Whence inflation?

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rockstar
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Re: Whence inflation?

Post by rockstar »

make_a_better_world wrote: Tue May 04, 2021 11:29 am Buffet thinks "very substantial inflation" is occurring.

https://www.youtube.com/watch?v=7t7qfOy ... ceVerified
The supply chains tied to anything home related is screwed up right now. And lot of people are renovating because they're stuck at home with limited options for things to do. Of course, his home building businesses are raising prices. Makes sense to me.

The stimulus is cause transitory inflation. If you want inflation to hold, you have to raise wages. Two things can cause this. Unionization. Employees gain collective bargaining power. So far they have been too stupid to do this. The other way is that potential employees refuse to work for the existing wages, which will cause employers to raise wages for new hires. I think, we're seeing a bit of this with restaurants today.
Last edited by rockstar on Tue May 04, 2021 2:37 pm, edited 2 times in total.
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bottlecap
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Re: Whence inflation?

Post by bottlecap »

dknightd wrote: Tue May 04, 2021 12:53 pm
willthrill81 wrote: Tue May 04, 2021 10:55 am
dknightd wrote: Tue May 04, 2021 9:50 am As I see it the number of people in the world keeps increasing. So to keep the costs of goods the same, the governments needs to create more money. Just to keep up with the number of people spending money. I think governments are making more money than we need. But that is probably OK since there are many people who do not spend the money.
Costs for some things are definitely going up. That is to be expected. As long as income keeps up with increasing prices, no problem.
I budget for 3% inflation. As long it as it is lower than that I'll be OK. I hope and think
Theoretically, if the supply of dollars is increased at the same rate as the demand for new dollars, there will be no inflation. This would be desirable for many reasons. However, the problem is that if the supply of dollars falls behind the demand for new dollars, deflation occurs. Frankly, deflation scares the pants off of the Fed and most economists because it can lead to a death spiral in the economy. It puts enormous pressure on debtors, effectively increasing the amount that they have to repay because they are getting few dollars in income than before. That causes the economy to tighten further, putting more downward pressure on economic activity, and so on. The Fed wants to avoid this at virtually all costs and has determined that 2% inflation is a reasonable target to avoid deflation while not being too much inflation.
To me this an interesting dichotomy. We are encouraged to save more. But we are also encouraged to spend more. A 2% target seems reasonable to me. I hope they can keep it close to that. Honestly I do not know how much control they have. Probably more than I have . . . I suspect in the long term they need deceased value of the dollar, just make it cheaper to pay back money being borrowed.
The interesting dichotomy exists because deflation is an effect, not a cause. If you define inflation/delation as a change in prices, you will undoubtedly miss that point.

There have been sustained periods of deflation that coincided with sustained economic growth throughout history. So no, falling prices do not "cause" economic tightening or declines. You need to look for another cause in every case.

You would think someone would look at this verifiable fact and conclude that we are mis-defining inflation and/or are wrong that deflation is the cause of economic death spirals, but you would be wrong.

Why? Follow the money. Try getting educational accolades, book deals, or government funding as an economist by advocating less spending - good luck!

Debasing currency is largely painless for politicians and thus has been a historically popular method of taxation. You get to rob Peter and Paul at the same time and then spend their wealth as you see fit! They barely notice. When they do, tell them deflation causes death spirals, encephalitis, and possibly even COVID-19. "Expert" economists will back you up. And, besides, even Bogleheads aren't smart enough to come to a workable definition of inflation or completely explain how money is created.

This game has been played by authorities since time immemorial. They've just been able to complicate it enough so almost no one can see the whole picture. Not even the highly paid experts at the Fed, the bulk of whom are proven wrong by the passage of time.

JT
DB2
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Re: Whence inflation?

Post by DB2 »

Agreed, JT.
AlwaysLearningMore
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Re: Whence inflation?

Post by AlwaysLearningMore »

dknightd wrote: Tue May 04, 2021 12:53 pm ...A 2% target seems reasonable to me. I hope they can keep it close to that....
Will the BLS' measurement of inflation match what you consider to be an accurate depiction? It's gone from the COGI (Cost of Goods Index) to other iterations. Adopting the methodology that takes into account changes in the quality of goods and substitution was not uniformly heralded as an "improvement." Lo and behold, these adjustments in how the CPI is measured have led to lower values, translating into lower spending for inflation-adjusted expenditures.

"The understatements in the consumer price index (CPI) are even more egregious. Years ago, the cost of living was changed to include "owner-equivalent rent," which sharply reduced the reported inflation rate during the recent housing boom. The concept of product substitution was also incorporated, meaning essentially that if top-grade hamburger gets too expensive, we substitute a cheaper grade. And (this is really true!) we don't count cost increases that are attributable to increased quality ("hedonic adjustments"). That is, if airfares double but air travel service is deemed twice as efficient, the calculated cost of air travel is unchanged." John C. Bogle, Enough, page 101.
Last edited by AlwaysLearningMore on Tue May 04, 2021 3:32 pm, edited 1 time in total.
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Tib
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Re: Whence inflation?

Post by Tib »

AlwaysLearningMore: "Retirement is best when you have a lot to live on, and a lot to live for."

I like this part, too!
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Re: Whence inflation?

Post by AlwaysLearningMore »

Tib wrote: Tue May 04, 2021 3:00 pm AlwaysLearningMore: "Retirement is best when you have a lot to live on, and a lot to live for."

I like this part, too!
Thank you!
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alex_686
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Re: Whence inflation?

Post by alex_686 »

AlwaysLearningMore wrote: Tue May 04, 2021 2:44 pm The concept of product substitution was also incorporated, meaning essentially that if top-grade hamburger gets too expensive, we substitute a cheaper grade. And (this is really true!) we don't count cost increases that are attributable to increased quality ("hedonic adjustments"). That is, if airfares double but air travel service is deemed twice as efficient, the calculated cost of air travel is unchanged." John C. Bogle, Enough, page 101.
Both of these statements are false.

