Any (post 2008) Economists in the house? - Inflation.

[Flynnwood]

Good day,
I want to understand what is driving inflation in the private sector (world-wide, not just UK).

If it was Governments debt (public sector), I would "get it".

Journalists in the Financial Times can't present a logical explanation without mentioning the FED.

 

[Blackswanwood]

It‘s worth Googling demand pull, cost push and built in inflation. Investopedia is normally a good source of a plain English (American!) explanation.

Edit - I should add I’m not an economist but I work with some and they quite often do not agree on what causes things!

 

[Jameshow]

Cost of raw materials, food costs, fuel costs, labour costs all push up inflation in a catch 22 way each feeding each other...

Cheers James

I'm not an economist btw!

 

[Spectric]

Inflation, it seems the biggest goal for a country like the uk is it's economy where making money is the key objective, supply and demand is something that is good for this objective, think of making hay whilst the sun shines. So with a high demand you raise the prices, ripple effect impacts everything and people want a pay rise so less profit and this cycle continues until you price yourself out of the market and getting things done abroad becomes cheaper. Now pay falls and people struggle until work returns and it is just cycles of good and bad, high pay and low pay but no long term stability.

 

[Terry - Somerset]

Years ago economics was "sold" as a "science" - defined by supply and demand curves, price elasticity equations etc etc. I have since come to the conclusion that "science" is at least equalled by the need to understand behaviours.

The economy is a confidence trick. Remove confidence - the economy will slow or decline. Positive outlooks - job secure, pay increasing etc - promotes different behaviours.

Inflation needs to separate global impacts from the local or national.

The price of raw materials, shipping costs, commodities (eg: oil, gas) are determined by global demand and supply as they are mostly traded in global markets. This can be impacted by limited sources of materials, monopolistic behaviour, local conflicts etc.

Inflation in global goods in a national market place will be impacted by changes in exchange rates. This may be due to events like Brexit, political changes, or simply that individual national economies will grow and/or decline at different rates.

Inflation at a national level depends far more on local circumstances - tax policy, economic growth, confidence, employment levels, public spending etc.

The references to the Fed I think relate to their role in setting interest rates which due to the size of the US economy have impacts globally. What smaller central banks do has far less impact - in fact many small countries link their currency to the $ anyway.

Changing interest rates will tend to have an economic impact - eg: an increase in interest rates will likely reduce investment by making borrowing more expense, reduce spending by making saving more attractive, reduce economic growth which in turn may reduce inflationary pressures.

As a very simplistic example. Too many people spend money on meals out. Restaurants may increase their prices to reduce demand as their capacity is limited. Full employment means that trained chefs want more pay etc.

Inflation is not homogenous. In the UK the services sector is ~80% of the economy, the balance is manufacturing, construction, agriculture. Recent events demonstrate it is possible for global energy prices to increase by 50% or more, yet UK inflation to be only ~3% overall.

A long response which really only demonstrates there is no simple answer to "why inflation" - it is just a balance of some very complex judgements that (in this country) Rishi Sunak tries to get right!

 

[DrDarren]

It’s worth reading Nouriel Roubini on this. He often calls right on when the global economy is about to tank as he understands the history and deep causal mechanisms. The global supply chain crisis could fuel a severe dose of stagflation

 

[Trainee neophyte]

Some thoughts from a depressed pessimist: ymmv

Economics is the "dismal science", and really is the study of people and their behaviour. For some reason economists got a bad attack of clever maths, and decided they could predict the future and therefore rule the universe. It's really not working out for them, but until everyone notices, they are building their castles in the air and wearing their new clothes with aplomb, to mix some metaphors.

I would say there are two types of inflation: real world cost increases, and financial manipulation/printing/economists running amok.

