Why Inflation is Coming Down So Fast
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- čas přidán 11. 06. 2024
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SOURCES:
I've linked my sources in the blog that goes along with this video. Links are in the text.
www.moneymacro.rocks/2023-10-...
Timestamps:
0:00 - introduction
1:26 - inflation spike drivers
10:45 - sponsor
12:06 - inflation fall drivers
13:36 - the future
Narrated and produced by Dr. Joeri Schasfoort
Thumbnail by Tom Hurling studiotomkin.com/
Is this the End of Sky High Inflation?
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Inflation is coming down for a brief period of time, energy costs will drive it into high gear in the coming months. The Fed probably wont cut rates before summer 2024.
I don’t think that countries will be able to borrow money at the interest rates we do. Or governments will have to learn how to cut spendings like we did. As the western countries aren’t ready to start paying their debt and will have to reborrow at the end of 2024 I think that interest rates will have to go down or else there will be defaults.
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I've always thought it was primarily supply shock, due to so many industries shut down.
As a printer in business for 35 yrs, 2021-2022 saw huge price increases and lack of supply.
In some cases, I had orders but no paper or graphic supplies (or had to wait a month) it was unprecedented.
A plumber friend building a shower for us in 2021 said there are no 2 inch elbows (at all).
In a year some paper was up almost 100%.
However, looking at paper prices, I am now seeing a 20-30% price drop since the peak. So some prices are definitely coming down.
I eat paper and drink ink. At one point I had to eat just once a day due to how expensive it was.
@@internet_userr you may as well start eating food bro. That juice's not worth the squeeze.
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0:08: 📈 Inflation in the United States, the U.K., and Euro Area surged during the pandemic but is now seemingly falling.
3:38: 💬 Inflation is falling and unemployment is low, contradicting predictions of hyperinflation and high unemployment.
7:42: 📊 The video discusses the drivers of inflation in Europe and the role of Russia's invasion of Ukraine.
10:14: 💰 The video discusses the role of government support and stimulus in inflation, as well as the potential end of supply problems and the rise of demand-led inflation.
13:42: ✅ The great inflation surge is unlikely to happen again due to various factors.
Recap by Tammy AI
Thanks for the recap!
AI is so wild🤯
yeah it's like oil, every excuse is good to raise the prices, and they always tend to go up, never down if there are no incidents. It's just greed ofc.
13:00 I think it would be a good idea to dive deeper into the relationship between rising interest rates, mortgages and rents. I’ve heard that in the UK, higher interest rates have meant that more people are deciding to rent, driving up rent prices and thus contributing to inflation.
The problems goes well beyond this because rents (cost of living is so high and prices are so high) that they cannot save enough to even enter ownership. Upwards mobility and the ability to build wealth through property is dead. With it goes the privileges afforded property owners. Major economies like the UK and US are converging to aristocracy once more.
Rent prices did go up significantly in the UK in the last year, in part because of the interest rate (other factors were significant too, I believe). But rent prices don't directly contribute to inflation. In fact I think high rent prices discourage spending on consumer goods.
@@mihaiburloiu367 That’s a very curious definition of inflation. A necessity like food or shelter sets the floor on wages and all the value of their wages is absorbed by people who have the surplus of money anyway. What increase in demand for food and heat spiked so much that normal people must be savagely impoverished as punishment?
In all cases higher interest is a rent or tax or tribute extracted from the entire economy to benefit creditors. It *is* an inflation that spreads from those who can raise prices and austerity from those who cannot. This is simply another round of wealth concentration and punishment of ordinary people.
@GhostOnTheHalfShell have you ever studied the data? Look at every study and you'll see that low interest rates are directly responsible for rising asset prices and increasing the wealth divide... they gave the wealthy unlimited credit
Meanwhile asset prices soared higher than ever and are only JUST NOW coming down in Canada and the USA
They will eventually lower interest rates... but saying that we it helps the wealthy is completely wrong from the data I've seen. It disproportionately hurts asset owning class and those the who have most in debt... which are the wealthiest people and corps
Banks in the USA AKA creditors are blowing up right now
In Switzerland it's even closer connected. When interest rates rise, landlords are allowed to increase the rent, since they have to pay more for mortgages. The main contributor to inflation in Switzerland now is rent😅.
I take option 3: Both teams are stuck in the past, and hold on to economic models that make no sense. MMT explains everything that happens right now to a T. I don't know much about US-Economy, except that rent prices got sky high during COVID, which is very different from House-Prices. Renting != Buying.
In Europe, and especially in Germany, where I'm from, the "inflation" isn't even infaltion. It was a price shock, which was perfectly explained here. I can't add anything more, as this whole thing was explained beautifully!
Now the next problem, as I understand it, will be growth. Germany is tanking its current economy, because it cuts its spending in the middle of a crisis. The hike in the interest rate is tanking the economy now. Germany has a massive rent issue, where people are spending 50-60% of their income on rent in major cities. At the same time, interest rates of 4.5% are killing the construction industry, which has a drop in contracts of (I think) 16% right now. Meaning we have not enough flats, and are going to build less now.
At the same time, prices will go up, because COVID stimulus will end, and the government will not extend it. One example for this is the reduced VAT on restaurant food. While Spain and Portugal set the VAT on food to 0, Germany will increase the VAT on restaurant food back to 19% from now 7% on Jan 1st 24. Another inflation factor will be the CO2 price increase. Coming 2024, the government will increase the price of 1 ton of carbon from 30€ to 40€, an increase of 33%, while announcing that, unlike promised, this money will not be returned to the consumer. Meaning prices will go up, consume will go down.
Germany is facing an economic crisis right now, and our government is pushing it into overdrive. Why? Because they think that one of these two teams from this video is right. They think this neo liberal bullshit of a state only having the money of its tax payers is true. They're morons, and they're ruining our economy because of it. Money in infinite, it is made up. It is physical resources that is limited. Labour, CO2, materials. We saw it during COVID, when the semi-conductors got rare => price shock. During the russian war, when gas got cut off => price shock. Not enough living space in cities => increasing rents. Not enough workers => Wages go up, or business go under because of understaffing. Not enough craftsmen => prices for reparis in your home go up. It is not always simple, but it usually breaks down to a straight forward cause and effect.
