Inflation

[Dusn]

I was wondering why the Fed targets low inflation and not zero inflation. Sounds like the economists disagree on this just like everything else, but what I took away from this is that it gives employers flexibility on wage adjustments. When there is middling productivity growth, employers can either keep wages the same (and decrease them in real terms) or only raise them by COL. On the other hand, if there is zero inflation, employers have to cut wages nominally to reduce costs, and supposedly this is more deleterious economically than just cutting them in real terms. There is less upward wage rigidity than downward wage rigidity.

I find myself listening to a lot more economics podcasts this year than ever before. Wish I’d taken a macroeconomics class in college.

If there’s no inflation or deflation wouldn’t people and institutions have less incentive to invest money which could slow economic growth and lower the stock market value? Why put as much money at risk if it’s not going to lose value under your mattress or in safe investments?

I’ve assumes that this is why the Feds aim for a goal of 2% inflation.

[Lordosis]

If there’s no inflation or deflation wouldn’t people and institutions have less incentive to invest money which could slow economic growth and lower the stock market value? Why put as much money at risk if it’s not going to lose value under your mattress or in safe investments?

I’ve assumes that this is why the Feds aim for a goal of 2% inflation.

The reason that always made the most sense to me was that if there is a small amount of inflation it stimulates people buying things which stimulates the economy. If something is going to cost more later you're more apt to buy it now. Which is why deflation is so painful for an economy. If things are going to get cheaper you might as well not buy anything and wait it out. And if nobody's buying anything you're in a real big trouble.

However it always seems like people are buying things all the time if they have money or not. So I don't really know. Just a doctor. Not my field of study.

[jacoavlu]

why do we need economists ?

[Turf Doc]

If there’s no inflation or deflation wouldn’t people and institutions have less incentive to invest money which could slow economic growth and lower the stock market value? Why put as much money at risk if it’s not going to lose value under your mattress or in safe investments?

I’ve assumes that this is why the Feds aim for a goal of 2% inflation.

I wonder if people are really that logical though. And even if inflation is nothing, wouldn't you prefer make money investing basically by doing nothing? (and get your chicks for free...)

[Tim]

why do we need economists ?

Actually to correct misconceptions. By far, most cost reductions are due to productivity. You know that. Someone needs to explain why GDP doubled with same number of people employed. Was it higher prices or productivity? Voicemail has virtually eliminated the hand written messages.
I wonder what all those people are doing now?

[Dont_know_mind]

care to explain how inflation will be bad for the 1% ?

in accumulation phase i'm not planning to realize any gains

The effect of inflation depends on the components.

I disagree with the heuristic that inflation is bad for low income earners and middle income earners. That would only be the case if there was no wage inflation.

If you look at the inflation data in the last year, there is significant wage inflation: 5% recently. People on the lowest incomes have had the largest percentage wage gains in the last year compared to other income brackets. Contrary to popular belief, the low and middle class have been doing well in the last year. It is not hard to see this continuing and I expect (but could be wrong) that at some stage wage inflation will exceed CPI. For high income earners though (but hopefully not you and me), income growth may lag moderate or high inflation.

As a large component of inflation is housing (OER and market rent), this will favour the 99%. The 1% will tend to have a smaller proportion of their net worth in housing. The 1% have a larger proportion of their assets in tech, US stocks and bonds- which I guess are the segments most likely to get crushed by moderate or high (wage) inflation.

I don’t see how the young and the poor will get crushed by inflation in the current environment. They get crushed by high unemployment and deflation.

Even amongst retirees, those on a pension with COLA adjustments may be better off relatively.

[Dont_know_mind]

Wow.

You are often a very insightful and interesting forum member with good ideas.

Please educate us as to how:

1. high inflation is ever good for anyone?

2. high inflation is preferentially "good for the 99%"?

I was just thinking to invert the problem.
Imagine significant wage inflation then imagine how does that start at the beginning.

It may not occur, but I tend to think this is a situation where it may well turn up:
- Unemployment rate super low
- no sign of recession in the next 2 years
- really odd events that no one could have forecast (deadly virus, war in Ukraine, oil price shock) that make the Fed parse inflation as transient
- I guess, if it does occur, if 90% of people are better off with higher wage inflation and higher house prices, there may be overwhelming pressure on the Fed to stay behind the curve.
- long term, the US economy may well be worse off and less competitive internationally with higher inflation, but when will that long term decision be made, if the short term is better?

Anyway, just something I’m thinking through lately. Spurred by the graph about the seemingly relentless increase in the wealth held by the 1%, I thought, trees don’t grow to the sky, so how might this situation be reversed if it does.

[Tim]

“I disagree with the heuristic that inflation is bad for low income earners and middle income earners. That would only be the case if there was no wage inflation. “

I think you are missing a few screws (good natured sarcasm only), basically benefits of asset inflation which has zero impact on 50% of the population (no assets to inflate).
Income - taxes - savings = spending
$500k - 28% - 20% = 52%
$60k - 0% - 10% = 90%
Realistically, lower incomes spend a huge percentage more and have little asset appreciation. Actually, the housing/rent increase is a double hit, higher rent and no home ownership for appreciation. Half of the population pay no taxes and is getting crushed (or at least feeling a much greater impact).
Btw- the $500k group has a 15-30 fixed rate mortgage. Housing inflation has zero impact but impacts the majority of the lower income spending.
Just illustrating how inflation impacts different income profiles.

[Random1]

Btw- the $500k group has a 15-30 fixed rate mortgage. Housing inflation has zero impact but impacts the majority of the lower income spending.
Just illustrating how inflation impacts different income profiles.

