Friday, August 16, 2019

July 2019 CPI Inflation

Core inflation has recovered a bit in the last two months, but we remain in the context of relatively low non-shelter inflation and high shelter inflation, averaging out to roughly on-target total core inflation.

I will probably continue to do these updates for a while, but I suspect the context is set, and specific shifts in inflation won't affect things much in the near term.  Inflation isn't likely to shift sharply in either direction, and in the time frame that is important for the Fed right now, noise dominates information.  So, effectively, Fed discretion will rule, although it will frequently be cast in language of inflation or interest rate control.

The context in place seems to be that the Fed will loosen.  Not so much to avoid a bit of a contraction, but not so little as to be greatly disruptive.  Excess shelter inflation is part of that context, but other factors will come into play, too.

Here, I think the 2008 event is informative.  The Fed is somewhat forgiven for allowing NGDP and inflation expectations to drop so sharply because at that time inflation was slightly above target.  This makes inflation seem like an important short term element in Fed decision making.  But, I disagree with that analysis.  Inflation wasn't anywhere near a level that would have led any sane regulator to sit aside as one panic after another struck the economy.  And, even as the Fed did that, the overwhelming criticism of them was that they were even daring to try to stabilize financial markets.  Even today, many commentators explicitly complain that selected economic agents weren't made to suffer enough.  The financial crisis in late 2008 happened because it was popular.  Slightly above target inflation is simply one of several justifications that were used to allow it to happen.  For any reasonable observer with a straightforward goal of maintaining economic stability, none of those justifications were plausible excuses for allowing such economic dislocations to occur.

The reality in late 2008 was that any reasonable monetary or fiscal policy would have caused a rebound in housing prices, as a side effect.  That would have been taken as indefensible.

We don't have the same dramatic setup today, so the stakes aren't as high.  But, similarly, inflation and interest rates will be used to communicate short term monetary shifts even though those shifts will have little to do with either.


  1. I certainly hope you maintain these monthly reviews of inflation, along with the valuable economic commentary.

    There seems to be some concern out there about leveraged loans and collateralized Loan obligations. Let us hope the economy keeps growing so we don't have to find out how ensnarled our financial system is with these types of loans.

  2. "The financial crisis in late 2008 happened because it was popular."

    This I think is the most insightful single sentence about the financial crisis I've read. I feel it's so true.

    Wasn't just the real estate either! The bubble narrative was so overwhelming that it actually infected the oil markets too. Remember oil spike in -07-08? And that it then "spilled" over to inflation hysteria (gold!)?

    Now that I think, it was literally only a few years after the tech stock bubble had deflated. I think that factor shouldn't be discounted. The tech stock crash didn't really hit the real economy, and the consequences were minor. A hangover. Considering the spectacle, the comeuppances might have seemed lacking to the public. And consequences trivial to the civil servants.

    I found my first "Housing Bubble" blog in -05. I ate it up! Flip that house! "Liar loans", subprime, cdo, abs, alt-a. Sending "jingle mail" like it's not your home you're vacating. Witnessed disgusting amount of glee, which put me off and I went out for a few years

    The whole thing was too complex to even pin a narrative on, but you could clearly see the house price increase and fall. In all the right places too now that I think. Las Vegas!

    I figure the consequences exceeded expectations, because we didn't care to predict that unlike with tech software, when you drop a piece of real estate on your foot, you're going to have a bad time. We thought we needed a bit of a spanking and what we got was the black death flagellants

    Remember tea party? I think it died because at one point we just didn't get off on the s&m anymore. The same with Occupy WS. Instead we got apathy.

    Apathy is special. It requires no moral narrative, it requires literally nothing to fuel it. All the economists are saying things couldn't be better but sure could get worse. Life expectation in us is falling. It's horrible

    The thing about apathy though is that just about anything extreme enough to give that jolt of dopamine to kickstart the circuits will do. We just got lucky we got a clown. Count our blessings.

