The new paper by a group of economists from Harvard and the International Monetary Fund, headlined by former Treasury Secretary Larry Summers said that that rising interest rates were as much a part of inflation as the rising price of ordinary goods.
The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly Marijn A. Bolhuis, Judd N. L. Cramer, Karl Oskar Schulz, and Lawrence H. Summers
The formula used to calculate the inflation rate is subjective. It requires economists to make hundreds of judgment calls about how one assesses the overall trajectory of prices.
Summers and his coauthors Marijn Bolhuis, Judd Cramer, and Karl Schulz point out, in 1983 the BLS eliminated interest costs from its calculations of consumer price inflation. The argument at the time, made by BLS economist Robert Gillingham, was that including home mortgage interest rates in the CPI formula was overstating inflation. Instead, Gillingham argued, the BLS should estimate what homeowners could charge if they rented out their homes, and use that to calculate housing inflation.
Summers and IMF economists found that consumer sentiment—as measured by the widely-used University of Michigan Index of Consumer Sentiment—correlated much more strongly with the pre-1983 CPI formula than it did with the modern one that excludes interest costs.
They found these differences to be also true in Europe: higher interest rates were correlated with lower consumer sentiment, and vice versa.
hope this helps pic.twitter.com/FYP3WIxeee
— Dario Perkins (@darioperkins) March 21, 2024
ABSTRACT
Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates. Proposed U.S.-specific factors do not find much supportive evidence abroad.
Marijn A. Bolhuis
International Monetary Fund
[email protected]
Judd N. L. Cramer
Harvard University
[email protected]
Karl Oskar Schulz
Harvard University
[email protected]
Lawrence H. Summers
Harvard Kennedy School of Government
79 JFK Street
Cambridge, MA 02138
and NBER [email protected]
Brian Wang is a Futurist Thought Leader and a popular Science blogger with 1 million readers per month. His blog Nextbigfuture.com is ranked #1 Science News Blog. It covers many disruptive technology and trends including Space, Robotics, Artificial Intelligence, Medicine, Anti-aging Biotechnology, and Nanotechnology.
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As inflation makes the dollar increasingly worthless, will more people start using crypto-currencies?
I can’t help but feel the article wants to point the blame in a certain direction. My observations on the issue? The moment ‘work from home’ was rescinded, the price of gas and everything else skyrocketed. My conclusions? All entities are making up for lost revenue over almost three years of people putting everything on hold, hence the price jumps everywhere. I believe the term ‘greedflation’ has been correctly thrown about quite liberally on the matter.
Economics shows that blame is not to be placed on those “greedy” corporations. Capitalism has worked so well because it depends on taking human nature into account – that includes greed. Periods where there has been no to low inflation are not periods of time where humanity was living in a utopian society where people were suddenly void of greed and self interest. Inflation’s biggest cause is simply poor government fiscal policy. Based on the overspending and printing of money with no backing, that is the main fault of this current round of inflation.
Sorry, it may not match the wishful thinking of those on the left, but government is to blame.
Wishful thinking on the left? From what I’ve seen people “on the left” try to solve problems (certainly not always effectively, but they do seem to try). Were as people “on the right” are very quick to blame “that person, or that party, or phases of the moon for all I know” for whatever situation their in they don’t like. Hey, it’s easy to bitch, and honestly, never very effective about changing things in a way you consider “better”.
We all have the power to predict the future. By knowing what we do NOW, creates our future. We all have the power to do this. Knock yourself out dude.
Things you don’t see discussed:
1. There are fewer American-born young people entering the workforce, due to the Baby-Buster generation progeny being less numerous (These are the kids of Gen X. Gen Xers were born 1965-1984 – they had way fewer kids, and waited longer to have kids). The kids of Gen Xers are the Millennials and Gen Z. These kids have incredible leverage as they enter the job market. They have different expectations about work and wages. Entry level labor costs have skyrocketed. Leisure and entertainment (restaurants, hotels, sports venues, theme parks, etc.) plus retail (grocery stores, etc.) have been hit hard. Insane upward price pressure.
2. This is not just an American problem – almost every industrialized country is experiencing this. Supply chain disruptions are still happening, due to lack of cheap, skilled labor. More upward price pressure.
3. Infrastructure projects have become unreasonably slow and costly due to regulatory agencies and laws. Very few new highway miles built over the preceding 30 years, even as our population expands about 11% per decade. The price of land and new homes have grown exponentially, especially in metro areas that have not expanded their highways and have restricted multifamily dwellings.
4. Mental health is at an all-time low. Social media has set unrealistic expectations for young people. Depression and pessimism are rampant. Even older generations have been slow to recover from lockdowns and delayed retirement prospects. Fewer productive workers increases inflation.
5. It’s not just interest rates – it’s also money supply. Trillions of dollars injected into the economy – none of it pegged to actual work performed – exasperates upward price pressure.
There’s no easy solution. Maybe AI and humanoid robots will help, but when and how much? No guarantees.
