O Inflation, Where Art Thou?


Motoconomist is a motorcycle riding economist comfortably squirreled away in the bowels of the federal bureaucracy, whose normal day job involves helping prevent the mistakes of the Great Recession. He lives in the Washington, DC Metro Area with his wife, his dog, and his 3 year old daughter. He often rambles about voting issues (he is a recognized expert on estimating voter behavior), housing policy and urban growth on twitter as @motoconomist.

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48 Responses

  1. Brandon Berg says:

    In April, the Consumer Price Index rose 4.2%, beating expectations by 0.6%.

    You know what this means, and I know what this means, but I suspect that most people reading this will not, so it’s worth clarifying: This is year-over-year inflation, not monthly. The CPI in April 2021 was 4.2% greater than the CPI for April 2020, not 4.2% greater than the CPI for March 2021.

    The actual month-over-month increase was 0.8%, which is quite a lot for one month, but we can’t extrapolate from this and conclude that inflation over the next year is likely to be 10%.Report

    • Motoconomist in reply to Brandon Berg says:

      Yeah, that’s why I said “The change is coming off from a low base from last April, when Covid shutdowns artificially slowed economy.”

      Your point is on point and rightReport

      • Brandon Berg in reply to Motoconomist says:

        Right, I got that. It’s just that the natural interpretation of “In April, the Consumer Price Index rose 4.2%” is that the CPI literally increased 4.2% between March and April, which would be totally bananas, in the sense that it’s the kind of thing that happens in a banana republic. When communicating with those who may not be as familiar with economic reporting conventions (i.e. 95% of the population), it’s important to phrase things in a way that minimizes the risk of that kind of misinterpretation.Report

        • Motoconomist in reply to Brandon Berg says:

          Yeah, I tried my best to explain it later, but yeah, its not something that easily translates.Report

        • Jaybird in reply to Brandon Berg says:

          Remember how we were saying that only a handful of people were sick in January 2020?

          This feels like that.Report

          • Ozzzy! in reply to Jaybird says:

            I’m curious why does it feel like that for you?Report

            • Jaybird in reply to Ozzzy! says:

              Because of all of the things that I’m told don’t count as inflation for the inflation measurement.Report

              • Motoconomist in reply to Jaybird says:

                That’s not why I am unconcerned. I am not concerned because the big spike that made the news is in part a result of a low base to change from i.e. last April. I expect that as the economy opens up and we figure out what normal is again, we’ll see prices temporarily rise above trend expectations, but it should all settle out in a few months. Data is noisy right now because we’d never had an economy artificially shutdown before. The nasty jobs reports looks to be just a fluke based on other job reporting data that came out a few days later.

                Also remember we had the cyberattack / pipeline / gas shortage right now, so that’s a one off which will resolve by next weekend.Report

              • Brandon Berg in reply to Motoconomist says:

                I wouldn’t say that the jobs report was a fluke. The weak job growth combined with the record-high job openings rate points to supply-side unemployment, which was a fairly predictable consequence of the expanded unemployment benefits.Report

              • Oscar Gordon in reply to Brandon Berg says:

                It’s also explainable by uneven openings. Businesses opening up faster that schools/child care means some percentage of the workforce can not return yet.Report

              • It’s the seasonally adjusted first estimate. The unadjusted jobs change estimate was +992,000. That was discounted by some 700,000 jobs to compensate for the extra hiring employers do in April in normal times. These are hardly normal times.Report

              • Jesse in reply to Brandon Berg says:

                Except the lack of growth in jobs wasn’t disproportionately among low wage workers.Report

          • DensityDuck in reply to Jaybird says:

            “This is a matter of national-level policy and it’s one of the things that is literally the government’s whole job, it’s impossible to imagine that they’d screw it up so badly as to cause a crisis!”Report

          • JS in reply to Jaybird says:

            You mean when all the experts said “this is a big deal” and the pundits and armchair analysts were “Nah, man, it’s just a China thing” and the experts were right?

            And right now all the experts are saying “It’s exactly what you’d expect given the supply chain disruption of a year+ long pandemic as the pandemic starts to end and things open back to normal” and the pundits and armchair analysts are screaming “IT”S GERMANY! WHEELBARROWS OF CASH! THE INFLATION WE’VE FORECAST EVERY YEAR SINCE 1983 IS REALLY GONNA HAPPEN THIS TIME”?

            I mean sure it “feels” like that, in the since that you have experts saying one thing and people on TV explaining how those experts totally don’t get it.

            Except if it’s like January 2020, then….there’s nothing to worry about.

            But that’s not as fun as doomcasting, is it?Report

            • Jaybird in reply to JS says:

              I was more remembering stuff like this.

              But, sure. Maybe this is all happening according to plan.