We have no mortgage , car payments or other recurring debt. So in all reality inflation does not hit us that hard financially right now. But even the most junior economic student can predict what will need to happen in order for inflation to be "tamed", which includes putting the brakes on the economy with higher rates , recession and lower forward looking equity markets. Most of my assets are in equities which will likely be significantly affected by any sort of policy corrective measures, and therefore will hurt even higher income and NW families.

[jacoavlu]

The effect of inflation depends on the components.

I disagree with the heuristic that inflation is bad for low income earners and middle income earners. That would only be the case if there was no wage inflation.

If you look at the inflation data in the last year, there is significant wage inflation: 5% recently. People on the lowest incomes have had the largest percentage wage gains in the last year compared to other income brackets. Contrary to popular belief, the low and middle class have been doing well in the last year. It is not hard to see this continuing and I expect (but could be wrong) that at some stage wage inflation will exceed CPI. For high income earners though (but hopefully not you and me), income growth may lag moderate or high inflation.

As a large component of inflation is housing (OER and market rent), this will favour the 99%. The 1% will tend to have a smaller proportion of their net worth in housing. The 1% have a larger proportion of their assets in tech, US stocks and bonds- which I guess are the segments most likely to get crushed by moderate or high (wage) inflation.

I don’t see how the young and the poor will get crushed by inflation in the current environment. They get crushed by high unemployment and deflation.

Even amongst retirees, those on a pension with COLA adjustments may be better off relatively.

its not about 99% vs 1%, its more like bottom 50% vs top 50%.

if you think that the inflation that's happening benefits the bottom 50% more than the top 50% well sir I will just say I disagree and think that's ridiculous.

[Tim]

Btw- the $500k group has a 15-30 fixed rate mortgage. Housing inflation has zero impact but impacts the majority of the lower income spending.
Just illustrating how inflation impacts different income profiles.

We have no mortgage , car payments or other recurring debt. So in all reality inflation does not hit us that hard financially right now. But even the most junior economic student can predict what will need to happen in order for inflation to be "tamed", which includes putting the brakes on the economy with higher rates , recession and lower forward looking equity markets. Most of my assets are in equities which will likely be significantly affected by any sort of policy corrective measures, and therefore will hurt even higher income and NW families.

Sorry about your asset loss.
Low income loses the same 50% in their 10% retirement savings,
But lower income is likely to have income reduced or go to zero or cut in half. Now they still need to find a way to live.
I am terribly sorry for your investment loss.
The 50% average low income is trying to now find $54k to pay the bills. A shrinking economy is painful to everyone. Again probably more painful loss of income to lower income than asset value from investments.
The amounts are much greater, but the impact on standard of living is more severe at the lower levels.
Actually, the pandemic is the first economic black swan event that I have seen that resulted in layoffs and furloughs in healthcare.
Your are not leveraged. Your loss is SORR. I am assuming you planned for that.
50% don’t have assets, that 5 year recovery will be much more painful.
Econ 101 is followed by Econ 102. Freshman courses. Not junior, those are micro Econ 301 and Econ 303.
Again, well intended sarcasm, just a poor sense of humor. Recessions and markets are also not directly correlated. You will be fine.

[Zaphod]

Btw- the $500k group has a 15-30 fixed rate mortgage. Housing inflation has zero impact but impacts the majority of the lower income spending.
Just illustrating how inflation impacts different income profiles.

We have no mortgage , car payments or other recurring debt. So in all reality inflation does not hit us that hard financially right now. But even the most junior economic student can predict what will need to happen in order for inflation to be "tamed", which includes putting the brakes on the economy with higher rates , recession and lower forward looking equity markets. Most of my assets are in equities which will likely be significantly affected by any sort of policy corrective measures, and therefore will hurt even higher income and NW families.

Sounds like it is hitting you since you're not getting to take advantage of the free debt.

[Random1]

My point was that inflation hits almost every one. Those with enough savings don't feel the direct pain as much as most of society, but it does affect everyone in one way or another, I can't think of one way that it would be a positive for anyone.

[Tangler]

I was just thinking to invert the problem.
Imagine significant wage inflation then imagine how does that start at the beginning.

It may not occur, but I tend to think this is a situation where it may well turn up:
- Unemployment rate super low
- no sign of recession in the next 2 years
- really odd events that no one could have forecast (deadly virus, war in Ukraine, oil price shock) that make the Fed parse inflation as transient
- I guess, if it does occur, if 90% of people are better off with higher wage inflation and higher house prices, there may be overwhelming pressure on the Fed to stay behind the curve.
- long term, the US economy may well be worse off and less competitive internationally with higher inflation, but when will that long term decision be made, if the short term is better?

Anyway, just something I’m thinking through lately. Spurred by the graph about the seemingly relentless increase in the wealth held by the 1%, I thought, trees don’t grow to the sky, so how might this situation be reversed if it does.

Thanks for responding. I am not sure I follow correctly, but it could just be that I have been filling out credentialing nonsense too long today and my brain is feeling mushy.

[Tangler]

“I disagree with the heuristic that inflation is bad for low income earners and middle income earners. That would only be the case if there was no wage inflation. “

I think you are missing a few screws (good natured sarcasm only), basically benefits of asset inflation which has zero impact on 50% of the population (no assets to inflate).
Income - taxes - savings = spending
$500k - 28% - 20% = 52%
$60k - 0% - 10% = 90%
Realistically, lower incomes spend a huge percentage more and have little asset appreciation. Actually, the housing/rent increase is a double hit, higher rent and no home ownership for appreciation. Half of the population pay no taxes and is getting crushed (or at least feeling a much greater impact).
Btw- the $500k group has a 15-30 fixed rate mortgage. Housing inflation has zero impact but impacts the majority of the lower income spending.
Just illustrating how inflation impacts different income profiles.

This makes sense to me.
I am no economist but seems like if you are living off almost all your income and prices spike you will get harmed more.