The Fourth Horseman - Inflation?

[alfred russel]

I don't agree population growth is inflationary as a general proposition; if that were true 1880-1914 would have been a high inflation era and it was the opposite. Population growth can be deflationary if it generates a large surplus of potential workers that can be controlled and put at the disposal of a globalized economy with freely moving capital.

When you have free flows of capital combined several hundred million people engaged in extremely low productivity agriculture and those people are released, controlled and made available to the global economy as a continuous supply of cheap labor, the overall effect can be deflationary.  If that continuous flow of surplus labor dries up and capital retreats to national boundaries, the opposite is more likely.

Services are tricky because some are tradable, and some are not.  Technology and globalization expanded the scope of potentially internationally tradable services (e.g. Indian call centers), but it's not clear to me that kind of globalization is going to continue to deepen.  And even if it does, demographic reversal will confine the exploitable scope.

I'm an accountant with 5 people reporting to me...one is romanian, one is brazilian...they work remotely. We had an open position and I interviewed someone in the Philippines, though it went to an american in the US. I have no doubt this type of international activity is going to explode.

There are lots of puts and takes with population growth because the population is both on the supply and demand side, but real estate/housing/real property is a factor that is purely negative when you have a declining population. Existing building stocks simply need to be maintained.

[The Minsky Moment]

Is there really a trend towards de-globalization? Global trade volumes are still rising...

According to the World Bank data, export/GDP ratio was 30.6% in 2011 declining to 28.3% in 2019 and 26.5% in 2020.
We may see a post COVID bounce back but will it be an enduring trend or a dead cat bounce?

[The Minsky Moment]

but real estate/housing/real property is a factor that is purely negative when you have a declining population. Existing building stocks simply need to be maintained.

How does that play into inflation?  There seems to be an assumption that construction activity is inherently inflationary.  If so, it is mistaken.

Changing demographics is likely to change the mixes of goods and services produced and consumed and that may impact certain relative prices, but the overall general price level impact is a different matter.

[alfred russel]

but real estate/housing/real property is a factor that is purely negative when you have a declining population. Existing building stocks simply need to be maintained.

How does that play into inflation?  There seems to be an assumption that construction activity is inherently inflationary.  If so, it is mistaken.

Changing demographics is likely to change the mixes of goods and services produced and consumed and that may impact certain relative prices, but the overall general price level impact is a different matter.

Obviously price level is set by supply and demand. In general if you increase population the result on price levels is ambiguous because you increase both supply (more workers) and demand (more people want more stuff). But land can't be created. Rents will go up with increased population. That creates some inflationary pressure that wouldn't be present absent population increase.

[Jacob]

Read a thing a few days ago that global diesel reserves are close to an all-time low. It was argued there's a real risk of significant price increases and potentially even shortages, with knock on effects on global shipping and thus prices.

Is this something that's popped up on anyone's radar here?

[The Minsky Moment]

Rents will go up with increased population. That creates some inflationary pressure that wouldn't be present absent population increase.

Rents increase when housing demand increased faster than supply.  Population growth is one driver of demand but not only one.  In the 1910s the average American had a little over 300 square feet of living space; now it is over 950.

There are many factors that influence housing supply - including regulatory restrictions - but land availability is not a critical restraining factor.  There is still plenty of open and cheap land available in the US - indeed, there a long-standing trend of people moving out of areas where land is cheap to big cities (where it is not).

At the end of the day what rent tells you is the price of rent.  It's a relative price, not a general price level. Thus, for example, between 2011 and 2020 median US rents increased 26%; however, inflation increased only 15%. If a country really has severe structural constraints on the building of housing, that could have significant distorting effects across the economy.  However, take an extreme example like Hong Kong - which does face brutal structural constraint on land availability.  HK experienced steady population growth during 1998-2010, but had very little inflation during that period.

[crazy canuck]

Read a thing a few days ago that global diesel reserves are close to an all-time low. It was argued there's a real risk of significant price increases and potentially even shortages, with knock on effects on global shipping and thus prices.

Is this something that's popped up on anyone's radar here?

Shipping rates are already sky high.  I am doing an interesting commercial arbitration over who took the risk of that increase.  If they go higher then some goods will probably stop being shipped because the profit margin will shrink to zero 0, unless the costs can be passed on - which depending on the goods in question might be possible. But of course leading to further inflationary pressures.

[Zanza]

Is there really a trend towards de-globalization? Global trade volumes are still rising...

According to the World Bank data, export/GDP ratio was 30.6% in 2011 declining to 28.3% in 2019 and 26.5% in 2020.
We may see a post COVID bounce back but will it be an enduring trend or a dead cat bounce?

Ok, if you define it as share of GDP, it might decline. Probably a function of China's domestic market growth. But in absolute terms, it is still growing. For de-globalization, I would expect unraveling of existing trade ties, which seems to be rare. Russia being the major exception this year of course.

https://unctad.org/news/global-trade-hits-record-high-285-trillion-2021-likely-be-subd

[alfred russel]

Rents will go up with increased population. That creates some inflationary pressure that wouldn't be present absent population increase.

Rents increase when housing demand increased faster than supply.  Population growth is one driver of demand but not only one.  In the 1910s the average American had a little over 300 square feet of living space; now it is over 950.

There are many factors that influence housing supply - including regulatory restrictions - but land availability is not a critical restraining factor.  There is still plenty of open and cheap land available in the US - indeed, there a long-standing trend of people moving out of areas where land is cheap to big cities (where it is not).