The substitution effect happens when the price of A increases people switch to B. But we can't do this willy nilly. One needs to make sure that the 2 baskets have equivalent utilities. Saying that 1 high quality hamburger is the same as 1 low quality hamburger is obviously false. Maybe 1 high quality hamburger is the same as 2 low quality ones. There are economic tests for this. Here are some better examples. Sushi & steak. Landlines & cell phones & smart phones. Movie tickets & DVDs w/ home theater & streaming services. As prices change people will change the basket of goods that they buy. That does not mean that their utility has decreased.

CPI does account for hedonic adjustments. This is critical for items that change over time. Cars, cell phones, TVs, etc.

https://www.bls.gov/cpi/quality-adjustm ... 20products.
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AlwaysLearningMore
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Re: Whence inflation?

Post by AlwaysLearningMore »

alex_686 wrote: Tue May 04, 2021 3:31 pm
AlwaysLearningMore wrote: Tue May 04, 2021 2:44 pm The concept of product substitution was also incorporated, meaning essentially that if top-grade hamburger gets too expensive, we substitute a cheaper grade. And (this is really true!) we don't count cost increases that are attributable to increased quality ("hedonic adjustments"). That is, if airfares double but air travel service is deemed twice as efficient, the calculated cost of air travel is unchanged." John C. Bogle, Enough, page 101.
Both of these statements are false.

The substitution effect happens when the price of A increases people switch to B. But we can't do this willy nilly. One needs to make sure that the 2 baskets have equivalent utilities. ...
CPI does account for hedonic adjustments. This is critical for items that change over time. Cars, cell phones, TVs, etc.

https://www.bls.gov/cpi/quality-adjustm ... 20products.
"In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can "live with" by reducing their standard of living. This is incorrect: the CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction." https://tinyurl.com/wzdxj39u
"Constant level of satisfaction" seems subjective, especially with comestibles.

It would be interesting to see the details of the hedonic adjustments (and their effects on the overall CPI-U) published alongside the CPI-U data.
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make_a_better_world
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Re: Whence inflation?

Post by make_a_better_world »

rockstar wrote: Tue May 04, 2021 2:22 pm The supply chains tied to anything home related is screwed up right now. And lot of people are renovating because they're stuck at home with limited options for things to do. Of course, his home building businesses are raising prices. Makes sense to me.
There is a common theme to all this discussion is it that is lacks good explanations although there is no shortage of explanations offered as demonstrated by headlines or what you've just said.

People offer similar explanations regarding home price appreciation. People want to leave the city or want more space at home. As I mentioned earlier in this thread, I bought a piece of commercial property in 2018 in for $556k. In the last two months I got unsolicited offers to buy it at $1.5M and $1.8M by two separate parties.

Indeed, there are too many explanations and none of them good. You see it everywhere. Why will cryptocurrency keep rising? Because of the aggregate demand and positive network effects. Why will it fail? Because of announced government regulation of crypto space. But then, it could succeed because of government regulation of crypto, or it could fail because of network effects.

The number of sectors and asset classes in which prices are increasing dramatically are legion. If some of you want to believe inflation is not occurring because of CPI and the price of candy bars best of luck.
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Re: Whence inflation?

Post by ballons »

make_a_better_world wrote: Tue May 04, 2021 4:06 pm There is a common theme to all this discussion is it that is lacks good explanations although there is no shortage of explanations offered as demonstrated by headlines or what you've just said.

People offer similar explanations regarding home price appreciation. People want to leave the city or want more space at home. As I mentioned earlier in this thread, I bought a piece of commercial property in 2018 in for $556k. In the last two months I got unsolicited offers to buy it at $1.5M and $1.8M by two separate parties.

Indeed, there are too many explanations and none of them good. You see it everywhere. Why will cryptocurrency keep rising? Because of the aggregate demand and positive network effects. Why will it fail? Because of announced government regulation of crypto space. But then, it could succeed because of government regulation of crypto, or it could fail because of network effects.

The number of sectors and asset classes in which prices are increasing dramatically are legion. If some of you want to believe inflation is not occurring because of CPI and the price of candy bars best of luck.
No one offered you crypto for your commercial property. Very interesting.
alex_686
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Re: Whence inflation?

Post by alex_686 »

AlwaysLearningMore wrote: Tue May 04, 2021 3:54 pm "In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can "live with" by reducing their standard of living. This is incorrect: the CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction." https://tinyurl.com/wzdxj39u
"Constant level of satisfaction" seems subjective, especially with comestibles.

It would be interesting to see the details of the hedonic adjustments (and their effects on the overall CPI-U) published alongside the CPI-U data.
Inflation is a ordinal (ranking) value, not cardinal (scaler) value. It is personal, so it can't be used between people. It can't be used to compare 2 different points in time. It assumes you are a homo economicus and not a real person.

So, measuring inflation request subjectivity piled on top of subjectivity. On this foundation we are going to try to construct a price index to measure inflation.

With this in mind, there is less subjectivity than you think.

As a example, let us look at gasoline and cars. Since the 1960s the price of gasoline has risen dramatically, much faster than inflation. In particular, during the oil embargos of the 70s. The price signal here is clear. Oil is now more expensive to produce - please buy something else.

One response was to buy more expensive but fuel efficient cars. And while we can compare gas prices of the 70s verse today, we can't directly compare car prices. You can't buy a new land yacht like the full size rear wheel driven Oldsmobile Delta 88. Instead I have to buy a SUV with fancy crash zones, a more reliable engine, higher quality, etc. But we can compare indirectly. We can splice improvements and changes from year to year, step by step.

Another response is that you should spend your money differently. You don't throw you kids in the back of the station wagon for a long road trip. Rather you build a swimming pool in the back yard. This too can be measured by observing what people are actually buying. How their baskets change over time.

The problem is not subjectivity, rather errors in measure of estimation of observed people's behavior.
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new2bogle2
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Re: Whence inflation?

