Saturday, July 21, 2012

No Wage-Price Inflation Spiral with Stagnant Wages

The graph above shows two monthly series back to 1965 (data here): a) annual wage increases in the BLS series "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private" (blue line), and b) annual inflation calculated from the Consumer Price Index (red line).  Here are some observations:

1. There has been a downward trend in annual wage increases since 2007, and wage increases have been below 2% for the last nine months starting in October 2011. There has never been any other nine month period in the history of that wages series going back to 1964 of nine back-to-back months of wage increases below 2%.   

2. These are actual market-based hourly wages, and therefore not subject to the measurement issues that are frequently cited by those who think the CPI significantly overstates or understates actual inflation.

3. The chart also shows that the inflationary episode of the 1970s and early 1980s in the U.S. was accompanied by both rising wages and rising consumers prices, which both peaked in 1980-1981; CPI inflation peaked at 14.6% in 1980 and wages in 1981 at 9.4%.  Since wages are simply the price of labor, and because inflation is a general overall increase in most prices, it would follow that rising inflationary pressures would generally have to also include rising inflationary wage increases, which we obviously haven't seen yet.  In fact, wage increases have been falling since 2007 as the graph and data indicate. 

Bottom Line: As I concluded in several other related posts on this topic, it would be historically unprecedented to experience rising inflation with stagnant wages, and therefore we can assume that unless and until we start seeing rising wages on the order of 5%, we won't see higher inflation this year.  That is, we can't possibly have a 1970s-style inflationary "wage-price spiral" if wages are stagnant.  

76 Comments:

At 7/21/2012 11:25 AM, Blogger Steve in Pennsylvania said...

You can have rising wages without inflation. The owners and senior management just have to share productivity gains with workers.
There are many reasons for the stagnation, as this article explains. But a large share is caused by productivity gains going to capital, not labor. (That's a fancy way of saying Chinese pay scales are holding down American wages.)
http://www.epi.org/publication/ib330-productivity-vs-compensation/

 
At 7/21/2012 2:26 PM, Blogger PeakTrader said...

If inflation has really been 6% to 12%, as the propagandists claim, the dollar burger at McDonalds would be smaller than a raisin, and dollar stores would be as obsolete as 10 cent phone booths.

 
At 7/21/2012 2:30 PM, Blogger VangelV said...

Bottom Line: As I concluded in several other related posts on this topic, it would be historically unprecedented to experience rising inflation with stagnant wages, and therefore we can assume that unless and until we start seeing rising wages on the order of 5%, we won't see higher inflation this year. That is, we can't possibly have a 1970s-style inflationary "wage-price spiral" if wages are stagnant.

If you measure inflation the same way as you did when Carter was president you would get an inflation rate of around 5%.

 
At 7/21/2012 2:35 PM, Blogger PeakTrader said...

Carter wasn't president when the Information Revolution accelerated after 1982.

 
At 7/21/2012 2:36 PM, Blogger PeakTrader said...

The Baby-Boomers began to enter "prime-age" in 1982 and trade deficits became increasingly larger after 1982.

 
At 7/21/2012 2:46 PM, Blogger PeakTrader said...

VangelV, your chart suggests U.S. real GDP growth has been zero.

Everyone knows U.S. living standards, labor standards, and environmental standards are much higher today than in the 1970s (see episode of Kojak).

 
At 7/21/2012 3:03 PM, Blogger PeakTrader said...

Chart of Real Compensation Per Hour:

http://research.stlouisfed.org/fred2/series/COMPRNFB/

If you don't feel richer, maybe it's because government has driven-up the cost of health care.

 
At 7/21/2012 5:25 PM, Blogger VangelV said...

Carter wasn't president when the Information Revolution accelerated after 1982.

When Carter was president, (Reagan and Bush I too), the methodology that reported inflation was different than it is today. If one applies the same methodology s/he finds that the inflation rates today are not all that different than those in the early 1970s or throughout most of the 1980s. Mark has refused to look at the changes and the fact that they were never applied to the older data. That allows him to ignore reality and pursue a narrative that he wishes to advance. The problem is that you cannot ignore the consequences of reality.

 
At 7/21/2012 5:38 PM, Blogger VangelV said...

VangelV, your chart suggests U.S. real GDP growth has been zero.

No. It suggests that we have had a contraction for most of the time since 2000. Zero would be an improvement.

Everyone knows U.S. living standards, labor standards, and environmental standards are much higher today than in the 1970s (see episode of Kojak).

It is very true that we have more cheap and high quality goods available. And it is true that we spend much more than we used to and save less than we used to. But that is part of the problem. Today we need two parents working to bring up a child. And we have a hard time sending that child to a good university that would provide valuable education that would be attractive to employers. Before the end of the Bretton Woods system a family was able to purchase a home and pay it off without needing both parents to work full time. Most families had one primary breadwinner with a stay-at-home mom who looked after the kids until they went to school and could be left on their own unsupervised. Property taxes were low and paid for pretty good education and local services. Most families owned their own vehicles, usually purchased for cash, and were able to save to cover the tuition expenses of their children. And when they retired they did so without carrying large debt loads.

It was only after the collapse of the Bretton Woods system that retirees experienced massive losses in purchasing power and often had to look for jobs even after they turned sixty-five. As taxes at all levels went up both parents wound up working and if they wanted good schools they had to pay extra for homes in good districts. And they saw tuition costs explode until they are no longer capable of handling those costs.

The end game is clear. The USD will lose its reserve status once the short term debt has to be rolled over and foreign creditors figure out that they will never get paid back with money of the same value. If the Fed and Congress become prudent many businesses and families will wind up bankrupt and unable to handle their debt loads. If they do as expected the hyperinflation will destroy everything.

 
At 7/21/2012 6:09 PM, Blogger PeakTrader said...

