Chartbook 327 From "anti-core" to "felt inflation": Or how I calmed my populist demons & resolved my cognitive dissonance on inflation, and how the Fed could do more to help.
Chartbook 327 From "anti-core" to "felt inflation": Or how I calmed my populist demons & resolved my cognitive dissonance on inflation, and how the Fed could do more to help.
So the explanation here seems to be that central bank creates and reports a measure, the core inflation rate, based on whether it can manipulate that rate through it's available monetary tools, then claims victory when that core inflation rate is manipulated in the way it expects. Where is the extrinsic value of this measure here? If this inflation rate does not actually impact food and fuel and rent, the things that literally everyone else cares about. This seems recursive - the bank is setting its own goalposts only on what it can actually achieve then patting itself on the back for achieving the goal.
Are residential rents included in core inflation? If not, are they accounted for in "anti-core"? For many ordinary folks who rent, these rising costs have really hurt, adding not only insult, but insecurity.
It has never made sense to me that they leave out food and fuel. That they left it out because those elements are volatile makes me think of the fact that scientists traditionally left women out of medical trials because it was too hard to calculate the variables. Garbage in, garbage out. Separately, what I find missing from such discussions is that businesses put less of that money toward worker salaries (corporate profits at all time highs, stock buybacks, etc., instead of wages). Maybe the higher price of eggs wouldn't pinch so much if the wages matched.
"I could feel the tug. Was I morphing from a sophisticated social constructivist on inflation, to being something closer to a “fakenews” guy?"
As you point out, the "core inflation" numbers are not fake, but they do not take into account things that humans actually use, unless you are one of those kind of humans who consumes neither food nor toohpaste nor energy.
At the same time, what constitutes "core inflation" is chosen in a self-serving manner. Did not Goodhart's Law teach the masses of old, that once a measure becomes a target, it ceases to be a good measure?
In this case, however, the target is chosen so as to fit the preferred measure. Sort of like if corporate executives were to set the strike prices for the options that they grant themselves.
I count myself among the vast school of Goodhart friends! Yes, he said that. And a lot of the inflation reporting/commentary has been intensely politically self serving (cue any Krugman column). And here we are, three weeks to go.
Absolutely a spot-on exposition of the persistence of "vibe-flation" amongst the general US population, and how the pleas of Biden, Harris, et
al for the public to look at the "solid" economy as reflected in the "2.5% inflation rate", high employment rate, growth in wages, etc., are having minimal affects, especially reflected in the "what's right - what's wrong" direction of the country in polling surveys. "Wrong direction" leads by miles, 72-28% over "right direction", and that alone should tell the politicos SOMETHING about the voters' state of mind, surely.
Why isn't there a huge popular voting lead for Harris, running against a demented proto-fascist? Adam Tooze gave us the answer, full stop.
It's absolutely wild to me that gas and groceries are not counted in US core inflation. Gas, especially, affects the price of everything else because of logistics!
Ok, so we get into how prices for food are set. By the federal government? Yes and no: as Michael Pollan has pointed out, farm policies have encouraged production of cheap calories that have kept prices artificially low at the cost of human health, soil health and animal suffering. As someone who has been in the produce business on a retail and distribution level, I have seen the consolidation of the industry lead to monopolistic pricing as well as the overproduction of highly processed products. It’s the old story of socialize the costs, privatize the profits. In my opinion, it would be far better if the federal government backed off on propping up corn/soy/ factory meat production at the very least to slow the massive upsurge of metabolic disease like diabetes that these policies encourage. While it would save billions in health care costs while improving well being, it would cost more at the register and we can’t have that!
If the Fed had been listening to Claudia Sahm, they would have cut interest rates at least a year ago (I have indeed been listening to her). I wonder what the anti-core and core impact would have been if that had been the case.
Very nicely done, Adam. I wrote a Substack about this, or parts of this. " What I have in mind is something like “real feel” weather numbers, because wind and humidity matter to how actual humans (as opposed to thermometers) respond to heat. Such a number must be difficult to generate well." I also tried to tie the perception of economic health into floating rate interest rates, which soared as the Fed fought inflation by, well, raising interest rates. I had to destroy the village to save it, sir. Anyway, keep up the great work at Chartbook!