Post by new2bogle2 »

bottlecap wrote: Tue May 04, 2021 2:31 pm
dknightd wrote: Tue May 04, 2021 12:53 pm
willthrill81 wrote: Tue May 04, 2021 10:55 am
dknightd wrote: Tue May 04, 2021 9:50 am As I see it the number of people in the world keeps increasing. So to keep the costs of goods the same, the governments needs to create more money. Just to keep up with the number of people spending money. I think governments are making more money than we need. But that is probably OK since there are many people who do not spend the money.
Costs for some things are definitely going up. That is to be expected. As long as income keeps up with increasing prices, no problem.
I budget for 3% inflation. As long it as it is lower than that I'll be OK. I hope and think
Theoretically, if the supply of dollars is increased at the same rate as the demand for new dollars, there will be no inflation. This would be desirable for many reasons. However, the problem is that if the supply of dollars falls behind the demand for new dollars, deflation occurs. Frankly, deflation scares the pants off of the Fed and most economists because it can lead to a death spiral in the economy. It puts enormous pressure on debtors, effectively increasing the amount that they have to repay because they are getting few dollars in income than before. That causes the economy to tighten further, putting more downward pressure on economic activity, and so on. The Fed wants to avoid this at virtually all costs and has determined that 2% inflation is a reasonable target to avoid deflation while not being too much inflation.
To me this an interesting dichotomy. We are encouraged to save more. But we are also encouraged to spend more. A 2% target seems reasonable to me. I hope they can keep it close to that. Honestly I do not know how much control they have. Probably more than I have . . . I suspect in the long term they need deceased value of the dollar, just make it cheaper to pay back money being borrowed.
The interesting dichotomy exists because deflation is an effect, not a cause. If you define inflation/delation as a change in prices, you will undoubtedly miss that point.

There have been sustained periods of deflation that coincided with sustained economic growth throughout history. So no, falling prices do not "cause" economic tightening or declines. You need to look for another cause in every case.

You would think someone would look at this verifiable fact and conclude that we are mis-defining inflation and/or are wrong that deflation is the cause of economic death spirals, but you would be wrong.

Why? Follow the money. Try getting educational accolades, book deals, or government funding as an economist by advocating less spending - good luck!

Debasing currency is largely painless for politicians and thus has been a historically popular method of taxation. You get to rob Peter and Paul at the same time and then spend their wealth as you see fit! They barely notice. When they do, tell them deflation causes death spirals, encephalitis, and possibly even COVID-19. "Expert" economists will back you up. And, besides, even Bogleheads aren't smart enough to come to a workable definition of inflation or completely explain how money is created.

This game has been played by authorities since time immemorial. They've just been able to complicate it enough so almost no one can see the whole picture. Not even the highly paid experts at the Fed, the bulk of whom are proven wrong by the passage of time.

JT
A brilliant post
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Re: Whence inflation?

Post by Forester »

2% inflation target is an easy option. A tiny overshoot - let's not get into Shadow Stats malarky - and money is debased by a third every decade - and it's just about socially palatable. I will always believe the magic 2 number is as much superstition as anything else. Stable prices would be best for frugal working families. ""2"" compounded isn't a public service to them.
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Re: Whence inflation?

Post by VtsaxParade »

I think there will always be a disconnect between officially reported inflation, true inflation, and perceived inflation across a range of people.

So ignoring that disconnect, suppose officially reported inflation hits 5% and runs that high for a number of years (worse than any time in 30 years).

What kind of impact would that have?
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Re: Whence inflation?

Post by willthrill81 »

VtsaxParade wrote: Tue May 04, 2021 10:05 pm I think there will always be a disconnect between officially reported inflation, true inflation, and perceived inflation across a range of people.

So ignoring that disconnect, suppose officially reported inflation hits 5% and runs that high for a number of years (worse than any time in 30 years).

What kind of impact would that have?
It's safe to assume that the Fed would raise interest rates in response in an attempt to bring it down. That's what Volcker did, and it seemed to work very well to squelch inflation, though I'm not sure whether the current Fed members have the....guts....to do anything as drastic as he did.
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Re: Whence inflation?

Post by alex_686 »

VtsaxParade wrote: Tue May 04, 2021 10:05 pm I think there will always be a disconnect between officially reported inflation, true inflation, and perceived inflation across a range of people.

So ignoring that disconnect, suppose officially reported inflation hits 5% and runs that high for a number of years (worse than any time in 30 years).

What kind of impact would that have?
Not much.

As long as inflation is under 10%, steady, and expected societies have adapted well. Not saying it is great, but a fair number of developed economies had that level of inflation for long periods in the 20th century.
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Re: Whence inflation?

Post by Tib »

alex_686 wrote: Tue May 04, 2021 10:42 pm
VtsaxParade wrote: Tue May 04, 2021 10:05 pm I think there will always be a disconnect between officially reported inflation, true inflation, and perceived inflation across a range of people.

So ignoring that disconnect, suppose officially reported inflation hits 5% and runs that high for a number of years (worse than any time in 30 years).

What kind of impact would that have?
Not much.

As long as inflation is under 10%, steady, and expected societies have adapted well. Not saying it is great, but a fair number of developed economies had that level of inflation for long periods in the 20th century.
Not much impact? Perhaps for those who are working and whose wages keep pace with inflation. A lot of impact on retirees dependent on fixed pensions, fixed annuities, and/or investment accounts.

Morningstar’s John Rekenthaler gives the real returns for cash, intermediate bonds, long bonds, and large stocks for each of the periods of high inflation in the U.S. since 1941:

https://www.morningstar.com/articles/99 ... tion-hedge

From January 1973 through December 1981, inflation averaged 9.2%. The cumulative real return for long bonds was -52%. For large stocks it was -33%.

Perhaps the inflation wasn’t “steady” and “expected” but next time it probably will be?
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Re: Whence inflation?

Post by alex_686 »

Tib wrote: Tue May 04, 2021 11:51 pm
alex_686 wrote: Tue May 04, 2021 10:42 pm Not much.