Agree that deglobalisation, ageing population and geopolitical tension will make inflation stay much longer this time to fall to 2% long-term target. The technology revolution e.g. AI will also play a role in whether productivity growth suppresses inflation.
Ageing populations in Europe are not the same as those in the USA or the developing world. Traditionally these are the most solvent group in society, most have private health insurance (creating jobs), own a home so no need for social housing and provide income by travelling, hiring help or giving money to family members.
Fantastic analysis and nicely explained
I love your thorough analysis!
Thank you for providing links to the papers. Many people ignore citing sources and it kills me since many people ignore the importance of methodology and just report results.
I would have liked to hear about the methodology a bit in this video, but he focused on the conclusions. I'm very skeptical of such bold claims and would like to understand the impressive work that would be needed to produce this data. I guess I'll read the papers when I have time.
It would have been nice to hear your thoughts or any research you may have read that discussed how much of inflation is simply corporations raising prices because they can (beyond making up for higher cost of doing business), purely for higher profit margins, with inflation being their easy justification.
This isn't how profits work, higher prices don't magically create higher profits. There's an optimal price, if the company charges either above or below that price their profits will be lower. This is a large oversimplification but the idea that "higher prices = higher profits" is entitely untrue.
You arnt seen the forest through the trees. The Fed causes inflation. On purpose. As long as another human being has access to print and borrow more money without penalty, the status quo will remain, which isn’t good.
"tHiS iSN't hOW pROFiTs WoRK..."
@@kevincronk7981 Would the existence of the optimal price depended on willingness of consumers to purchase the product at that price? Because the argument is that because of inflation talk consumers are more likely to continue buying stuff even at higher prices, allowing the corporations to raise prices purely for profit margins.
@@kevincronk7981 keep in mind, these are frequently the same people that can't grasp that workers who aren't paid don't have money to buy things, and don't care about their business's continued existence so long as the share prices go up Right Now and thus happily run their business into the ground...
Great insight as always
Een 👍 ist niet genug!!! Dankon por viaj kvalitaj scienco-bazitaj videoj.
At least in the US, inflation numbers are not an accurate representation of the increasing cost of living people experience.
When i hear ppl say this i always ask them ....do you understand what inflation data represents and how raising rates are meant to combat the issue ?
Furthermore, what does an accurate representation for population wide inflation look like in your opinion? Especially, in country as vast as the united states
They aren't including food in the data. It's all fabricated
@@andrewthaboss6643Cope
That depends on where you live. Inflation measures includes everything, _including_ food and fuel. The version without those metrics is called core inflation. That said, Floridians are utterly screwed right now because of home insurance and the elimination of a large section of Florida’s Labor Force in the form of the ban on Cubans with lending asylum cases in the workplace. Florida is a mess. But Blue States tend to have quite low inflation.
you know its so funny to hear neo cons like ben Shapiro bitch about moan about social programs and modern monetary theory yet you wont hear a word about about how we spend trillions of dollars and print money to fund the military budget 😂atleast real liberatarians are consistent neo cons are a walking contradiction lol we could literally slash military spending in half to fund more social programs and still have the largest military in the world by a mile 😂we mostly wouldn't really need to expand the budget that much and they always point to California while ignoring the same problems in Florida because it doesn't match up with the idea of a conservative limited government utopia 😂
Excellent overview, thanks~
My pleasure!
Great video, thank you
Great analysis, bringing lots of different aspects together to systematically replace what I perceived a "gut feeling" by a consistent line of argument. Thanks
Always great content.
The transitory word was misused to infer prices would go back to lower level, not the rate of change would go back to a lower level.
Great video! Funnily enough I found this video, just as I submitted my Bachelor's thesis on this exact subject today 😃You even mentioned some of the same papers I used, like the ones from Shapiro.
Fascinating video!
I mostly agree with your take and truly love that you dug into the data and broke down the drivers of inflation.
The only thing you might have excluded (don't think you missed it) is the consequences of interactions or transmission mechanisms and/or lag/lag effects... For example... When you looked at US rental inflation, couldn't the driver there be the higher home loan interest rates?
Thanks. And yes you are right. Interactions are important. How much of food inflation was just a manifestation of energy inflation (e.g. through fertilizer prices). How much of the 'other' categories are actually just reflecting increased input costs? Alternatively, you could ask, isn't stimulus to blame after all because it enabled us to cope with higher energy prices. In all honesty i could have made an hour long video. But, I try to keep it somewhat digestible.
Lags are another great point. Wages might contribute to inflation for a couple of years as they try to catch up with increased profits and or energy prices.
Given that the US doesn't have enough housing built for the population (new housing starts haven't tracked with population growth for years), if interest rates come down housing costs rising more seems likely (also with interest the total amount spent on a mortgage is still higher). Also I'm curious with the amount of people moving from high cost of living areas to lower cost of living area due to being able to work from home had a more significant impact on housing/rent costs lowering than there being an oversupply of money causing costs to rise.
I agree. I would say that the increase in rent has almost nothing to do with increased money supply and that demand in housing is fairly static ( perpetually high) with landowners passing on the costs of interest increases to trapped renters who have no choice but to pay higher rent as moving is in itself is costly. Prices for rent may be leveling off as interest rates have leveled off. Additionally, I am not sure, but is retail rental space included in this? That sector is starting to get hit hard as many businesses realize that they do not need as much space with people being able to work remotely. Its hard to tell how big of a deal this is and how much is hype.
@@MoneyMacroI am a bit concerned that house and rental prices will rise strongly again due to lack of supply. Many builders pulled out of future developments some even went out of business.
This has been seen in Australia and Canada too that have a similar economic structure like the US. Even major builders and developers have filled section 11 äquivalents. Despite much demand form the influx of migration back into Australia high interest rates make it far less helpfull for builders and homebuyers and much worse for renters.
What are your toughts on those effects in the medium to long term?
@@MoneyMacro When do we get lecture style videos (1-2hrs long)? :-)
Nice overview. I would also like to know your opinion on team “vibes inflation.” This was mostly popular among news outlets (especially NPR’s Planet Money), where they highlighted the effect of market expectations in inflation. From that perspective you could argue that, although the underlying causes of inflation may have been transitory, central banks signaling their willingness to raise interest rates to fight inflation may have helped convinced investors and large firms to plan for a decrease in inflation, and that communal expectation that inflation would come down (either naturally or with help from central banks) ended up making the inflation spike transitory.