VangelV, Americans were much poorer before WWII, and in the 1970s.

I stated before, a larger percentage of Americans can afford a new Ford F-150 today than a new Ford Pinto in 1980.

The Roaring Twenties

"Generally, groups such as African-Americans, women and farmers did not enjoy the prosperity of the Roaring Twenties. More than 60 per cent of Americans lived just below the poverty line."

Your StaticStats inflation data suggest the U.S. economy has been contracting for years or decades, even at full employment with high productivity.

 
At 7/21/2012 6:17 PM, Blogger PeakTrader said...

"The clearest indicators of an improved standard of living are income levels and household expenditures.

Between 1901 and 2003, the average U.S. household’s income increased 67-fold, from $750 to $50,302. During the same period, household expenditures increased 53-fold, from $769 to $40,748.

Equally dramatic is that the $40,748 would have bought more than $2,000 worth of goods in 1901 prices, indicating a tripling of purchasing power."

http://www.bls.gov/opub/uscs/report991.pdf

 
At 7/21/2012 6:21 PM, Blogger VangelV said...

I stated before, a larger percentage of Americans can afford a new Ford F-150 today than a new Ford Pinto in 1980.

The average American is now in far more debt than ever before. People used to be able to retire and live off pensions and savings before the end of the Bretton Woods system. They used to be able to support a family with one person working and ordinary office or blue collar job. Not many can do that today.

 
At 7/21/2012 6:27 PM, Blogger VangelV said...

Your StaticStats inflation data suggest the U.S. economy has been contracting for years or decades, even at full employment with high productivity.


I am suggesting that after the US went off the gold exchange standard (Bretton Woods) in 1971 the economy has been in a clear decline.

Funnily enough I just put "bretton woods wage stagnation" into Google and got the same commentary as the top three hits. Here it is from Azizonomics. The argument is very similar to one that I have made (along with others) a number of times on this blog.

 
At 7/21/2012 6:33 PM, Blogger PeakTrader said...

Maybe, if you were an overpaid union worker, not an underpaid non-union worker.

Lower prices and interest rates induced demand. So, it was perfectly rational to spend and borrow.

 
At 7/21/2012 6:38 PM, Blogger PeakTrader said...

VangelV says "...after the US went off the gold exchange standard (Bretton Woods) in 1971 the economy has been in a clear decline."

You're confusing poor government policies with improved economic policies, since the gold standard and fixed exchange rates.

 
At 7/21/2012 6:41 PM, Blogger VangelV said...

Between 1901 and 2003, the average U.S. household’s income increased 67-fold, from $750 to $50,302. During the same period, household expenditures increased 53-fold, from $769 to $40,748.

The tax rates were much lower in 1901. You did not have to pay the same level of sales taxes on most goods, had much lower license fees, lower property taxes, etc. The government consumed much less than it does today and the workers did not have to carry the same burden as they do today. As I said, you could raise a family not very long ago with one parent working and the other staying home. That got you a house that got paid off, education for the kids, health care, cars bought for cash, your annual vacation, and still left more savings as a percentage of earned income than today.

Equally dramatic is that the $40,748 would have bought more than $2,000 worth of goods in 1901 prices, indicating a tripling of purchasing power."

That is called increased productivity. In an era before standardization, adequate quality control systems, and assembly lines we would expect that things would be more expensive. Had those increases in productivity been passed along to the consumers and workers they would be able to buy much more than they can today. But they were not passed along and were stolen through government spending, deficits, and money printing. When the last link to gold was cut the American worker and saver were crushed by the financial system.

 
At 7/21/2012 6:47 PM, Blogger PeakTrader said...

Your chart doesn't reflect that union workers were grossly overpaid and non-union workers were grossly underpaid. That disparity is much smaller now.

Also, many more Americans have 401(k)s and other retirement accounts, and the homeownership rate is higher.

The anomaly could be between WWII and 1973 rather than after 1973, because the U.S. economy was relatively larger after WWII, while Europe and Japan rebuilt.

 
At 7/21/2012 6:51 PM, Blogger PeakTrader said...

VangelV, the inflexibility of the gold standard is what caused the Great Depression initially. Why go backwards?

 
At 7/21/2012 7:04 PM, Blogger VangelV said...


Maybe, if you were an overpaid union worker, not an underpaid non-union worker.

Lower prices and interest rates induced demand. So, it was perfectly rational to spend and borrow.


Wrong on both counts. First, it was common for most skilled worker families to be able to live on one salary. Second, lower prices make it more advantageous to save because falling prices increase your purchasing power.

The problem for your view is that when the US went off the gold standard wages stagnated and you needed both spouses and longer hours to pay for a basket that included costs for shelter, food, transportation, clothing, insurance, health care, and education.

 
At 7/21/2012 7:07 PM, Blogger VangelV said...

You're confusing poor government policies with improved economic policies, since the gold standard and fixed exchange rates.

I am not confusing anything. When you allow the financial system to rob workers and savers of purchasing power by creating more money and credit out of thin air because the link to a tangible commodity is removed you will see a transfer of wealth from productive individuals to the financial system. That is exactly what we have today. The banks are the biggest players in the economy while workers and savers are in big trouble and having a hart time making ends meet.

Why is this so hard for you to follow given the both objective evidence AND the sound logic?

 
At 7/21/2012 7:14 PM, Blogger PeakTrader said...

VangelV, Americans were much poorer in the past.

The gold standard caused boom/bust cycles in the macroeconomy, which slowed improvements in living standards. Periods of economic strain and slack are inefficient.

 
At 7/21/2012 7:16 PM, Blogger VangelV said...

Your chart doesn't reflect that union workers were grossly overpaid and non-union workers were grossly underpaid. That disparity is much smaller now.

