Posted on 06/22/2021 5:31:25 AM PDT by Kaslin
Because of obvious uncertainty. forecasting future activity is always tricky. Usually forecasters look to the past, noting previous outcomes when certain events occurred. If it turned out that way before, then it’s probably going to turn out that way again.
The issue is a bit more complicated for economists, because human behavior is many times inconsistent. For instance, if a consumer sees a higher price for a product will she pay the higher price or will she refrain from the purchase? In the past, she has done both.
Economists today are deeply divided regarding their forecast for future inflation. The Biden Administration and the Federal Reserve (Fed) believe that the inflation spike we have experienced so far this year is temporary and will subside once the economy is fully reopened. They expect inflation to be around 3% this year and drop in the future years.
Other economists say the current inflation is due to a number of demand related reasons, all of which will lead to even higher inflation in the not-to-distant future. They say we could see double digit inflation which could lead to very restrictive monetary and a recession.
Who is likely to be right?
Since January prices have increased by 2.7%. If the current rate continues, inflation would be 6.5% for the year. The administration believes that the inflation rate will fall very low, perhaps to near zero for the remainder of the year, so that inflation would be in the 3% range for all of 2021.
There are essentially two reasons why an economy experiences inflation. One is the supply-side and the other is the demand side.
On the supply side, if there are not enough units of output produced to meet the demand, then the price mechanism in the marketplace rations the short supply. In other words, insufficient supply means the price rises and some people decide they won’t or can’t purchase at the higher price. But if output can increase to meet the demand, the price will fall back to its original position.
The other supply-side inflation issue is rising costs for the firm. If costs rise, they will no longer be willing to produce the output at the original price. In order to maintain profitability, they must raise the price.
On the demand side, inflation is caused simply by excess demand. In other words, the market is able to purchase more than business can produce. The first hope is that business increases output to meet the excess demand. If, for some reason, they can’t increase output, then the price will rise to ration the shortfall.
The Fed and the Biden Administration take the supply side view. They reason that the inflation was caused by temporary supply chain disruptions, weather related plant shutdowns and a failure to accurately predict the high economic growth for the past twelve months. As such this supply-side caused inflation will disappear as the economy operates at full capacity.
Already, they argue lumber prices are plummeting from their highs. As the supply catches up to the demand, downward pressure will be put on prices, and the inflation problem goes away.
The opposing view says that there are excess demand issues and even a couple of other supply related issues that won’t disappear anytime soon.
The Money Supply has increased by 18% in the last twelve months. Most economists believe this will inject large amounts of excess demand, especially considering interest rates are at historical lows. This means interest rate sensitive products like houses and cars are seeing unprecedented increases in excess demand, driving prices sky-high.
Additionally, the federal government will have a deficit spending of at least $6.5 trillion in 2020 and 2021. That amount is all excess demand. On a $21 trillion economy, that is operating at full capacity, that’s purely inflationary.
Also, the federal government gave out free money to all income earning households. A family of four received more than $11,000. With excess cash comes excess demand.
On the supply-side, they argue Biden Administration policies continue to drive up the cost of oil and gas. That’s an inflationary ripple through the economy.
And lastly wages are rising rapidly as, for whatever reason, the high-growth economy struggles to draw workers back into the workforce. Higher wages increase cost to the firm resulting in higher prices. Labor shortages mean business can’t expand output.
Time will tell which view is correct.
The division is between those economists who actually have a modicum of intelligence and those who are liberals.
Inflation is too many dollars chasing too few goods. If you have that, you’ll have inflation. The rest is just words.
And then there is New York, Oregon, Washington and perhaps California.
These states harboring non-American city states will never recover from the covid shut downs. They are thus a drag on the overall economy
Regardless of their political bent I think most of these people know the country’s economy is going south.
The 10 year bond market has fallen 25 basis points since the peak at the end of March, indicating lower fears of expected future inflation over this quarter. This year overall will feature a significant inflation spike because of reopening, stimulus, and supply chain disasters, but those will mostly come out over time, leaving inflation around 2%.
Soon $15/hr will have little to no purchasing power
Everything is political today.
Science, finance, climate, medicine, health care, energy, geology, sports, religion...
What isn’t?
Politics everywhere is ruining life.
So lets go back to slavery then everything we buy will be free!!!!
Yes, human behavior is inconsistent. However, in macroeconomics they look at the behavior of very large populations. That is much more predictable. I don't want to be picky, but the author used a feminine pronoun for a consumer making a buying decision. Is that intentional? That is unpredictable. (just kidding).
Maybe we will see a spike, maybe we won't. If it really was TEOTWAWKI then the bond market would have collapsed. As you note the 10-yr Treasury hasn't gone bezerk, and lumber prices are now falling back to earth.
I see many inflation concern trolls and really think their motive is to push their freeze-dried food sales side gig, or sell doomsday or gold newsletters. Of course a well-diversified portfolio of food, water and ordnance is helpful, but the financial markets have beaten gold over the long haul.
And it never surprises anyone that these trolls accept payment in the dreaded "fiat currency."
Thank you again.
Eventually I realized that was not a joke.
Pretty obvious you didn't majoring in English. /s
“Inflation is too many dollars chasing too few goods. If you have that, you’ll have inflation. The rest is just words.”
A PhD thesis in economics, written with just two sentences.
Always and forever true, but globalization completely changed the “too few goods” part of that over the last 30 years. A billion Chinese laborers and a billion Indian computer programmers have kept inflation in the USA very much at bay for a generation, especially for laborers who have seen real wages collapse, if they still have jobs. How much longer? That’s the question no one knows for sure.
Always and forever true, but globalization completely changed the “too few goods” part of that over the last 30 years. A billion Chinese laborers and a billion Indian computer programmers have kept inflation in the USA very much at bay for a generation, especially for laborers who have seen real wages collapse, if they still have jobs. How much longer? That’s the question no one knows for sure.
Do these economists shop?
You would think they would have a list of items to compare to from year to year.
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