Journos and numbers again

World is on ‘tipping point’ of permanently high prices
Inflation risks becoming embedded in leading economies and difficult to control

Sigh.

Inflation is a continued increase in prices, not a high level of them. Difference between speed and acceleration, level and changes in level.

Getting all the news written by the arts graduates might not be the bestest of ideas….

32 thoughts on “Journos and numbers again”

  1. I see comments from some “right wing” types that all inflation is bad and that only zero should be tolerated.

    I was very puzzled by this. I thought that inflation ( at a sensible rate) was necessary for growth and that growth fed inflation.

    But then I guess this sounds abit like a Good AIDs/ Bad AIDs discussion.

  2. A bit of inflation is a political thing, not economic.

    So, if we have no change in the general price level at all we’ll still have changes in relative prices. That will also mean changes in wages in certain sectors – they go down in real terms in those sectors shrinking. But folk are really, really, resistant to falls in nominal wages. So, a little bit of inflation – 2%, say, just as a guide – makes it much easier for real wages to fall in certain sectors, rise in others, without hitting that intense reluctance to suffer falls in nominal wages.

    Now, whether that argument’s convincing or not is another matter, but that is what it is. A little bit of inflation greases the wheels of changes in relative prices.

  3. Also a little bit of inflation can push prices down. Retailers are reluctant to raise prices.

    We’ve seen lots of things remain at constant nominal prices in recent years.

    Few sellers will permanently reduce prices though.

  4. …but there are more arts graduates then ‘suitable’ jobs so they are cheaper to employ. Luckily most organisations produce press releases which the arts graduates can use as ‘research’ – without actually understanding or caring about the truth of the content as long as it follows the ‘house style’.

  5. I’ve often wondered how household electrical appliances feed into the whole inflation thing. Obviously you don’t buy such things every week but they have been getting much cheaper in real terms for decades. Some people complain that this cheap stuff doesn’t last but that isn’t my experience. I bought a kettle to use at work for £6 and used it for years. Our microwave oven wasn’t a cheap one but it’s now 29 years old so I think it was excellent value.

  6. “Household electronics” or whatever subset you desire to use are 0.1% -or 0.01% – of weekly consumer spending therefore price change in household electronics x 0.1% is the contribution of the sector to inflation – or deflation – this week. That’s how it’s done, with a weighted basket of actual expenditures.

  7. Bloke in the Fourth Reich

    Surely inflation is always a political choice?

    The political choice since 2001, print money wildly, give it all to the government to spaff around because we aren’t honest enough to raise taxes, or politically can’t get away with it.

    This time is different. Because we’ve been doing it for 21 years on the trot.

    Almost all major currencies have done the same thing.

  8. While I accept your point about low inflation allowing for relative falls in some areas, I had always been told that the real reason was to prevent deflation, which is potentially damaging, but more difficult to cure. Wasn’t that what all the QE was about?

  9. That’s a rather later story we’ve been told about it. Modest inflation really stems from Keynes back in the 1940s. The have a bit of inflation to stop deflation idea really started in the 1990s, with independent central banks.

  10. The main arguments for inflation are:
    1. Inflation changes sticky prices (wages being the most prominent, but not the sole, example).
    2. Deflation delays purchases (it’ll be cheaper next year).
    3. Inflation facilitates debt reduction (high interest is nasty but a ‘growing’ principal is way nastier).

    The arguments against it are basically that some or all of those are actually bad, and that it steals savings.

    As for the relationship with growth:
    A. Inflation is not necessary for growth. IIRC there are several instances of deflationary growth in the 19th Century.
    B. Simple productivity growth (same product, more output per input) is actually deflationary. When Q rises, the price must fall (or money increase in circulation or velocity). Again, the 19th Century has some good demonstrations.

  11. Tim will know, but I believe that the markedly low inflation from the end of the Napoleonic Wars until the Great War was an average result. There were years when prices rose and years when they fell. But I suppose the advantage was that nobody supposed that a couple of years of rising prices would never be reversed.