That is not material in this discussion. Union workers were never the driver of productivity increases.

Also, many more Americans have 401(k)s and other retirement accounts, and the homeownership rate is higher.

True, but more households owe more on their homes than the homes are worth and the actual ownership percentage is lower now than it was before.

The anomaly could be between WWII and 1973 rather than after 1973, because the U.S. economy was relatively larger after WWII, while Europe and Japan rebuilt.

There may be something to that argument but you are going to have to do a lot more than just a statement. The only reasons why Americans could afford to consume as much as they did and borrow as much was because the Nixon killed off Bretton Woods. Without all that money printing and the status of the USD as a reserve currency the rest of the world could not sell as much to the US as it did. It was the grossly overvalued USD that allowed Americans to buy things without really paying for them. Ironically, the USD has been strengthened by the collapse of another reserve fiat currency, the Euro.

The problem is that the Euro will have to either change radically or disappear before the US has to refinance its massive short term debts next year and in 2014. Given the fact that almost all of the debt is being purchased by the Fed and other central banks it will be very difficult to keep all the balls up in the air. Some time after the election we could see a major collapse in stocks, housing, base metals, some energy, and most currencies against gold and silver.

 
At 7/21/2012 7:18 PM, Blogger PeakTrader said...

VangelV says: "Why is this so hard for you to follow given the both objective evidence AND the sound logic?"

There is no "objective evidence" and/or "sound logic," along with no economics.

 
At 7/21/2012 7:21 PM, Blogger VangelV said...

VangelV, the inflexibility of the gold standard is what caused the Great Depression initially. Why go backwards?

The world was off the classical gold standard before the Great Depression and the Fed was inflating credit in the second half of the 1920s to help the BoE and its stupid overvaluation of the pound after it was linked back to gold. The stock market collapse did not cause the depression. It was actually a much needed cure for overvaluation. The problem was that Hoover did not want the market to clear the malinvestments and used the power of the federal government to prevent a liquidation. Instead of a sharp contraction and a recovery the US got a long stagnation that was not cured until after WWII ended. Instead of learning the BoJ and the government of Japan repeated the Hoover/FDR mistakes.

 
At 7/21/2012 7:34 PM, Blogger bart said...

...a large share is caused by productivity gains going to capital, not labor.

Which is precisely what has been happening


Labor share

 
At 7/21/2012 7:37 PM, Blogger bart said...

If inflation has really been 6% to 12%, the dollar burger at McDonalds would be smaller than a raisin, and dollar stores would be as obsolete as 10 cent phone booths.

I guess you believe that the burger is the same exact one as 10 or 20 years ago, considering your eyes are closed to the real facts... including productivity, imports, outsourcing, labor share issues... and of course:

Why CPI doesn't measure real inflation, and CPPI is much closer

 
At 7/21/2012 7:47 PM, Blogger bart said...

These are actual market-based hourly wages, and therefore not subject to the measurement issues that are frequently cited by those who think the CPI significantly overstates or understates actual inflation.

Hourly wages are measured in dollars, and dollars are subject to inflation - regardless of how it is measured.

The actual record of hourly earnings, corrected by both CPI and CPPI shows that they peaked in the 70s

 
At 7/21/2012 7:52 PM, Blogger VangelV said...

The gold standard caused boom/bust cycles in the macroeconomy, which slowed improvements in living standards. Periods of economic strain and slack are inefficient.

You have no idea what you are talking about. The boom and bust cycles had nothing to do with any gold standard. They were actually created by state or federal regulations that created excess credit and natural harvest cycles when the economy was primarily based on agriculture. Even when there were massive discoveries of gold in California, the Yukon, and Australia and the amount of gold production went up sharply the inflation rate averaged less than 2% per year for the duration of the boom. When the USD was linked to gold its purchasing power went up and savers and workers were rewarded. The fastest growth in productivity and the standard of living took place under the classical gold standard. The disruptions happened when the gold standard was ignored or abandoned.

You may want to do some reading on this front because the information that you have may not be as accurate as you expect it to be.

 
At 7/21/2012 7:53 PM, Blogger VangelV said...

...a large share is caused by productivity gains going to capital, not labor.

Which is precisely what has been happening


The biggest share of the wealth has gone to neither capital nor labour. It has gone to the financial sector. That is the problem with the system.

 
At 7/21/2012 7:54 PM, Blogger bart said...

The chart also shows that the inflationary episode of the 1970s and early 1980s in the U.S. was accompanied by both rising wages and rising consumers prices, which both peaked in 1980-1981; CPI inflation peaked at 14.6% in 1980 and wages in 1981 at 9.4%. Since wages are simply the price of labor, and because inflation is a general overall increase in most prices, it would follow that rising inflationary pressures would generally have to also include rising inflationary wage increases, which we obviously haven't seen yet. In fact, wage increases have been falling since 2007 as the graph and data indicate.

Except that the actual record (per the chart above, and per both CPI and CPPI) shows that hourly wages *did* peak in the early 70s.

Wages were only rising nominally, while the purchasing power was declining during that stagflation. And we *still* have not exceeded the hourly earnings peak established in the 70s as of today, just when measured per the BLS CPI-U.



it would be historically unprecedented to experience rising inflation with stagnant wages

False, as shown in the chart.

 
At 7/21/2012 7:56 PM, Blogger bart said...

This comment has been removed by the author.

 
At 7/21/2012 8:00 PM, Blogger bart said...

Peak: Equally dramatic is that the $40,748 would have bought more than $2,000 worth of goods in 1901 prices, indicating a tripling of purchasing power."


False analogy.

No one is saying or asserting that purchasing power isn't up since 1901. It's just not up as much as the BS from the BLS says it is.

 
At 7/21/2012 8:03 PM, Blogger bart said...

Peak: an overpaid union worker, not an underpaid non-union worker.

