[awm]

I've been reading quite a bit recently about inflation in the US (cnn article, vox article, fivethirtyeight article). Apparently US inflation has been quite high the past few months, people are noticing in their family budgets, and this is one of the factors driving Biden's current unpopularity.

The articles generally blame this on supply chain issues (although Robert Reich has an alternative explanation) but none of them seem to address the fact that this is (so far, at least) mostly a USA issue. European countries have seen a slight uptick but nowhere near the massive rise in the US! In Switzerland we have not noticed this locally at all.

Are people worried about inflation? And does anyone have a good explanation for this being primarily a US problem?

[hrothgar]

Inflation is definitely noticeable here in the North East.

I've seen a whole lot of discussion around this. My understanding is that the key bottleneck is a massive shortage of container chassis which is impacting the ports as well as long haul trucking.

The following two threads have some good discussions

https://twitter.com/...543776992845834
https://threadreader...9114576900.html

[y66]

Krugman spent a couple days last week looking at inflation in Europe after US CPI #s were released Wednesday.

Quote

As you can see, inflation has surged on both sides of the Atlantic. It’s now higher in the United States, but as you can also see, that’s normal: U.S. inflation consistently runs above European inflation. I’ll talk in a second about why.

It’s also helpful to look at one European nation in particular: Germany. The Germans are famously inflation averse (largely because of selective historical memory — everyone knows about the hyperinflation of 1923, far fewer about the deflation that brought you-know-who to power). They also chose not to engage in large-scale spending to promote recovery from the Covid pandemic; there was no German equivalent of the Biden administration’s American Rescue Plan. Yet Germany has seen inflation rise and, in fact, has the highest inflation rate, 4.6 percent, among the largest euro area economies:


Why has European inflation risen? For the same reasons it’s higher here. Prices of food and energy, which are set on world markets, have risen sharply everywhere. The interaction of an uneven economic recovery with the lingering effects of the pandemic has led to extensive supply chain problems. In fact, the findings in a European Central Bank survey of businesses sound remarkably similar to the discussion in the Federal Reserve’s Beige Book.

But why is European inflation about two percentage points lower than inflation here?

Part of the answer, surely, is that Europe started from a lower base — that is, underlying inflation in Europe was lower before the pandemic. This is especially clear if you look at core inflation, stripping out volatile food and energy prices:

Core inflation in the euro area started out roughly one percentage point lower than in the United States, and this difference accounts for about half the current inflation difference. It’s also important to note that low euro area inflation before the pandemic was a bad thing: There’s a broad consensus among economists that monetary authorities should target somewhat positive inflation, at least 2 percent, to give them room to cut interest rates in recessions. European inflation has been low because its policymakers have consistently been too conservative.

Still, what about the other half of the inflation difference? As I said, I’ve been down various rabbit holes, and I still don’t have an explanation. But I may have been searching for too much precision. After all, reported inflation rates are significantly different within the euro area, with Germany’s about a point and a half above France’s and Italy’s. There might be real economic reasons for these differences, but how much is just statistical noise?

At one point in his magnum opus, “The General Theory of Employment, Interest and Money,” John Maynard Keynes remarked that “to say that net output today is greater, but the price level lower, than 10 years ago or one year ago is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth — a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus.” Keynes was actually making a dubious case for measuring everything in wage units, but I’ve always cited that line as a caution about taking economic measures too seriously.

In the case of inflation, I’d say that the moral of the story is not to dwell too much on international differences in the latest print. The important point is that we’ve seen broadly similar inflation surges in many countries. Which tells you that what’s happening in the United States isn’t mainly about policy.

Andrew Ross Sorkin at NYT said:

https://messaging-cu...896ed87b2d9c72a

But the bond market isn’t pricing in runaway inflation. The difference between the interest rate on a typical government bond to the yield on similar bonds that offer protection against inflation, called the break-even rate, is a gauge of investors’ expectations for inflation. Right now, that rate for five-year Treasury bonds is 3.1 percent, or about half October’s actual rate of inflation. The rate for 10-year bonds is even lower, at 2.7 percent. (Mind you, those rates are still above the Fed’s target of 2 percent average inflation over time.)