Usually it works the other way though. They see fed not raising interest rates so they are free to increase prices which causes more inflation.
The video focuses on basic economics of supply and demand without considering the supply of money (debt) which is at the heart inflation. In a fiat system, inflation is first and foremost a monetary phenomenon. As long as government deficit spending persists the money supply will increase and so will prices.
Good video, do you think the FED should start thinking about lowering rates next year?
Very good analysis as usual.
On the supply side, what would be your take on the impact of the Chinese economy hitting the brake because of a real estate crisis? Could it free lots of production capacity leading to strong price reduction as more chinese companies try to compensate falling internal demand?
Great video, always enjoy watching your analysis. I agree the US had a greater total monetary amount of stimulus, however between the US and Europe the stimulus mix was quite different. From my understanding in the US, the stimulus was much more supply focused and in Europe the stimulus was much more demand/household focused. I wonder if this also played a role in the discrepancies between inflation outcomes.
Thanks!
Chapeau for your interesting video! Let’s see how it will go.
I would welcome if the housing market would cool off a bit
What no one is factoring in regarding inflation is all the companies being bought out by bigger businesses leading to less competition. This resulted in corporations fleecing consumers for prices of products that didn't increase in cost. Furthermore, if it was a supply chain issue, then why did so many companies report record profits? The main driver was less competition between companies. As new businesses rise to compete, we should see products and services get cheaper.
The second argument always makes me laugh just because it's so clearly and easily refutable. Prices are fixed by supply and demand - A variety of elasticity can cause it, for instance, inelastic goods typically cost more due to consumers lowered sensitivity to price increases, but never does profit directly impact price. At best, price impact profits. High profits does not mean higher supply, in the short-term nor does it mean lower demand.
Let me give an example: If I was selling 10 apples for 5 dollars each, and I made a profit per apple of 3 (cost being 2) I'd see a profit of 30. According to you, I should lower my price then, so now I sell it at 3 and makes 1 profit per apple. But, are people more or less likely to consume my apples now? Well, they're more likely, the result is that where we previously had 10 consumers buying apples at 5 dollars each, we now have 20 trying to fight over the 10 apples.
You might retort "well, they could raise production," but an apple tree doesn't grow in 5 seconds does it? And indeed, if you had actually followed the many "big profit" stories, you'd also know most companies indeed doubled their investment. In other words, they were trying to grow new apple trees. But it takes time for investment to produce results. This is why inflation is declining now, and in some countries (my own for instance) has now turned to deflation.
Now, to the empirical claim - "Less competition is the cause," this would be true if evidence for the contrary didn't exist. The many studies above actually goes into these things, and that's why they conclude supply constraint is, at least in Europe, the primary cause. You can believe that as much as you want, and while it's a likely contributing factor (lockdown also forced many businesses to close down too, not just being bought up) we still have evidence for the contrary here.
Impressively fair video for what is usually such an infected topic online. Nice work!
Yep. People are very emotional online.
Literally one of the only eco / finance channels where every video is solid, unbiased and thorough. Does a great job of making the video informative for both beginners and experts on the topic, I think.
Inflation is a short term problem ... The problem is the on coming depression/recession over 50% of small businesses shut down over covid and there not coming back... And small towns got hurt the most. The money has run out and now everything is dropping in value.
Great work! I would like to see your analysis on the economic timeline of Argentina.
The current inflationary episode has BOTH components. The large part was transitory, but we are now seeing sustained inflation above the target. This remainder is due to conflicting claims between workers and firms, due to a number of factors including higher debt costs due to interest rate spikes (leads to hire mark-ups by firms), wage hiking due to a tight labor market, and opportunistic profit inflation. Because fed interest rate hikes have not led to a rise in the unemployment rate, their policy could very well be making inflation worse by putting pressure on firms via debt costs, prompting them to raise prices.
Also, long term inflation (>30 years) is exclusively caused by government deficits. If the Fed raises rates too much, they will increase inflation by federal debt interest payments.
This is an excellent video on inflation. Most informative that I have seen so far. The conclusions from the data is balanced and very professional. Thank you..
It's been 4 months and this video holds up well. It was well researched and presented. I'll bet it'll hold up just as well a couple of years from now.
Great video, I would say that whether supply shocks will come in the future is a bit up in the air. The world seems to be geopolitically unstable right now, so it is conceivable that there will be future supply shocks (though hopefully none as bad as Covid or the Russian War). Some potential shocks I could see happening could be a coup in Egypt causing another disruption to the Suez Canal, a major drought in Panama forcing the Panama Canal to close. Some kind of instability in Saudi Arabia as hardline conservatives oppose the government growing closer to Israel, a blockade of Taiwan (which hopefully would not erupt into conflict), mass shutdowns of lithium mines over environmental concerns as we move farther into the renewable energy transition, and of course trade wars as countries move towards self-sufficiency and protectionism.
So it seems like it'd be a good idea to at least have plans in place for dealing with future supply shocks.
I love how you put EE into the non economist bin. Good. Say it like it is.😂
Thank you for this video, it explains a number of findings very clearly. As others in the comment section are asking, could you investigate "greedflation" and make a video out of it? That would be awesome!
He likely won't, because the concept of "greedflation" is simply not real in any significant way. This would just make a lot of people upset to hear however, because it's far easier and more satisfying to blame big companies for financial hardship than some amorphous economic concepts.
@@jacobprior9651That it not true and demonstrated in several countries in the past. Especially regarding fuel prices:
czcams.com/video/nCc0FBSCtKI/video.htmlsi=_YD0px29ISGA95f0
@@jacobprior9651 But it is. Price watching it's obvious that certain group brands are partaking in it. Looking into their finances, transport/ production areas, employee wages timing of price increases and degreases, it's glaringly obvious.
Greedflation is a controversial term. Did companies get more greedy? Likely not. Still, on the demand side we saw a huge spike in profits, far more so than in wages. This goes against standard theory.
I left it out of this video because it's a huge and difficult discussion that i think would not have significantly altered how i answered the main question of this video.