The first of these are things like food inflation, which we are seeing because of worldwide crop failures. No economists were harmed in the raising of these prices. Supply and demand, time preference etc all go to making prices between two or more real people, buying real goods. The "free market", if you will. Fewer real things means each thing gets more expensive, as people bid up prices based on ability to pay and need/want/desire. Obviously government tries to get between people wherever possible to make monopoly or cartel conditions and skew the free market, but that's just what government does.

The second type is based on unreal conditions caused by our current insane monetary system (money as debt) and this inflation is caused by the creation of more debt - as - money out of thin air. The people closest to the money spigot get to spend first, before prices rise, and then the shiny new money radiates out, causing too much money to chase the same amount of things in the real world, giving rise to a reduction in the value of money, rather than an increase in the cost if goods. It looks like a rise in prices, but is actually a fall in the value of each unit of currency.

You can see easily who gets to put their snouts in the trough by where the inflation is prevalent. Property, mega yachts, classic cars, invisible works of art etc. Not too much will trickle down to the real world where us serfs live, other than the UK with its ludicrous property market designed to crate false wealth out of thin air.

Pretty much everything since 2008 has been deflationary, but deflation is garlic to the banking vampires, so they print and print to keep the system afloat, but keep the free money mostly to themselves. The more deflation there is, the more they will print to save the banks. When they start giving free money to the serfs rather than the elite, you know the wheels are truly coming off.

During times of inflation asset prices rise faster than wages, benefiting asset owners at the expense of wage earners. During deflation the reverse happens.

In other words, deflation will be fought tooth and nail, because the owners of assets stand to lose more in deflation that the earners of wages, and asset owners make the rules.

 

[Jacob]

......

In other words, deflation will be fought tooth and nail, because the owners of assets stand to lose more in deflation that the earners of wages, and asset owners make the rules.

But on the other hand those who are cash rich lose - it's worth less and buys less - and vice versa, those in debt gain - the real cost of the debt falls

 

[Terry - Somerset]

I bought my first flat in the mid 1970s. Property price inflation meant that on purchase I owned 10% of the equity. Two years later, thanks to inflation, I owned 50% of the equity.

Inflation was unambiguously good!

45 years on, retired with some cash in the bank I now worry that inflation may erode personal savings and spending capacity and make retirement financially challenging.

Conclusion - Treasury policy to target predictable modest levels of inflation is correct as it encourages rational behaviours and decision making against a stable financial background.

 

[Spectric]

If you want it really simple then an economist is just a croupier, the finance sector is based on gambling with other peoples money and in the UK it is a very large part of our economy, we no longer have the manufacturing like most European countries that can help dampen sudden spikes. Then add in good old Borris who thinks he can take on the world and rattle swords with Russia and China and come out on top and you have problems, the economy does not like uncertainty and in reality the UK is no longer a major player on the worlds stage although no one wants to admit it.

 

[Jacob]

If you want it really simple then an economist is just a croupier, the finance sector is based on gambling with other peoples money and in the UK it is a very large part of our economy, we no longer have the manufacturing like most European countries that can help dampen sudden spikes. Then add in good old Borris who thinks he can take on the world and rattle swords with Russia and China and come out on top and you have problems, the economy does not like uncertainty and in reality the UK is no longer a major player on the worlds stage although no one wants to admit it.

Money and the economy is unstable in the hands of the gamblers.
There are strong arguments for debt cancellation at various levels. An old idea:
Jubilee 2000 - Wikipedia

David Graeber is the man and his book is very readable.



It's like Monopoly the board game - it usually ends up with too much money/wealth in too few hands and the game stops. Starts again when they pull in all the money, cancel debts and credits and share it out again.

 

[jcassidy]

As a novice central banker, still struggling to understand how it all works, here goes...

Inflation is a function of supply and demand, specifically the demand for money.

Worldwide inflation is increasing because there is a lot of money in the system which is outstripping the supply of goods. As prices go up the demand for money increases, which the central bank will supply until inflation reaches the target level.

At that point the Central Bank will restrict the supply of money, causing higher interest rates and suppressing the demand for money.

