Inflation: Who's To Blame And Why It's Important To Know That -- The Nation -- June 17, 2023

Locator: 44966INFL.

Updates

Later, 12:32 p.m. CDT: as the fog lifts, as the dust settles it is obvious the one major driver of inflation in the US is not government spending, nor wage inflation, but rather:

• too much money chasing too few goods.

Both conditions (too much money, and too few goods) flow directly from the Covid pandemic and associated lockdowns -- see graphics below.

If one cannot see that, now that the fog is lifting and the dust is settling, one is simply not paying attention. Period. Dot.

Now, if that's accurate, and, of course, it is, is raising interest rates or raising the cost of borrowed money the answer to inflation?

Let's look at the second half  (in bold) of "too much money chasing too few goods."

Suppliers are working as fast as they can to meet demand. Raising interest rates hurt the ability of suppliers to increase supply. Raising rates in this environment is ... crazy and counterproductive if one is concerned about the supply chain.

Now let's look at the first part, again in bold: too much money chasing too few goods."
This is a wash. I could write a long, long blog on how increasing interest rates would simply make inflation worse but at the end of the day, it's probably a wash.

If one is really concerned about "too much money," there's a simple fix: raise federal income taxes on everybody, and not just by a little bit but by a lot. So, if anyone tells me there's too much money, I'll reply, individuals and corporations are not paying enough in taxes ... or maybe better yet, increase social security and Medicare withholding by a huge amount but in a progressive matter. 

Folks who argue with that last point do not understand that increasing interest rates and / or inflation itself is (a form of) taxation.

Minor point but I bet everyone focuses on this, the least important point / comment: those who say increased government spending causes inflation: I don't buy it. The government tends not to buy the same things that individual consumers buy. In other words, the government is not chasing too few goods. Look at the federal government budget: what percent is non-military, non-mandatory, completely discretionary?

Original Post

Today, a new writer for the Atlantic looks at who is to blame for inflation and why it matters to know. Link here.

Bottom line: the new writer says current inflation is largely to do with "greedflation." I don't disagree. That's also my premise. 

However, having said that,  I don't like that word “greedflation” because it suggests something "negative" on the part of American corporations. In addition, "greedflation" encompasses a lot of "inflationary" categories, not just greed. In fact, in general, “greed” is an entirely wrong word to use in an academic study of economics, except as a stepping-off point for discussion.

Business can raise prices only if Americans are willing to accept higher prices. There is almost nothing in the US economy in which Americans cannot "cut back," if prices get too high. Poor grammar but I think you know what I mean. Don't take that premise about “cutting back” out of context.

Bottom line, blaming this wave of inflation on "greedflation" is wrong. A much better way to say it, but it's not a catchy word / phrase: inflation is due, in this case, to what the consumer is willing to pay. Don't take that out of context, but if one needs any supporting evidence, look at my two favorite charts which reveal just how much money Americans have to spend. Lots. And they’re willing to spend it. Exhibit A: it’s being reported that the lines at Disney World (Florida) are as long as ever.

It's still back to "too much money chasing too few goods." Remember, the supply change shortages are still with us. We have not fully recovered from the Covid pandemic. That is just one of many reasons for supply chain challenges. Port closures on the west coast are another reason.

Previously posted.

Locator: 44943B.

Updates

Later, 10:20 a.m. CDT: two additional thoughts while biking.

First: has inflation in the past two years affected your lifestyle, your quality of life, or your standard of living. If the answer is "yes" to any of the three:

• you are not doing something correctly;
• you do not live in Texas;
• or both.

Second: I forgot to mention in the big expenses below. Except for those living in one of handful of states, state income tax far exceeds any "federal" inflation concerns for the audience to which this blog is addressed. Texas, where I reside: no state income tax.

Original Post

Inflation? Bloomberg's chart of the day: gold. Link here. I'm certainly getting mixed messages here.

Inflation: fairly superficial but excellent summary and explanation.  The third wave.