Still I do follow this debate with great interest and hope to be able to cover it on the channel at some point.
@@MoneyMacro thanks for the answer)
I wanted to add in another consideration, as it's becoming clearer interest rates might no longer be increased for a while.
To relieve the pressure on the housing market, the other economic steering mechanism is reduction of government expenses. I think the chances of this happening are dependent on if a country has to re-finance a high government debt at higher interest rates. That government has more incentive to cut spending.
In the case of The Netherlands, that chance might be very small to non-existent. The US might be another story though. And this can then affect global demand and worldwide inflation.
In the short term, the market in NL has very little incentive to re-organize, and the pressure on people in their 20s and 30s to earn and spend more on housing remains high. But before a further increase in home prices happens, we will likely see an increase in overall price levels on the stock market as these more easily purchaseable assets move faster.
That increase in stock market prices could be starting just about now as interest rates seem to have stabilized. It's something I'll be watching for sure.
Literally perfect video
Amazing video! Thank you. I finally understood a lot of what drives inflation.
Good video! Very fair as you steelman both side positions and very unbiased as you gave both sides credit. Honestly if i would make such a video i would just dismiss team permanent givern how off mark and ridiculous their explns are
You missed a potentially significant effect (at least as much as wage-growth): the ratcheting effect of pricing increases -
Some call it corporate greed, others will defend increased profit margins since the pandemic to make up for decreased margins or even losses during the pandemic... either way, the ratcheting effect comes into play when consumers get accustomed to paying the higher prices and are 'satisfied' when they level off without actually declining to historic pre-pandemic margins.
Some methods to capture this factor's effect and measure its relative significance, would be to look at the different industry categories and compare the net earnings, during each quarter; you could also then do a 1 or 2-year moving average to see if the losses or decreased margins during the pandemic combined with the increased margins following it were lower, higher, or equal to the years preceding the pandemic.
Yes but regarding transmission lags at 4:44, those are before high speed internet so one could argue that the lag is considerably shorter now than at any time before.
Amazing analysis, thank you! Could OPEC+ recent initiatives reignite supply-side inflation? Oil prices are already reflecting supply cuts (+30% WTI since july) and this is already impacting gasoline prices in EU. Western economies always seem to be kept in check by their strategic moves.
I'm sort of puzzled, how does an increase in rent translate to it being a stimulus-driven inflation? A good bit of the rent increases in the U.S. were from people shifting residences after the major push from work-from-home in the pandemic, and the neighborhoods in demand changed. Combine that with city rent rates stubbornly refusing to decline in proportion (along with CRE), and I'm wondering if there's not more to the story there.
EDIT: I think I answered my own question, NM!
Also, US cities just have too much housing demand relative to available supply (thanks to restrictive zoning that forbids high density residential in many places), there'd have to be monumental shifts in demand for rents to fall.
I've read and watched countless videos and articles blaming zoning for a housing shortage. But none of them even mention that a large portion, perhaps a majority, of the high density housing we do have is terrible. Regardless of what people say, almost everyone would rather have a house in the suburbs and drive an hour to work than an apartment in the city. Also, work is moving out of the city and to the suburbs or even the beach. They also never mention an obvious mitigation, an immigration moratorium.
@@rightwingsafetysquad9872that’s note true, as most metros have actually overbuilt class-A MF complexes. You can also have higher densities that are very well-considered and good looking. While many would rather a house in the burbs, you have to consider the costs associated with building such a neighborhood, and then what you would have to charge the market to make it worthwhile. In that event, you’re still looking at nearly $400k/home on the lower end just to make up for increased interest carry and materials costs.
The bottom line is, we need more for-sale “starter” products. And starter products (as they have been throughout most of history) tend to have higher densities. Whether that’s row or townhomes, condos, whatever, we need them. I think more senior living facilities will help as well, as some older folks will move out of their houses and into those places with desired amenities, and put their homes on the market
Your assessment isn't mutually exclusive to the zoning law issue. Yes you are correct - people moved to suburbs, diff states which drove up demand of these areas. Suburbs are naturally more susceptible to high demand issues due to lower density - which zoning laws absolutely exacerbate when supply of available homes can't keep up
@@kyactive Perhaps in San Francisco and Austin there are legitimate housing shortages, which zoning could help with. Sending a lot of immigrants home could also help as well. But in most of the country, there are enough houses, but the price is too damn high. And there are tons of abandoned homes in the cities "for rent". There is not a shortage of housing per se, but a shortage of the kind of housing people want - single family houses in the suburbs. Zoning will not help with this, the only 2 things that will are building more of the houses we've already zoned for and waiting for the older generations to leave and inheritance to their grandchildren.
Really appreciate the sources and such it really helps my tiny brain understand the scope of things and just how many different factors can create the same space for inflation or different spaces.
Good description. This is how I see it too.
I would not give Team Permanent any real credit if future circumstances change such that there is huge supply push inflation in the future, because they are always predicting hyperinflationary Armageddon no matter what. They would merely be broken clocks happening to be right because the real time finally caught up their fixed prediction of the time.
It would be like giving Revelations credit 1 billion years from now when The Sun will cook our planet into a plasmatic goo, for predicting a vague notion of eventual Armageddon: you didn't predict shit with any meaningful accuracy, you just said that the world will end some day and then the world happened to end countless generations later. Wow, much insightful, so informative.
Such a refreshing channel to watch. Backing up claims with actual data and not succumbing to doomsday titles and videos for clicks. You deserve way more views than you're already getting. Thank you!
Turkey didn't rase interest rates and is experiencing ongoing hyper inflation. This would indicate that inflation drop is due to interest rates and not supply issue corrections.
Thanks for the video. I would have thought you were going to say that the base effects are also making inflation rates going down
One thing I am wondering: If supermarkets or food suppliers increase their prices simply to make more money, and cover it up saying that there is inflation going on, wouldn't this be counted to the supply kind of inflation and skew the results? Because then it would be a direct follow up from the alread existing inflation, which could be caused e.g. by goveenment stimulus, etc.
Also increase prices in expectation of price increase would look like a supply shortage especially in non elastic areas like you said food as people still need to eat
This was fascinating, thank you so much for this video!