What does it mean? Bond investors have generally bet that inflation will rise over time. Just before the pandemic, the five-year break-even rate was 1.6 percent, and the 10-year was higher, at 1.7 percent. A decade ago, it was 1.8 percent and 2.1 percent. Directionally, that bond investors now expect high inflation to moderate over time, despite Biden’s big spending plans, means that either bond investors are skeptical the bill will pass, that they think the Fed will act to contain inflation if passes, or that they are buying what Biden is selling.

There is also this:

Andrew England at FT said:

https://www.ft.com/c...e7-082ba2ed4cd9

Now, with US petrol prices having risen about 40 per cent since Biden’s inauguration, Prince Mohammed controls a lever that has the power to help or hinder the White House. As the president’s frustration highlights, despite the US markedly reducing its dependence on Gulf crude over the past decade and a creeping disengagement from the Middle East, it’s not immune from global market forces. And Saudi Arabia is the key player.

Quote

“There’s a clear view in Washington that this is probably more than just about oil, that Prince Mohammed is annoyed Biden hasn’t called him personally, hasn’t shown him enough respect and wants greater recognition before he becomes king,” one energy analyst said.

[kenberg]

Am I worried about inflation?
Yes.
That's a quick answer to a quick question, so of course it's not the end of it.
Mostly a US problem?
Well, Krugman is quoted above as saying:

Quote

But why is European inflation about two percentage points lower than inflation here?<br style="color: rgb(28, 40, 55); font-size: 11.7px; background-color: rgb(243, 249, 246);"><br style="color: rgb(28, 40, 55); font-size: 11.7px; background-color: rgb(243, 249, 246);">Part of the answer, surely, is that Europe started from a lower base — that is, underlying inflation in Europe was lower before the pandemic. This is especially clear if you look at core inflation, stripping out volatile food and energy prices:

This is part of his argument that the difference could not be due to policy decisions.

Candidates for office portray their economic plans as very important. After they are elected, if something goes wrong, they explain that of course their policies have no effect on issues such as inflation. It's usually best to seek the truth somewhere in between. Covid affects the economy, of course it does, and government policies affect the economy, of course they do.

Now, am I prepared to explain exactly what causes what and what we should thus do? Of course not. We recently had company and Becky knew they liked beef so we served beef. We don't each much beef and Becky was stunned to learn how much the price has gone up. Much more than the price of trout has gone up. We like trout more than we like beef so that's fine, but don't expect me to explain it. Gas prices go up and down. I suppose these ups and downs could be predicted if I watched the news closely enough but I don't.

I expect the current inflation and the threat of higher inflation, will have an effect on Biden's hope for legislation. I strongly suggest that he not argue that his agenda could not possibly have any inflationary impact. He will not be believed.

Krugman says "In the case of inflation, I'd say that the moral of the story is not to dwell too much on international differences in the latest print." I agree with this, as stated. He is not saying we should ignore international differences, he is saying we should not let it be at the top of our list. Countries vary. Krugnan speaks of Germany, Adam lives in Switzerland, probably the issues are different in these two countries. And so it is with the US. Countries vary. Lets's not ignore what we can learn by comparing what's is happening in different places, but let's not go nuts over it either. I always think Krugman is worth listening to, sometimes I just find it hard to do so.

[awm]

One thing I've noticed, looking at a breakdown of prices, is that the biggest cost increases seem to be around energy (especially gas and oil) and cars (especially used vehicles). This creates more of a problem in the US than Europe, since Americans rely much more on cars for personal travel and trucks for logistics. Some of the increase outside fuel and vehicles can be driven by this also (food has to get to the market somehow, and in the US this typically involves trucks).

There's also a shortage of truck drivers (in the US, but also in the UK and elsewhere) and again this is probably a smaller problem in the EU (where a lot more products move via rail or river). And of course the issues in US ports may not be replicated in Europe.

My experience in Germany has been that it's a much more driving-oriented country than Switzerland or France (both of which have much better rail connections) and this may explain why Germany is among the few European countries seeing significant inflation (although still nowhere near the US rate).

[johnu]

awm, on 2021-November-14, 12:39, said:

One thing I've noticed, looking at a breakdown of prices, is that the biggest cost increases seem to be around energy (especially gas and oil) and cars (especially used vehicles). This creates more of a problem in the US than Europe, since Americans rely much more on cars for personal travel and trucks for logistics.

Agree this is a major cause of inflation.