• first wave: "demand-led," primary in durable goods
• Covid-19;
• shortage of chips (computer, not potato);
  
• logistics (west coast ports, truck-drive shortage); and,
  
• that was it
• now: durable goods -- outright deflation [where not to invest]

• second wave: "supply-led,"
• the energy shock coming out of the war in Ukraine
• if you don't understand this, you are not alone, neither do I
• I think it's a stretch; writer needed three points
  

• third wave: "greedflation" -- wow, wow, wow -- we discussed this quite awhile ago and is part of the reason the "inflation" story has not concerned me much (at all?).
• within a reasonable range, "inflation" is "good" for investors (don't take that out of context)
• when running from a bear in the woods, you don't have to outrun the bear; you only have to outrun the others trying to outrun the bear
• "greedflation": the analyst considers this an unusual profit-led inflation story;
• profit-led inflation occurs when consumer-facing companies toward the end of the supply chain persuade shoppers to accept price hikes by pointing to plausible explanations -- such as historically-elevated inflation -- LOL -- 
• exactly what we mentioned on the blog some months ago [think new auto sales and grocers]
• compare costs at your local regional grocer with those of Walmart
• Target: markets a "better" shopping experience (but not for LGBTQ any more -- but that's another story for another time
  

"Greedflation":

The true reason for these elevated prices could have more to do with expanding margins and keeping investor sentiment high than with increased input costs.

"It's using excuses," Donovan said. "It's using a cover."

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What Wasn't Mentioned

US debt / US spending (which, by the way, I don't accept as a significant cause of inflation nor do a lot of economists including Nobel laureates -- in other words, I'm in good company.

Government policies mandating expensive alternative energy sources. Huge, unnecessary cost as far as I'm concerned but

Automakers: jacking up prices on ICEs to cover huge costs of EVs.

Grocers: most recent inflation number, 5%. A loaf of bread that cost me 99 cents last year should cost me $1.05 this year. In fact, I'm paying $1.49 for that same loaf of bread at Target or regional grocer. Walmart at $1.29 or thereabouts. One can do the math.

Cereal makers: 50% margins on corn flakes.

Rotisserie chicken:

• Costco: $4.99.
• Regional grocer: $9.99.

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Inflation Vs The Real World

Personal net worth: "everyone" seems to worry about inflation impacting quality of life, standard of living, investment returns, whatever.

Don't take this out of context, but within a reasonable range inflation has little impact compared to other factors:

First, inflation is only a factor if you buy inflated goods. 

• Example: the cost of US stamps and the cost of mailing packages has surged. For me, it could "break the bank." But, my overall postage has come to almost $0.00 -- e-mail has replaced mail. And I "never" mail packages any more -- Amazon does it for me -- and one can get true free mailing from Amazon without paying for Amazon prime.

Second, high cost items. In general:

• state income taxes in most states (added later)
  
• twenty years ago, I was paying college tuition: one, a private college; another, out-of-state tuition -- huge expenses; I don't have those any more
• a new car every three years? Nope.
• a McMansion? Nope.
• a boat? Nope.
• an RV that is seldom (if ever used after the first six months)? Nope.
  
• swimming pool maintenance? Nope.
• unexpected need for new air conditioner? Nope.
• need for cruises, Disney vacations? Nope.
  

Break, break: a family of four could forego this year's Disney vacation and with one stroke, offset all other inflation "stuff" this year.

Second, more high cost items. Family, personal.

• "big family"
  
• divorce
• medical care, inconsequential: age 65 -- Medicare; supplement paid by prior employer
• not working, no job, temporary / permanent:
• redundant, laid off;
• medical condition;
• lack of skills, education
• drug addiction

Second, more high cost items. Telecommunication, entertainment.

• way more "smart phone" than you need
• way more cable, streaming than you need
• way more computer than one needs: buy Chrome, not Apple
  

Break, break: cancel all subscription-streaming this year. That will more than offset all the rest of one's inflation for the year.

Third, transportation costs.

• I'm retired, so daily driving almost unnecessary
• warm-weather, dry state, urban, in good health: can bike almost anywhere.

Fourth, utilities: inconsequential.

• small footprint
• warm weather, highly competitive sector

Fifth, offset --

• for savers and investors: getting higher return on savings, investments
• best example: dividend-paying utilities, others need to increase dividends to compete with bank rates

So, yes, I get it. Inflation. 

But the country has much bigger problems than this focus on inflation by the mainstream media -- it gets tedious. One needs to ask why the mainstream media focuses on inflation. I have thoughts on that, also, but time to move on. The market opens in fifteen minutes and I haven't even gotten to Bud yet -- another non-story -- but a great opportunity for savvy investors. Which I am not. LOL.