The professional economists, including experts, the Fed, university professors, and Paul Krugman, appear to have gotten the call on inflation wrong. Krugman at least admits culpability:
First, yes, the Fed — and a number of economists, me included — called inflation wrong over the past year and a half, which has a reputational cost. Fair enough. But when people talk about policy getting behind the curve, they mean more than being embarrassed 2/
— Paul Krugman (@paulkrugman) July 15, 2022
In this thread he reviews the results of inflation expectation surveys and finds that expectations are moderate or moderating, a sign that current rampant inflation will quickly subside over the next few years. Though human sentiment is of value, this data is not sufficient for predicting the future course of inflation, which will depend on other macro factors.
Three Causes Not Addressed
It takes more than "entrenchment" of expectations to generate inflation. The causes of current inflation include:
- increases in energy costs, especially prices of crude oil and gasoline;
- increases in the money supply. M1 and M2;
- surges in demand for goods and services combined with constraints on production or supply of raw materials.
As I pointed out last week, refiners foresee weak to moderate medium-to-long term demand for gasoline, and therefore do not plan to build new refineries or increase production. U.S. oil production is potentially constrained by the availability of leases on federal lands. International oil production is constrained by warfare in Ukraine and sanctions on Russia. Russia also discovered a war bonus: Sanctions have increased its income from selling oil. Even if the West were to seek to end the war soon or lift sanctions, it's not clear that Russia would increase its output. OPEC and Russia have an incentive to hold down production to raise market prices, and with the U.S. and Europe willing to throttle their own production in the name of climate change, the policy tools may not be in the toolbox to force oil supply to meet demand.
Since energy is an input to many other costs of production, high prices of oil and gasoline will then have a cascading and continuing influence on pricing of other goods and services.
The second cause, money supply, might not be a cause of future inflation, but the existing increased level will act against possible deflationary influences, as too many dollars will continue to chase goods.
The third case has been drive in part by the so-called Great Resignation, in which people incentivized by government payments or other aspects of COVID-19 decided to retire or stay home rather than work. That doesn't seem to have changed; turnover is still high, and early retirements in many sectors are still unusually high.
Longer term, constraints on labor supply then depend on net immigration and birth rates. Total fertility rate (TFR) in the U.S. is now below 2.0, where 2.1 is considered the minimum for replacement of a constant population level. Worldwide, TFR is well below 2.0 in nearly every developed country. Europe, China, North America, and Australia have shrinking populations when immigration is excluded.
The ratio of retirees to workers has been decreasing for decades, and is a big problem for the solvency of Social Security. Even if SS were not a problem, one has to think about what happens to the economy when a third of the population is retired (or trying to be) and the other two-third holds jobs. Clearly the market-clearing prices for labor will rise and be under increasing pressure as time passes. Already we see many, many markets in the U.S. where the "natural" lowest wages payable for entry level work are well above the national minimum wage.
The escape valve for labor costs since 1995 or before has been offshoring, especially to China for manufactured goods and India for IT services. As China's economy booms, wages have been increasing there too. They will not be "cheap" relative to American wages forever. When they catch up, wage inflation in China will then affect goods inflation in the U.S.
Forecast
Officially, there is no Vorpal Trade forecast on inflation. Best I can do is ramble on about what I might believe and why, and then you can take it from there to decide what will happen.
Structurally, the world is presently set up to avoid inflation as long as work can move across national borders. There are limits to the rate of this process, so there will always be pockets of inflation, such as in China, when countries run out of under-employed populations. The amount of liquidity in the US is ridiculous; with so much cash and high absolute levels of wealth even among the poor and middle class long-term low interest rates will still dominate in the long term future.
Against that backdrop is the usual rent-seeking behavior of elites, much of it both unconscious and arising from entitlement feelings. Colleges, medical care, and glamour city real estate will continue to be highly controlled for the benefit of the elite, and will experience severe long term inflation in the future. This is a trend that could go too far. If there were a perception that lack of college was cool, or dying nobly without medical care was cool, or some other crazy systemic shock, then denying medical cost inflation could turn into a macro phenomenon. But the odds are low because these scenarios are just plain weird.
