It's helpful to have a look at the graph in the article and to remind yourself that the numbers are reported year-on-year. Inflation spiked up in the first half of 2021 and the comparison is between the current month and the same month last year so prices could stay the same and you would still report high inflation for a while (until the back end of the comparison window catches up to the moment in time when inflation went up).
I think it's important to clear this up because people say things like "high inflation of over 5-6% for months now" which is kind of misleading. Prices can go up 6% just once and then stay the same and you'll still report 6% inflation every month throughout the following year.
This isn't to say that things are great and high inflation isn't happening. The month-to-month increase is 0.9% which is very high (see the graph).
USSR disintegrating after 91 and the opening up of markets around the world from the wave of neoliberalism helped a fucking lot, movements such as Latin America slowly dropping its market-protection practices, former Soviet states adopting free market ideologies and so on created quite a high demand, it was the start of globalisation as we are used to nowadays.
Most of the most prosperous periods in American history are following large shifts in the world order, WW1 and 2, collapse of the USSR, starting the Age of Information, etc.
The Consumer Price Index (CPI), for example, measures the prices of a basket of household goods and services that households regularly consume, with weights assigned to each item in the basket based on their average shares of total expenditures. Among these is a shelter component that includes both rental costs and the consumption value of owner-occupied housing, in addition to other forms of lodging such as hotels. Shelter makes up nearly a third of the basket for CPI inflation, and 40 percent of the basket for core CPI that excludes the volatile food and energy components.
Yes but through hedonic adjustment fuckery, many CPI measurements, especially housing, are complete nonsense.
Basically, if the cost of housing is rising, but the quality of housing is also rising, then these things will offset to a degree as far as CPI is concerned.
It’s one of the reasons healthcare inflation is so absurdly underrepresented. CPI basically assumes that you could pick any level of quality for a good or a service since the index inception. But you can’t go to a hospital and say “I just have a small cut on my finger, I’d like the 1950s level of care”…you will get the 2021 level of care and 2021 prices. But CPI will say “ah that’s not necessarily inflation because the quality of care has also gone up!”
Of course CPI is imperfect and worthy of plenty of criticism. But one must acknowledge: it’s an incredibly complicated thing to try and measure. This cynical conspiracy theory that big bad government is twisting its evil mustache and trying to make inflation look low is… well, I don’t think it holds up to much scrutiny.
Completely agree. And hedonic adjustments are not a bad thing either. As you say, inflation is an insanely complex beast that we don’t really understand.
But it’s worth pointing out that certain agencies use CPI imperfections when it suits them: the Fed has pointed to low inflation for years as justification to continue its monetary policies. And then when CPI no longer backs their actions, they change the narrative and claim it’s “transitory”.
CPI isn’t broken. It can’t be broken. It’s just a metric with a methodology.
But our interpretation of CPI is broken at best, and manipulative at worst.
I'm not quite sure what 'housing' means in that quote because CPI specifically excludes most housing costs.
RPI takes into account housing costs such as mortgage interest payments, building insurance etc. I'm not sure what USA measure, but the UK shifted to CPI in 2003 to harmonise with EU.
So no, UK/EU/CPI inflation measures basically don't include housing related costs. Certainly not the price of houses, which might be the thrust of OPs point.
I have no clue haha. I mean if it DOESN'T include housing doesn't that just mean that since housing costs are skyrocketing that this reported number is actually a lowball for inflation?
Inflation does not affect (relatively speaking) the poorest more. On the contrary, it's a tax on people that have a lot of cash or cash-equivalent assets. That's not the poor. The poor have either very little cash or even negative (via debt), so inflation benefits them.
You can literally see how the wealth gap inequality nose dives in the high-inflation environment of the 70s and then continually increases after low-inflation rates become the norm for decades after around 1982.
Inflation is a tax, should be seen as such but is a tax on the rich in cash (I keep insisting on the term cash because that's what inflation taxes, if you are rich in other assets inflation may or may not result in an effective taxation of your wealth). Monetary and fiscal policy should be designed with this in mind.
This is completely wrong, it disproportionally affects the poor and middle class the most because all they have is their wages and a little bit of cash. Wages are not that elastic and will certainly lag behind.
Rich are heavy on assets and it doesn't affect them at all unless they are stupid enough to convert those assets to cash during high inflation period (it of course doesn't happen).
I agree. I'm not ashamed to admit though, I'm still a little baffled by Buffet's backing off into "cash" - or out of the market - I guess cash means different things to different people...
This is so wrong I don't know where to start. I'll just say 2 things:
a) your charts are a classical example of "try hard enough and you will find 2 charts that correlate"
b) Inflation affects the poor because they don't, and sometimes can't, hold assets that traditionally protects the rich from inflation, such as real hard assets (such as real estate) and a sizeable chunk of stocks (some types) and bonds (TIPS and short duration). The poor lives paycheck to paycheck and see their income staying the same while everything else around them is increasing in price.