As long as inflation is under 10%, steady, and expected societies have adapted well. Not saying it is great, but a fair number of developed economies had that level of inflation for long periods in the 20th century.
Not much impact? Perhaps for those who are working and whose wages keep pace with inflation. A lot of impact on retirees dependent on fixed pensions, fixed annuities, and/or investment accounts.
If society expects inflations it adjusts for inflation. All of the these items tend to be adjusted for inflation. Inflation adjusted annuities were once common. Most pensions adjust for inflation.
Tib wrote: Tue May 04, 2021 11:51 pm Morningstar’s John Rekenthaler gives the real returns for cash, intermediate bonds, long bonds, and large stocks for each of the periods of high inflation in the U.S. since 1941:

https://www.morningstar.com/articles/99 ... tion-hedge

From January 1973 through December 1981, inflation averaged 9.2%. The cumulative real return for long bonds was -52%. For large stocks it was -33%.

Perhaps the inflation wasn’t “steady” and “expected” but next time it probably will be?
I think you are misreading the situation here. You are suggesting that inflation caused poor stock returns, but you are citing a correlation - not a causation. Oil was the cause.

The period you are citing was during the OPEC oil embargos. It was unexpected and highly distributive to the economy. IIRC oil provided about 30% of the inputs to the economy, verse 5% today. It is used in almost every product sold. I mean, you need gas to haul organic vegetables to market. So increases in oil prices cascaded throughout the economy. Even after the oil embargo ended the impacts still rippled through the economy as it retooled to be less dependent on oil.
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Re: Whence inflation?

Post by jeffyscott »

alex_686 wrote: Wed May 05, 2021 8:48 amOil was the cause.
From 1973-81, oil went from around $4 per barrel to about $37. That's about 32% annual inflation, compounded over 8 years. If it was around 30% of the inputs to the economy, then it alone accounts for all of the ~9% inflation of those years.
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Re: Whence inflation?

Post by typical.investor »

rockstar wrote: Mon Oct 12, 2020 1:31 pm
willthrill81 wrote: Mon Oct 12, 2020 1:14 pm
rockstar wrote: Mon Oct 12, 2020 1:13 pm
willthrill81 wrote: Mon Oct 12, 2020 12:38 pm
rockstar wrote: Mon Oct 12, 2020 12:31 pm Helicopter money referred to as MP3 by Ray Dalio should create bursts of inflation.
Why? Will the velocity of money increase?
You give money to a part of the population that lives nearly paycheck to paycheck. They're going to spend it, not save it. This should drive prices up.
Unless money is continually given to them, it seems likely to me to be spent quickly and find its way into the pockets of those who are already hoarding it. The stimulus money does not appear, based on the data I've seen, to have materially changed the velocity of money.
Which is why I said bursts of inflation. The most steady stimulus has been the additional unemployment. This appears to have drove up grocery prices.

https://fred.stlouisfed.org/series/PCU4451104451103#0

Tweak the chart to look at percentage change from a year ago. You'll seek the spike.

If you're retired, you're now paying a lot more for groceries.
It’s plain nuts to blame stimulus for rising grocery prices.

Grocery prices were clearly rising before stimulus happened and coincidentally, food prices in cafeterias and restaurants (ie eat-in) were actually falling.

Show me one shred of evidence that people are actually eating so much more now that we are seeing higher prices. Maybe a little as we munch while watching more movies but I seriously doubt because of stimulus.

Rather we are seeing the impact of COVID on supplies and the effects of mass consumption changes (as people eat at home) that affect production.
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Re: Whence inflation?

Post by willthrill81 »

typical.investor wrote: Wed May 05, 2021 9:33 am
rockstar wrote: Mon Oct 12, 2020 1:31 pm
willthrill81 wrote: Mon Oct 12, 2020 1:14 pm
rockstar wrote: Mon Oct 12, 2020 1:13 pm
willthrill81 wrote: Mon Oct 12, 2020 12:38 pm

Why? Will the velocity of money increase?
You give money to a part of the population that lives nearly paycheck to paycheck. They're going to spend it, not save it. This should drive prices up.
Unless money is continually given to them, it seems likely to me to be spent quickly and find its way into the pockets of those who are already hoarding it. The stimulus money does not appear, based on the data I've seen, to have materially changed the velocity of money.
Which is why I said bursts of inflation. The most steady stimulus has been the additional unemployment. This appears to have drove up grocery prices.

https://fred.stlouisfed.org/series/PCU4451104451103#0

Tweak the chart to look at percentage change from a year ago. You'll seek the spike.

If you're retired, you're now paying a lot more for groceries.
It’s plain nuts to blame stimulus for rising grocery prices.

Grocery prices were clearly rising before stimulus happened and coincidentally, food prices in cafeterias and restaurants (ie eat-in) were actually falling.

Show me one shred of evidence that people are actually eating so much more now that we are seeing higher prices. Maybe a little as we munch while watching more movies but I seriously doubt because of stimulus.

Rather we are seeing the impact of COVID on supplies and the effects of mass consumption changes (as people eat at home) that affect production.
I agree. Consumption has shifted greatly from restaurants to grocery stores, and that seems to have driven much of the inflation in groceries.

Further, even those that believe that the money supply is the predominant factor underlying inflation, which the data in the OP refute rather strongly, there has to be a significant lag between an increase in the money supply and inflation. A month or two wouldn't cut it.

Despite the rising Fed funds rate from 6.70% in January of 1978 to 17.61% in April of 1980, CPI still rose over that entire period from 6.81% to 14.59%, when it finally reached its peak and fairly steadily fell to under 5% in late 1982. It took over two years for high and increasing interest rates to finally get inflation to turn around.

Likely a substantial factor causing the above lag is consumers' expectations for future inflation. We've had such low inflation for so low (e.g., we've only seen CPI break 5% since mid-1991 and only very briefly then) that consumers expect it to continue to be low. And if they expect it to be low, that puts significant downward pressure on nominal prices of goods and services.
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Re: Whence inflation?

Post by dodecahedron »

willthrill81 wrote: Wed May 05, 2021 10:31 am
typical.investor wrote: Wed May 05, 2021 9:33 am It’s plain nuts to blame stimulus for rising grocery prices.