At the end of the day what rent tells you is the price of rent.  It's a relative price, not a general price level. Thus, for example, between 2011 and 2020 median US rents increased 26%; however, inflation increased only 15%. If a country really has severe structural constraints on the building of housing, that could have significant distorting effects across the economy.  However, take an extreme example like Hong Kong - which does face brutal structural constraint on land availability.  HK experienced steady population growth during 1998-2010, but had very little inflation during that period.

Not really getting the resistance to population's impact on rents being inflationary...obviously it is one of many factors but the giveaway that you agree with me in principle is in your post: people have been moving from rural areas to big cities: ie the population growth in big cities exceeds that of the sticks (which in many cases has declining populations. Big cities have had significant rent increases vs. rural areas, haven't they?

[The Minsky Moment]

ig cities have had significant rent increases vs. rural areas, haven't they?

Sure rents in America's largest cities have gone up for lots of reasons.  But that doesn't really have anything to do with inflation.

[alfred russel]

ig cities have had significant rent increases vs. rural areas, haven't they?

Sure rents in America's largest cities have gone up for lots of reasons.  But that doesn't really have anything to do with inflation.

How does it not have anything to do with inflation? Rents going up are inflation by themselves, and it is a cost that must be borne by almost every business.

[The Minsky Moment]

Ok, if you define it as share of GDP, it might decline. Probably a function of China's domestic market growth. But in absolute terms, it is still growing. For de-globalization, I would expect unraveling of existing trade ties, which seems to be rare. Russia being the major exception this year of course.

In my original post from today, I indicated I did not expect to see that kind of catastrophic deglobalization that occurred during and after WW1.  For example, I would not expect to see absolute declines in the nominal dollar value of trade.  Rather, I would expect to see a relative retreat from the practice of deepening ever more intricate international supply chains and an increase in national-strategic policies encouraging developing domestic sources of key raw materials and as many components of manufacturing supply chains as possible.

[The Minsky Moment]

ig cities have had significant rent increases vs. rural areas, haven't they?

Sure rents in America's largest cities have gone up for lots of reasons.  But that doesn't really have anything to do with inflation.

How does it not have anything to do with inflation? Rents going up are inflation by themselves, and it is a cost that must be borne by almost every business.

Because inflation is the rise in the general price level - of all goods and services expressed in money.  Rent is a relative price of a particular good. 

Rents have increased continuously in the US since the end of WW2.  At the same time real per person incomes have all increased in a similar proportion.  The average size of dwellings has increased.  The quality and amenities of the dwellings have increased.  So there is no clear relationship between what people are paying in rents and what the overall price levels are for the economy as a whole.

One simple explanation of the rise in rents in the US is that as incomes have increased, Americans have chosen to spend more resources building bigger or better homes, or choosing to locate themselves in more costly areas in exchange for better availability of certain amenities. Or maybe consumption baskets are changing and people are choosing to spend more (or less) on their houses and apartments in relative terms than on food or travel or insurance or something else.  The larger point is that to look at raw increases in rent numbers in isolation doesn't tell you much about economy-wide effects

[alfred russel]

Housing is literally the biggest component of the consumer price index. An increase in the cost of housing is inflationary and a decrease is deflationary. The same goes for costs related to commercial and industrial real estate.

If you double the population without a change in income levels, the effect on cost of some widget is ambiguous. Demand is increased but so is the labor available to meet that demand, and there could be some efficiences of producing at higher volumes (there could also be inefficiencies).

Land is not in the same situation. It is part of why the cost of rent in places like NYC or San Francisco is astronomical. A lot of people want to live there but there isn't much land, you can't produce more, and hence what there is gets bid up. By contrast it was obscenely cheap to get off campus housing when i lived in South Bend Indiana with a population way off its high and a bunch of abandoned buildings even in the city center.

[The Minsky Moment]

Housing is literally the biggest component of the consumer price index. An increase in the cost of housing is inflationary and a decrease is deflationary. The same goes for costs related to commercial and industrial real estate.

There's a lot of confusion in these sentences.

First, the CPI is not equivalent to inflation.  The popular financial press uses the CPI as a convenient proxy for inflation, but the CPI is what is says it is - a measure of change in a defined basket of consumer goods.  Shelter is the largest component of the CPI but most of that component consists of owner-occupied housing. Despite that fact, the owner occupied houses are not surveyed for the purposes of estimating costs.  Rather rents are imputed based on the rental survey. 

An increase in the amounts that people spend on housing can mean a lot of things.  It can mean that people are choosing for any number of reasons to allocate more of their budget to housing.  It can mean that certain costs relating to provisioning of housing is going up and that can occur for any number of reasons - including changes in regulatory structure.  It can mean that people for whatever reason are choosing to move from where housing is plentiful to where housing is scarce.  It CAN occur because there is inflation - a general rise in the price level - but it may not be.

Land is not in the same situation. It is part of why the cost of rent in places like NYC or San Francisco is astronomical. A lot of people want to live there but there isn't much land, you can't produce more, and hence what there is gets bid up. By contrast it was obscenely cheap to get off campus housing when i lived in South Bend Indiana with a population way off its high and a bunch of abandoned buildings even in the city center.

There's actually plenty of land in NYC.  It would not be that hard to lower housing costs in the city, if there were a major change in social habits and completely reworking of the regulatory structure.  High costs in the "good neighborhoods" are WAD - the point is to use physical space to express one's dominance over others and to exclude the outs. 

This is all interesting but really has nothing to do with inflation which is a national not local phenomenon.  Nationally there is a glut of land in America.