My pleasure:)
Can you do a video on the relationship between housing prices and housing supply. Especially interested in how these factors manifest at the neighborhood level.
In a nutshell and other factors being equal, Supply up = lower prices. Supply down = higher prices.
I think a look at the granger causality between repo rate hikes and the rate of bank credit expansion would have helped. Especially since the logic behind repo rate hikes is that it will hike the cost of borrowing for banks in the interbank lending markets, which will dampen the rate of growth of deposits (money) which at the end will bring down inflation. Now although from the video we know that except for the US house rents this channel hasn't been effective, a look at the hard numbers would have made clear how illogical the Taylor rule is in general, especially given the background of such absolute euphoria among the central banking community that their proactive measures have been solely responsible for inflation's downward trend.
PS: I admit that the rate hikes might have played some role in steering inflation expectations, but now that the energy costs are much less it's hard to make up one's mind about what caused what - maybe energy costs coming down could have been just by itself enough motivation for suppliers and property owners to bring prices down. The long term solution for this is probably to restrict loans to only the producers of consumables, barring consumption loans completely and to ensure basic necessities are fulfilled through government provisioning. We live in a capitalist system, let's not pretend otherwise.
In complement, I often hear economists remind us that central banks riding rates takes about 18 months to really affect the economy.
The lag time was mentioned at 4:35
Hmm, numbers are one thing, however I see in Australia despite the hype that inflation is dropping (I think is govt jaw boning) Petrol up now to $A2.35 per litre, Electricity up not down, rents up not down, house prices still rising, supermarket basket totals still up and many things e.g. dairy and meat still up and in some places rising. Australia has an issue with duopolies e.g. Supermarkets and we will not see a reversal in trends here because there is no incentive to when there is lack of competition. So in the end I measure inflation as to how much I am paying now for food, power, mortgage, fuel etc and it ain't less than it was pre pandemic !!!
He's not saying that prices are coming down. He's saying that the amount of inflation is coming down. So if inflation was 10%, but now prices are only going up by 5% per year, it's still less inflation, but prices will continue to rise.
Housing price rises have little to do with inflation generally. But yeah, inflation coming down doesn't mean prices go down, just mean the increases are lower. So you're not really measuring yearly (or monthly) inflation
The thing to remember is that inflation slowing does not mean things are cheaper just not getting more expensive as fast. But if something went up 10 lest year and 5% this year inflation is 50% less but the price is still 15% more. While most people got a 3-6% bump in pay in the same time
Yeah I feel like this is more like a gaslighting attempt saying its going down. Unless we see deflation things are not getting cheaper. They are simply not getting more expensive as fast as what it used to. Inflation is more of a compounding effect.
Hmm very interesting, the methods and principles of that analysis make sense. But with that we can really see that everyone was right, there was a supply disruption driven component of the inflation that has since really subsided to equilibrium levels but there is a demand driven component that has not subsided. Given the target of 2% and when the tightening cycle began, some extrapolation seems to suggest the 2 year lag time of action to achievement is looking to hold up. Since the fed began its cycle in early 2022, we can see the predictions for an easing cycle beginning in ~Q2 2024 and lasting through Q4 seems to make sense. But a narrow scope on this and saying it is purely transitory was wrong, while saying it was more than transitory seems to have been the right call.
A couple reasons I'd argue:
1. The unprecedentedly-massive globally-coordinated deficit-financed-fiscal-stimulus combined with globally-coordinated forced-supply-chain-closures mess was mostly over in a year or two, so the predictable inflationary results had a similarly quick peak and fall.
2. Long-term inflation expectations and the ensuing wage-price spiral take more time than we've had so far to really get rolling. In the USA at least we had over two years of continuous decline in median real earnings, but even as inflation has finally fallen enough to stop the losses you see things like the UAW winning massively inflationary future wage concessions. If you think new car price inflation was fast in the last four years just wait until automakers are obligated to raise employee pay 10% every year...
Nailed it.
15:45 A "...crucial part..." that was left is the problem with government spending in the US - running such a huge deficit (close to 6% of GDP). If this doesn't change or keeps getting worse then the fed singlehandedly can't do very good job with it's rate increases .
You need additional debt to keep the economy flowing due to the zero lower bound interest problem that we copied from metal commodity currency. The FEDs control over inflation is a weak one as it abuses a signal of the market for a crude control of the money aggregate, which would not be needed if they'd follow the debt theory of money that would give them a negative lower bound interest currency that makes all this silliness go away as it works in a saturated economy just on its own - no need for inflation (and additional debt) to keep everything ticking along.
The US debt is not that big of a problem becasue the USA has some 7 trillion is actually net positive cash and another 6 trillion is owned by the FED so when you remove both of these you go from 33 trillion down to 20 trillion and that is around 60% of GDP which is the same debt to GDP as Germany that is a very careful country and avoids spending and racking up debt. So yeah it's not as bad as it seems.
@@drscopeify
I wasn't talking about the 'debt', I was talking about 'budget deficits'
US housing prices are going down partly because a short-term rent spike in 2021-2022 is only now appearing in the data. Renters renew leases once a year, so there's a year lag before everyone's rate has been adjusted. Just as people suddenly switched from services to goods and and back again, so they also suddenly switched housing preferences and threw supply out of whack, and they're now revising their housing preferences again (but not all going the same way this time).
In the US the m2 money supply was expanded by about 25% in 2020 and the fed pumped it into the economy buying corporate bonds and mortgage backed securities at the same time that production of goods and services was disrupted. I believe this is a huge factor in the inflation we’ve had.
Contrary to popular belief, the government doesn't control most of m2 (except notes and coins). Therefore it wasn't mentioned. It did likely increase in part due to fiscal spending. Therefore fiscal spending was mentioned.
Very interesting and easy to understand video on the causes behind inflation in Europe and the US. Thanks.
