Home / General / Inflation: What is it and what should be done about it?

Inflation: What is it and what should be done about it?


This is mostly intended as an open thread to talk about inflation both as a theoretical and practical issue. The impetus for it on my part is that I’m extremely interested in inflation as a historical phenomenon. A lot of stuff I write about, such as the price of law school in particular and higher education in general, involves very long term changes in prices, and I’ve been struck by the extent to which the transformation of inflation from an episodic to a constant factor in the economy hasn’t really been fully internalized psychologically by the broader culture.

What I mean by that is that there are still millions of Americans alive today who grew up in a world in which inflation and deflation had essentially offset each other for many generations. For example, in the USA nominal prices for goods and services were about the same in 1940 as they had been in 1790. This meant that nominal prices had, roughly speaking, a kind of long-term signaling power that they’ve lost completely over the past 80 years, as constant inflation has made nominal prices a generation or two or three ago increasingly meaningless in contemporary terms.

This, I think, is an under-appreciated feature of contemporary economic mass psychology — the amorphous sense that “everything costs so much more these days than it used to,” which is completely false in most specific instances, but is actually true in a few critical areas, specifically housing, education, and medical care, thus leading to many confused ideas about the economy that can be exploited by among others populist demagogues, not that we have a lot of those these days.

Here’s Jordan Weismann on how the latest inflation numbers are pretty concerning:

For much of last year, inflation was disproportionately driven by just a handful of spending categories, particularly cars, gasoline, and meat. Many economists and journalists (myself included) actually saw that as a reason to feel optimistic, since all three of those products were getting expensive thanks to unique supply problems created by the pandemic and recovery. Those snags would eventually go away—and once they did, those categories’ prices would drop, or at least plateau.

But meat, trucks, and gas aren’t really the only story of inflation anymore. In January, the Consumer Price Index, or CPI, rose 0.6 percent—which works out to a roughly 8 percent annualized rate. Core CPI, which subtracts volatile food and energy prices, also rose by 0.6 percent. It has been increasing at about that pace since October.

So what’s dragging inflation higher? Used car prices, which have skyrocketed in the past year, are still a factor. So are rising housing expenses, thanks to landlords who have started raising rents again. But the ludicrous costs of buying a pre-owned F-150 can’t explain what happened in January. If you subtract used cars, energy, food, and shelter, the CPI actually grew 0.7 percent last month, up from 0.4 percent in both November and December.

Rather, the answer seems to be that inflation just sort of made everything a bit more expensive in January. Clothes, tools, prescription drugs, you name it. You couldn’t chalk it up to a handful of industries. And it wasn’t just the cost of stuff, either. The price of services, including medical care, suddenly shot up in January, too, which might be a sign that rising wages are beginning to push up prices as well. (In 2021, services excluding housing got 3 percent more expensive, a little high by recent standards, but not unheard of. Last year, the inflation story was really much more about physical items.)

Inflation data can be a bit erratic in the short term, and it’s always dangerous to draw heavy conclusions based on a single month’s number. But the fact that core inflation doesn’t seem to be slowing down, and that inflation appeared to broaden its reach through the economy in January, has contributed to a sense of anxiety that, no, these problems just aren’t going to get better on their own, at least any time son. As inflation becomes more widespread, the concern is that it will become stickier and harder to stop. For instance, a lot of corporate executives have recently been telling investors that they’ve used inflation as an excuse to increase their own prices and margins. Progressives have frequently cited this as an example of how the real problem is profiteering by big business; but you could just as easily interpret it as an example of how, after a while, the psychology of inflation can become self-perpetuating. It’s still possible that inflation will subside on its own. Maybe inflation will ease naturally. But it’s hard to look at a report like January’s and feel like this is still a problem that will fix itself.

Here are just a few initial questions that seem worth discussing:

(1) In what ways is inflation good and bad? Obviously it’s bad for workers to the extent that wages aren’t keeping pace with it, but so much of the inflation discussion at present seems based on the idea that increasing wages themselves would be the key factor in fueling the dreaded “inflationary spiral.”

(2) Just as obviously inflation is good for debtors who have significant amounts of debt at fixed rates, like, for example, people who have big mortgages on otherwise nondescript houses in fashionable western college towns where such houses now cost more than ONE MILLION DOLLARS. To pick an example at random.

(3) Monetary policy seems to be the key weapon available to the government in regard to doing something about inflation, to the extent it’s becoming problematic, but how is this supposed to work exactly? I personally have a problem understanding the answer to this question because my eyes automatically glaze over when I hear the phrase “monetary policy” just as surely as they do when I hear phrases like “today’s Wordle” and “the Marvel Cinematic Universe” and “Non-Fungible Tokens.” OK to be fair we really should have a thread at some point on the latter, if only because LOL and WTF?

But let’s stick to inflation in this thread anyway.

  • Facebook
  • Twitter
  • Linkedin
This div height required for enabling the sticky sidebar
Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views : Ad Clicks : Ad Views :