciousness. It’s ridiculous to assert that academics are somehow responsible for the behavior of politicians. What matter is that they develop theories that are correct and true.
• paulusthe 4y ago
  The short answer is we don't know for certain. The long answer is that today's inflation doesn't seem to be monetary in cause, because nearly every country is experiencing inflation simultaneously. If the Fed had printed too much money and that was why the US was inflated, that dynamic shouldn't really affect, say, Germany, or Brazil. (Caveats abound, of course). Despite that, we're seeing nearly every major country have similar and sustained rates of inflation across monetary policy regimes. So, we know there's been something that affected everyone globally, and that's obviously supply chain disruptions along with gas and oil price changes due to Ukraine. Fed policy didn't cause the inflation, something bigger than the Fed did. The question then is can the Fed fix it. The answer here is maybe. The Fed has tools to fix inflation - when the inflation is caused by monetary policy reasons - and those tools should, all else held equal, reduce inflation eventually. The real question is whether or not the Fed is the best entity suited to tackling today's inflation. Politically, it's very easy to just delegate all that stuff to the Fed so that it becomes some technocratic thing that's essentially beyond the scope of normal politics. This is what Reagan did in the early 80s. But in terms of actually fixing the underlying problems, I don't know how much impact the Fed can have. Raising rates won't make supply chains readjust to today's geopolitical environment, or hire more truckers to move long-stored inventory. It will fix the monetary part of the inflation, but to get back to your question, nobody really knows what the monetary part is. It's less than we'd normally think, but we don't know precisely.
  • KingOfCoders 4y ago
    I do agree, though the US does export it's inflation with a lot of the world trading in $.
  • MrBuddyCasino 4y ago
    > The long answer is that today's inflation doesn't seem to be monetary in cause, because nearly every country is experiencing inflation simultaneously. Every country printed money during Covid.
    • neffy 4y ago
      Correct - once the world saw the Fed dumping $1 trillion into the money supply to prevent a collapse due to Covid in 2020, everybody else did as well. It takes time for that to make its way through the pricing system (bearing in mind inflation is measured over the last 12 months, its a lagging indicator). There are also demand factors as well, but most of what we are seeing is monetary in origin, raising interest rate is also somewhat "demand" driven, in that the big trigger there was the market for buying MBS (packages of loans mostly made by banks and S&L) market froze and then spiked up significantly.
• christkv 4y ago
  I see a lot of record profits in the supermarket chains suggesting that a fair bit of the inflation is probably price gauging. https://www.reuters.com/business/retail-consumer/carrefour-predicts-further-profit-growth-this-year-2023-02-14/#:~:text=PARIS%2C%20Feb%2014%20(Reuters),operating%20profit%20despite%20high%20inflation https://www.reuters.com/business/retail-consumer/carrefour-p.... I imagine its like this all over which each part of the logistical chain opportunistically cashing in using the excuse of inflation.
• dosco189 4y ago
  From a theory pov, inflation can be cost push (raw materials cost more for producers) or demand pull (demand more than available supply). In the real world - both can happen simultaneously. When interest rates rise, not only does higher cost of borrowing discourage investments and spending (an attempt to kill demand to bring down prices) it also reduces the money supply of the economy. The money supply refers to all the liquid assets and cash that are in circulation in a country's economy. It is important because it is closely related to the credit market. But money supply works in conjunction with market risk - which often branches out to two functions - liquidity preference and risk premium. The former is a theory that suggests that an investor might prefer 6% over 10 years than 3% over 5 years. The latter suggests that one investor might pick the 3% (lower yield) option because it has better risk premium - say the 6% is a bond in a DVD store, and the 3% is a government bond (example). What we're witnessing now is the spiralling, second order effects of rising rates - which on the one hand attempt to kill demand and curb prices for consumer goods, but on the other, affect the money supply and force investors to rebalance their portfolio and start evaluating different risk premiums. The Fed has dug itself into a hole because monetary policy changes have massive spillover effects into other areas of the economy, not just inflation and cost of borrowing, but also things like how participants in the economy view liquidity and risk premiums. Can't A/B test monetary policy, or life. Institutions, like people, will learn to face the consequences of their actions and learn to live with their choices.