Inflation, Debt and Public Sentiment, May 25, 2024 (and some pictures of the high plains in spring)
Next post I'd like to see a combination of the two graphs. Even then, many important factors will be left out. I can't itemize these, but I am sure you can. The 1970's inflation was not noticed, because women wee pouring into the workforce ergo two income families, and imports wee starting to trickle in from China, meaning many prices - shoes for example - were beginning to come way down. The increase in the price of food per se is really not so bad if you have a good stove and no how to cook. You can et a not of nutrition from a shin bone and a head of cabbage. But - many Americans do not know how to cook - and many Americans have only a microwave oven or less - and many Americans are therefore buying the outrageously priced and unhealthful foods from the middle of the store. I shop at two markets, one for wealthy suburbanites, one for poor people. Wow what a difference in the market baskets in the checkout line! The poorest people are getting the least food value for their dollar. Then there's the travel cost - here in the West the bottled orange juice comes from Florida! And the poorest shoppers use taxis.
I always thought that the spike in grocery prices during the initial phases of the COVID epidemic was due in part to the shift from eating out to eating at home -- different supply chains mostly, and, if some price gouging was to blame, that was due more to the upstream processors rather than the retailers. Now, finally, we are seeing a leveling off of grocery prices and even reductions in wholesale prices.
But what about energy? What can bring those prices down as we work to shift from fossil fuels and, despite lower prices for solar panels, we confront upgrading the grid and dealing and utilities' passing the cost of their legacy systems (what they call stranded costs) on to consumers, where will the relief come from in the near term?
Nice piece but don’t they already do this? Is this not just the difference between headline and core inflation? Am not sure the term “anti-core” adds anything although I do like “felt”. But from a targeting perspective there is a reason to strip out goods in the basket that might simply be volatile for a number of reasons unrelated to underlying supply/demand forces.
I'm stunned by this. Can absolutely nothing be done by policy-makers to influence anti-core inflation? Does anti-core inflation correlate with core inflation? Are the UK figures calculated in the same way? Too many questions.
This is wonderful, Adam: thank you. It has long seemed to me that discussions of the annual rate of change in real wages vis-à-vis inflation—especially at the national scale, and however in point of fact averaged across industries, regions, and demographics—have denigrated this ‘anti-core inflation’ as ‘vibes’ or just reactionary miasma. (Not to let the right-wing media off the hook here but that’s another story.) This also overlooking the fact that lower-wage workers may well not have salaries indexed to inflation, say! Or the strange, barely articulated consensus that $400K somehow marks the tax threshold between ‘middle-class’ and wealthy in policy discussions. All this to say that one would hope policy-makers also distinguish 'anti-core' and 'felt' inflation among different tax brackets, &c., too with as much precision as possible.
So the explanation here seems to be that central bank creates and reports a measure, the core inflation rate, based on whether it can manipulate that rate through it's available monetary tools, then claims victory when that core inflation rate is manipulated in the way it expects. Where is the extrinsic value of this measure here? If this inflation rate does not actually impact food and fuel and rent, the things that literally everyone else cares about. This seems recursive - the bank is setting its own goalposts only on what it can actually achieve then patting itself on the back for achieving the goal.
Are residential rents included in core inflation? If not, are they accounted for in "anti-core"? For many ordinary folks who rent, these rising costs have really hurt, adding not only insult, but insecurity.
It has never made sense to me that they leave out food and fuel. That they left it out because those elements are volatile makes me think of the fact that scientists traditionally left women out of medical trials because it was too hard to calculate the variables. Garbage in, garbage out. Separately, what I find missing from such discussions is that businesses put less of that money toward worker salaries (corporate profits at all time highs, stock buybacks, etc., instead of wages). Maybe the higher price of eggs wouldn't pinch so much if the wages matched.
And how do food prices in grocery stores get set?
Not much substantial to add apart from to say thanks for blowing my mind...
Thank you - very helpful. I had no idea that the essential ingredients of life were missing from the stats...
"I could feel the tug. Was I morphing from a sophisticated social constructivist on inflation, to being something closer to a “fakenews” guy?"
As you point out, the "core inflation" numbers are not fake, but they do not take into account things that humans actually use, unless you are one of those kind of humans who consumes neither food nor toohpaste nor energy.
At the same time, what constitutes "core inflation" is chosen in a self-serving manner. Did not Goodhart's Law teach the masses of old, that once a measure becomes a target, it ceases to be a good measure?
In this case, however, the target is chosen so as to fit the preferred measure. Sort of like if corporate executives were to set the strike prices for the options that they grant themselves.
I count myself among the vast school of Goodhart friends! Yes, he said that. And a lot of the inflation reporting/commentary has been intensely politically self serving (cue any Krugman column). And here we are, three weeks to go.
Absolutely a spot-on exposition of the persistence of "vibe-flation" amongst the general US population, and how the pleas of Biden, Harris, et
al for the public to look at the "solid" economy as reflected in the "2.5% inflation rate", high employment rate, growth in wages, etc., are having minimal affects, especially reflected in the "what's right - what's wrong" direction of the country in polling surveys. "Wrong direction" leads by miles, 72-28% over "right direction", and that alone should tell the politicos SOMETHING about the voters' state of mind, surely.