Grocery prices were clearly rising before stimulus happened and coincidentally, food prices in cafeterias and restaurants (ie eat-in) were actually falling.

Show me one shred of evidence that people are actually eating so much more now that we are seeing higher prices. Maybe a little as we munch while watching more movies but I seriously doubt because of stimulus.

Rather we are seeing the impact of COVID on supplies and the effects of mass consumption changes (as people eat at home) that affect production.
I agree. Consumption has shifted greatly from restaurants to grocery stores, and that seems to have driven much of the inflation in groceries.

Further, even those that believe that the money supply is the predominant factor underlying inflation, which the data in the OP refute rather strongly, there has to be a significant lag between an increase in the money supply and inflation. A month or two wouldn't cut it.

Despite the rising Fed funds rate from 6.70% in January of 1978 to 17.61% in April of 1980, CPI still rose over that entire period from 6.81% to 14.59%, when it finally reached its peak and fairly steadily fell to under 5% in late 1982. It took over two years for high and increasing interest rates to finally get inflation to turn around.

Likely a substantial factor causing the above lag is consumers' expectations for future inflation. We've had such low inflation for so low (e.g., we've only seen CPI break 5% since mid-1991 and only very briefly then) that consumers expect it to continue to be low. And if they expect it to be low, that puts significant downward pressure on nominal prices of goods and services.
Food stamp (SNAP) and WIC benefits have both increased substantially during the Pandemic. Those are highly liquid benefits that are not part of the official money supply (though they likely have a "spending velocity" substantially higher than unrestricted cash benefit payments) and are required to be spent on eligible food items, which could be contributing to upward price pressure on groceries.
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Re: Whence inflation?

Post by typical.investor »

dodecahedron wrote: Wed May 05, 2021 10:46 am
willthrill81 wrote: Wed May 05, 2021 10:31 am
typical.investor wrote: Wed May 05, 2021 9:33 am It’s plain nuts to blame stimulus for rising grocery prices.

Grocery prices were clearly rising before stimulus happened and coincidentally, food prices in cafeterias and restaurants (ie eat-in) were actually falling.

Show me one shred of evidence that people are actually eating so much more now that we are seeing higher prices. Maybe a little as we munch while watching more movies but I seriously doubt because of stimulus.

Rather we are seeing the impact of COVID on supplies and the effects of mass consumption changes (as people eat at home) that affect production.
I agree. Consumption has shifted greatly from restaurants to grocery stores, and that seems to have driven much of the inflation in groceries.

Further, even those that believe that the money supply is the predominant factor underlying inflation, which the data in the OP refute rather strongly, there has to be a significant lag between an increase in the money supply and inflation. A month or two wouldn't cut it.

Despite the rising Fed funds rate from 6.70% in January of 1978 to 17.61% in April of 1980, CPI still rose over that entire period from 6.81% to 14.59%, when it finally reached its peak and fairly steadily fell to under 5% in late 1982. It took over two years for high and increasing interest rates to finally get inflation to turn around.

Likely a substantial factor causing the above lag is consumers' expectations for future inflation. We've had such low inflation for so low (e.g., we've only seen CPI break 5% since mid-1991 and only very briefly then) that consumers expect it to continue to be low. And if they expect it to be low, that puts significant downward pressure on nominal prices of goods and services.
Food stamp (SNAP) and WIC benefits have both increased substantially during the Pandemic. Those are highly liquid benefits that are not part of the official money supply (though they likely have a "spending velocity" substantially higher than unrestricted cash benefit payments) and are required to be spent on eligible food items, which could be contributing to upward price pressure on groceries.
I’d suspect that the extra $25/month for food is in many cases offset by a loss of other income so there is no prof here that anyone is eating that much more. And remember, they are paying higher food prices too so it’s not really like they are consuming so much more.

Do people really eat that much more when they have a little more money anyway? Do we normally see food consumption and prices rise with strong employment?

I think this thread is just trying to scapegoat others for their COVID related higher food prices.
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Re: Whence inflation?

Post by willthrill81 »

typical.investor wrote: Wed May 05, 2021 11:12 am I think this thread is just trying to scapegoat others for their COVID related higher food prices.
Some may be trying to do that now, but that was absolutely not the purpose of the OP, which didn't even mention the prices for any group of goods or services.

Nonetheless, we haven't seen higher prices when grocery shopping of late. On the contrary, we just got a lot of really good deals this morning from our local Fred Meyer.
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Re: Whence inflation?

Post by AlwaysLearningMore »

alex_686 wrote: Tue May 04, 2021 4:43 pm
AlwaysLearningMore wrote: Tue May 04, 2021 3:54 pm "In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can "live with" by reducing their standard of living. This is incorrect: the CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction." https://tinyurl.com/wzdxj39u
"Constant level of satisfaction" seems subjective, especially with comestibles.

It would be interesting to see the details of the hedonic adjustments (and their effects on the overall CPI-U) published alongside the CPI-U data.
Inflation is a ordinal (ranking) value, not cardinal (scaler) value. It is personal, so it can't be used between people. It can't be used to compare 2 different points in time. It assumes you are a homo economicus and not a real person.

So, measuring inflation request subjectivity piled on top of subjectivity. On this foundation we are going to try to construct a price index to measure inflation....
CPI-U values are certainly used to inform payments to Homo sapiens, the ones the BLS wants to see maintain a "constant level of satisfaction." :wink:
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Re: Whence inflation?

Post by Oicuryy »

In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not changed on average. Changes in value in real terms therefore exclude the effect of inflation. In contrast with a real value, a nominal value has not been adjusted for inflation, and so changes in nominal value reflect at least in part the effect of inflation.
https://en.wikipedia.org/wiki/Real_vers ... economics)

What inflation measure should we use to calculate the real return of our investments? Should we all use the same measure? Or should we each use our own personal inflation measure?

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Re: Whence inflation?