Don't make me laugh everybody knows it's because of greed and government corrupted officials catering to mega corporations the government is not for the people they're supposed to be protecting us from these mega corporations instead they're in bed with them and now the American people will suffer but we won't suffer for long we will eat the rich
I am surprised that there was not much emphasis on the cost of energy. Pure Energy components of inflation were significant in Europe on the charts shown and to a lesser though still significant extent in the US. This clearly helped drive food inflation through transport, fertiliser and farming costs. As energy spikes declined, naturally the level of inflation declined. We are now seeing up ticks in inflation in the last two months with energy rising again. For long term price stability, we need long term stable energy prices. The over reliance on wind and solar has driven a lot of this. The world needs to go back to an "all of the above" strategy to ease this bottleneck in energy production, as it takes time to bring more stable solutions like nuclear on board in big enough production quantities.
pretty sure the cost of wind didn't just surge, and the sun didn't just disappear these past 3 years. Over reliance on russia is what caused all of this. Nuclear i obviously a possible complement.
Danke!
There are 2 kinds of inflation demand-pull where you have too much money chasing too few products. And cost-push where business costs rise pushing them to raise prices to compensate. The former naturally can be transitory, while the latter is more likely to be permanent.
Honestly I've got nothing to add, I think you covered it very well.
Would love to see how this looks in 3 months once the lagging indicators catch up.
really depends on what you count as inflation. is it price, or is it payment flows sensitive to interest rate.
Great video. Its very informative and explains the inflation crises very well.
(your production is also very good although I have on piece of feedback: the sound quality could be better in my opinion :))
Excellent video. I've taken screenshot every graphs at the part of "inflation spike drivers" and written a summary of causations of inflation drive in Europe and USA. Then I thinked about my country Turkey, man it is a whole mess. I wish things were much more simple in Turkey too. We have food, energy and rent inflation. Biggest catalyst to those is the day by day weakining currency. In nations like Turkey, volatile currency is main driver of inflation. For example, iPhone 12 launched for 20.000 Turkish liras 3 years ago, iPhone 15 launched for 85.000 Turkish liras a few weeks ago. Wow.
Isn't Turkish inflation coming down now though? Plus Turkey wasn't hit by the energy price spike as much as Europe thanks to still buying from Russia (and even borrowing from Russia too...). Last I heard Erdogan was finally coming around on interest rates.
@@ArawnOfAnnwnyes, this is true. But as I said before in my comment, currency rate is the biggest catalyst. Natural gas from Russia do not come with Turkish lira and Turkish lira has lost it's value so much. Inflation is a temporary situation as said in this video, it lasts about 2,5 years. The cookdown on it is just that markets arrangement on themselves. Interest rates are increasing since May 2023 because after the election Erdogan has changed his cabinet and put back an Orthodox guy on economics whose name is Mehmet Şimşek. He has been on duty for just 100 days, his policies will affect us in the middle run. His aim is decreasing annual inflation rate to 8,5% by 2026. I hope he succeeds.
@@ArawnOfAnnwn so our electric and gas bills are increasing because of volatile currency rates, we are being affected from it. In dollars, we have one of the cheapest gas and oil prices in Europe. But in Turkish liras, it hurts us. Minimum wage is just 420 dollars and more than 60% of population works on minimum wage.
@@alperenbastiat if 60 percent of population work on 460 dollar that problème with your boss of compagnies who dont pay their employés. And if that IS case why are you not adressing this issue in your parlement instead of hating on tourist
@@aghileshemdani3144 are you dumb? Why are bosses in Germany pay higher wages? Bosses are all bosses, what is the difference? It's the management of economy. I am not blaming tourists, where did I say that? And fuck socialism.
Brilliant video, I was telling the same thing in a discussion with my professor too: Interest rates are one side, but the government must address core inflation. I was wondering on your thoughts about increasing businesses in inflation driven areas? Like say there is a corn shortage, I make incentives to make farmers grow Corn to avert the crisis
You "make" incentives? Why you? And who says you know what is correct and what is wrong there? Hilarious.
Shortage of corn leads to a rise in corn prices. If corn can sell for more, farmers will be automatically incentivized to grow more of it, but it usually takes at least a growing season for that to have any effect. What you’re talking about is fiscal policy, which spins controlled by governments and not central banks.
This is exactly the type of thinking that leads to problems. You and your Keynesian professor shouldn't want government incentive structures to fix markets. You do because you're narcissistic and feel like playing intellectualized monopoly with people's lives...
Allow me to be perfectly clear, we need ZERO government market incentives without government market making, and the job you seem to be training for is evil. Please be better
@@Idontwannahandl
I applaud that sentiment.
A question though - what is ur stance towards fiat money / debt theory of money?
@@joansparky4439
That brother, is an example. I was referring that we must address the supply side of the issue. I am not saying I will, I am saying that I am thinking like that. Besides, If I was so high in stature, you really think I waste my time commenting?
Fantastic subtle take on economics explained 0))))
Would be interesting to hear your take on global housing
Most rich people stay rich by spending like the poor and investing without no stopping then most poor people stay poor by spending like the rich yet not investing like the rich but impressing them
You are right.!
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I understand what you mean by saying that inflation caused by Russia's invasion of Ukraine is temporary, but I don't think that's actually an accurate term. It's looking like this is going to become a long war of attrition, so the energy and food shortages caused by it will last for a while. Yes this is mostly outside the control of other countries, it's not like they invaded Ukraine, but that doesn't necessarily make this temporary
If the disruptions caused by the war in Ukraine don't get worse, inflation will end, but prices won't get back to what they used to be.
@@jeanf6295 true, inflation is just change in prices not the prices themselves
I'd argue that in many areas, the limited housing supply vs. large demand will drive up wages in the coming years. People need a place to live, organizations need people. Nobody is going to work if they cannot afford a home in a foreseeable period.
We're still in a situation where labor has become less valuable in comparison to capital investments, as wages did not automatically rise with lower interest rates. I think that's because lower interest rates can be profited from by any single individual or organization, while wages require a coordinated effort to increase, which we've only seen recently. So there is a delay.
And without coordinated government policy to seriously address these issues (which will not happen) there is a risk that this will again drive up house prices and business costs locally, both potentially increasing consumer prices inflation in the short and the long term for entire countries. Even if velocity can go down, this then only increases future risk. Of course productivity increases can limit consumer price growth, but not housing cost increases.
In the end nothing is solved and the problem is only pushed further forward towards every next cohort of people wanting to rent or buy a home.
Perhaps the only thing that can prevent that is a recession or crisis combined with austerity policy (as recession/crisis with procyclical policy will undoubtedly drive up inflation even higher)? The drop in house prices might already be going on, but only in specific regions that are more sensitive to the overall economic wave.