My fear is global unrest leading to extremists taking over (both on the left and the right). If the American tech sector and the university hard sciences crumble (subjugated and taken over by idealogues) freedom around the world could recede to be replaced by 1984 Orwellian governments. When people are fearful and desperate, they will give up their rights to governments who promise utopias. Hello Venezuela, Russia, and soon enough, Chinese social credit scores.
Hopefully, I am wrong. Thank goodness for men like Elon Musk…
Prior to moronism-I mean, monetarism taking over monetary policy, non-cult economists understood that high interest rates were per se inflationary. They’re not a blunt panacea but a tool with proper contexts – which may entail raising the cost of money for some sectors of the economy to prevent speculation and overheating while lowering it on others. (Though there’s nobody in government capable of such appropriate navigational finesse anymore.)
Covid and war killed plenty of people to tie our extended global supply chain in knots – and teach us an expensive lesson in national sovereignty. When you have these kinds of supply shortages, you need cheap capital to alleviate them and produce more supply. Actually raising rates worsens the problem by choking industries of that cheap capital. The oil industry in the 1970s needed more investment to lower oil prices, not less and, as my dim memory of the time attests, these high rates had disastrous effects on investment in oil states. We weren’t the ones being inefficient with our capital use, but we were punished for it.
Volcker quite intentionally and explicitly waged class warfare on workers late in Jimmy Carter’s term to break unions and the power of labor – and to help Republicans, who were by then fully transformed into their segregationist/anti-New Deal coalition of today, thanks to the Southern strategy of Lee Atwater and Kevin Phillips pioneered for the Nixon campaign.
Biden has fallen prey to the same anti-democratic, pro-tax cut/oligarch forces running the Fed today. Their rate hikes have destabilized banks, made supply shortages worse, not better, and driven down wages just at the time Covid transfers were reversing forty years of working class wage erosion. This trap was entirely predictable. Note that certain asset prices (houses, stocks) have been inflating during this forty year period because of policy choices like letting hedge funds/private equity scoop up houses and leave them empty to jack up rates. (A typical middle-man supply manipulation we used to prosecute.)
In 2018, the average family income needed to finance an average house ran about $53,000 a year. Today in 2024, the annual family income needed to finance that average house has almost doubled, thanks to the way mortgage rates interact with housing inflation. The same is true of cars (and don’t get me started on the crooked insurance industry).
The way finance costs interact with asset prices is why most people are upset when polled about the economy, thought the Democrats have been tone deaf and resentful over the “great” economy; but the fact is, most people have to finance large purchases and it isn’t simply the price of the goods going up. The Democratic Party’s leadership isn’t out there buying appliances at rent-to-own stores on credits. (Shutting down rent-to-own and pay-day lenders would be a great place to start boosting working class incomes; these groups have long faced impoverishing rates of interest.)
America must now politically confront a truth we haven’t wanted to face since rates started their long trend line down under Volcker. For forty years, various policies have transferred wealth from the rest of us to the already wealthy. The Supreme Court legalized bribery by calling it protected free speech and the rich went out and bought themselves a government: ours. It now works for them, paying a nice rate of return for their “investment.” Over that period of time, the real erosion in workers’ share of national income was papered over with cheap debt and falling rates. Now we’re hit the bottom and that trick is played out. Voters now feel the pinch in their budget as rates have bounced off that bottom.
Disappointed as I am with Biden sticking his foot in this obvious bear trap, Trump will be much, much worse for our economy. What you’re seeing in the new Trump playback is the purest form of Southern strategy policy that has ever been expressed. From Nixon’s budget and impoundment battles over congressional spending to relitigating birth-right citizenship and Dred Scott, Trump has revived the zombie ideas of Dixie’s incompetent planter class. You think inflation is bad now? Wait until Trump “protects” us with 50% tariffs, deports our fruit-pickers and then global warming dries up the Mississippi River transportation network and leaves crops to rot in their fields – provided you can ever grow them in such a drought. Talk about inflation.
I’d love to use the tariff system to help bring back manufacturing – but not like a clumsy skull-cracking cudgel on ourselves and our allies.
What you, and so many others seem to not appreciate is the “actionable” value of an American dollar, from one moment to the next. The reason the American dollar is the worlds currency is not based on anything “inate” to our currency. It’s based on our economy, military power, and a bunch of other things that makes the US the biggest most powerful entity the world has ever seen. Yup, we’re bad ass. And honestly, I don’t have a problem w/that. In fact, I love it.
Covid and Russians waging war against others took its tool. Blame them, they caused it.
If Trump was in charge to let Ukraine to Russians, then Ukrainians would be drafted and forced to fight for Russia. Russia would attack other countries and the inflation would be way, way, way higher than it was in the last years.
Government is the enemy of The People. The founding fathers were powerful men in State Government. They knew. They did not need a corrupt federal government lording over them and so they wrote the US Constitution to include every precaution to defend The People against government. “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Departments of education, health, transportation, energy, affirmative action, labor, etc. are unconstitutional.
We found the libertarian. Ask him if he knows the age of consent in every state, I’ll bet he does.
It cost $15–20 to eat at a taqueria now. Before COVID, it was $10. This is similar to fast food as well. Everyday restaurant food has seen a 50% to 100% increases. Pricing for everyday items is what drives consumer sentiment.