Post by alex_686 »

Oicuryy wrote: Thu May 06, 2021 1:16 pm
In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not changed on average. Changes in value in real terms therefore exclude the effect of inflation. In contrast with a real value, a nominal value has not been adjusted for inflation, and so changes in nominal value reflect at least in part the effect of inflation.
https://en.wikipedia.org/wiki/Real_vers ... economics)

What inflation measure should we use to calculate the real return of our investments? Should we all use the same measure? Or should we each use our own personal inflation measure?
In short, CPI. Lots of people use the word "Inflation" when they mean CPI. Even I make this mistake in casual conversation. Or maybe a specialized sub-index. I have used indexes for higher education and building & construction expenses when building plans for those specific goals.

If inflation can be measured it can only be measured with ordinal numbers. i.e., 1st, 2nd, 3rd. This, of course, is useless when trying to comparing against returns which are a cardinal number.

So we are trying to measure something highly subjective and personal in a rational and organized fashion. Most consumer price indexes' methodologies are robust and consistent. We can debate the nuances involved in construction. However I really doubt it is worth the effort to build a new customized price index that matches your consumption preferences.
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Re: Whence inflation?

Post by rockstar »

At the end of the day, all that matters is if this inflation is being picked up in your inflation protected bonds: i bonds or TIPS. If it's not, then you're out of luck.
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Re: Whence inflation?

Post by willthrill81 »

rockstar wrote: Thu May 06, 2021 6:46 pm At the end of the day, all that matters is if this inflation is being picked up in your inflation protected bonds: i bonds or TIPS. If it's not, then you're out of luck.
Well, it need not be quite as bad as that unless all you own is fixed income instruments. But to be sure, the fact that one's own 'personal' inflation rate may be significantly higher than CPI is reason enough for me at least to never want to 'quit playing the game'. (I really can't stand that saying of Bernstein's.) For instance, our property taxes have increased 36% since 2018, far greater than CPI's cumulative 7% over the same period. At least our portfolio has grown faster than our property taxes. :D
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Re: Whence inflation?

Post by tomsense76 »

willthrill81 wrote: Wed May 05, 2021 10:31 am
typical.investor wrote: Wed May 05, 2021 9:33 am
rockstar wrote: Mon Oct 12, 2020 1:31 pm
willthrill81 wrote: Mon Oct 12, 2020 1:14 pm
rockstar wrote: Mon Oct 12, 2020 1:13 pm

You give money to a part of the population that lives nearly paycheck to paycheck. They're going to spend it, not save it. This should drive prices up.
Unless money is continually given to them, it seems likely to me to be spent quickly and find its way into the pockets of those who are already hoarding it. The stimulus money does not appear, based on the data I've seen, to have materially changed the velocity of money.
Which is why I said bursts of inflation. The most steady stimulus has been the additional unemployment. This appears to have drove up grocery prices.

https://fred.stlouisfed.org/series/PCU4451104451103#0

Tweak the chart to look at percentage change from a year ago. You'll seek the spike.

If you're retired, you're now paying a lot more for groceries.
It’s plain nuts to blame stimulus for rising grocery prices.

Grocery prices were clearly rising before stimulus happened and coincidentally, food prices in cafeterias and restaurants (ie eat-in) were actually falling.

Show me one shred of evidence that people are actually eating so much more now that we are seeing higher prices. Maybe a little as we munch while watching more movies but I seriously doubt because of stimulus.

Rather we are seeing the impact of COVID on supplies and the effects of mass consumption changes (as people eat at home) that affect production.
I agree. Consumption has shifted greatly from restaurants to grocery stores, and that seems to have driven much of the inflation in groceries.

Further, even those that believe that the money supply is the predominant factor underlying inflation, which the data in the OP refute rather strongly, there has to be a significant lag between an increase in the money supply and inflation. A month or two wouldn't cut it.

Despite the rising Fed funds rate from 6.70% in January of 1978 to 17.61% in April of 1980, CPI still rose over that entire period from 6.81% to 14.59%, when it finally reached its peak and fairly steadily fell to under 5% in late 1982. It took over two years for high and increasing interest rates to finally get inflation to turn around.

Likely a substantial factor causing the above lag is consumers' expectations for future inflation. We've had such low inflation for so low (e.g., we've only seen CPI break 5% since mid-1991 and only very briefly then) that consumers expect it to continue to be low. And if they expect it to be low, that puts significant downward pressure on nominal prices of goods and services.
Yeah exactly. Also as things normalize expect we will we see the situation reverse resulting the opposite shortages that we had going into the pandemic.

This whole experience has really highlighted how specialized some goods have become and how that impacts downstream utilization. Also how there is some work to be done to improve the responsiveness and resiliency of supply chains.

The toilet paper shortage is a great case study for this: https://www.forbes.com/sites/loracecere ... e4d72c56f6
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Re: Whence inflation?

Post by rockstar »

willthrill81 wrote: Thu May 06, 2021 7:45 pm
rockstar wrote: Thu May 06, 2021 6:46 pm At the end of the day, all that matters is if this inflation is being picked up in your inflation protected bonds: i bonds or TIPS. If it's not, then you're out of luck.
Well, it need not be quite as bad as that unless all you own is fixed income instruments. But to be sure, the fact that one's own 'personal' inflation rate may be significantly higher than CPI is reason enough for me at least to never want to 'quit playing the game'. (I really can't stand that saying of Bernstein's.) For instance, our property taxes have increased 36% since 2018, far greater than CPI's cumulative 7% over the same period. At least our portfolio has grown faster than our property taxes. :D
True.
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Re: Whence inflation?

Post by willthrill81 »

The annual inflation rate for the U.S. is now 4.2%. In the context of the OP, which looked at both the money supply and the velocity of money over the prior decade, I believe that it's worthwhile to look at how both of these variables have changed since 2020.

The M2 money supply increased from $15.41 trillion at the beginning of 2020 to $19.9 trillion as of April 27th, 2021. The velocity of M2 decreased from 1.379 in Q1 of 2020 to 1.123 in Q1 of 2021.

This means that the money supply increased by 29%, while the velocity of the money supply decreased by 19%. So it seems that the decreased velocity of money has continued to put downward pressure on inflation, which increased at a far slower rate than has the money supply.
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Re: Whence inflation?

