Sven and Kristoff are interesting, but only one aspect of the causes of inflation. For example, the deflation of the late 1800’s follows nicely from monetary explanations (the gold supply did not expand fast enough to keep up with production growth), as does the long inflation of the 1500s and every hyperinflation I have seen investigated.
Yes - I think that element is important and still fits with an inflation as a conflict model. Deferring to Lorenzoni and Werning:
"Many economists confidently agree that extreme and persistent inflation episodes are
understood as largely driven by the growth in money supply, often prompted by a need
for seignorage. But how exactly does money transmit to inflation? The simplest idea is “too much money chasing too few goods.” Formalizing this involves the quantity equa-
tion or more general forms of money demand. On closer inspection, one may still wonder
what “money chasing goods” means and how the prices in good markets adjusts to clear
the money market. The story feels incomplete, as it requires out-of-equilibrium intuitions
for a general-equilibrium macroeconomic situation—simple microeconomic ideas of sup-
ply and demand may not be a proper guide. Nevertheless, it is fair to say that this idea
is very well rooted in economists’ thinking and that money supply is central to all these
stories.....
To sum up, both traditional inflationary stories contain elements of truth and are not
necessarily at odds with each other. In our view, these existing theories of inflation are
either incomplete about the mechanism, or overly specific to cover the broad issues sur-
rounding inflation. As such, they may describe the root causes of inflation in some situ-
ations, but fall short of isolating the more general and proximate cause of inflation. This
leads to the question we address in this paper: What is the most minimal and general
framework that spells out the mechanism for inflation and describes its most proximate
Well put. I assume you will go on to lay out the role of monopoly power and the way it pushes toward conflict/ asynchrony causes by contrast with monetary “accomodation.”
I don't t think the money-less apple and carrots trading model is helpful or if it even has "inflation" or not. What _I_ want "inflation" for is as a summary measure of the money prices of all commodities in one period compared to anther. There could be inflation with no change in relative prices.
The 1-1-1 New Keynesian model -- 1 output (GDP), 1 input (undifferentiated labor) and one relative price (real wage) is so limiting as to be virtually useless. It essentially is moneyless. "Money" is a way of overcoming the double coincidence of supply/demand of two traders and two commodities.
A quick note on CPI/PCE. They trace each other quite closely (ridiculously high t values) wit the CPI being about 0.3 percentage points higher over multiple observation periods
That's an interesting way to look at the CPI/PCE comparison. I wonder if this tells us that the components of each do end up catching up to each other over time.
I started doing it because I track TIPS whose “inflation” is the CPI and I want to say thing about TIPS and the Fed’s 2% PCE target. [_I_ though it was significant that the TIPS went from under target to over (my correction of the) target in Sept 2021 well before the Fed raised the EFFR in March 2022] Ditto the disinflation saga of 2024.
Very good primer on CPI v PCE, Well written, thank you.
I didn't realize that a large component, shelter was calculated by the BLS doing surveys of homeowners where they simply asked a couple of questions, so here it is...
The BLS uses data from owner-occupied units in the Consumer Expenditure Survey to derive expenditure weights. The expenditure weight in the CPI market basket for OER is based on the following question that the CE Survey asks of consumers who own their primary residence:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
The Consumer Expenditure Survey asks the following questions of renter-occupied units to derive the expenditure weight for rent:
“What was your total rental payment for this month for this unit? Include any extra charges for garage or parking facilities, but do not include direct payments by local, state or federal agencies.”
This seems like an outdated model and way of doing things. I understand the law of large numbers and averages but can't we do better?
Owners’ equivalent rent of residences was 26.8 percent of the calculation for December 2024 relative importance. Almost 27 PERCENT of the calculation.
The CPI methodology for owner occupied housing is shocking. I assumed they measured actual transactions of units similar to owner occupied united. At best it gets a memory of something they saw on Zillow one time. PCE is a reasonable question, but what behavior of an owner occupier is being affected by this (either) estimate?
They do use market rents in the BLS (albeit with a 6 to 18 month lag depending on when their sample has rent renewals). But the weighting of rent in the basket it is subjective.
The only 'comforting' element is that it appears the Federal Reserve (and the BLS) are aware that this may create slightly distorted/lagged measures and take that into account when making their interest rate policy decisions.
But it is worth noting that not all commenters mention OER when they talk about the current inflationary period. As someone who likes putting assumptions up front, I think that during the current inflation cycle, referencing the weird behavior of OER is important. (During most times it appears to have worked ok, but during pandemic+WFH shock, the OER measure is lacking).
What’s your take on Modern Monetary Theory which says that inflation occurs only when total spending (private and public) exceeds total supply (and implies that fiscal policy and taxes are factors)?