Union wages show the exact same pattern as non union wages, although minimum wage is the worst as far as losing purchasing power since the early 70s.

 
At 7/21/2012 8:08 PM, Blogger bart said...

Peak: many more Americans have 401(k)s and other retirement accounts, and the homeownership rate is higher.

Yes of course, but total household net worth peaked over a decade ago when a real and correct inflation measure is used.

 
At 7/21/2012 8:10 PM, Blogger Ed R said...

"...after the US went off the gold exchange standard (Bretton Woods) in 1971 the economy has been in a clear decline."

The US economy definitely did go into decline for 10 - 12 years starting in 1972. Probably had nothing to do with going off the gold standard, but more likely the first oil shock (1972) the second oil shock (1978) and then Volcker's money tightening in 1979 to 1982.

 
At 7/21/2012 8:13 PM, Blogger bart said...

Peak: There is no "objective evidence" and/or "sound logic," along with no economics.

Nothing but assertions - no facts at all.

Jet has given up and has implicitly admitted he has no answers on the purchasing power losses that I have proven that are much higher than the bogus CPI-U.

"Fascinating" how you totally avoid them, while not having any real and broad and proven facts on your side on how inflation is higher than what the BLS asserts.

 
At 7/21/2012 8:21 PM, Blogger Benjamin said...

Vange raises certain ineteresting points, and it may be that US employees did better in the 1960s than today.

That said, I see no inflation surge in years ahead, for the reasons Dr. Perry cited, and also (even more telling) declining unit labor costs.

The Chicken Inflation Littles are simply hysterics.

Plus, the Fed is asphyxiating our economy.

 
At 7/21/2012 8:25 PM, Blogger bart said...

Vangel: The biggest share of the wealth has gone to neither capital nor labour. It has gone to the financial sector. That is the problem with the system.

Nothing but semantics, in context.

 
At 7/21/2012 8:32 PM, Blogger bart said...

Benjamin: That said, I see no inflation surge in years ahead, for the reasons Dr. Perry cited, and also (even more telling) declining unit labor costs.

Unfortunately, his data about hourly wages is incorrect. They *did* decline during the 70s stagflation, even when only using the BLS CPI-U as a correction factor.

 
At 7/21/2012 8:50 PM, Blogger bart said...

Benjamin: The US economy definitely did go into decline for 10 - 12 years starting in 1972. Probably had nothing to do with going off the gold standard, but more likely the first oil shock (1972) the second oil shock (1978)

Going off the gold standard sent a message that the US was going to inflate much more, which it did (2X from 1971-1980).

Given that the oil price in 1955 was about $2.50/barrel and only $3.60 in mid 1973, and that CPI based inflation from 1955 through mid 1973 was about 2X, oil was very substantially under priced at $3.60.

Anyone aware of that data (very few, I was there) was not shocked by oil price increases.

 
At 7/21/2012 8:57 PM, Blogger bart said...

Peak: a larger percentage of Americans can afford a new Ford F-150 today than a new Ford Pinto in 1980.

If you insist on cherry picked data, a much smaller percentage of Americans can afford a solid walnut dining table or set of furniture today than in 1980... and it's the same, not a better table.

 
At 7/21/2012 9:12 PM, Blogger VangelV said...

That said, I see no inflation surge in years ahead, for the reasons Dr. Perry cited, and also (even more telling) declining unit labor costs.

Really? How do the US and EU roll over their short term debts?

 
At 7/21/2012 9:18 PM, Blogger bart said...

Peak: You're confusing poor government policies with improved economic policies, since the gold standard and fixed exchange rates.

From 1900 through August 1971 when the US went totally off the gold standard, CPI based inflation for 71 years was 5.2x.

From August 71 through Jun 2012 (41 years), CPI based inflation was 5.6x... and the more correct CPPI or Shadowstats numbers shows real inflation of well over 10X.

Oil is about 25X, median houses (with less land) are about 8X, range fed cattle priced steaks (apples to apples comparison) are about 10X, etc.


That doesn't appear to be "improved economic policies" from here.

 
At 7/22/2012 5:44 AM, Blogger Jon Murphy said...

Vangel-

Question for you: where, exactly, do you see inflationary pressures coming from?

You believe we have not had any real economic growth since 2005.

You believe we are in a recession, so there can't be any producer-demand inflation.

You believe that consumer spending are incorrect and actually falling, so there can't be any consumer-demand inflation

(I might add, for those of you who are new to the conversation, there is no data to suggest the above)

Commodity prices are down across the board, so there can't be any input-cost inflation.

I can understand your point about printing money, but the money is not making its way into the economy (as evidenced by the record bank holdings at the federal Reserve). Banks aren't lending in great levels right now. If we are indeed in a recession (which, again, no evidence to suggest we are), then banks will be less hesitant to lend, so the money will stay at the Federal Reserve.

So, where will inflationary pressures come from? Running the printing press is not enough to force it up: the money needs to make its way into the economy.

 
At 7/22/2012 6:14 AM, Blogger seekingtraceevidence said...

Inflation is not a simple monetary phenom. It is a conbination of new money created, how it is spent and MZM velocity. The "Brat Inflation" as Meltzer defined it occurred as a result of government making the actual decision to buy labor and materials without care for how it affected prices to produce a social end called the "Great Soceity" Government not only printed the money but spent it without a profit motive, i.e. without a Return on Capital-without a sense of "Value given for Value received". MZM Velocity soared as individuals feared that unspent dollars would lose value before they could spend them as prices for needed goods soared. Govt printed money in our current situation, but the spending remained in the hands of individuals,i.e. govt gave money to states to support excess levels of unionized state and municipal employees. This money was spent by these employees with a Return on Value mentality and many saved it such that MZM Velocity fell to historic low levels. Like wise international holders exchanged other currencies for US$ and MZM Velocity fell even more. The world has become a hoarder of US$.
The Fed will have to withdraw US$ carefully as economies recover which it intends to do so as to not stimulate MZM Velocity with inflation fears, but this is not likely to occur without government suddenly becoming the printer and spender of US$ on wildly inflationary projects. This is just not going to happen in the current climate

 
At 7/22/2012 7:39 AM, Blogger VangelV said...