I've been looking at getting a Tesla in the near future and Tesla has had 11(!!!) price increases in 2021 although not every model received a price increase every time. Many of the price increases have been very substantial. Teslas use many more computer chips than the average car. The demand is apparently very big, even with the price increases because the version of the Model Y I was looking at had a delivery date of May 2022.

The shortage of various computer chips has also drastically affected prices of fairly standard cars and trucks. There have been numerous stories of temporary auto "graveyards" where bodies of new cars are being stored while they are waiting for the computer chips they need to be completed. Also, production is reduced until the computer chips are available to complete the cars and trucks. This has caused a large increase in the price of used cars and trucks, which also affects inflation.

Before the Covid vaccines became widely available, travel was down significantly as many employees worked from home (or were laid off ) and people cancelled or reduced vacation and day to day travel left and right. Gasoline prices were lowered due to decreased demand, and refineries reduced production because there is limited storage available. So shipment of crude oil was reduced, and going back to the oil production sites, production was reduced. Supply chain problems. Now that travel is getting back to normal levels, it takes a long time to get the supply chain for gasoline back to previous levels. So, supply and demand is causing rapid inflation right now. In a few months, energy prices should stabilize.

[akwoo]

Our economy has a broad inequality problem right now. It's not the billionaires, because there aren't enough of them to matter that much. The problem is that tech workers are making 5 times what fast food workers are making, and with that disparity, over time they buy up the entire housing supply.

If inflation is how we manage to raise fast food workers wages and in comparison cut those of tech workers (and me), I'm all for it.

[awm]

akwoo, on 2021-November-14, 23:14, said:

If inflation is how we manage to raise fast food workers wages and in comparison cut those of tech workers (and me), I'm all for it.

I don’t really think this will work. As one of those overcompensated tech workers, I’m not very price sensitive and might not even notice if my groceries went up 10% in price — I had to check statistics online to know that Switzerland has low inflation! Meanwhile people who live paycheck to paycheck certainly feel the pressure when grocery prices rise 10%.

Certainly if wages were outpacing inflation (at least for lower incomes) this would be great… but my wages are increased every year to reflect cost of living and I’m not sure people working blue collar jobs are getting this sort of regular pay hike.

Of course, inflation would help devalue the dragon hoard of cash I keep in my basement! Except of course there is no such hoard — my savings are mostly in stocks and the market tends to go up with corporate profits which rise with inflation… overall it feels like this is hurting the working class more than the wealthy.

As far as housing, I don’t think the problem is really tech salaries. The problem is that there’s not enough supply in areas with available jobs. Of course the US being a capitalist society, when there’s a supply shortage the prices go up and it’s the poor (or working class or middle class or whatever) that lose out. If everyone had equal income it would become a question of who has fewest other expenses or who is most willing to be “house poor” or who has family money or something. The only real solution is to increase supply.

[Gilithin]

akwoo, on 2021-November-14, 23:14, said:

Our economy has a broad inequality problem right now. It's not the billionaires, because there aren't enough of them to matter that much. The problem is that tech workers are making 5 times what fast food workers are making, and with that disparity, over time they buy up the entire housing supply.

If inflation is how we manage to raise fast food workers wages and in comparison cut those of tech workers (and me), I'm all for it.

There are a number of equality issues. A tech worker might make 5 times the salary of a fast food worker but the senior management of that tech company will make 30-50 times what the tech worker does. There is also the factor of generational inequality. Boomers got the benefits of the property boom together with highly favourable financial conditions provided by governments. Because of this, most cities have a small group of investors, the vast majority of which are either Boomers or their descendants who inherited the benefits, who control a large proportion of the housing supply. These are the people that have bought up the market at least as much as those professional C1s and C2s. And that is before we get on to the inequalities of race, gender and location.

As far as inflation goes, it has been mentioned to me a few times by people who know about these things that inflation of about 2% is not really a bad thing for an economy. The problem for the US is that the current numbers seem to suggest a figure well above that. That would be ok if it were a transitory phase after the covid lockdowns but there is some evidence to suggest that this runs considerably deeper than that. It would be nice to think that the results of such inflationary pressures would be a reduction in inequality but somehow I seriously doubt that is actually what is happening here. Rather the poor will probably end up more or less where they are (higher wages, higher costs) while the rich will just increase the gap (negligibly higher costs and a considerably better investment environment).

[Winstonm]

An under-represented cause of house prices rising is the REITs who have millions in cash to outbid and close more quickly than any single person or family.