  12. World is on ‘tipping point’ of permanently high prices

    If your income remains fixed but prices rise X% then even if inflation stops you face permanently high prices.
    This is so evidently true that only an economics smartarse would try to refute it.

  13. “So, a little bit of inflation – 2%, say, just as a guide – makes it much easier for real wages to fall in certain sectors, rise in others, without hitting that intense reluctance to suffer falls in nominal wages. ”
    So we all suffer a tax on our savings to make life easier for failures? Right.
    “Deflation delays purchases (it’ll be cheaper next year).”
    Sorry but no coconut. Time preference works just as well with things as it does with money. People show a preference for enjoying the benefits of things now, not tomorrow. As buying on credit clearly shows.

  14. I sneeze in threes

    “ Deflation delays purchases”, mmm maybe, maybe not so much. Technology (computers) are an obvious example of goods that are hedonically cheaper than in the past ( they can do much more for the same price (or even with rising price)). When you see prices dropping (or as we do utility increasing), there will get to a point where you value current consumption over future savings/improvements. You do eventually by a computer or car rather than wait for the next iteration.

    Now introduce the state fucking about with the money supply (in either direction) if that leads to instability/unpredictability the consumer (and other actors in the economy) may hold of from making purchases/ investments etc because the see prices falling. But if you have a fixed money supply and some prices fall due to individual improvements in efficiency people will not be as inclined to put off purchasing due monetary policy (political intervention). The overall price level could fall to in response to how the economy reacts to efficiency in production individual markets.

    Ah, but sticky wages. Sticking wages get made redundant. (screens in McDonalds, self checkouts in super markets). People then take worse paying jobs (in nominal terms), but as you can buy more with less (due to improvements in efficiencies and production) people are on average no worse off. The reality would be more complex but there is a economic argument (separate from a political one) for a fixed money supply and general deflation due to improvements in output . (It a least removes the dead hand of politicians interviewing in the economy, interest rates, capital allocation decisions.

  15. @philip
    The way you’re putting it is a meaningless statement. “High prices” is a qualitative not quantitative term. People from ten years ago might easily say that what we were paying before Covid inflation started to bite was high. If inflation eases off people in 10 years time may be saying the opposite. It is all about the rate of change.

  16. I sneeze in threes

    Bis, not all about the rate of change. If you had assets or activity that doesn’t benefit from inflation or feels the effects more than others then a one time inflation event is still a confiscation of your purchasing power. The rate your cutting off my limbs maybe be falling but I’m still being butchered.

  17. My problem with the ‘deflation delays purchases (it’ll be cheaper next year)’ argument is: how on earth is a consumer, at the moment they’re deciding whether to make a purchase, supposed to anticipate what the price of an item will be next year?

    If the price were expected to be cheaper next year, it would surely be cheaper now, or the seller wouldn’t be able to shift it.

  18. “If the price were expected to be cheaper next year, it would surely be cheaper now, or the seller wouldn’t be able to shift it.”

    Err, yes.

  19. I sneeze in threes

    Tim, not if the price is falling due to a money deflation. Next year less money available to buy goods, next year prices are cut ( or more goods are offered to attract the falling money supply). Again it all depends on specifics. If it was announced that a policy of reducing the money supply of x percent per year was announced the price of goods today would not necessarily be the price in T+1, T+2 etc.

    Today we expect goods to be cheaper on New Year’s day but we are not surprised to find they are higher on Christmas Eve.

  20. I think Tim’s point (the ‘err’ before the ‘yes’) that I’ve refuted my own argument, by pointing out that the item will indeed remain unsold (unless the price is dropped to the level it’s expected to be next year).

    Whereas my argument is that the price does get dropped, right now, to that anticipated level. The item gets sold, the consumer is left with more money in their pocket after making the purchase, and we are thereby richer. Hence a bit of deflation (say, 2% per year) is a good thing.

