The Fourth Horseman - Inflation?

[alfred russel]

There's a lot of confusion in these sentences.

There is not any confusion on this on my side and I'm sorry you feel the need to obfuscate and insult. The idea that there is a land glut in America is not true. There is a lot of land of varying value including some of the highest value real estate in the world.

We have a current stock of land, buildings and infrastructure. If the population of the US declines significantly, that stock will exceed demand and the price will fall, all else being equal. The result will be lower rents. If you are in an in demand area the opposite is true.

I looked up the apartment building i moved into right out of school. The price has more than doubled. The current price of my house has almost tripled in the last 10 years. Those represent significant increases in the prices people have to pay, which is reflective of this being the largest component of the CPI calculation. Those are well above the national inflation rate: do you think that has something to do with Atlanta growing faster than the national average?

[DGuller]

Let's say you have a basket of goods with 100 different goods.  If the price of one of those goods goes up while the price of all the other goods stays the same, then it's not inflation, it's just a relative price change of that one good. 

Is there an inflection point to this logic?  If the price of 10 goods goes up while the price of 90 goods stays the same, is it still just the relative change of price of these 10 goods?  What about if the price of 99 goods goes up while the price of the 100th one stays the same?

[Jacob]

There is not any confusion on this on my side and I'm sorry you feel the need to obfuscate and insult. The idea that there is a land glut in America is not true. There is a lot of land of varying value including some of the highest value real estate in the world.

We have a current stock of land, buildings and infrastructure. If the population of the US declines significantly, that stock will exceed demand and the price will fall, all else being equal. The result will be lower rents. If you are in an in demand area the opposite is true.

I looked up the apartment building i moved into right out of school. The price has more than doubled. The current price of my house has almost tripled in the last 10 years. Those represent significant increases in the prices people have to pay, which is reflective of this being the largest component of the CPI calculation. Those are well above the national inflation rate: do you think that has something to do with Atlanta growing faster than the national average?

Vancouver property prices have been skyrocketing for well over a decade, but inflation has only started being a real concern this year. From that I surmise that increasing housing prices in a local market is not a good indicator nor driver of inflation.

I'm not an expert in these things, but Minsky's argument seems relatively clear to me: an increase in the CPI is no a relieable indicator of inflation, nor is an increase in property prices. I am less clear what your argument is, unless it's simply to opposite - that increases in housing prices is driving inflation?

[alfred russel]

Vancouver property prices have been skyrocketing for well over a decade, but inflation has only started being a real concern this year. From that I surmise that increasing housing prices in a local market is not a good indicator nor driver of inflation.

I'm not an expert in these things, but Minsky's argument seems relatively clear to me: an increase in the CPI is no a relieable indicator of inflation, nor is an increase in property prices. I am less clear what your argument is, unless it's simply to opposite - that increases in housing prices is driving inflation?

The general way to measure price changes in the US economy is CPI. I started this by saying that a contributing factor to why we may not have high inflation in the next few decades is because populations are plateauing and in some cases declining, and that is going to impact real estate prices which impacts inflation. MM at some point argued that is just one thing and I pointed out that rents are by far the biggest component of CPI.

I really don't get the controversy or why anyone is disputing this. It isn't a theory i've made up and I've never seen it as something people don't accept. I can't possibly see some agenda that either i'm pushing or how it might disrupt someone's else's agenda.

If rents double, that is a significant change in price levels. It sucks for people that need to live in places. It also sucks for providers of goods and services, like barbers, restaurant owners, bowling alleys, grocery stores, etc. that have significant costs in real estate. Those prices will end up getting passed on. I don't see how that wouldn't be considered inflationary.

[alfred russel]

Vancouver property prices have been skyrocketing for well over a decade, but inflation has only started being a real concern this year. From that I surmise that increasing housing prices in a local market is not a good indicator nor driver of inflation.