              Have you seen the U-5 numbers? They’re pretty good!Report

              • JS in reply to Jaybird says:

                So you feel inflation worries feel like….the mayor of florence hamfistedly denouncing anti-China racism?

                And somehow, in your head, this means something? or more likely, you’re just stirring the pot because why use words to communicate when you can use them to prevent communication?

                Cool. I regret engaging.Report

              • CJColucci in reply to JS says:

                You’re learning.Report

              • Jaybird in reply to JS says:

                Not quite.

                It’s that while “The Experts” are saying one thing, there are people who are “Authorities” that are saying completely the opposite and pushing forward policies that would be likely to make things worse in the name of some grander narrative.

                And somehow, in your head, this means something? or more likely, you’re just stirring the pot because why use words to communicate when you can use them to prevent communication?

                Means something? Mmmm. I’d like to communicate unease and a general feeling that something is not right.

                I mean… look at healthcare costs over the last two decades. Look at university costs over the last two decades. Look at housing costs over the last two decades. Sure, adjust for inflation.

                People are saying that there isn’t any inflation outside of a normal, healthy (or healthy enough) range.

                But that’s because of so many things that aren’t considered part of inflation.

                There are a lot of things that feel “hinky”.

                Now I understand that I need to trust the experts on this and that the authorities can probably be waved away.

                I’m not confident in the ability of people to tell the difference.

                The arguments that this is nothing to worry about are arguments that make sense to me. But I also know that they are comforting.Report

              • Brandon Berg in reply to Jaybird says:

                Health care, housing costs, and education are all part of the CPI basket. They do count. Housing in particular counts quite a lot: The shelter component of the CPI is a third of the basket.

                You can see the weights here: https://www.bls.gov/cpi/tables/relative-importance/2020.htm

                If some of those seem wrong to you, keep in mind that they’re calculated based on the average consumer. People who go to college without scholarships may spend more than 1.5% of their lifetime incomes on tuition; people who don’t pay less. Employer health insurance premiums are not included because the CPI is based on out-of-pocket consumer spending. Another index, the PCE, does include this. Despite this, it tends to grow more slowly than CPI, because the CPI has some known issues that cause it to overstate inflation.

                It’s not that these things don’t count; it’s that the increases are largely offset by relative decreases in the price of other things. Inflation is a weighted average; if the prices of some components grow more slowly than average, the prices of other components must grow faster than average.Report

              • Jaybird in reply to Brandon Berg says:

                I’m looking at stuff like this.

                Historical home prices over the last decade… somewhere in the middle of May, 2011, the median value of a home was $200,000.

                December 2020 was over $300,000.

                That’s the median. Not the mean.

                Stuff like this talks about health care costs.

                As for the price of education, here’s a take from 2019 on college costs.

                It feels like there’s a lot of “hide the ball” going on.

                That’s part of why I think that there’s something hinky going on.Report

              • InMD in reply to Jaybird says:

                The hide the ball is where we pretend the costs to the keys to a middle class life (housing, healthcare, and higher ed) are being offset by cheap TVs and cell phones at Costco.Report

              • Brandon Berg in reply to InMD says:

                The hide the ball is where we pretend the costs to the keys to a middle class life (housing, healthcare, and higher ed) are being offset by cheap TVs and cell phones at Costco.

                As stated, this can’t actually be true, because televisions and telephones are each 0.1% of the CPI basket, so even if their price fell to zero it would have minimal impact on measured inflation.

                But interpreting it more broadly, I don’t see why people have so much trouble with this concept. Housing, health care, and education (HHE) combined make up about 40-45% of consumer spending. People spend the majority of their money on other things, and those things being cheaper in real terms absolutely does offset the rising cost of HHE. If food costs less, you have more money to spend on HHE. If clothing costs less, you have more money to spend on HHE. If car ownership costs less, you have more money to spend on HHE. If items accounting for 55% of your spending get cheaper, you have more to spend on the other 45%.Report

              • North in reply to Jaybird says:

                Ehhh… inflation is a measure of the dilution of the purchasing power of the currency. Saying that certain sectors are increasing in price doesn’t mean that inflation necessarily is increasing- it means that certain sectors are increasing in price. Housing for instance, is hiking in price more due to bad housing construction/zoning policy than a decrease in the purchasing power of the dollar itself.

                Same with health care and education. Blaming it on inflation is kind of a copout really.Report

              • Jaybird in reply to North says:

                I’m seeing the inflation as an indicator, really.

                It’s the policies causing the rot that are the problem. The rot is, itself, a symptom. It isn’t the disease.