What surprises me is how few prognosticators are counting on significant changes in productivity due to advancements in automation and reduced energy costs via renewables and development of storage infrastructure. Greater energy efficiency should contribute to freeing up more energy for automation as well. Energy prices have already prompted investment in more efficient technology.
This is excellent and just shows that it's very easy to dismiss the actions of a central bank but when you look into it they acted in the best way possible at the time. Well, the ECB did, maybe Fed should have turned off the money printers a lot sooner but easy to say with hindsight
FED is clearly the reason and no one wants to talk about it. Inflation of the dollar leads to automatic inflation in all other currencies. It's how the monetary system works at the moment. It is also the reason countries want to make a new global currency. You can clearly see the spike of money supply (M2) in the FED charts. That is the reason for all of this. It isn't even debatable.
Only a Keynesian would say that the Fed or ECB acted "in the best way possible at the time". The flexibility you exhibit to get your head between your legs and up into your own butt is admirable though. I think everyone can benefit from yoga
I actually more or less agree that 2% inflation will more or less remain in the future regardless of Industrial/Defense policy and higher wages due to aging workforces. As i doubt we are fully returning to a full cold war era style economic isolation between blocs, The West and China still need each other economically more than it would cost to fully decouple and more efficiencies in production due to automation and new mancurefering techniques.
this 2% target can't be guaranteed as it needs DEBTORS to create fiat currency, who will not create MORE debt when the economic outlook is flat (which is normal, just add 100 units of GDP to a start GDP of 100 each cycle and then calculate the growth rate - it trends towards 0%).
Inflation targets have only been "invented" as a way to deal with the zero lower bound interest problem, which is only a problem because we make an accounting mistake upon creating fiat that we copied over from metal commodity currencies. The solution is not allowing for inflation (by "setting" the interest rate, destroying a market signal leading to market failure) but to account properly and use a negative lower bound interest fiat currency.
@@joansparky4439 what does the conclusion even mean, you can't have a fiat currency with a negative lower bound: people could just hold onto the physical notes with 0% interest. The closest you get is QE to drop the yield curve, which is what central banks are already doing.
@ krissp8712 1of2
When a society 'invents' work sharing it inevitably runs into delayed exchanges of product. A creditor gives a debtor product, while the debtor makes a promise (iou, fiat) to return the favor in the future. As the debtor won't be around forever, his promise won't be valuable forever - say 10 years and you get a linear value loss of 10% per year of the start value. Or in other words - a NEGATIVE lower bound.
@ krissp8712 addendum
Zero lower bound fiat omits this important information from any holders (subsequent creditors) of such currency and thus leads to a misallocation of resources and ultimately market failure (this is for historic reasons as metal commodity currency has this very same flaw). Fiat is created BY debtors who make promises and creditors can either accept that reality or try to live in denial. Its just that reality does not entertain delusions IMHO.
@ krissp8712
Holding onto NLB notes will realize the value loss that is based on the real debtor (or pool of debtors) that created them?!
To avoid this outcome the notes need to be either exchanged for product now OR temporarily lent to someone else so they can be used in exchange for product now, while the original note holder gets a new promise to be able to consume in the future. The interest rate will simply track the preference of the overall market for consumption now vs later with some interesting dynamics IMHO (something that CBs today disturb).
There is another factor and it is "opportunistic price raises." This price rise is NOT due to the item's costs of production going up but rather due to merely choosing to raise prices because "you can." Food items in smaller cans but keeping the price of a "can" where it was but having smaller cans. That is opportunistic price increasing.
And "opportunistic raising of prices" is NOT based on higher production costs but based on NOTHING at all except greed, or "opportunistic" raising of prices. I bet that that opportunistic price raising is more prevalent than you think.
For instance, the price of cars has gone up by a lot, but total cost to manufacture has NOT gone up as the reason for car prices going up. You can verify this by looking at the total profit of auto makers which has gone up by a lot for the entire auto industry over the last 10 years. Their car prices have been significantly higher NOT due to higher manufacturing costs but for the "greed" for higher corporate profitability and the reason being that it's being "hidden".
You prove this by looking at the published shareholder profits for an industry vs. its costs of manufacturing for that industry over 10 - 12- 15 years. You can use published financial reports filed for SEC and stockholders. It is far bigger than you may guess.
...
Thumbnail : No better video than watching Jay Powell really happy.
I'm Fed up with all these interest rate hikes 😅
Not a word about corporate greed and record profits.
This actually feels like gaslighting at this point. Gas prices, auto prices, food prices, medical costs and rents have all skyrocketed while propaganda is released stating that "America should become a nation of renters." We live in a kleptocracy and the dying gasps of a capital hellscape.
Yeah pretty sure mainstream outlets like CNN with Oliver Darcy openly admitted they were working with the White House to spin economic news in a more positive manner. People also forget inflation is a compounding thing. So unless there is deflation, everything is just going to go up. The gaslighting part is saying it is going down, when in actuality it might not just be going up as fast as it used to.
Not trying to defend one particular party here, I think one is bad and the other is controlled opposition. The Smith Mundt Act got amended under Obama in 2012, with that law initially being passed in 1948 from a bygone era. If I understand it correctly, it originally had placed regulations that prevented government entities from working with the media and so had to do it in a roundabout way before. Probably the reason why we saw the companies brining in so many experts. Operation Mockingbird was a thing the CIA was doing after all. Wouldn't be surprised if it was still being operational under a different name. The Twitter files revealed the government was suppressing people's speech, Zuckerberg also admitted to doing something similar with the Hunter Biden story. Where the government told them some misinformation was about to be leaked and so they helped killed the story, turns out it was real. Recently there was a leak about censorship and it involves CZcams. Which isn't all that surprising.
Bill Clinton also signed the Telecommunications Act in 1996 and that helped consolidate the media companies into the few that we have today.
We have essentially centralized how information is consumed because a handful of companies control what people are allowed to see.
You left a crucial part out: concentration on every market that is the great pusher of inflation as well.
I think one of the central flaws of economics is that it simply seeks to describe what's happening and removes the human aspect of it. I mean this by saying that people make choices to raise prices... it's not something that just happens in a vacuum and is done by an impartial computer according to the laws of supply and demand.