It doesn’t matter if ‘Inflation is dropping’.
Yay. Inflation drops. We’re saved! Prices are going to drop! Lol, not really.
Inflation’s a ratchet – it drives prices up. Inflation gets to 0, then prices stop increasing. We get into negative numbers on that, get into deflation, then prices will start to drop.
If you’ve bought groceries in the last 5 years, and paid attention to how much you’re paying – you’ll notice that beef prices have roughly doubled, same with chicken and pork. Eggs have been variable, with a spike to ridiculous prices because of a bird flu epidemic that took out a lot of the laying hens – but that’s worked its way mostly through the system.
Gasoline prices are roughly double what they were. (Lots of reasons for the variability, usually political, some infrastructure, some policy.)
Restaurant prices are affected badly by inflation. The cost of ingredients goes up, you can only absorb so much of that before the prices have to increase. Make a law mandating $20/hour and you’re going to have to price that in.
So – yeah. There’s inflation, and we haven’t seen the end of it.
Since the primary policy tool to fight inflation is to raise interest rates, including interest expenses in the cpi would make it very difficult to achieve.
Excuse me, but what planet let alone country are you living on/in? The idea that inflation today is 22% is utter nonsense. The fact the American dollar is “worth less” today, from say 20, years ago, 30 years ago, is just false. OK gang, lets review: 20/30 years ago our economy was smaller then it is now. Not by much, but enough to make a difference. Today, there are trillions of dollars more that IS our economy.
This has nothing to do with inflation. It has to do with economic expansion. Entities like the Federal Reserve have to balance the functional “value” of the American dollar (How much it can buy, wherever/whenever), and remain a “predictable” currency enough so, other countries economies rely on it. Go Team USA!
That is word salad. A dollar buys a lot less today than it did in 2020. The value of my home was static from 2007 to 2020 and now it is worth 176% of the 2020 price. Candy bars are $1.50. Cars are $50,000; trucks are $90,000. You can put “quotes” around whatever words you are trying to accentuate but you’re not making any nonsensical argument. A government do-print/spend loop devalued our currency. Plain and simple.
This reply may be ‘whistling into the wind’, but here goes.
[1] INFLATION has a definition: a rise in prices for things, products, services whose characteristics haven’t changed.
Take “a potato”. Putting aside the fancy new kinds, yellow, purple, pink … the “standard Russet spud” remains unchanged since at least the 1940s. Yet, it takes but a few minutes of Google searching to find that Russet potatoes now average 75¢/lb for 10 lb bulk bags. I found a receipt in a forgotten drawer from 1995 from Safeway, where the same 10 lb bulk bag was only 19¢/lb.
Inflation? yep. clearly so. Those now basically useless dimes used to buy stuff. Even then, not much stuff, but still, a tangible amount.
[2] Dollar depreciation has a similar-if-but-inverse definition. It isn’t product specific, but general to an economy. (for example, astoundingly the price of some things has almost inexorably gone down over the last 35 years. Shirts, clothes, computers, electronics, information and technology; yet the same timespan, the overall economy has seen the purchasing power of The Dollar erode quantitatively. The dollar HAS depreciated substantially.
However, that said, the argument (which you made) is that the economy has expanded. There are more people, more aggregate economic activity.
Well, that is very likely true, but doesn’t in and of itself define a cause for monetary depreciation. Double the population of a nation, and you may well require double the coin to get ‘er done. But you do NOT also require that the coins are worth half as much. That part is rather independent of the first.
[3] Claim, The Fed engineers the Value of the Dollar for grand economic purposes.
Most likely so, but not independently or in isolation. Monetary instruments (“money”) have their own contributors-to-value, apart from Federal policy. Dynamic changes in consumer and business economic activity are part. The influence of “grand actors”, international agents of supply-and-demand manipulation, are a factor. Wars, famines, disasters and taxes — as well as remarkable periods of peace, innovation, plenty and sustained government subsidies— markedly act to revalue the monetary instruments of the economy.
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What is true however, is that the relative value of The Buck has declined in the last 10 years and has done so substantially. Whether this has its majority from banking trends, The Fed policy, the ‘organic growth’ of spuds, or changes in Consumer Consumption patterns, well: its not exactly any one of those. Yet is is real.
And that’s the take-away.
⋅-⋅-⋅ Just saying, ⋅-⋅-⋅
⋅-=≡ GoatGuy ✓ ≡=-⋅
No one carea what you stated. The US dollar IS worth less and where it matters most- consumer purchasing power.
Like the above poster said- you just made word salad and, bizarrely, used quotes.
Honestly, do you think other nations would tie their currency to the American dollar if they didn’t think it held an existential value? Yes, inflation and s*** happens. But what makes the American dollar the worlds money has nothing to do with any innate value in itself. The value of our dollar is based on predictable progress we’ve made, in our economy and other things since WW2. “Predictable” is very, very important. I can’t over emphasize this.
It’s what my country can and does do, that makes our money “valuable” to many people, who live in many other countries.