                (The argument that we can have 2% inflation forever and that would be good is one that makes sense to me… but I look at the field and I’m not seeing 2% inflation. I don’t know what I’m seeing. But I look and I don’t like it.)Report

              • Brandon Berg in reply to Jaybird says:

                You’re cherry-picking. If you start in May 2011, you’re starting from the bottom of the market. If you start from December 2005, the median house price rose about 8% in 15 years. Would you say that there must have been massive deflation between 2005 and 2011, since home prices fell by nearly as much as they rose between 2011 and 2020?

                Even if we measure from December 2010 to December 2020, that’s an annual increase of about 3.8%.

                Keep in mind that mortgage rates were 4.6% in May 2011 and 2.6% in December 2020. If you lower mortgage rates, median house prices are going to go up. In places where supply is inelastic, house prices are going to go up because people can afford to bid up the price on a fixed pool of houses, and in places where supply is elastic, prices are going to go up because people can afford to build bigger, better houses. When you account for

                The CPI doesn’t include the sale prices of homes, because the sale price is a terrible measure of the actual cost of owning a home. Instead they use something called “Owners equivalent rent,” which is calculated by asking homeowners how much their homes would rent for. Obviously this is not ideal, but it’s not clear that it’s biased in any particular direction, since it tracks actual rents pretty well.

                With health care, it’s important to understand the difference between health care inflation and increases in health care consumption. If you’re paying more for the same thing, that’s inflation. If you’re spending more because you’re buying a new thing that didn’t exist before, or a better version of the thing you used to buy, that’s not inflation. There’s a tendency to report on increases in health care spending as if it were 100% due to inflation, and that just isn’t true.

                College tuition is in fact one of the fastest-growing components of the CPI, up nearly 700% since 1982, while the overall index has increased only 170%. However, this has a limited impact on the overall price index, because people just don’t spend that much on college tuition. Imagine a typical college graduate, who goes to state school, pays about $10,000 per year in tuition for 4 years, and then makes an average of $60,000 per year (in 2021 dollars) for 40 years. $40,000 is about 1.7% of $2.4 million, and college tuition is about 1.6% of the CPI basket. Some people pay more, yes, but many people don’t go to college.

                All of these things are counted, in proportion to how much people actually spend on them. It seems to me that you’re saying that since some things are increasing faster than the average, the average must be wrong. But that’s how averages work!Report

              • Brandon Berg in reply to Brandon Berg says:

                I just realized that I was looking at the wrong column of that table of median house prices, so I did significantly understate the increase in home sale prices. But, again, median home sale prices are a terrible measure of the cost of home ownership, both because the median house is a moving target, and because changing mortgage rates affect the relationship between sale price and actual cost to homeowner.

                Here’s a chart of [historical mortgage rates](https://fred.stlouisfed.org/series/MORTGAGE30US). The reason houses were cheap in the 80s is that mortgage rates were in the double digits. They never fell below 5% until 2009.Report

              • Jaybird in reply to Brandon Berg says:

                When I sit down at the car dealership and the car salesman guy asks me “how much are you looking to spend a month?”, I wince a little inside.Report

    • James K in reply to Brandon Berg says:

      The tendency of the US government to report annualised monthly or quarterly changes in the manner of annual changes is utterly infuriating.Report

  2. Philip H says:

    The weather analogy is interesting. My hurricane research colleagues have devoted a LOT of energy and time the last two decades to improving track forecasting – they are close to 85% correct inside 72 hours. They also can’t improve track forecasting anymore without a computational breakthrough in supercomputers (Too many variables). So they have turned their attention to improving intensity forecasting. Despite the hard work of a couple of other close friends who are practicing economists, I don’t know how that translates.

    But based on this article, we appear to not be anywhere near inflation that needs to be worried about.Report

    • Motoconomist in reply to Philip H says:

      Yeah, I think weather forecasters get a bad rap. Forecast within 72 hours is SO MUCH BETTER than it was in the 90s. And in my analogy, I used a 7 day forecast, to allow for that type of forecast miss so the analogy would be roughly correct.Report

  3. Oscar Gordon says:

    Yeah, I’ll start to worry when the feds bumps interest rates up high enough to cool down real estate pricing.Report

    • North in reply to Oscar Gordon says:

      Agreed. After the Great Recession the inflation bugs have zero credibility. So long as the Fed is left free to hike interest rates in the event of inflation really springing to life the subject is mostly moot at the moment.Report

      • Motoconomist in reply to North says:

        Oscar and North if you want you can look at the dot plot maps


        As of March, expectations are about 2.4% annualized , up from 1.8% and above the typical 2.0% target , but Fed was already signaling it was going to let inflation rise above 2% for a short period to catch up to trendReport

        • Oscar Gordon in reply to Motoconomist says:

          Yeah, I don’t see that as causing the real estate market to soften in any significant way, so I remain unconcerned regarding inflation.Report

        • North in reply to Motoconomist says:

          I’m personally no expert but the Feds’ position makes sense to me. They’ve basically been undershooting inflation targets for nearly a decade. There’s a lot to be learned and potentially a lot to be gained from an experiment in letting the economy run hot for a bit.Report

          • Michael Cain in reply to North says:

            Sustained long-term inflation is only possible if workers believe that it will also apply to their wages. I was there for the late 70s bout of inflation, working at what was then the company with the most employees in the country. Our unions were demanding, and getting, three year contracts with 5-8% annual salary increases. Managers were getting 7-10% per year in order to keep them ahead of the union. A 14% mortgage wasn’t that big a deal because the payment was fixed and in three years expected income was going to be much higher.

