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Unsolved Macro Mystery Is Key To Inflation Puzzle
Even after watching it play out, and to somewhat disastrous effect in the inflation data, macro observers seem reluctant to countenance the reality of wage-price spiral dynamics.
Note that because this is a chicken-egg problem, flipping it around to call it a price-wage spiral (in an effort to vilify corporate management teams) doesn't solve the underlying dilemma, even if it's a politically useful distinction.
Like everything else since 2020, the situation is exacerbated meaningfully by linge
So much analysis, so many vague and uncertain conclusions… I think Whire Rabbit is on the turntable, and the needle just keeps skipping!
After reading this I happened upon a Bloomberg story which may seem unrelated but may not be. As you concede, the word order is relevant in a political context. Focusing interest rate policies solely on reducing wage growth will likely fuel yet more resentment from the 70%. Sadly, in the US that manifests in growing support for extreme right-wing ideas and, as we saw in Texas this past weekend, violence.
‘We Just Want Someone Sane’: What Happens When a Small Town Goes MAGA https://www.bloomberg.com/opinion/features/2023-05-07/gop-election-deniers-are-gunning-big-for-pennsylvania-local-government
How do restrictive Fed policies help bring down prices of the daily staples relevant to most Americans? Will they bring down food and healthcare prices? The last time the latter fell was in 2009 when demand fell thanks to layoffs which left many Americans without insurance coverage. I guess a similar mechanism may help reduce demand for some food items, but otherwise?
Some help if Fed actions reduce diesel prices, theoretically reducing distribution costs. Theoretically because fuel or energy cost surcharges are as sticky as wages are said to be so it will be months until they are rescinded, if at all.
So that leaves housing and autos which certainly are showing the impact of higher interest rates. Is that popular on Main Street? Or to folks who work in construction?
It could be that the Fed is forced to back off or even reverse course if the commercial real estate market weakens further. A witty populist, like Ronnie-D, might ask why the Fed only responds when the business sector is damaged by their policies…
Yes, “the Fed has to do something”, but that “something” may be helping the nation step over the edge.
Would the Fed ever dare to comment on how corporations raising prices well beyond the increase in their costs is forcing them to keep rates higher for longer? Nah.
One factor that I hadn’t considered previously when considering housing construction was that new construction might hold up better than I previously anticipated due to the lack of existing homes for sale. I’m hoping that helps ameliorate some of the longer term housing inflation. All bets are off though if interest rates come tumbling down again at some point.
I think new SFR construction will hold up, the builders have figured out how to make a normal-ish profit (GM% and OM% generally at or above pre-pandemic levels) and they have customers in both owner-occupant and institutional rental fleets. However, new multi-family dwelling projects are almost non-existent, and new office as well. When existing MFD and office projects are done, I’d think construction jobs will get thinner.
https://www.aia.org/pages/6617159-abi-march-2023-business-conditions-improve
Interesting reading
Yeah, the order of the words may not matter to a looped phenomenon but it does matter where you break that loop. Is it going to be at the wage stage, screwing up workers as always or are we for once going to squeeze corporations?
The Fed isn’t the best tool for the job. The Federal government is. But it’s so mired in stasis we may only have the Fed available and the only thing they can do to break the loop is break the economy in its entirety via a recession… while hoping for a soft landing.
But if, as Derek suggests, they were at least as willing to speak about greedflation as they are to mention wage price spirals, I think it’d be a good first baby step.
A GIANT thumbs up, sir.