Post by alex_686 »

willthrill81 wrote: Wed May 12, 2021 8:51 pm The annual inflation rate for the U.S. is now 4.2%. In the context of the OP, which looked at both the money supply and the velocity of money over the prior decade, I believe that it's worthwhile to look at how both of these variables have changed since 2020.

The M2 money supply increased from $15.41 trillion at the beginning of 2020 to $19.9 trillion as of April 27th, 2021. The velocity of M2 decreased from 1.379 in Q1 of 2020 to 1.123 in Q1 of 2021.

This means that the money supply increased by 29%, while the velocity of the money supply decreased by 19%. So it seems that the decreased velocity of money has continued to put downward pressure on inflation, which increased at a far slower rate than has the money supply.
I will point out the money velocity theory depends on the amount of money in the system. The better measure then would be the money that most of us actually use, which is M3. M3 is darn hard to measure, but is probably about 10 tines the size of M2 and has probably declined over the period you cite.
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Re: Whence inflation?

Post by willthrill81 »

alex_686 wrote: Thu May 13, 2021 7:59 am
willthrill81 wrote: Wed May 12, 2021 8:51 pm The annual inflation rate for the U.S. is now 4.2%. In the context of the OP, which looked at both the money supply and the velocity of money over the prior decade, I believe that it's worthwhile to look at how both of these variables have changed since 2020.

The M2 money supply increased from $15.41 trillion at the beginning of 2020 to $19.9 trillion as of April 27th, 2021. The velocity of M2 decreased from 1.379 in Q1 of 2020 to 1.123 in Q1 of 2021.

This means that the money supply increased by 29%, while the velocity of the money supply decreased by 19%. So it seems that the decreased velocity of money has continued to put downward pressure on inflation, which increased at a far slower rate than has the money supply.
I will point out the money velocity theory depends on the amount of money in the system. The better measure then would be the money that most of us actually use, which is M3. M3 is darn hard to measure, but is probably about 10 tines the size of M2 and has probably declined over the period you cite.
How could M3 have declined when M2 has more than doubled over the last 10 years, and why?
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Re: Whence inflation?

Post by alex_686 »

willthrill81 wrote: Thu May 13, 2021 9:24 am How could M3 have declined when M2 has more than doubled over the last 10 years, and why?
So, I misread the post and thought you were talking only about the last 12 months. Sorry about that.

However, there is a very large disconnect between M2 and the broad money supply, M3. During the last 2 financial crisis, 2008 and 2020, M3 crashed. That is one of the reasons why the Fed and Treasury were encouraging the creation of M2 - to counterbalance this liquidity crisis.

It is very easy to create money. After all, what is money? It is a low duration bond, highly liquid, with principal protection. Any asset that meets that definition operates as if it were money. Banks are really good at converting assets into money. As John Kenneth Galbraith said in 1975:
The process by which banks make money is so simple that the mind is repelled
The big change in the past 50 years is how much money creation is done outside banks. For example, a corporation that issues commercial debt is creating broad money. This all works well during normal times. In times of crisis this all falls apart. Now, obviously this is not fixed to gold or a bank's fractional reserve. The broad money supply can expand and contract according to market needs and appetite for risk.
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Re: Whence inflation?

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Re: Whence inflation?

Post by Robot Monster »

"On May 12, the Underlying Inflation Dashboard was updated with new data. See how longer-term inflation trends have changed." - -> link
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Re: Whence inflation?

Post by F150HD »

NPR: Beware Of 'Shrinkflation,' Inflation's Devious Cousin

I had no idea they were making TP sheets smaller :confused

Image

Retooling machinery to make it smaller has to have some cost.
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Re: Whence inflation?

Post by Whakamole »

F150HD wrote: Tue Jul 06, 2021 6:48 pm NPR: Beware Of 'Shrinkflation,' Inflation's Devious Cousin

I had no idea they were making TP sheets smaller :confused

Image

Retooling machinery to make it smaller has to have some cost.
Yes, and companies wouldn't do it unless it paid for itself. I imagine it did so fairly quickly. There was also a cost to change the size of Tillamook ice cream containers from 56 oz to 48 oz to keep the price of a carton the same (for those keeping track at home, that's a 15% price increase.)
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Re: Whence inflation?

Post by Random Poster »

Whakamole wrote: Tue Jul 06, 2021 7:01 pm There was also a cost to change the size of Tillamook ice cream containers from 56 oz to 48 oz to keep the price of a carton the same (for those keeping track at home, that's a 15% price increase.)
Plus the cost of all the coupons for one free ice cream container that Tillamook sent out to everyone who complained about the size change.
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Re: Whence inflation?

Post by phantom0308 »

We had a decade plus of QE with no inflation. Suddenly after a pandemic with an obvious massive supply shock (and most of the world still struggling), inflation has risen to levels not seen since 1990 and inflation hawks are convinced yet again QE is the problem. Inflation is localized to sectors where supply shocks are hitting most severely. The only worry is that it spreads if the shocks aren’t handled quickly and expectations become set.

Everyone suggesting that rates need to be raised now are forgetting the other half of the feds dual mandate. Maximum sustainable employment. We have recent evidence that the natural rate of unemployment is much lower than its current level. Driving that down is far more important to me than likely transitory inflation. Low unemployment is good for productivity, real wages, and people the lowest end of the income distribution.
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Re: Whence inflation?

Post by Forester »

phantom0308 wrote: Wed Jul 07, 2021 2:05 am We had a decade plus of QE with no inflation.
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Re: Whence inflation?

Post by F150HD »

Whakamole wrote: Tue Jul 06, 2021 7:01 pm Yes, and companies wouldn't do it unless it paid for itself. I imagine it did so fairly quickly. There was also a cost to change the size of Tillamook ice cream containers from 56 oz to 48 oz to keep the price of a carton the same (for those keeping track at home, that's a 15% price increase.)
I have seen w/ many products over the past X years, coffee for example which I buy a lot of. Also seeing w/ Powerade bottles which used to be 32oz and are now 28oz, though price is the same.