Question for you: where, exactly, do you see inflationary pressures coming from?

I see it coming from the devaluation of the currency as debt holders refuse to roll over massive amounts that are coming due at low rates and the Fed and other central banks decide that they must buy sovereign debts.

When you look at the big picture you see massive deficits no matter who is president and total unfunded liabilities of more than $100 trillion for the US. You see the states in big trouble and municipalities looking to shed their liabilities by going into bankruptcy. You also see a large increase in the agricultural sector, a desperate president looking to start a foreign war as a way of getting reelected, and you see the Chinese making deals with other countries to trade directly without using USDs.

Now you can pretend that money printing does not matter and that fiat currencies will not move towards their intrinsic value but I am not one of those people who accept the 'it's different this time' argument.

As I wrote above, the two choices are between debt deflation/destruction and money printing. I think that the Fed and Congress will push for the latter.

You believe we have not had any real economic growth since 2005.

What I believe does not matter. That is what the data is telling us, which is why you have the 99% protesting against the 1%.

You believe we are in a recession, so there can't be any producer-demand inflation.

Yes to the first part. But as the 1970s showed you can have a recessionary environment and inflation at the same time.

You believe that consumer spending are incorrect and actually falling, so there can't be any consumer-demand inflation.

I see your problem. You think that inflation is just about prices, the typical monetarist or Keynesian error. It isn't. Inflation is about what is happening to the supply of money (and credit). The way I see it there is a choice for the authorities. They can let the debt defaults take place and drive down prices as a result or they can fight it by printing more and more money until the value of the currency goes down by enough to eliminate the 'debt problem'. From what we have seen both Bush and Obama chose to fight the debt destruction and price deflation by resorting to money printing. I see nothing different in the wings because both sides are worried that a collapse would push them away from power and leave an opening for a third party or independents working within the current established parties to take over.

 
At 7/22/2012 7:44 AM, Blogger marmico said...

CPPI or Shadowstats

You dudes are wackos.

Nominal GDP deflated by ShadowStats "fantasy CPI".

 
At 7/22/2012 9:04 AM, Blogger Jon Murphy said...

I agree with you Vangel, but those are long term issues. If things keep going as they are, we will see inflation in the long term, but there is nothing to suggest inflation in the here and now. I am not ignoring the effect of the printing press nor the money supply in inflation, but when the printed money is not making its way into the system, then it doesn't matter how much you print.

Again, I agree with you that in the long term as the economy recovers, then inflation could become a problem. But you have not answered my question (because I was unclear); what do you see that makes you think massive inflation is likely in the near term?

 
At 7/22/2012 9:17 AM, Blogger PeakTrader said...

There has been little or no inflation, because the U.S. produces (and consumes) more output with fewer inputs, in the Agricultural-Industrial-Information Revolutions:

Michael Mandel
2012

"According to the Bureau of Economic Analysis, American manufacturing output was 16 percent higher in 2010 than it was a decade earlier, despite the devastating impact of the Great Recession and the virtual disappearance of some manufacturing industries.

Combined with the sharp plunge in employment, the BEA statistics imply that manufacturing productivity rose by a stunning 74 percent from 2000 to 2010.

Companies that distribute and sell these goods also seem to be enjoying sizable efficiency gains.

According to government data, wholesale and retail trade companies have seen a 20 percent increase in productivity since 2000, as information technology and the Internet enables them to deliver more goods with fewer people."

 
At 7/22/2012 9:19 AM, Blogger bart said...

CPPI or Shadowstats

You dudes are wackos.



As I've stated before, it's my belief (supported by many facts, as detailed on my cpi issues page) that SGS-CPI has overstated inflation since 2005-6 due mostly to using fixed amount corrections. It isn't that bad.

And my work supports GDP heading towards or already in another recession.

Nominal GDP deflated by CPPI, etc.


I continue to believe that the only ones in trouble are the ones who categorically refuse to look at simple facts.

1. Using hedonics without using reverse hedonics understates real inflation significantly.

2. Asserting that chicken=beef, per the BLS substitution bias, ignores that purchasing power (aka inflation) is declining.

3. Ignoring the huge faults in OER in tracking real housing prices since 1983 has presented a false picture of real inflation, and disinflation too.

4. BLS rent data has been understating rental price increases for almost a decade.

5. Failing to include in medical costs the amounts involved with Medicare, Medicaid, etc. severely understates total price moves. It's like pretending that someone receiving Medicare is not a consumer... and is Orwellian.


Lastly, by design the CPI has never included taxes. They're approximately 30% of total income. Does anyone *really* believe that taxes aren't part of Consumer Prices and expenses, or don't affect overall Purchasing Power?

 
At 7/22/2012 9:32 AM, Blogger PeakTrader said...

In the production function: y or i = t(l, k, r, e,...x), output or inflation is a function of technology or productivity on labor, capital, raw materials, energy, and other inputs.

The U.S. has a high level of labor productivity (the 35-54 age group is the most productive group and the 55-64 group is the second most productive group, based on education, experience, and training).

Capital is cheap from capital creation of U.S. firms and the global saving glut.

Technology or innovation is high, e.g. from the Information Revolution, along with a highly educated workforce and capital equipment expenditures.

 
At 7/22/2012 9:49 AM, Blogger PeakTrader said...

Nominal GDP will likely be reported below 3% for the second quarter late next week (1% real growth and less than 2% inflation).