As I explained above, some assets protect you from inflation. Like stocks in companies with pricing power, real estate... But almost no assets protect you from the raise in the risk-free-rate that is usually following a high inflationary periods. As the risk-free-rate enters into model valuations of future cash-flows and a raise to it implies a multiple contraction.
Without looking back at the wealth inequality chart. What would you say was the result of the highly deflationary period of the 1920s? Increase of wealth inequality or decrease of wealth inequality?
Without looking back at the wealth inequality chart. What would you say was the result of the high inflationary period of the 1940s? Increase of wealth inequality or decrease of wealth inequality?
I think you are confusing two things. The poor may struggle to reach ends-meet more than the rich, of course. But that doesn't mean that relatively speaking inflation is a regressive tax that the poor have to carry the burden of disproportionately.
> No, wealthy people tend to invest theirs saving in various things that resist or often even beat inflation.
This is easier said than done. Given a risk-free rate it's not that hard to find investments that beat it. What usually happens is that the risk-free rate is around inflation. But right now the risk-free rate is significantly lower than inflation. If the Fed raises the risk-free rate to match inflation then high valuations will correct resulting in a strong correction in the stock market.
Look at the 70s, same period of high-inflation I was referring to above. The wealthy didn't beat inflation back then, which again is reflected in the previous wealth inequality chart.
All things being equal (income for one) inflation in the most practical sense dis proportionally affects the poor and the middle class.
In a numerical sense the rich may suffer more but they won't eat a sandwich less because of it, whereas poor people may end up much poorer and the middle class (aka the comfortably poor) are significantly impacted.
Keep in mind that at the same time there’s a high tax on cash central banks have arranged things such that there are no safe investments. They’ve pushed people into memecoins, electric car companies that haven’t made any cars, and flipping homes in the exurbs of Las Vegas.
Only if wage inflation doesn't keep up with price inflation. If wage inflation keeps pace, it's actually a fairly progressive result since debt loses value relative to wages.
For people without income or assets it's a disaster.
Very true. And, unfortunately, thus far, the wage growth we saw earlier on in the pandemic has not held, because it was largely the result of lower paid people becoming unemployed. Wages have barely budged relative to inflation since 2019, even if you only consider employed people. We're definitely in the "very not good" scenario here.
Minimum wage is always going to lag way behind inflation. In practice, almost all wages lag behind inflation. But "people without income or assets" is my definition of "poor" and ...yeah, inflation basically takes a meager $1200/mo government check and makes it worthless. they're already on the brink of starvation.
>> I do think defining poor as unemployed is way too narrow.
Definitely. You floated the idea that inflation would be progressive if the creditors have to pay higher wages (if wages rise in sync) while their loan portfolios in "old dollars" become essentially a worthless write down. There's a beautiful, even just economic logic to that. The trouble is that the lag itself becomes wealth under inflation. Normally, TTL between promising a worker a check and sending it gives a nominal value for holding that money as long as possible in an interest bearing or inflation-proof asset. Under inflation that time differential goes wild. Sometimes within a day or two, the value of the payment is gone by the time it gets to the employee. This is before it even enters the system as purchasing power.
Time becomes the most crucial element of profit and control, under inflation.
If there was a scale of value in terms of being between the borrower (people in debt) and people lending (people with cash). It swings heavily in favour of people in debt.
This. Let's not discount the fact that this is why I've been loading up on everything I always wanted to buy on 2-3% APR for the past year. I'm a person who never had any debt or credit for the last 25 years. But now's the time. Me and everyone else in America. That's the demand spike. Everyone wants to lock in the rate before the party stops.
Taxation is deliberate and easily measured. Inflation is much more difficult to measure and it results from many parts of a complex system interacting with each other. The only thing in common is that people end up with less money.
This is a foreign concept, but Americans have caught on just fine: When the currency is inflating, people buy hard physical goods or whatever they can get their hands on now before the price goes up. Cars, white goods, remodels, houses, jewelry. It's funny to watch the whole universe of punditry wring its hands over the supply chain crisis when in fact what we're seeing is Americans attempting to cash out of the dollar (wittingly or by brute instinct), and China narrowing the umbilical by which those dollars can be redeemed for goods.
> in fact what we're seeing is Americans attempting to cash out of the dollar
Interesting! Did not look at it like that. I've had that subconscious instinct as well to purchase important things I need now because tomorrow feels so unstable.
Investments have to meet an estimated inflation barrier of 6% right now just to break even with inflation THEN they get taxed as well on that 6% gain!
And 6% isn't an easy target to reach for safe conservative investments like a retirement account.
So the gov't borrows money, has the power to make the money they borrowed worth less to pay back, then taxes everyone on earnings on this newly inflated money.
https://news.ycombinator.com/item?id=29175110
https://news.ycombinator.com/item?id=29174804
https://news.ycombinator.com/item?id=29182768