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Re: Whence inflation?

Post by phantom0308 »

:confused
Forester wrote: Wed Jul 07, 2021 5:00 am
phantom0308 wrote: Wed Jul 07, 2021 2:05 am We had a decade plus of QE with no inflation.
Image
19% over 10 years (2009-19) is 1.75% per year, so like I said nothing.
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Re: Whence inflation?

Post by jeffyscott »

F150HD wrote: Tue Jul 06, 2021 6:48 pm NPR: Beware Of 'Shrinkflation,' Inflation's Devious Cousin

I had no idea they were making TP sheets smaller :confused

Image

Retooling machinery to make it smaller has to have some cost.
I have not studied the history of TP width, but had thought that Costco just sold, non-standard, unusually wide TP?

Their touting of wider sheets, implies "wider than normal" to me, rather something like "still 4.5 inches wide".
Image

One thing I don't understand is what a "regular roll" is, have these ever existed? Our brand's "mega rolls" claim to be equivalent to 4 regular rolls, implying a regular roll of about 70 sheets or total length of just 22-23 feet.
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Re: Whence inflation?

Post by Random Poster »

Bacon prices continue to rise and astound me.

About 8 months ago, Sam’s Club sold a 72 slice pack of pre-cooked bacon for $12.98.

Then the price increased to $14.98.

Today, I noticed the price increased again to $17.98.

The higher price has happened within the past two weeks, as my last purchase was at the $14.98 price.

I doubt I’ll buy it at $17.98.

Are pigs really in that short of supply these days? I know they prematurely slaughtered a bunch during the height of the pandemic last year, but how long does it take to raise a pig for slaughter?
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Re: Whence inflation?

Post by Walkure »

jeffyscott wrote: Wed Jul 07, 2021 11:13 am I have not studied the history of TP width, but had thought that Costco just sold, non-standard, unusually wide TP?

Their touting of wider sheets, implies "wider than normal" to me, rather something like "still 4.5 inches wide".

One thing I don't understand is what a "regular roll" is, have these ever existed? Our brand's "mega rolls" claim to be equivalent to 4 regular rolls, implying a regular roll of about 70 sheets or total length of just 22-23 feet.
Well, prepare to be educated, because it so happens that nisiprius has an entire thread on that exact subject:
viewtopic.php?t=266360
nisiprius wrote: Thu Dec 13, 2018 8:40 pm Of course, I can't find any evidence that Charmin actually sells anything called a "regular roll," can you?

Is that the trick?

Is it not actually sold? Is there one sole solitary single "regular roll" kept at Procter & Gamble... in a sealed cube filled with dry nitrogen under controlled temperature... with no function except to be a standard of measuring 1/6th the size of a "super mega rolls?"
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Re: Whence inflation?

Post by jeffyscott »

Walkure wrote: Wed Aug 25, 2021 4:35 pm
jeffyscott wrote: Wed Jul 07, 2021 11:13 am I have not studied the history of TP width, but had thought that Costco just sold, non-standard, unusually wide TP?

Their touting of wider sheets, implies "wider than normal" to me, rather something like "still 4.5 inches wide".

One thing I don't understand is what a "regular roll" is, have these ever existed? Our brand's "mega rolls" claim to be equivalent to 4 regular rolls, implying a regular roll of about 70 sheets or total length of just 22-23 feet.
Well, prepare to be educated, because it so happens that nisiprius has an entire thread on that exact subject:
viewtopic.php?t=266360
nisiprius wrote: Thu Dec 13, 2018 8:40 pm Of course, I can't find any evidence that Charmin actually sells anything called a "regular roll," can you?

Is that the trick?

Is it not actually sold? Is there one sole solitary single "regular roll" kept at Procter & Gamble... in a sealed cube filled with dry nitrogen under controlled temperature... with no function except to be a standard of measuring 1/6th the size of a "super mega rolls?"
Nisi got about the same for Charmin, so at least they are consistent putting the mythical single roll at ~22ft.

But here's Cottonelle with 154 sheet single rolls:
https://www.instacart.com/products/2005 ... 1-ply-4-ct
that's about 2x the expected, thought maybe it was related to 2 ply vs. 1 ply, but then our Northern is 3 ply.
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Re: Whence inflation?

Post by Blue456 »

Tib wrote: Tue May 04, 2021 11:51 pm
alex_686 wrote: Tue May 04, 2021 10:42 pm
VtsaxParade wrote: Tue May 04, 2021 10:05 pm I think there will always be a disconnect between officially reported inflation, true inflation, and perceived inflation across a range of people.

So ignoring that disconnect, suppose officially reported inflation hits 5% and runs that high for a number of years (worse than any time in 30 years).

What kind of impact would that have?
Not much.

As long as inflation is under 10%, steady, and expected societies have adapted well. Not saying it is great, but a fair number of developed economies had that level of inflation for long periods in the 20th century.
Not much impact? Perhaps for those who are working and whose wages keep pace with inflation. A lot of impact on retirees dependent on fixed pensions, fixed annuities, and/or investment accounts.

Morningstar’s John Rekenthaler gives the real returns for cash, intermediate bonds, long bonds, and large stocks for each of the periods of high inflation in the U.S. since 1941:

https://www.morningstar.com/articles/99 ... tion-hedge

From January 1973 through December 1981, inflation averaged 9.2%. The cumulative real return for long bonds was -52%. For large stocks it was -33%.

Perhaps the inflation wasn’t “steady” and “expected” but next time it probably will be?
How did ex-US do during such high inflation period?
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Re: Whence inflation?

Post by willthrill81 »

I thought that it might be worthwhile to update this thread.

The M3 money supply increased by 11% since Oct., 2020, as seen below.

Image

The velocity of money initially increased a bit but appears to have largely stabilized. It is currently under 2% higher than its low from Q2 of 2020.

Image

All else being equal, an increased money supply with a stable velocity of money should result in meaningful inflation. And that's exactly what we've seen. The annualized inflation rate as measured by CPI has increased from 1.2% in Oct. of 2020 to 5.4% in Sep. of 2021.
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