We need to expand the economy to absorb millions of unemployed and underemployed and raise nominal GDP to roughly 6%, through massive deregulation, spending cuts, and tax cuts by government. It should be easier for small businesses to start-up and expand.

 
At 7/22/2012 10:01 AM, Blogger PeakTrader said...

Actually, we need to raise nominal GDP to 7% or higher initially and then maintain 6% nominal growth at full employment.

 
At 7/22/2012 10:25 AM, Blogger bart said...

According to government data, wholesale and retail trade companies have seen a 20 percent increase in productivity since 2000, as information technology and the Internet enables them to deliver more goods with fewer people.

Yes, productivity is up but fewer people has translated/contributed to higher unemployment.

Most importantly though, productivity is quickly reflected in prices... and prices as reflected in just the bogus CPI is up 1.4X since 2000. CPPI is up 2.4X.

In other words, productivity has been trumped and then some by inflation.




Since 2000:

* M2 money supply is up 2.2X
* M3 is up 2.3X
* Z1 total credit is up 2.1X
* Federal debt is up 2.7X
* US derivatives are up 7.1X
* TMS is up 3.1X
* AMS is up 2.1X

* Nominal GDP is up 1.6X

It's pretty amusing that so many think there's no or low inflation.

 
At 7/22/2012 10:42 AM, Blogger PeakTrader said...

Yes, real GDP growth has been understated and inflation has been overstated.

If a worker can produce 50% more iPhones with the same effort, living standards rise, ceteris paribus (of course, iPhones didn't exist 10 years ago).

 
At 7/22/2012 10:59 AM, Blogger bart said...

Actually, we need to raise nominal GDP to 7% or higher initially and then maintain 6% nominal growth at full employment.

NGDP is yet another *special moment* from politically biased and doofus so-called economists, or the poorly educated.

In other words, it doesn't matter what the inflation rate is and it doesn't if more real production is happening - the only thing that's important is more money than last year, regardless of the inflation rate.


It's very sad.

 
At 7/22/2012 11:02 AM, Blogger bart said...

The unchallenged facts are that real GDP growth has been overstated and inflation has been severely understated.

Those who can't or won't see it are in danger.

 
At 7/22/2012 12:18 PM, Blogger marmico said...

1. Using hedonics without using reverse hedonics understates real inflation significantly

What's a reverse hedonics? And what is the the that understates real inflation significantly? That's wacko analysis.

2. Asserting that chicken=beef, per the BLS substitution bias, ignores that purchasing power (aka inflation) is declining.

Only a wacko would care. Chicken is 0.379% weight and beef is 0.548% weight of the CPI-U.

3. Ignoring the huge faults in OER in tracking real housing prices since 1983 has presented a false picture of real inflation, and disinflation too.

Only a wacko doesn't understand the difference between a stock (Case-Shiller house prices) and a flow (OER). In any event, so what, both tracking measurements are at the same level today.

4. BLS rent data has been understating rental price increases for almost a decade.

Maybe. But so what. Rent of primary residence is 6.45% of CPI-U.

5. Failing to include in medical costs the amounts involved with Medicare, Medicaid, etc. severely understates total price moves. It's like pretending that someone receiving Medicare is not a consumer... and is Orwellian.

I never knew that Medicare and Medicaid were a basket of services purchased by a household at the point of use. I thought they were after-tax transfer payments allocated to specific households. Those households only represent 25% of total households..

You are still a wacko.

 
At 7/22/2012 12:41 PM, Blogger bart said...

What's a reverse hedonics? And what is the the that understates real inflation significantly? That's wacko analysis.

You don't know what it is, but call me a wacko anyhow? Great ID 10 T move!... like the rest of the deniers and those who run & hide from truths.

If anyone else doesn't know and wants to, just ask.

Only a wacko would care. Chicken is 0.379% weight and beef is 0.548% weight of the CPI-U.

You obviously have no clue of what substitution bias is and how broadly it applies, per the BLS itself.
Thanks for proving my points, and for having zero admitted clue how chicken=beef is wrong, doofus and Orwellian.



Only a wacko doesn't understand the difference between a stock (Case-Shiller house prices) and a flow (OER). In any event, so what, both tracking measurements are at the same level today.

Only someone who doesn't know there are dollar based indexes and that they can be converted from indexes like CS would state that.

As I said, it understated for *many* years and overstated for *many* years. Fascinating that you shot yourself in the foot, and basically proved my points about CPI being incorrect over the long term.



Maybe. But so what. Rent of primary residence is 6.45% of CPI-U.

Don't keep adding up all the areas where the CPI is mostly way low, as proven and as you have admitted.

I'm also glad that one more person has admitted that the BLS understates so many items.



I never knew that Medicare and Medicaid were a basket of services purchased by a household at the point of use. I thought they were after-tax transfer payments allocated to specific households. Those households only represent 25% of total households..

I'm glad again that you don't think Medicare etc. recipients are consumers, or that Medicare etc. costs don't matter to overall medical expenses when one is calculating a Purchasing Power Index that corrects for the massive understatements in CPI or actual and real inflation.

As I said, Orwellian.


Call me a wacko all you want, it's amusing how little you know about the facts.

 
At 7/22/2012 1:17 PM, Blogger marmico said...

Call me a wacko all you want, it's amusing how little you know about the facts

Okay. I'll rephrase. You are nutbar and stupid beyond belief.

To wit: Your own data says that there is no difference in levels between Case-Shiller and OER in 2012 compared to 1983. That means that in your bizarro world, 40% of the CPI measurement between CPPI and CPI-U matches. So in 2012, your argument must succeed or fail on the other 60%. So I guess you are relying on medicare, eh!

Have you ever heard of the CPI-U-RS? I didn't think so nutbar!