Why isn't there a huge popular voting lead for Harris, running against a demented proto-fascist? Adam Tooze gave us the answer, full stop.
It's absolutely wild to me that gas and groceries are not counted in US core inflation. Gas, especially, affects the price of everything else because of logistics!
Ok, so we get into how prices for food are set. By the federal government? Yes and no: as Michael Pollan has pointed out, farm policies have encouraged production of cheap calories that have kept prices artificially low at the cost of human health, soil health and animal suffering. As someone who has been in the produce business on a retail and distribution level, I have seen the consolidation of the industry lead to monopolistic pricing as well as the overproduction of highly processed products. It’s the old story of socialize the costs, privatize the profits. In my opinion, it would be far better if the federal government backed off on propping up corn/soy/ factory meat production at the very least to slow the massive upsurge of metabolic disease like diabetes that these policies encourage. While it would save billions in health care costs while improving well being, it would cost more at the register and we can’t have that!
If the Fed had been listening to Claudia Sahm, they would have cut interest rates at least a year ago (I have indeed been listening to her). I wonder what the anti-core and core impact would have been if that had been the case.
Very nicely done, Adam. I wrote a Substack about this, or parts of this. " What I have in mind is something like “real feel” weather numbers, because wind and humidity matter to how actual humans (as opposed to thermometers) respond to heat. Such a number must be difficult to generate well." I also tried to tie the perception of economic health into floating rate interest rates, which soared as the Fed fought inflation by, well, raising interest rates. I had to destroy the village to save it, sir. Anyway, keep up the great work at Chartbook!
Inflation, Debt and Public Sentiment, May 25, 2024 (and some pictures of the high plains in spring)
https://open.substack.com/pub/davidawestbrook/p/inflation-debt-and-political-sentiment?r=13evep&utm_campaign=post&utm_medium=web
Next post I'd like to see a combination of the two graphs. Even then, many important factors will be left out. I can't itemize these, but I am sure you can. The 1970's inflation was not noticed, because women wee pouring into the workforce ergo two income families, and imports wee starting to trickle in from China, meaning many prices - shoes for example - were beginning to come way down. The increase in the price of food per se is really not so bad if you have a good stove and no how to cook. You can et a not of nutrition from a shin bone and a head of cabbage. But - many Americans do not know how to cook - and many Americans have only a microwave oven or less - and many Americans are therefore buying the outrageously priced and unhealthful foods from the middle of the store. I shop at two markets, one for wealthy suburbanites, one for poor people. Wow what a difference in the market baskets in the checkout line! The poorest people are getting the least food value for their dollar. Then there's the travel cost - here in the West the bottled orange juice comes from Florida! And the poorest shoppers use taxis.
I always thought that the spike in grocery prices during the initial phases of the COVID epidemic was due in part to the shift from eating out to eating at home -- different supply chains mostly, and, if some price gouging was to blame, that was due more to the upstream processors rather than the retailers. Now, finally, we are seeing a leveling off of grocery prices and even reductions in wholesale prices.
But what about energy? What can bring those prices down as we work to shift from fossil fuels and, despite lower prices for solar panels, we confront upgrading the grid and dealing and utilities' passing the cost of their legacy systems (what they call stranded costs) on to consumers, where will the relief come from in the near term?
Nice piece but don’t they already do this? Is this not just the difference between headline and core inflation? Am not sure the term “anti-core” adds anything although I do like “felt”. But from a targeting perspective there is a reason to strip out goods in the basket that might simply be volatile for a number of reasons unrelated to underlying supply/demand forces.
I'm stunned by this. Can absolutely nothing be done by policy-makers to influence anti-core inflation? Does anti-core inflation correlate with core inflation? Are the UK figures calculated in the same way? Too many questions.
This is wonderful, Adam: thank you. It has long seemed to me that discussions of the annual rate of change in real wages vis-à-vis inflation—especially at the national scale, and however in point of fact averaged across industries, regions, and demographics—have denigrated this ‘anti-core inflation’ as ‘vibes’ or just reactionary miasma. (Not to let the right-wing media off the hook here but that’s another story.) This also overlooking the fact that lower-wage workers may well not have salaries indexed to inflation, say! Or the strange, barely articulated consensus that $400K somehow marks the tax threshold between ‘middle-class’ and wealthy in policy discussions. All this to say that one would hope policy-makers also distinguish 'anti-core' and 'felt' inflation among different tax brackets, &c., too with as much precision as possible.