• MrBuddyCasino 4y ago
  “Inflation is always and everywhere a monetary phenomenon.” -Milton Friedman This is a pretty exhaustive text on why this is the case, I found it quite convincing: "The inflation economy" https://graymirror.substack.com/p/the-inflation-economy His last two articles are similar and are about the architecture of the financial system and the role the Fed plays in it, this might interest you as well. "The golden age of informal securities" https://graymirror.substack.com/p/the-golden-age-of-informal-securities "Bitvana or the bitcaust" https://graymirror.substack.com/p/bitvana-or-the-bitcaust
• cc101 4y ago
  I have long doubted that policy has much to do with inflation. Having lived through sever inflation, in my personal experience inflation is all about inflationary expectations. It was all about trying to personally gain advantage by getting ahead of everyone else. On the other hand I don't know squat about monetary policy, so I'm probably confused.
  • thwayunion 4y ago
    Monetary policy says that the most dangerous thing is when inflation expectations become un-moored, which is deeply and fundamentally psychological. If you've lived through that, you probably have a better understanding of the most dangerous part of inflation than any modern US central banker who doesn't have a similar personal experience.
    • cc101 4y ago
      Thank you
• beefman 4y ago
  Powell's been clear that the purpose of the rate hikes is to destroy demand until it matches what the economy can currently supply – this is practically a direct quote from his last press conference. Supply and demand are always interchangeable when it comes to prices. We might compare supply (real GDP) to trend, and find it's been low, and conclude there's a supply and not a demand problem.[1] But the Fed is a bank and can't do much about supply. Another question is whether inflation is actually high. There was a sharp change in the CPI last June.[2] Measuring from February 2022 still gives 6.0% but measuring from June gives 3.5%/year. There's also the question of inflation stability (2nd derivative of prices), and things have been pretty smooth since June. So should the Fed crash the economy to try to bring stable 3.5% inflation down to 2%? Probably not. But the bigger question is: What can we do to increase supply? [1] 1.7%/year 2022Q4/2019Q4 versus 2.6%/year 2019Q4/2016Q4 or 4.7%/year 1999Q4/1996Q4 etc. [2] https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPIAUCSL
  • some_banker_guy 4y ago
    Agreed, nice to see someone talking about recent inflation figures. I think the real issue remains the labour market, it's not clear if companies are labour hoarding still or we are somehow amidst a massive shortage. Anything you do to try to increase supply is counter-productive if you don't have workers to do it..
  • dogma1138 4y ago
    I’m a bit confused by this comment. You state that supply and demand are interchangeable they are not, a classic example would be the elasticity of a specific demand or market. Then you say that the fed cannot do anything about the supply which isn’t correct at least if you are talking about the supply of money increasing the interest rates can reduce the supply of money within a given economy.
    • beefman 4y ago
      "Supply" here does not refer to money, but to physical goods and services. A price change by can be caused by changes in supply, demand, or both. Additional information is needed to determine which. In the present situation it seems demand is 'normal' but supply is constrained.
• TradingPlaces 4y ago
  At first it was almost entirely a supply and goods phenomena, but since mid-2022 it has shifted to services and demand. SF Fed breaks out the PCE index by supply and demand: https://www.frbsf.org/economic-research/indicators-data/supply-and-demand-driven-pce-inflation/ https://www.frbsf.org/economic-research/indicators-data/supp...