I am somewhat schooled in Monte Carlo modeling as we needed it for planning least-cost outages. All models require known variables as real world data input to function. Manipulate the variables to any extent, and the model returns a false result. When real world cost of living variables are manipulated, the numbers can, and will, say anything fitting the manipulators agenda. What is never spoken of by talking heads is inflation is compounding the actual currency cost of living. Real world inflation destroys the standard of living for those with market wage ceilings and those on fixed incomes. Most of us who fall into the working classes or the retired instinctively know what inflation is. We have to make decisions every day like chicken or beef and if beef, then select, choice, or prime. If not apples then what, oranges, or bananas. Certainly not avocados. And where do we shop, Bristol Farms, Whole Foods, Ralphs, Vons, Albertsons or any of the other high end stores or the Discount food chains to squeeze our food dollars until the Buffalo squeaks. That is just so those who still have to commute to work can afford the gas to get to a job to earn enough to get by, barely.
God help the working man and woman looking for a roof to put over their heads.
Then there's the cost of medical and getting put back together if one breaks something or gets really sick which is compounded exponentially should a couple deign to have children.
The long held American Dream of our children having a better life than the one we built is all but dead for the working classes; never mind working their way into middle class. So if a self employed working class tradesman wants to stay even or better their lot, they demand more for their services driving inflation even harder. and the notion of bettering our lives even further away.
The bottom line is we don't need lessons in economic inflation theory, we know what it looks like since we have to look it in the face every damn day of our lives. Some of us have to hold down multiple jobs to hold it at bay. Or simply do without.
Which should we choose to do without; food, energy, transportation, housing, or medical? Never mind the American Dream.
Repatriate capital and industry. Stop single corporate entities from gobbling up their competition. Compete with those megaliths when they price fix to pick consumer pockets and purses turning American Capitalism into predation. In the name of the people manufacture generic medicines here where the FDA has a chance to live up to their mission statement---for instance.
Sven and Kristoff are interesting, but only one aspect of the causes of inflation. For example, the deflation of the late 1800’s follows nicely from monetary explanations (the gold supply did not expand fast enough to keep up with production growth), as does the long inflation of the 1500s and every hyperinflation I have seen investigated.
Yes - I think that element is important and still fits with an inflation as a conflict model. Deferring to Lorenzoni and Werning:
"Many economists confidently agree that extreme and persistent inflation episodes are
understood as largely driven by the growth in money supply, often prompted by a need
for seignorage. But how exactly does money transmit to inflation? The simplest idea is “too much money chasing too few goods.” Formalizing this involves the quantity equa-
tion or more general forms of money demand. On closer inspection, one may still wonder
what “money chasing goods” means and how the prices in good markets adjusts to clear
the money market. The story feels incomplete, as it requires out-of-equilibrium intuitions
for a general-equilibrium macroeconomic situation—simple microeconomic ideas of sup-
ply and demand may not be a proper guide. Nevertheless, it is fair to say that this idea
is very well rooted in economists’ thinking and that money supply is central to all these
stories.....
To sum up, both traditional inflationary stories contain elements of truth and are not
necessarily at odds with each other. In our view, these existing theories of inflation are
either incomplete about the mechanism, or overly specific to cover the broad issues sur-
rounding inflation. As such, they may describe the root causes of inflation in some situ-
ations, but fall short of isolating the more general and proximate cause of inflation. This
leads to the question we address in this paper: What is the most minimal and general
framework that spells out the mechanism for inflation and describes its most proximate
causes?"
Well put. I assume you will go on to lay out the role of monopoly power and the way it pushes toward conflict/ asynchrony causes by contrast with monetary “accomodation.”
I don't t think the money-less apple and carrots trading model is helpful or if it even has "inflation" or not. What _I_ want "inflation" for is as a summary measure of the money prices of all commodities in one period compared to anther. There could be inflation with no change in relative prices.
The 1-1-1 New Keynesian model -- 1 output (GDP), 1 input (undifferentiated labor) and one relative price (real wage) is so limiting as to be virtually useless. It essentially is moneyless. "Money" is a way of overcoming the double coincidence of supply/demand of two traders and two commodities.
No money is needed in a one relative price world.
Very instructive.
Lots of meat.
A quick note on CPI/PCE. They trace each other quite closely (ridiculously high t values) wit the CPI being about 0.3 percentage points higher over multiple observation periods
2.28% Jan-60 2.30% Jan-07
2.35% Jan-00 2.31% Jan-02
That's an interesting way to look at the CPI/PCE comparison. I wonder if this tells us that the components of each do end up catching up to each other over time.