 
At 7/22/2012 1:57 PM, Blogger VangelV said...

Commodity prices are down across the board, so there can't be any input-cost inflation.

From what I see there is evidence of massive manipulation in all markets, including commodities. That means that I do not see certain markets as good indicators of the true picture. For example, when you have brokers steal customer holdings and liquidate them I expect agricultural prices and the price of precious metals to go down. When I see the big Wall Street firms being short more than six months of global production in silver I am not surprised that prices are down and do not consider the price action as indicative of what is happening.

That said, I have expected the base metals to have a meaningful decline while the world got used to the new reality of slower growth and less energy availability. But over time I expect the nominal prices to explode as the fiat currencies get wiped out as they are rejected by ordinary citizens who have had enough of being robbed by their governments and bureaucrats. Note the the EU is still showing price inflation even though economic activity is collapsing?

While I am at it let me note that your call for low inflation is not compatible with the optimistic view that you and Mark have put forward. If the economy is doing as well as you think demand should recover and prices should rise far more than the projected 1.5% rate.

 
At 7/22/2012 2:11 PM, Blogger VangelV said...

I can understand your point about printing money, but the money is not making its way into the economy (as evidenced by the record bank holdings at the federal Reserve). Banks aren't lending in great levels right now. If we are indeed in a recession (which, again, no evidence to suggest we are), then banks will be less hesitant to lend, so the money will stay at the Federal Reserve.

The problem is the Federal Reserve Notes that circulate as your currency. They are backed by bad loans that the Fed purchased from a troubled banking system that was sliding towards bankruptcy. Why would a fiat currency that is backed by bad debts that cannot be paid back retain its purchasing power?

And how exactly does the US government refinance the trillions in short term debt that is coming due even as it adds several trillion of new debt and unfunded liabilities each year? Why would any sane individual buy US debt at less than 2% per year when that debt cannot be paid back with money that has the same purchasing power?

 
At 7/22/2012 4:49 PM, Blogger VangelV said...

I agree with you Vangel, but those are long term issues. If things keep going as they are, we will see inflation in the long term, but there is nothing to suggest inflation in the here and now. I am not ignoring the effect of the printing press nor the money supply in inflation, but when the printed money is not making its way into the system, then it doesn't matter how much you print.

But that is my point. If we use the pre-Boskin methodology the inflation rate today is not much lower than that in the 1980s when interest rates were much higher. You are always referring to the official data without thinking how accurate that data is. We just had the Fed admit that it knew of the LIBOR manipulation a long time ago but went along with it. We have seen manipulations by government supported banks in government bonds, silver, gold, etc. Fines have been paid out admitting that this manipulation has taken place. Yet you seem to think that no such manipulation takes place in the government reported data even though we know that the methodology changes have produced very different results that cannot be justified when looking at the previous methodology and the previous data sets.

Again, I agree with you that in the long term as the economy recovers, then inflation could become a problem. But you have not answered my question (because I was unclear); what do you see that makes you think massive inflation is likely in the near term?

Because I see the foreign lenders lose confidence in European and US bonds and move their holdings into gold and other assets that provide more security.

 
At 7/22/2012 4:53 PM, Blogger VangelV said...

The U.S. has a high level of labor productivity (the 35-54 age group is the most productive group and the 55-64 group is the second most productive group, based on education, experience, and training).

Really? I doubt that most of the 35-54 age group has very marketable skills sets or useful education, experience, and training. This is why companies are screaming for the government to allow skilled workers to come into the country.

Capital is cheap from capital creation of U.S. firms and the global saving glut.

What nonsense. The US is borrowing from the developed world not to invest in new capital but to fund government and private consumption. To have real capital formation you need real savings and those are in very short supply inside the US.

 
At 7/22/2012 4:55 PM, Blogger VangelV said...

Nominal GDP will likely be reported below 3% for the second quarter late next week (1% real growth and less than 2% inflation).

Perhaps, but the real data is suggesting that the economy is contracting.

We need to expand the economy to absorb millions of unemployed and underemployed and raise nominal GDP to roughly 6%, through massive deregulation, spending cuts, and tax cuts by government. It should be easier for small businesses to start-up and expand.

But both candidates are calling for something else. Both would run large deficits for more than a decade and would keep adding to the unfunded liabilities that can never be made good.

 
At 7/22/2012 4:56 PM, Blogger VangelV said...


Actually, we need to raise nominal GDP to 7% or higher initially and then maintain 6% nominal growth at full employment.


They call this the pretense of knowledge.

 
At 7/22/2012 5:22 PM, Blogger bart said...

Yet you seem to think that no such manipulation takes place in the government reported data even though we know that the methodology changes have produced very different results that cannot be justified when looking at the previous methodology and the previous data sets.

As an aside, the errors and changes in that methodology didn't just start in 1982-3 when OER was implemented. They go back to at least 1968 when Medicare started. It was not added to the CPI per LBJ.

 
At 7/22/2012 5:44 PM, Blogger marmico said...

Yet you seem to think that no such manipulation takes place in the government reported data even though we know that the methodology changes have produced very different results that cannot be justified when looking at the previous methodology and the previous data sets.

You are a nutbar. The CPI-U-RS goes back to 1978 with the 25 methodological changes incorporated, the first one (OER) being implemented in 1983.

Since you can no longer argue about housing, what are you going to argue about, nutbar? Food and beverages, apparel, transportation, medical care, recreation, education and communications and other goods and services.

Stick with medical care, nutbar, because there has been substitution between the buggy & whip and the steering wheel & front wheel drive in the transportation measurements.

 
At 7/22/2012 5:53 PM, Blogger VangelV said...

Since you can no longer argue about housing, what are you going to argue about, nutbar? Food and beverages, apparel, transportation, medical care, recreation, education and communications and other goods and services.