    I'm reading your book (early still, it's a tome). I originally heard you talk with David Beckworth in Macro Musings. Blew my mind because I'd never heard a comprehensive non-moralistic narrative about the crisis before. It's perfect because it comes with a drop-on-your-foot-and-ruin-your-day concrete solution too:

    Build. Houses. Especially where locals oppose it. That's the kind of antidote to apathy we need.

    I hope the US political system coughs up someone who isn't pathetic or evil. I'll buy another copy of your book and send it to her (one hopes)!

    1. Thank you, fe2plus.

      Once you step out of that moral framework and notice the moralism, the hate-mongering, and the demands for inflicting hardship, it's sort of a brick in the face, isn't it? As long as it all seems justified, it just rolls right over us. But, when the justifications for it become doubtful, the awfulness of it is impossible to ignore. What kind of governance can we possibly expect if, in the wake of the worst business cycle event in generations, the consensus complaint against the Federal Reserve and the Treasury is that they didn't inflict more pain on more people sooner?

    2. Whenever I get really upset about the lazy, cruel, ignorant things people who should know better say or do, and the generally prevailing level of apathy and willful ignorance, I calm myself by thinking about the good doctor Ignaz Semmelweis.

      He tried to get obstretricians to wash their hands. They operated corpses before helping in births. 10-20% of mothers developed infection and died. Mothers rather birthed on street than his clinic. He did a remarkable study, unflinching check on his own and his colleagues practice. He became riddled by guilt and desperation. Here's excerpt from his wikipedia page

      "Despite various publications of results where hand washing reduced mortality to below 1%, Semmelweis's observations conflicted with the established scientific and medical opinions of the time and his ideas were rejected by the medical community. Semmelweis could offer no acceptable scientific explanation for his findings, and some doctors were offended at the suggestion that they should wash their hands and mocked him for it."

      He ended up in an asylum after being committed for acting "erratically". He had sent accusatory letters to other obstetricians for example. He was beaten by guards for trying to escape. And after 2 weeks of waterboarding, forced laxatives and straightjacket, he died from wound infection caused by the beating.

      I've thought about it, and figured out that his problem probably wasn't him being right, but because he was irritable, moralizing and shamed his colleagues.

      Now contrast his fate with that of Darwin's...who was a friendly sort of fellow with an even more controversial theory.

      I'd say your genial, professorial manner of presenting the facts serve the cause well. Think about how difficult, soulcrushing, it would be for a dutiful, well intentioned leader to realize he had made a bad mistake and nearly toppled the whole world. He'd need more a hug than a whipping

      The fault is really in the system that entrusts such unchecked responsibility to so few. We're all trapped. Except you're maybe like Neo in The Matrix who wakes up in a vat. It's all sticky and gooey and your job becomes to convince others to give up their comforting illusions. It takes time. You know I bet lots of influential people are silently weighing things. They follow Marginal revolution and listen to Beckworth. What we need is a new storyline to run parallel to the old one, but which steers us to right direction. Evolution of narrative. Just keep doing your thing. When the stupidities overwhelm, think of Semmelweiss. And read Marcus Aurelius' Meditations! It is a comforting book

    3. Thanks for the story! And the kind words.

      I have found that I have become softer about the issue over time. Probably if you go back in the blog, you will find more rants 3 or 4 years ago. A lot of the editing on the first book, truth be told, probably involved removing the passages where I was being off-putting. I recognize that it is natural to be skeptical of a paradigm shift, so I have mostly moved to a "lead horses to water" frame of mind, leaving the drinking to others. Mostly, today, my experiences are positive, because it really feels more like there is this surprising thing that I discovered rather than an argument I have to make. And, now when I share it, I get to share the excitement of discovery again as others, like you, see some value in it.

      Thanks for your comments!

  3. Cheers, and I like the discovery angle. Why it's fun to discover things. It helps to put things in proportion too:

    Four billion years and the central problem for life to solve still is finding a nicer place to call home.