I'm not an expert in these things, but Minsky's argument seems relatively clear to me: an increase in the CPI is no a relieable indicator of inflation, nor is an increase in property prices. I am less clear what your argument is, unless it's simply to opposite - that increases in housing prices is driving inflation?

Jacob, you are off on a couple of counts.

First, there are a few ways CPI is measured in the US but it is the generally used indicator of inflation. When people quote a number for US inflation in news stories it is almost one of the versions calculated by the US government's Bureau of Labor Statistics. I don't think anyone is arguing it shouldn't be used.

Second, rents are just one of the components of CPI. So saying that rents have dramatically increased in Vancouver over the past decade but inflation wasn't a problem and therefore inflation is not connected to real estate/housing is just not correct. Inflation is calculated by combining calculating the change in price levels of basically everything that consumers buy. Inflation rates have tended to be low because increases in rent were offset by decreases in price levels of manufactured goods like TVs. The share of income people have been spending on food has been plummeting for years. Inflation is calculated by averaging all the changes in price levels that consumers spend money on. Housing costs are included in the calculation--in the US version they have the biggest weight of any input--by definition they impact inflation though they are still a minority of the inputs and can be offset/diluted away.

[DGuller]

I think the one and only thing where AR is a little off is mentioning the housing prices.  I don't think that's the relevant part.  The housing price increase doesn't have to scale with the rental price increase, especially if the housing prices appreciate due to lower mortgage rates.  Just because AR's house goes up in price threefold doesn't mean that the rent for that house would go up threefold.

In fact, I think that the inflation of asset prices without it being reflected in the inflation of consumer prices was the rule rather than the exception the last few decades.  You'd think that at some point people would want to cash out rather than double down on their paper asset wealth, though, at which point you're going to unleash a whole bunch of money to chase the same quantity of goods.

[Zanza]

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.

Ok, then I focused too much on the term de-globalization. I share your expectation as outlined above.

I am not convinced that government policies to encourage moving supply chains into friendly economic blocs will be successful though. Multinationals will do what is best for them, regardless of policy, as long as it is legal and viable.

[The Minsky Moment]

There is not any confusion on this on my side and I'm sorry you feel the need to obfuscate and insult.

The confusion was in the sentences not the person.  I believe that my responses have been clear.  If there is something you find unclear please feel free to point it out.

The idea that there is a land glut in America is not true. There is a lot of land of varying value including some of the highest value real estate in the world.

We have a current stock of land, buildings and infrastructure. If the population of the US declines significantly, that stock will exceed demand and the price will fall, all else being equal. The result will be lower rents. If you are in an in demand area the opposite is true.

In the 18th and 19th century most proto-economic models - the Physiocrats, Malthus, Ricardo - viewed land as the key limiting factor.  That made sense in modelling what was still predominantly agricultural economies in a continent with a fixed supply of arable land.

In these models, there was a hierarchy of land values based on the fertility of the land.  That still exists but is negligible significance economically now because agriculture is such a small part of overall activity and output.

Differentials in land values now are not due to an absolute scarcity of land that has particularly valuable natural or inherent characteristics.  Some of the most valuable land in the world is located on a swamp near the Potomac River.  Land values vary now because of a combination of theorized clustering synergies and social ordering.  Want to get housing prices down in the big US cities?  One way to do it would be radically level income and wealth inequality.  This a phenomenon that has little to do with overall price levels.

I looked up the apartment building i moved into right out of school. The price has more than doubled. The current price of my house has almost tripled in the last 10 years.

This anecdote proves the point.  You have experienced a big increase in a particular price. But over the same period, measured inflation has been unusually and historically low. 

[The Minsky Moment]

The general way to measure price changes in the US economy is CPI.

CPI is very useful for lots of things, but the general way to measure inflation is the GDP deflator.

[The Minsky Moment]

Let's say you have a basket of goods with 100 different goods.  If the price of one of those goods goes up while the price of all the other goods stays the same, then it's not inflation, it's just a relative price change of that one good. 