            Volcker came in and convinced everyone he was serious that he would accept whatever unemployment was necessary to make asking for that sort of wage increase untenable.Report

  4. Chip Daniels says:

    Inflation should be a subject that only trained economists and government officials have a strong opinion about. The average layman doesn’t anywhere near the expertise to predict when or if it may occur.

    But like many things, it becomes a proxy battle over deeper political opinions. It is a stand in for general theories of governance and budgeting, which themselves are proxies for general ideas about how society should work.Report

    • Motoconomist in reply to Chip Daniels says:


    • Brent F in reply to Chip Daniels says:

      I have no expertise in the subject area but make a point of reading people who do.

      They seem to think that so long as the long term bond market is reacting with a shrug of indifference, so should we and I’m largely content with following that advice.Report

    • Pinky in reply to Chip Daniels says:

      Inflation can ruin your savings and it has destabilized many governments. Everyone should keep an eye on it. Doesn’t mean everyone will forecast it correctly, but it’s really important.Report

      • Ozzzy! in reply to Pinky says:

        I kind of go the opposite direction here from the same starting place, at least regarding your mention of savings.

        The only thing a person with savings can do under rising inflation is to skew thise savings even more towards equities and away from bonds. Other than that, not sure what the value is to keep an eye on it all the time. It’s just not something that an individual can counter with even multiple one special tricks.Report

        • Pinky in reply to Ozzzy! says:

          As citizens in a democracy we should be keeping our eye on anything we think the government may be mismanaging. I can’t imagine Chip saying that health care or interrogation methods should be subjects that only trained experts and government officials have strong opinions about. As for hedges against inflation, there are different strategies, but it’s something I personally haven’t studied up on – yet.Report

          • CJColucci in reply to Pinky says:

            I’d be interested to know what “keeping an eye on” inflation would mean for a private citizen with no special training. The government and various private sector institutions put out reports. Otherwise, the only way we could “keep an eye on” inflation is to notice that, for example, the parking garage I use in lower Manhattan on the rare occasions that I drive there recently raised its rates, and that gasoline prices have been jumping around in a roughly 30-cents-a-gallon range for some time and are, at the moment, at the high end. A large amount of such anecdotal information, sustained over time, might mean something, but the short-term fluctuations in different sectors of the economy aren’t something we can understand without expert help — and often not with it.Report

            • Chip Daniels in reply to CJColucci says:

              For me, and what prompted my original comment, was that we ordinary citizens need to make voting decisions based on these complex issues like economics and foreign policy, but lack the technical expertise to form our own opinions, so we are forced to rely on experts and their consensus.

              But because many of these issues touch on our personal moral and philosophical priors, there is a temptation to be autodidacts and assume a level of knowledge we really don’t possess, instead of just trusting our expert sources.Report

          • Ozzzy! in reply to Pinky says:

            Ok, going pretty broad there but that’s fine.

            When you have done your research I’d love to hear your conclusions.Report

            • Pinky in reply to Ozzzy! says:

              Yeah, I went broad with the answer. We do mostly talk about big-picture things on this site. As for how I would hope to handle inflation, I’ve been doing a lot of thinking about foreign currencies as a hedge. The question of what currencies are sound is pretty tough, but it’s even tougher to figure out what currencies would be strong in a world where the dollar flounders.Report

  5. Brandon Berg says:

    I was wondering what the other circle in the image at the top of the article was, so I looked it up, and it turns out that this was a token made as a criticism of William Jennings Bryan’s proposal for a bimetallic standard. Under Bryan’s proposal, a silver dollar would contain only about half a dollar worth of silver at then-current market prices. The token was made the size of a coin containing a dollar worth of silver at 90% purity, with the inner circle being the size of Bryan’s proposed silver dollar, you can see the other side here:


    While Bryan was correct in his belief that the money supply needed to expand, bimetallic standards are inherently unstable, because the market values of the two metals tend to diverge, creating an incentive to hoard or melt down coins made with the more valuable metal (relative to the official exchange rates). For example, under Bryan’s proposal, there would be an incentive to melt down gold coins and spend only silver coins. Hence Gresham’s Law: Bad money drives out good.Report