Good question! If I were ambitious enough to try to do that (is it doable with public dataa/) which components do you thing are the ones to look at?
I started doing it because I track TIPS whose “inflation” is the CPI and I want to say thing about TIPS and the Fed’s 2% PCE target. [_I_ though it was significant that the TIPS went from under target to over (my correction of the) target in Sept 2021 well before the Fed raised the EFFR in March 2022] Ditto the disinflation saga of 2024.
Very good primer on CPI v PCE, Well written, thank you.
I didn't realize that a large component, shelter was calculated by the BLS doing surveys of homeowners where they simply asked a couple of questions, so here it is...
The BLS uses data from owner-occupied units in the Consumer Expenditure Survey to derive expenditure weights. The expenditure weight in the CPI market basket for OER is based on the following question that the CE Survey asks of consumers who own their primary residence:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
The Consumer Expenditure Survey asks the following questions of renter-occupied units to derive the expenditure weight for rent:
“What was your total rental payment for this month for this unit? Include any extra charges for garage or parking facilities, but do not include direct payments by local, state or federal agencies.”
This seems like an outdated model and way of doing things. I understand the law of large numbers and averages but can't we do better?
Owners’ equivalent rent of residences was 26.8 percent of the calculation for December 2024 relative importance. Almost 27 PERCENT of the calculation.
The CPI methodology for owner occupied housing is shocking. I assumed they measured actual transactions of units similar to owner occupied united. At best it gets a memory of something they saw on Zillow one time. PCE is a reasonable question, but what behavior of an owner occupier is being affected by this (either) estimate?
OER - is an extremely quirky concept. I did have a few posts discussing it and showing the difference between more market based rent measures (Zillow) vs BLS based measure (https://www.nominalnews.com/p/inflation-supply-demand-interest-rates).
They do use market rents in the BLS (albeit with a 6 to 18 month lag depending on when their sample has rent renewals). But the weighting of rent in the basket it is subjective.
The only 'comforting' element is that it appears the Federal Reserve (and the BLS) are aware that this may create slightly distorted/lagged measures and take that into account when making their interest rate policy decisions.
But it is worth noting that not all commenters mention OER when they talk about the current inflationary period. As someone who likes putting assumptions up front, I think that during the current inflation cycle, referencing the weird behavior of OER is important. (During most times it appears to have worked ok, but during pandemic+WFH shock, the OER measure is lacking).
Great write up, Nominal News. This is great timing, given the uptick in CPI last week!
What’s your take on Modern Monetary Theory which says that inflation occurs only when total spending (private and public) exceeds total supply (and implies that fiscal policy and taxes are factors)?
I am somewhat schooled in Monte Carlo modeling as we needed it for planning least-cost outages. All models require known variables as real world data input to function. Manipulate the variables to any extent, and the model returns a false result. When real world cost of living variables are manipulated, the numbers can, and will, say anything fitting the manipulators agenda. What is never spoken of by talking heads is inflation is compounding the actual currency cost of living. Real world inflation destroys the standard of living for those with market wage ceilings and those on fixed incomes. Most of us who fall into the working classes or the retired instinctively know what inflation is. We have to make decisions every day like chicken or beef and if beef, then select, choice, or prime. If not apples then what, oranges, or bananas. Certainly not avocados. And where do we shop, Bristol Farms, Whole Foods, Ralphs, Vons, Albertsons or any of the other high end stores or the Discount food chains to squeeze our food dollars until the Buffalo squeaks. That is just so those who still have to commute to work can afford the gas to get to a job to earn enough to get by, barely.
God help the working man and woman looking for a roof to put over their heads.
Then there's the cost of medical and getting put back together if one breaks something or gets really sick which is compounded exponentially should a couple deign to have children.
The long held American Dream of our children having a better life than the one we built is all but dead for the working classes; never mind working their way into middle class. So if a self employed working class tradesman wants to stay even or better their lot, they demand more for their services driving inflation even harder. and the notion of bettering our lives even further away.
The bottom line is we don't need lessons in economic inflation theory, we know what it looks like since we have to look it in the face every damn day of our lives. Some of us have to hold down multiple jobs to hold it at bay. Or simply do without.
Which should we choose to do without; food, energy, transportation, housing, or medical? Never mind the American Dream.
Repatriate capital and industry. Stop single corporate entities from gobbling up their competition. Compete with those megaliths when they price fix to pick consumer pockets and purses turning American Capitalism into predation. In the name of the people manufacture generic medicines here where the FDA has a chance to live up to their mission statement---for instance.
Give us a frigging break already.
Okay, done for now.