Whence inflation?

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rockstar
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Re: Whence inflation?

Post by rockstar »

willthrill81 wrote: Fri Oct 15, 2021 8:32 pm 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.
Wouldn't the liquidity trap mitigate part of this?

Now, I get the stimulus and enhanced unemployment having an impact on inflation as that is money that flows to consumers most likely to spend. But I struggle with printing money as a cause of inflation by itself.

https://www.stlouisfed.org/on-the-econo ... lation-low

https://web.mit.edu/krugman/www/trioshrt.html

However, it does look like consumers are starting to drain their savings:

https://fred.stlouisfed.org/series/TSDABSHNO
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willthrill81
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Re: Whence inflation?

Post by willthrill81 »

rockstar wrote: Fri Oct 15, 2021 8:53 pmBut I struggle with printing money as a cause of inflation by itself.
If you read the OP, you'll note that I agree with you. Current views of inflation are that is a function of both the money supply and the velocity of money. If money is 'printed' but not spent, it does not result in inflation. From at least 2010 through part of 2020, that's precisely what we supply: an increased money supply but a declining velocity of money, with the result being very low inflation. But for the last year or so, we've seen the money supply continue to increase while the velocity of money has stabilized, and inflation has been significant.
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rockstar
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Re: Whence inflation?

Post by rockstar »

willthrill81 wrote: Fri Oct 15, 2021 9:44 pm
rockstar wrote: Fri Oct 15, 2021 8:53 pmBut I struggle with printing money as a cause of inflation by itself.
If you read the OP, you'll note that I agree with you. Current views of inflation are that is a function of both the money supply and the velocity of money. If money is 'printed' but not spent, it does not result in inflation.
I'm trying to wrap my head around what happens when the savings start to run out and the job wage growth doesn't keep up. Right now, it feels like we're in a wage price spiral. Of course, we have far fewer unions than we did back in the 70s. And job hopping is likely to become a red flag again.

https://www.investopedia.com/terms/w/wa ... spiral.asp

However, another possible tool to contain this is to broadly raise taxes on everyone. This will supposedly reduce inflation as an alternative to raising rates. But I don't think folks have the appetite to take this approach.

So how will we contain it this time?

The last time we saw it out of control our government took action against the air traffic controllers, deregulated like crazy, and raised rates through the roof. Since then we have seen rising inequality and stagnant wages when adjusted for inflation on most of the population. We have also seen very little inflation other than periods of time coming out of recessions.

I'm more concerned with how we get out of this mess. I'm good holding more equities than I'd like, but I'd also like to buy bonds other than I Bonds too. If we ever do get back to a double digit 30 year treasury bond, I'll just buy that and forget about equities.

I'm not ready to dive into MLPs like Bill Gross suggested in his latest rant:

https://www.prnewswire.com/news-release ... 99444.html

It was so bad last time that there was a four part All in the Family story about them dealing with inflation.

https://www.imdb.com/title/tt0509927/ (1974)

https://www.npr.org/transcripts/1001023637
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AnnetteLouisan
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Re: Whence inflation?

Post by AnnetteLouisan »

Shouldn’t that be, whither inflation?
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Re: Whence inflation?

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