[johnu]

The forever running US TV news magazine 60 Minutes had a good piece on the reason a shipping container backlog was causing prices to rise and inventory to be low in a piece whimsically called "Freight Expectations". This helps explain why the US in particular is seeing some high inflation numbers.

Freight Expectations

[y66]

Paul Krugman, on Nov 14 said:

Trying to clarify my own thoughts on inflation. I got inflation wrong; I didn't see the current surge coming. But why? I didn't think the fiscal stimulus early this year would boost demand as much as Summers et al predicted ... and, in fact, so far it hasn't 1/

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Real final demand (excluding inventories) is up 2.6% over the past two years. https://twitter.com/...940358071230475 That's well short of normal growth in potential output 2/

Quote

What's happened, however, is that we've faced supply constraints, both supply-chain issues in meeting huge demand for durable goods and withdrawal of workers from the labor force, i.e. Great Resignation 3/

Quote

This doesn't say that the inflation will necessarily be transitory, although I think that's still the best bet. But it is important to realize that the story is more complicated than excessive stimulus 4/

Quote

This is a very good analysis of where we appear to be at right now https://theovershoot...ce-on-inflation 5/

[kenberg]

That Klein article (the last of the above citations) is not exactly reassuring. Eg "So far, the data still suggest that prices should stop spiking once (if?) the pandemic is brought under control globally." And, referring to hoarding and such in anticipation of worse inflation in the future, " Fortunately, that doesn’t seem to be happening—yet. "

We need to see that the problem is seen as a potentially large problem and we need to see that it is being effectively addressed. At the risk of sounding simple-minded, I say that we need neither pessimism nor optimism, we need realism. Skip over who to blame for past mistakes and get moving on what to do next.

Adam started this thread and let me take an early comment of his:
"There's also a shortage of truck drivers (in the US, but also in the UK and elsewhere) and again this is probably a smaller problem in the EU (where a lot more products move via rail or river). And of course the issues in US ports may not be replicated in Europe."
I agree. I fondly recall when trains were a greater part of life. Most of my train riding has been on my very infrequent trips to Europe. But The City of New Orleans, bemoaning the disappearing railroad blues, is a very old song. I doubt we can change that much, but the extreme backup at the ports can, I hope, be addressed. Like, now. Greater use of trains? I'm all for it, but it's long term. Long term is important, but we need to address now, and people need to see it happening.


BBB is overwhelming. I expect that is a widely shared feeling. If you start with 3.5 and whittle it down to maybe 2 or maybe 1.75 or maybe something else, it's natural that observers say "Hey guys, when you finally figure out what it is you are talking about, let me know and I will try to think about it then". But some things are clear on general principles.
Some aspects of this are more important to do than others.
If the plan was to spend x dollars on an item over ten years, cutting it back to x/2 spent over five years is not really cutting anything back.
We should look at unintended side effects. Inflation could be one, there could be others.
I realize we are not supposed to look at how the sausage is made, sometimes we must.


Adam asked if we worry about inflation, I said yes I do. But I worry about many things. No, I don't spend the day fretting, but I think we have some serious problems. I wish us well.

[Gilithin]

kenberg, on 2021-November-17, 08:09, said:

BBB is overwhelming. I expect that is a widely shared feeling. If you start with 3.5 and whittle it down to maybe 2 or maybe 1.75 or maybe something else, it's natural that observers say "Hey guys, when you finally figure out what it is you are talking about, let me know and I will try to think about it then". But some things are clear on general principles.

Did you similarly focus on the cost when it came to the 2017 tax cuts? Given the choice between spending $2.3t on tax breaks for the top 10% and $2.3t on modernising an obsolete national infrastructure, which do you think provides the most benefit to the country? If the inflation does turn out to be structural, take some cash out of the system from the top. That is the right way to do trickle-down economics - put cash in at the bottom, take it out from the top. America has for far too long been doing the reverse.

[kenberg]

Gilithin, on 2021-November-17, 08:19, said:

Did you similarly focus on the cost when it came to the 2017 tax cuts? Given the choice between spending $2.3t on tax breaks for the top 10% and $2.3t on modernising an obsolete national infrastructure, which do you think provides the most benefit to the country? If the inflation does turn out to be structural, take some cash out of the system from the top. That is the right way to do trickle-down economics - put cash in at the bottom, take it out from the top. America has for far too long been doing the reverse.