Is there an inflection point to this logic?  If the price of 10 goods goes up while the price of 90 goods stays the same, is it still just the relative change of price of these 10 goods?  What about if the price of 99 goods goes up while the price of the 100th one stays the same?

It may be that some of the disagreement here is terminology.

There are many prices of many different things and those prices are always changing relative to each other.  The question is why those prices are moving around. There is a saying sometimes heard in that one should never reason from a price change.  The logic behind that is that prices are like symptoms, but you need to analyze the underlying condition to understand what is really going on.  For example, to what extent is a price increase due to particular conditions affecting that market and to what extent is it due to an economy-wide price inflation?

That brings in the concept of a general price level - that is the price of all goods and services as expressed in the monetary unit.  That is what I understand to be inflation.  The general price level is a theoretical construct, but there is no question it is real - some prices in early 20s Germany might have gone up for any number of reasons, but all of them skyrocketed due to deliberately inflationary monetary policy.

That is source of Friedman's famous dictum that inflation is always and everywhere a monetary phenomenon.  And while I don't 100% agree with the statement, it is at least partially true in the sense that inflations require some kind of monetary accommodation to take root.  That said, I do agree that inflation can have non-monetary causes.  Namely, if real resources are close to full employment, anincrease in demand that is accommodated (not suppressed) by the monetary authority is likely to cause a rise in the general price level (but not necessarily a rise in *all* prices).

Taking that framework and looking at the period from the last 30 years or so, the most significant economic fact was the rapid arrival of hundreds of millions or working age people, previously effectively unemployed in an economic sense, but now suddenly integrated into the world economy, with their wages repressed by domestic policies.  That sudden appearance of mass reserve army of labor, combined with policies promoting free movement of goods and capital, and technologies that radically reduced transport costs, exerted a deflationary force during this entire period.  Whatever demand might be generated in the world economy could easily be satiated by the seemingly bottomless Chinese manufacturing capacity, so long as capital could flow about to address the resulting imbalances.

The US policy response during this period was (and still is) to maintain a totally open capital account and absorb enormous quantities of capital from trade surplus countries, resulting in historically low interest rates and asset booms.  Thus, even as the US economy experienced low inflation, it also experienced a boom in asset prices.  And that boom meant that anything seen as an investible asset - stocks, bonds, Warhol paintings, crypto, music catalogs, etc. - went up in price.  And that is why prices of certain housing increased even as inflation remained dormant.  Because houses are seen - rightly or wrongly - as investment assets.

[alfred russel]

This anecdote proves the point.  You have experienced a big increase in a particular price. But over the same period, measured inflation has been unusually and historically low. 

How does it possibly prove the point?

[alfred russel]

I think the one and only thing where AR is a little off is mentioning the housing prices.  I don't think that's the relevant part.  The housing price increase doesn't have to scale with the rental price increase, especially if the housing prices appreciate due to lower mortgage rates.  Just because AR's house goes up in price threefold doesn't mean that the rent for that house would go up threefold.

I agree with this. I was mentioning it because they are connected and everyone is better aware of what is going on with housing prices than rental (including me).

[crazy canuck]

This anecdote proves the point.  You have experienced a big increase in a particular price. But over the same period, measured inflation has been unusually and historically low. 

How does it possibly prove the point?

Consider the rapid rise in house prices in Canada - through a couple of decades of those large increases inflation was essentially non existent.

[The Minsky Moment]

Incidentally, house prices do not figure into the CPI.  The CPI imputes a rental value to owner-occupied housing.  the price change in the index is based on changes in normalized rents.

[alfred russel]

Incidentally, house prices do not figure into the CPI.  The CPI imputes a rental value to owner-occupied housing.  the price change in the index is based on changes in normalized rents.

I understand that. But there is a link between housing prices and the rental rates applicable to the housing.