Some of the inflation I'm sure was legitimate inflation caused by supply issues. But the main thing in my mind that's making so many people struggle right now is the fact that rents dramatically increased following the pandemic (and during it, even) coupled with inflationary increases in prices in a lot of basic consumer goods. You don't need to go far to see that a lot of these businesses are basically bragging about the fact that they managed to hoodwink consumers into raising prices beyond what was just needed to maintain the same margin, and were gleefully using it as an excuse to in fact raise profit margins across the board. They also did this instead of innovating to keep prices down, as businesses sometimes have in the past. They brag about it in basically every earnings call they have with their investors.
Landlords raised rents on people moving back into cities as the pandemic eased. This, coupled with the record high interest rates, has meant the housing market has been under tremendous pressure in some parts of the US and probably will take years to settle out, if it ever does at all. Home values certainly are never going back down again.
I know "greedflation" isn't exactly mainstream economics, but I think ignoring its role (particularly in the united states) is a disservice. Would be cool to see a video of you looking more into it if you can.
Right, the rent raise freeze was probably a huge factor in what caused things, because reminding these people that you can't, or shouldn't, do something harmful to someone economically during a crisis could make them go and act even more harshly once the crisis is "over.
@@meganegan5992 there was no national rent freeze, that only happened in places like new york lol. It wouldn't be significant enough to chart.
humans just act on what is possible and if the outcome of that is inefficiencies (that do not work themselves out) then you're dealing with market failures being caused by rules that create those. I suggest reading 'The Myth of Capitalism' by Tepper and Hearn (2019) as an introduction to the concept.
Great video, Joeri. Really enjoyed how you covered a wide range of well-supported views we've all been hearing in the last few years. It feels as if everyone was, at minimum, a little bit correct in their analyses.
If you were a large corporation that directly benefited from quantitative easing, combined with the amazon 'market share over everything' model, would the periodic tanking/recovery of your sector, due to an essentially guaranteed pathway 'out' through sheer quantity of fed capital gains infusions give you ( as big corp ) a passive supply of low prices on buying out direct / indirect competitors?
Then, once sufficient monopolization has occured, the conventional price setting methods are replaced with monopoly price setting models, where you now can set however high of price you want, seeing typical market competition in free market has been removed/greatly diminished?
Idk, just spitballing here. I do not have an economics degree lol.
Very grateful for the nuanced explanation! Is there any research that shows whether the recent interest hikes were appropriately chosen or too high/low already?
Thanks, very informative. I'll update significantly towards no major inflation spike in the near term. I think the long-term demographic factors are a mixed bag. Yes lower labor supply could mean higher wages but an older population also means lower aggregate demand as the elderly spend less. No old population has ever had inflation problems so imo most likely demographic effect is net disinflationary.
Old people are very expensive.
"the elderly spend less" - source? I would expect the effect to be far more varied than just a blanket reduction in spending. The elderly have more money saved up for certain asset investments, and also no other demographic spends more on healthcare..
@@ArawnOfAnnwn here's a breakdown for American elderly circa 2014 www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm
My understanding is that generally consumption peaks in middle age as this is where the bulk of house, car, furniture, and child rearing expenses occur. Healthcare expenses go up in old age but it doesn't offset the decline in other areas, on average. Most obvious real world example is Japan which is furthest along in population aging of any major country and has had next to no inflation for 30 years.
@@ArawnOfAnnwnIf we talk about old as in really old and or needing care, what kind of care they need, the money they themselves have, what kind of welfare system they live in or have, etc, but also I think important to take into consideration is new medicines and aid systems, machines etc will make private or public services offer theis expensive new stuff.
For the less old who can spend money, new tempting entertainments will emerge. Maybe the target group for games of all sorts will be 60-70?
People at work age will work hard as hell to provide for the elders as their will be few workers per old.
Analysis like this is absolutely why I think Joeri's channel is one of the best economics channels currently available on CZcams.
Edit: added a crucial word after a faithful commenter was kind enough to point out the omission. 😂
Read that back to yourself lad
@@peterbett3076 LOL hats off to you for pointing that out, will edit now with acknowledgements, thanks again.
@@guydreamr no worries my friend. Are you watching the canelo fight? I’m in the uk and have stayed up until now (4:45am) 😰
@@peterbett3076 New York City here best regards to Britain! Haven't caught Canelo yet, will take a spin on the telly and see how much I can catch or if it's over, perhaps a rebroadcast. Thanks for the heads up! 👍
Thank you so much. This one was quite difficult to make. So, I always love reading that people appreciate the work:)
depends if they print money or not, inflation is 1:1 related to growth of money supply, it's not about demand and supply.
As a Canadian, I wish to experience some of this "inflation going down so fast now" you speak of.
Simply means prices will continue to grow albeit at a slower pace
@@98Enzio Yeah, that ain't happening here.
You can forget about that. The system is broken at the core due to some accounting error upon creating currency that we copied from metal commodity currency back when the gold standard was abolished. Keynes knew about this and as counter proposed inflation targets.. but that is not working once an economy becomes saturated, which most of our developed economies have been for the last 20-40 years at this point.
Inflation is a global phenomenon, not just in Canada. It's not even particularly bad in Canada for most things, which is a simple fact that is easy to discover and contradicts the current hysteria. This video is quite helpful in dispelling the current mindless conservative propaganda that it's all caused by the federal government, by the way. In truth, barely any is affected by federal policies.
Nice video
For most people housing expense is the biggest unknown driven by gov policies, ie, limiting building of housing which causes a rise in expense. Other expenses can be managed or got around but housing is a basic need, things like food can be managed by eating cheaper foods, cheaper cars etc.
Unfortunately for your analysis, there is another team you are leaving out. Team Opportunistic Consolidated. That's the team that sees prices going up and uses the excuse to raise their prices due to the lack of competition while using the excuse to blame supply shocks where they really don't exist. Thing is, they generally will not keep doing it because as inflation subsides they lose their justification to do so which would draw more eyes to their pricing. I believe this team accounted for a lot more of the temporary inflation than many economists want to admit.
“Inflation comes from one thing only, too much gov spending and too much printing of money.” Milton Friedman
Exactly this entire video is a steaming pile of BS