I am not sure what you mean by "similarly focus" but I very much think we need to tax upper-income people at a higher rate. I also think that we need to adequately fund the IRS to make it harder to escape the tax. It's both bad economics and bad psychology to have upper earners firstly getting big tax breaks and then not even paying what the law says that they should. I have never minded paying income tax, but it's frustrating to see those with greater wealth thumbing their noses at the idea that they should be paying more.

Added: Oh. "similarly focus" refers to what I think of as obvious. Yes, it's obvious that the wealthy should be taxed at a higher rate and it is fundamental that we should make a serious effort to keep them from skirting the law. I pay someone to do my taxes but it's not to get someone who knows how to get around things, I just decided about ten years ago that I am tired of doing it myself. I mow my own grass, I pay to have my taxes done, I find some chores pleasant and others unpleasant. I like simplicity. I can safely say that the IRS will not be coming for me. And the neighbors have not complained about my lawn.

[y66]

Paul Krugman said:

Early this year some prominent economists warned that President Biden’s American Rescue Plan — the bill that sent out those $1,400 checks — might be inflationary. People like Larry Summers, who was Barack Obama’s top economist, and Olivier Blanchard, a former chief economist of the International Monetary Fund, aren’t unthinking deficit hawks. On the contrary, before Covid hit, Summers advocated sustained deficit spending to fight economic weakness, and Blanchard was an important critic of fiscal austerity in the aftermath of the 2008 financial crisis.

But Summers, Blanchard and others argued that the rescue plan, which would amount to around 8 percent of gross domestic product, was too big, that it would cause overall demand to grow much faster than supply and hence cause prices to soar. And sure enough, inflation has hit its highest level since 1990. It’s understandable that Team Inflation wants to take a victory lap.

When you look beyond the headline number, however, you see a story quite different from what Summers, Blanchard et al. were predicting. And given the actual inflation story, calls for the Federal Reserve to raise interest rates to cool off the economy look premature at best.

First, overall demand hasn’t actually grown all that fast. Real final domestic demand (“final” means excluding changes in inventories) is 3.8 percent higher than it was two years ago, in an economy whose capacity normally expands about 2 percent a year (see link for chart).

It’s true that the Great Resignation — the unwillingness of many Americans idled by Covid-19 to return to the labor force — means that labor markets seem very tight, with high quit rates and rising wages, even though G.D.P. is still below its prepandemic trend. So supply is lower than most economists (including Team Inflation) expected, and the economy may indeed be overheated.

But everything we thought we knew from the past said that while overheating the economy does lead to higher inflation, the effect is modest, at least in the short run. As the jargon puts it, the slope of the Phillips curve is small. And those rising wages aren’t the main driver of inflation; if they were, average wages wouldn’t be lagging consumer prices.

So what is going on? The Bank for International Settlements — a Switzerland-based institution that is sort of the banker to the world’s bankers and has a formidable research team — argues that it’s largely about the bottlenecks, the now-famous supply-chain snarls that have ships steaming back and forth in front of Los Angeles and factories shut down for lack of chips.

What’s causing these bottlenecks? Overall demand still isn’t that high, but demand has been skewed: In the pandemic era, people have been consuming fewer services but buying a lot of durable goods — home appliances, exercise equipment, etc.:link for chart).

This surge in demand for durable goods has overstressed the ports, trucking and warehouses that deliver durables to consumers, leading to rapidly rising prices for stuff whose prices normally fall over time as technology advances: link for chart).

In other words, it seems to be the pandemic skew in demand, not excessive spending across the board, that’s driving current inflation.

Once you realize this, it has major implications both for our understanding of the recent past and for future policy.

First, because inflation reflects the huge surge in demand for durable goods, not the much slower growth in overall demand, a smaller Biden spending plan wouldn’t have made much difference. Even if demand had been a point or two lower, the rush to buy stuff as opposed to services would still have overwhelmed our logistical capacity.

Second, because inflation reflects bottlenecks rather than a general problem of too much money chasing too few goods, it should come down as the economy adjusts. Inflation hasn’t been as transitory as we hoped, but there is growing evidence that supply chains are getting unkinked, which should eventually provide some consumer relief.