    Then again, economics never existed as a subject at my old school, so I’m happy to be proved wrong.

  21. The detailed thought is that for some things, by some people, the prospect of a lower price in the future will delay the purchase. Therefore it will remain unsold now, which means less economic activity now – we’re poorer than we would be without the delay. The producer can’t drop the price now, because the deflation, to make it cheaper, hasn’t happened yet…..

  22. Thanks.

    I’d just be repeating myself by arguing that the producer does indeed drop the price if his product doesn’t sell. (The producer isn’t necessarily looking at inflationary predictions to determine the price of his product; he doesn’t particularly care what the reason is for his currently undesirable product remaining unsold: he’s looking at what price it does become desirable, right now.)

    I really do understand the theoretical argument you describe for deflation being a bad thing. I’m just dubious that it ever actually happens in practice. Not that we ever get a chance to find out, mind you.

  23. Paul

    Didn’t it happen to Japan in the 1990s and beyond ? We were heading that way after 2008.

  24. It’s not that some inflation is good – that gets cause and effect the wrong way around. One of the factors causing inflation is people willing to pay more because they feel that they are getting richer. But you generally don’t want to prevent them feeling that – nor to prevent them actually getting richer, so some inflation is inevitable.

  25. Fair point, Ottokring. I just think of the desperate, never-ending efforts over the last 35-odd years to prevent Japanese deflation, and forgot about the fact that deflation still actually happened.

    I suppose it generally still has had growth during those decades, but I accept it would have liked more.

    It still would have been nice, from an academic standpoint, if the Japanese Central Bank had not been intervening on such an epic scale for all those decades, just to see what would have happened to GDP with deflation left to its own devices.

    Probably a good thing that amateurs like me don’t get to pull the levers.

  26. I wonder if 0% inflation target would lead to employer/employees wage negotiations centred on improving productivity. The further away you move from that the more the employees, especially if unionised and their employers not being in competitive markets, argue for cost of living increases.
    Certainly the UK had massively fewer strikes during periods of low inflation.
    Obvs correlation is not causation but I’d rather not take my chances, thanks.

    And if the BoE could be told they are to target 0% house price inflation by being put in charge of planning permits, then I’d be happy bunny Monday. Anything to keep the politicians away from it.

  27. That, Charles, is beyond me. Inflation means people are getting poorer not richer.

    @Tim 5:25
    But that does seem to deny the time preference of money. We want money now not money whenever. So the same must apply to consumption. We want those pretty baubles now not next year. Their utility decreases with time from the now perspective.
    Deflation would be the result of increasing productivity. I would have thought that’s what we want, no? The benefits passed on to the consumer. Things that don’t benefit from increased productivity become relatively more expensive. What’s wrong with that? Savings increase in value but one person’s savings are another person’s investment. He better make sure he invests wisely.
    It all sounds remarkable virtuous. Or is that the problem?

  28. “Inflation risks becoming embedded in leading economies and difficult to control”
    Come to think of it, you can’t argue with that. Inflation has become embedded in leading economies as far back as I can remember. It’s been governments’ fucking policy. And they do indeed find it difficult to control. Hence the mess we’re currently in.

  29. ‘Hence the mess we’re currently in.’

    I agree BiS. During the panic they were spending money like a drunken politician.

    But I didn’t expect it to happen so fast. I suppose the system was being subjected to so much bullshit that the latest load finally cracked it.

  30. @bloke in spain – “Inflation means people are getting poorer not richer.”

    Not necessarily. If your income goes up by 10% a year and the price of everything you buy goes up by 10% per year, you’re obviously no richer or poorer.

    However, inflation does have many effects as it’s not normally so uniform. Those are due to the non-uniformity – not inflation itself.

Leave a Reply

Your email address will not be published. Required fields are marked *