• jaqalopes 4y ago
  The Fed as we have seen definitely "has the power" to raise rates. The question behind your question is, to what extent does raising rates lower inflation? I'm not an economist, just some guy on HN, but I'm pretty persuaded on the idea that inflation is, as others have said, a "monetary phenomenon." If you strip away money for a second, the "actual economy" is just supply (people making stuff), and demand (people buying stuff). Now imagine we're back in 2019 and the economy exists with some baseline amount of money in circulation. Then in 2020 and onwards, more money is printed to allow for emergency government spending in the face of the pandemic (a policy, by the way, that I think was completely correct in context). With interests rates low/zero, the money that was added to the economy basically stayed in the economy, bouncing around according to supply and demand. However, once people got the new money, and people consequently decided to buy more stuff with that money, the economy did not magically start making way more stuff right away to match. Classically, this is where the inflation supposedly happened. As we discovered with some recent bank failures, it is somewhat more complicated than this. People did not just use the new money to buy stuff. They also used it to invest, and a lot of those investments would not have made sense if interest rates were higher. Somewhere I saw the example of an "AI dog-washing startup"; this fake business illustrates the type of real but not necessarily sound business that was suddenly getting investment because there was a lot of money flying around inside the economy. Now, when the Fed "raised interest rates," what actually happened was it created new investment vehicles (e.g. treasury bonds) that offered returns on investment that were much more attractive to investors than the previous generation that offered low/zero interest. Banks and others shifted towards these new, better investments and tried to sell their old, worse ones. Hence, some of the money that was flying around began to exit the economy and return to the government coffers. This was bad for banks like SVB that had a lot of "interest rate risk." It was also bad for downstream investments like the AI dog-washing startup, which were now competing with "better" businesses in an environment with less money flying around—this is where you see e.g. the current tech hiring downturn and layoffs. So that's about what the Fed has been able to do. One assumption you've highlighted here is, to what extent is the Fed doing all this based on research and deliberation? I think the short answer is, we don't know. Interest rates are indeed a blunt instrument, but they are also the instrument the Fed can control, and so that's what the Fed is using. This leaves a lot of room for conspiracy theories and speculation. I happen to think the Fed is doing its best within the constraints of its powers, but the Fed cannot singlehandedly "fix the economy." They can print money and adjust interest rates. And doing these things affects the economy in theoretically well-understood ways. Ultimately, raising rates is like putting an ice pack on an injury. It reduces the swelling, which is helpful, but it doesn't fix the injury per se—the fixing happens in an entirely different, more complex system, really a system of systems. Just so with "the economy." The economy ultimately exists as a sort of distributed phenomenon in the thoughts and actions of all its participants. These thoughts and actions are not aligned, and so we get the infinite omni-directional tug-of-war known as the "invisible hand of the market." The Fed certainly has a lot of ways to influence the economy, but it cannot force people to think or act in precise, coordinated ways.
• Rury 4y ago
  It's not one or the other. People looking at this as it's more of a demand issue, or more of a supply issue aren't looking at things correctly. What matters is the ratio of demand/supply. If supply falls, and demand doesn't, this means there's too much demand for the supply, so saying it's caused by too much demand is as equally correct as saying it's caused by too little supply. It's the ratio what matters, not demand or supply alone. For hyperbole, houses would never sell for millions of dollars, if only 2 dollars existed in the worldwide economy, not even if the housing shortage was so bad that there only was 1 house available in the entire world. People may try as they might, but they'd never get more than the total money in existence (2 dollars). Ergo it's entirely possible to make a money shortage worse than any "supply" shortage and force prices down. The Fed controls interest rates, and how many dollars exist, so they do have quite a bit of influence over the situation. So, yes the Fed does have power to tame the current bout of inflation, but it takes time, and it is blunt. That said, there is a ceiling to how much money they can suck out of the economy, as they have little power to destroy dollars physically hoarded by people with no debt, or lost in a roadside ditch somewhere. But this doesn't matter much, as that money in practice, is out of the economy for the time being, as if it doesn't exist anyhow.
• NeuNeurosis 4y ago
  Great observation and interesting timing. Your post was right after this article was posted. https://news.ycombinator.com/item?id=35260210 https://news.ycombinator.com/item?id=35260210 https://annpettifor.substack.com/p/banks-as-collateral-damage-in-a-class/comments https://annpettifor.substack.com/p/banks-as-collateral-damag... The author actually touches on your point of supply side commodity speculation causing inflation instead of wage increases. She does an adequate job of putting into words the flip side of the coin where by raising interest rates and taming inflation it puts a real deflationary effect on wages. This is to satisfy a small group of creditors over the larger group of debtors. Its an interesting read and leaves a lot unexplained but I think captures the heart of the matter.
• BigCryo 4y ago
  Are suppliers using media news stories about supply chain issues in order to hike prices and increase profits?
• j0bear 4y ago
  Another way to tackle this is by asking how much was inflation kept down (if at all by other factors) over the past few decades, esp. in the so-called 'Great Moderation' era of 1980s - 2000s. One interesting theory includes impact of outsourcing production/labor arbitrage with China & others...