Finally, even if inflation stays elevated for a while, do we really want to slow the whole economy because bottlenecks are causing some prices to rise? One way to describe the argument of inflation hawks is that they’re saying that we should eliminate hundreds of thousands, maybe millions of jobs because the docks at the Port of Los Angeles are congested. Does that make sense?

Now, matters would be quite different if we saw signs of a 1970s-type wage-price spiral. But so far we don’t. And for the time being, at least, policymakers should have the courage to ride this inflation out.

[y66]

Tyler Cowen in comments to Nellie Bowles said:

"Inflation right now is still transitory in that we can choose to end it. The Federal Reserve could disinflate and raise interest rates—mortgage interest rates today remain well below 3%—though that risks starting a recession".

Cowen explained that the reason the inflation-wary are still pretty quiet is that all the anti-Obama Republicans were so wrong in 2008. After the Obama-era bailout during the Great Recession, Republicans were convinced inflation would run rampant. And they said so. A lot. But inflation stayed mostly in control. “They all got egg on their faces after that,” Cowen said. “So the crowd that would complain now, they’re whispering about it but not shouting yet.” (Larry Summers and Steve Rattner have sounded the alarm.)

“I think the inflation will last two to three years, and it will be bad,” Cowen said. But really grim hyper-inflation à la Carter-era, he thinks is unlikely. It could only happen if the Federal Reserve decides it’s too risky to trim the sails of cheap money. “I’d put it at 20% chance that the Fed will think, ‘Trump might run again, and we don’t want Biden to lose . . . history’s in our hands, so we’ll wait to tighten.’ And then it just goes on, and then it’s very bad.”

But a recession is also bad. It’s hard to sort it all out. “As the saying goes, ‘If you’re not confused, you don’t know what’s going on,’” Cowen told me.

[y66]

Martin Arnold at FT said:

Inflation in Germany has surged to its highest level since 1992, increasing the pressure on the European Central Bank to explain why it thinks it would be premature to tighten its ultra-loose monetary policy.

German inflation rose 6 per cent in November from a year earlier, as measured by the harmonised index of consumer prices. The increase exceeded the expectations of most economists. German inflation was last this high shortly after the country’s reunification three decades ago.

Spiralling prices are a sensitive subject in a country where people’s approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most people’s savings.

However, the ECB has tried to calm anxiety about rising prices by saying many one-off causes of inflation such as soaring energy prices and supply chain bottlenecks will fade next year.

Isabel Schnabel, an ECB executive board member, said in a televised interview with Germany’s ZDF on Monday that “November will prove to be the peak” for inflation in the country.

She said German inflation had averaged 2 per cent over the past two years, having fallen sharply when the pandemic hit in 2020, before a sharp rise in 2021. “There is no evidence to suggest that inflation is spiralling out of control,” she added.

Eurozone inflation data is due to be released on Tuesday and is expected to hit 4.4 per cent this month, the biggest rise in 13 years and more than double the ECB’s 2 per cent target.

There are several factors indicating German inflation will fade next year. One is that the rebound in prices from last year’s temporary cut in sales tax will drop out of the inflation data by January. Restrictions announced this month to contain a record surge in coronavirus cases could also cool consumer spending and prices.

“There is little doubt that inflation will fall next year: the only debate is how far and how fast,” said Andrew Kenningham, an economist at Capital Economics.

The main drivers of German inflation in November were energy prices, which increased 22 per cent from a year earlier. That helped to push overall goods prices up by 5.2 per cent. Food prices rose 4.5 per cent, services prices increased 2.8 and rents rose 1.4 per cent.

Part of the increase to the harmonised index of consumer prices came from changes to the weighting of items in the basket, which reflected unusual spending patterns during the pandemic.

Germany is not alone in confronting soaring inflation. Spanish consumer prices rose 5.6 per cent this month, according to data released on Monday — also the fastest pace since 1992. Prices in Belgium also rose 5.6 per cent this month.

Prices are rising even faster in the US, where they increased 6.3 per cent in October from a year ago, the biggest jump for three decades.

The Federal Reserve has responded by starting to wind down its bond-buying programme in a move widely seen as a precursor to the US raising interest rates next year. However the ECB has pushed back against investors’ bets that it will raise rates in 2022.

Christine Lagarde, president of the ECB, said last week that it would be “wrong” to tighten monetary policy in response to the current surge in inflation, predicting that price pressures would fade by the time such measures took effect 18 months later.