The intent - rarely achieved - is to yo-yo around the target inflation rate like a Goldilocks zone, never too got and never too cold.
Unfortunately people are complicated and rarely cooperate with the Cental Bankers...lol

 

[jcassidy]

As regards the concentration of wealth in the hands of the few, its far worse than any of you realise. But that is a political question. Unelected central bankers must neither create or destroy wealth; only elected representatives have tax powers and that's what allows the accrual of wealth to the rich and the destruction of wealth of the poor.

 

[Spectric]

Another aspect is wasting money on projects that only benefit the minority, leaders saying one thing and doing something else, your policies and decisions influenced by the people funding your party and you end up with a political system that is no longer fit for purpose, outdated and that no one respects, they become a circus. To get a strong economy you need everyone pulling together and then sharing the rewards equally, not just making the rich richer and alienating sections of the population.

 

[jcassidy]

FYI.

The top 10% own about $90trillion, of which the top 1% own almost half.

The next 40% own just a little more than the top 1%.

The bottom 50% own f**k all.

Other graphs show that after the Great Recession of 2008, the top 50% have largely recovered financially whereas the bottom 50% still haven't. This is largely because the wealth of the bottom half is largely in residential property (the family home and maybe some rental properties) and if you've defaulted on your mortgage, you're not getting another one easily...

 

[jcassidy]

(Double post)

 

[Jacob]

As regards the concentration of wealth in the hands of the few, its far worse than any of you realise. But that is a political question.

Everything is a political question. Notice how the establishment don't want you to talk about politics at all and have somehow made it unacceptable in "polite" society. Even on this forum!

Unelected central bankers must neither create or destroy wealth; only elected representatives have tax powers and that's what allows the accrual of wealth to the rich and the destruction of wealth of the poor.

And economics is largely written by the gamblers and others on the side of wealth and property ownership. Very one sided!
It's amazing how the gamblers have persuaded so many that just letting them get on with it ("free market") will somehow benefit us all! Biggest con trick ever.

 

[RobinBHM]

There is a sad fact…..it Is easier to make money out of wealth destruction than out of wealth creation.

George Soros is an example.

as are all hedge fund managers.

chaos creates opportunities for the greedy to make money out of the misery of others.

the pandemic is a perfect example of opportunistic wealth creation. Something beginning with B is another.

 

[D_W]

Availability of goods vs. availability of funds (liquid funds) pumped up by cheap monetary policy and income give-aways during covid.

if there wasn't a shortage of goods, the price changes probably wouldn't be that significant.

 

[D_W]

There is a sad fact…..it Is easier to make money out of wealth destruction than out of wealth creation.

George Soros is an example.

as are all hedge fund managers.

chaos creates opportunities for the greedy to make money out of the misery of others.

the pandemic is a perfect example of opportunistic wealth creation. Something beginning with B is another.

Hedge managers generally get less of a return than equity managers. Where they've succeeded is high wealth clients who need lower volatility due to tax rules than they do outright nominal returns.

I've got a lot of exposure to investments (not as an investment person but as a reporting person and for determining forward looking assumptions). It's not that uncommon for collective strategy (funds) that list their composition to stuff in an equity index if they want higher returns. I'm not aware of hedge funds that create long-term returns like an equity index does, but I'm also not aware of many equity index funds that a fund manager extracts 200 basis points from, and then plus some.

I'm a big fan of the reddit investors who blow up short strategies from hedge funds, though - they're doing what the hedge funds are doing and only ****s like Jim Cramer seem to really have a problem with it.

That said, what makes hedge fund managers rich is less performance and more relationship and advertising based (convincing high wealth clients that net returns smaller than in the open market will be good for them and they should pay a lot to get them). The actual long term return profile of hedge funds isn't that great, and when it's unusually high, they tend to be just illiquid funds that are only partial hedging and have a bunch of higher return bits in them (that you could just get more cheaply elsewhere).