As I pointed out, the application of the same methodology as in the past yields a different number than the one that is published. If the inflation number comes out to be similar to that of the 1980s, which it does, it is what it is. There is no objective evidence that life is cheaper today than it used to be and no amount of spin by a politically appointed body is going to change reality.

As I pointed out, I see the US economy being very weak and do not think that it left the recession that it entered after the collapse of the tech bubble. While the housing bubble may have produced an odd positive quarter of two in real terms there was never much positive in the data, which is why Main Street is in revolt against the corruption of Wall Street and K Street.

 
At 7/22/2012 6:29 PM, Blogger bart said...

The CPI-U-RS goes back to 1978...

Funny thing about the RS series. I was there, running a large photo lab and doing normal purchasing for it and also being a consumer, same with a lot of my friends.

If anyone would have suggested that inflation was 11.8% YoY at the peak in March 1980 as the RS asserts, they would have been laughed into oblivion. Even CPI-U at 14.8% YoY in 3/80 understated inflation. Annualized inflation was 16.7% and my and my friends experiences and actual expenses and budgets showed it was much closer to 20%.


Another funny thing - let's say the RS is actually accurate.
Why then did the BLS even bother making any of the changes if they all boil down to no change?

Doesn't that make the CPI changes over the years by the BLS worthless and useless? Did they really mean to show themselves as useless?

Does anyone really believe that they'd admit to having doctored the CPI-U?

Where's the proof that RS even vaguely reflects backing out all the changes? Funny thing - they didn't publish *anything* other than numbers and a chart, much like they don't publish *any* of the details of the Boskin adjustments.

One would think if they had the incontrovertible facts, given the huge amount of folk that believe that the CPI severely understates inflation, that they'd publish all the details so that we'd all STFU.
But they haven't and I don't expect that they will.





And all the inconvenient facts still remain, like how extremely poorly OER tracked housing prices like a converted Case Shiller, or how the supposed CPI correctly tracks all consumer medical care when it ignores Medicare and Medicaid, or how they use hedonics without using reverse hedonics, rent being understated for years, etc. etc. etc., as I've proven and documented.


The best part remains how you don't even know what hedonics is, failed to answer any of my counterpoints, but still call people nutbars and wackos... and don't even vaguely see the irony and your footbullets.

 
At 7/22/2012 6:34 PM, Blogger marmico said...

There is no objective evidence that life is cheaper today than it used to be and no amount of spin by a politically appointed body is going to change reality.

Here I was of the impression that I was engaging BARTNowandFuturesNUTTER in his bizarro reality.

You are talking about this not the CPI-U.

 
At 7/22/2012 6:37 PM, Blogger marmico said...

Funny thing about the RS series. I was there, running a large photo lab and doing normal purchasing for it and also being a consumer, same with a lot of my friends.

Funny thing, nutbar. When you lose the argument you resort to effing anecdotes.

 
At 7/22/2012 6:53 PM, Blogger bart said...

Funny thing, nutbar. When you lose the argument you resort to effing anecdotes.

Keep on ignoring and failing to directly deal with all the facts presented, failing to address any of the counterpoints, displaying your ignorance of key items like hedonics... and best of all, proving that you have nothing by continuing with the vapid personal attacks.

The irony continues to be very alive and well.

 
At 7/22/2012 6:59 PM, Blogger bart said...

marmico, let me know when you come up with anything substantive and provably factual like what is on my beta CPPI page that proves how low CPI-U is when measuring real purchasing power losses - especially about the CPI-U RS Series when the BLS shows their entire data set and the logic for it.

 
At 7/23/2012 9:32 PM, Blogger bart said...

bart said...

marmico, let me know when you come up with anything substantive and provably factual like what is on my beta CPPI page that proves how low CPI-U is when measuring real purchasing power losses - especially about the CPI-U RS Series when the BLS shows their entire data set and the logic for it.



The silence is deafening... and yet another displays his lack of facts or even simple understanding of what hedonics is... and goes down in flames and gives up - as they all do.

 
At 7/24/2012 10:21 PM, Blogger James A. Donald said...

Meat consumption per head, car ownership per head, and the number of big macs you can afford are falling at two or three percent a year.

Therefore GDP per head is falling, and falling fast. You can have inflation with stagnant or falling wages.

> " it would be historically unprecedented to experience rising inflation with stagnant wages,"

Which is just another way of saying it is historically unprecedented that western civilization is collapsing after several hundred years of rising. It is always "unprecedented" when a civilization comes to its end.

Science in the west has been stagnant since 1942. The tallest buildings in the west were completed around 1972. The last man walked on the moon in 1972. The coolest muscle cars were built in 1972. Electricity use per head maxed in 2009.

There is a lot of ruin in a nation, but people were predicting this in the mid nineteenth century, that social "progress" was going to bring an end to scientific, technological, and economic progress.

And so it has. When they gave Marie Curie two affirmative action Nobel prizes for doing science while in possession of a pussy, that was the beginning of the end of science.

Science in the west became prestigous, powerful, and effective, with the restoration of Charles the second and the establishment of latitudinarian anglicanism. It became discredited as phallocentric, capitalist, and exploitative in the early twentieth century.

With the restoration, the Royal Society proclaimed "Take no ones word for it", and every slaver and pirate looking for a bit of respectability as an English gentleman proceeded to burnish his credentials by doing a bit of scientific research in the colonies between collecting chests of bloodstained gold from terrorized rajas.

In the late nineteenth century, early twentieth, however, science was deemed subjective, male supremacist, white supremacist, colonialist, and capitalist.

In 1942, we switched from "take no one's word for it" to taking the word of secret cabals of "peers", a predictable consequence of the earlier demonization of science and affirmative action for women and non whites.

And now, things are, as predicted, falling apart.

 

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