“We would cause unemployment and high adjustment costs and would nonetheless not have countered the current high level of inflation,” Lagarde told the Frankfurter Allgemeine Zeitung newspaper. “I would find that wrong.”

[mycroft]

"having fallen sharply when the pandemic hit in 2020".

So - big scary 6% numbers year-over-year!

What's the inflation rate 2021 vs 2019? Given that big fall when the pandemic hit, could it be that it's a little lower than 1.02^2 - a little over 4%? So, you know, normal?

I don't know the answer to this. Oddly enough, nobody is providing that information (that I can see, with a quick search). But anyone who points to the Big Number year-over-year without saying anything about (what was, in the media anyway) the Big Scary Negative number year-over-year last year is being a bit disingenuous. Expecting inflation to not catch up to the "year off" once it mellowed out is a mug's game.

I desperately avoided looking at my retirement portfolio during the summer of 2020. When I did ask about it in January 2021, I was pleased to hear it was up a fair bit - basically normal for the previous few years - over the previous year. On the other hand it was up almost 50% over May. Anyone who suggested the 50% returns would be a New Default Number - well, anyone who believed them deserves what they get.

I absolutely agree that if this stays high - like beyond say March - there might be a problem. But right now, it's a Big Scary Number in the media. Why would the media be interested in a Big Scary Number? Why would the people that advertise and sponsor the media be interested in a Big Scary Number? I can think of a few reasons...

[y66]

Paul Krugman said:

This morning Eurostat, the European statistical agency, announced its “flash” estimate of November inflation for the euro area. It came in well above expectations — a 4.9 percent rise in prices over the past year. Still, this was lower than U.S. inflation: In October our consumer prices were up 6.2 percent over the year. And technical differences appear to downplay the U.S.-Europe difference. If we use a European-style index to calculate U.S. inflation over the past year, it was 7.3 percent.

Now, one-year inflation is a problematic measure right now, because many prices were temporarily depressed by the pandemic. Many commentators like to focus on price rises over two years to avoid this problem. When you do, however, the difference between the United States and Europe remains striking:



Does lower (although still high) inflation in Europe tell us something about inflation here? A number of commentators have argued that the difference shows that deficit spending, which has been bigger in the United States, is a major cause of inflation. For example, Jason Furman, the former head of President Barack Obama’s National Economic Council, has put the Europe-U.S. differential at the core of his argument that the American Rescue Plan bears a lot of responsibility for current inflation:



He could be right.

But I’ve been arguing that the case for deficit-driven inflation is weaker than it might first appear — that the details of the U.S. story don’t fit the narrative. What about the details of the argument based on trans-Atlantic inflation differences?

Well, I see two and a half problems with emphasizing Europe’s relatively low inflation. The half problem is that the story may change: The data released this morning offer at least a hint that Europe’s inflation is starting to catch up with America’s.

A bigger problem is that the trans-Atlantic difference in fiscal policy isn’t as large as many people assert. You don’t want to simply compare budget deficits; the United States came into the pandemic with much larger deficits than Europe, and what should matter is the change in the deficit — or more specifically the change in the “structural” deficit, that is, adjusted to correct for economic factors not related to policy. And there the difference between America and the euro area is a lot less striking — around six points of stimulus versus four:



Another problem is the issue I emphasized in yesterday’s column: Fiscal policy is by no means the only difference between the United States and Europe. Another key difference is that European employment policy appears to have been much more successful than ours at keeping workers connected to the job market. There is no European equivalent of the U.S. Great Resignation: Workers there have more or less fully returned to the labor force, even as many Americans stay on the sidelines:



As a result, Europe is suffering less from labor shortages, and hence from bottlenecks that drive up inflation, than we are.

Maybe the most important point, however, is that the question of what caused current inflation isn’t actually the question we want answered. What we want to know instead is what happens next, and even more important what we should do next. The fiscal expansion of early 2021 is receding in the rearview mirror. Will inflation also recede? Or do the Federal Reserve and the European Central Bank need to raise interest rates to cool off the economies they oversee?

I don’t think the answer to either of those questions is clear yet, especially with the Omicron variant of the coronavirus adding a new layer of uncertainty. As I write this, the price of oil is down about 20 percent from its level earlier this month; how will people feel about inflation if gasoline prices fall, say, 40 cents a gallon?

Still, I applaud the effort to use U.S.-Europe differences as a tool for understanding where we are and where we’re going.