As for the headline numbers, CPI and PPI, they will likely subside once the initial post-COVID YOLO and FOMO impetuses have run their course. In Spring 2022 people finally felt released from the confines of their houses and had enormous spring fever and urges to travel and be outside, which required large amounts of gasoline. People are fond of blaming Biden for high oil prices. He mostly didn't cause it directly, except that restrictive health policies exacerbated the pent up demand for outdoor travel experiences, so in that sense both the CDC and Putin caused our 2022 gas prices.
The labor shortage is real, as people decided to take the CDC seriously that they might die any minute, so why bother working? It just takes a few percentage points and some poor policy that exacerbates the trend to cause a serious imbalance. Old people are retiring, and since women no longer have children, the old workers are not being replaced by younger ones. Expect labor shortages and wage inflation to continue at rates that are beyond the cost inflation of inputs like fuel and mining outputs.
The other factor that seems remote to U.S. persons but is very unfortunately real to citizens of countries like Sri Lanka is that food prices have exploded and will not retreat because ESG policies will heavily constrain food production. This is a partly world-wide WEF agenda movement that will constrain food production in a way that we haven't seen before. I see very little chance of the ESG and pro-WEF folks backing down. The starvation caused by food restrictions is, unfortunately, part of the plan, and since the first world elite will deny that this pain exists, it will continue.
We cannot foresee the political fallout. As for inflation economics, the net result will be strange: computers, games, television, communications, gadgets, and clothes will show little to no inflation, while medical care, transportation, and food will continue to see moderate inflation, possibly lasting a decade or more.
House price inflation is likely already dead, at least for a while. To me housing looks like it has finished a "bang-bang slam" against the constraints and topped out. It is strange to see this happen to housing again, as before say 1996 we didn't used to see so much boom and bust in real estate. Boom or mini-boom, yes, but bust? Not very often. When I say "bang-bang" I'm thinking of the tendency of some commodity markets to slam back and forth between over bought (high price) and over sold (low price) conditions, not spending much time in middle prices and back and forth steady state markets. Hence, I would not be surprised to see housing park itself at current prices for two to five years before the next major move.
Update: Additional News and Sources
AMZN: Janet H. Cho and Liz Moyer at Barron's say in CEO Pay and Corporate Profits Rose in 2021. Workers Wages Didn't Keep Up.:
The average starting pay for Amazon workers is more than $18 an hour, the spokesperson told MarketWatch.
$18 per hour is about $36,000 annually, assuming full time work at 40 hours per week and two weeks unpaid time off, or $37,440 paid time off. The spokesperson did not elaborate on how many salaried and information technology workers are included in the average.
According to Indeed, Amazon packers, warehouse workers, drivers, and store shoppers make between $15 and $16 per hour ($30,000 to $32,000 annually).
Small business: According to guest writer Nancy Rommelman reporting at Common Sense, small business owners are being hit in multiple ways by inflation: by increased costs for the goods they buy, by customers who blame them for the high prices, and by reduced store traffic as customers shy away from travel (contradicting VT's "ferment" thesis) and buying things because the high prices no longer fit their budget. Says the owner of Taiwan Pork Chop House in NYC:
“We’ll never return to the way we were living before,” Wang says. “There’s so much instability, with the government but also with individuals and lifestyles and concepts and even our ideas of what life and work and eating out should be. You never know.”
CAG: ConAgra's FY22Q4 shows that even though customers didn't cut back as much as expected in response to increased prices, overall results were not adequate, and the market sold off CAG. Says Morgan Stanley:
CAG’s Q4 organic sales were relatively in-line with expectations (+6.8% vs. consensus +7.1%) reflecting stronger than expected price/mix +13.2% and softer volumes -6.4% as demand elasticity has remained below historical levels.
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