I've wondered what the effect our modern digital economy has had on consumer price inflation.

Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them and there is a limit on how much of any particular physical good is available.

This isn't the case, however, for digital goods. If there are suddenly 100 million new people who want to buy a Netflix subscription, it isn't like we are going to see the price of a Netflix subscription go up because there isn't enough Netflix to go around. The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage.

It would be easy to see that inflation would be essentially zero if ALL goods people wanted to buy were digital ones... no amount of demand can eat up the supply, since supply is practically infinite.

Of course, in the real world, some goods are digital and some are physical. If you gave everyone $5000, some of that would go to Netflix subscriptions, which wouldn't effect consumer prices, and some would go to buying TVs to play Netflix on, which WOULD cause inflation.

I am curious how much of our current "low inflation even with an increasing money supply" is caused by our increasing spending on non-exclusionary goods.

Some personal anecdotes. I grew up during the hyperinflation days in Brazil (80s, early 90s): talking about 60% a month.

People would get their salary and run to the supermarket and buy everything they needed for the month, because if they waited a single day the prices would have changed. A lot of people internalized that habit and still do that nowadays (not in the sense of running to the supermarket, but buying a lot for the whole month).

This was before barcodes, and every item had a price label on it. Supermarkets had people employed full time just to be remarking the items. I remember running to pick up an item on one end of a shelf while the employee was remarking the items coming from the other end, so you could buy the item at yesterday's price.

I lived through 6 currency changes. Usually when prices started being in the scale of millions, the government would announce that in a very short period (sometimes that being next week), there was a new currency with a new name and 1000 OLD = 1 NEW. Until the government could replace all existing bills, the old bills would be accepted as if they were the new bills (at 1/1000 of the face value, of course). Old bills passing through the banking system would be stamped with the name of the new currency and the new value before being put back into circulation.

Contracts like rentals were all indexed: there was a clause saying the price would be corrected every month using the official index that tracked the inflation. Or were pegged to the dollar. This by itself fed into the positive feedback loop that was perpetuating the hyperinflation.

The government tried some bizarre measures to tame inflation. Often they would try freezing all prices, but that was never sustainable for long. The craziest one was probably in 1990 when the government simply froze 80% of everybody's money in the bank for 18 months to reduce the amount of money in the economy. This was a total disaster and even caused many suicides.

In 1994 hyperinflation was finally tamed when the current currency, Real, was introduced. It was the culmination of an ingenious plan that actually worked.

Feel free to ask me more, if you're interested.

This chart in the expense share of a typical income illustrates a number of issues well, but healthcare stands out like crazy: https://mobile.twitter.com/_cingraham/status/123195012984367...

College, transportation and housing are all pretty high overall, but the healthcare share is just stunning. If we were looking at dramatically better outcomes or services, fine. Unfortunately, doctors get to see patients for less and less time, billing is going up and you don’t really see anything in return. Most other developed nations put a stop to this a long time ago…

So awesome to see Lyn Alden at the top of Hacker News. She is an absolute genius!

If you aren't familiar with her work and thinking I think a good introduction interview is: https://www.youtube.com/watch?v=f_JmGLMjIOk&t=35s

Fun fact: She is an electrical / industrial engineer by trade, not an economist.

“ The power of technological deflation is important not to overstate, though. In everyday use, the rise of the smart phone displaced a lot of house phones, cameras, video recorders, film, CD players, iPods, beepers, radios, scanners, roadmaps, and many ATMs. They also displaced a big percentage of physical newspapers, calendars, dictionaries, encyclopedias, and books. In more niche areas they displaced some mobile game devices, pocket translators when traveling, compasses, voice recorders, and photo scrapbooks. We folded many of our devices and consumables into one powerful device with dozens of software applications.”

This, and we haven’t even discussed the amazing tech in food production that is getting better daily. (Satellites telling tractors in iowa what to do based on hyper spectral drone flyovers).

I remember our family taking a few years monthly payments to get me encyclopedias, and now we have wiki.

I get the argument from the fed about hedonic adjustments and increased quality of life, but that's not how people measure their happiness. Subjective happiness is how you're doing relative to those around you. The hedonic adjustments are all about objective quality of life. Sure, my resources in my working class midwest neighborhood would be the envy of Louis XVI's court, but that doesn't matter to me when my neighbor gets a new car.

I wonder how difficult it would be to build a "Subjective Inflation" measure that was useful. Based on category consumption by income quintile you can figure out rough price inflation experienced. With the understanding that happiness is mostly about keeping up with the Joneses you can just assume away the hedonic quality boost and call it "subjective inflation".

The point from the inflation link about not being to eat ipads is critical. Increased resources are definitely nice, but the happiness derived from them is zero-sum, and at the end of the day they're taking more of my income.

This, coupled with the stagnation of median wages, means that:

    We're not getting any happier as a cohort, and

    The things we consume cost a bigger chunk of our earnings every year

I buy the link's argument that we should expect price inflation. Interestingly, this analysis is done with mostly pre-COVID data. COVID has amplified all these trends leading to price-inflation, and narrowed our demand into fewer goods and services. That further amplifies the inflationary forces that were already gearing up to make the 20's crazy.

Buckle up. There's going to be a lot of people who feel like their quality of life is crashing.

Mentioning M2 without mentioning the accounting change that completely changes the graph starting May 2020 is very odd. Of course the percent change is large when you start measuring a different thing from before.

The simplest explanation of accounting change can be found here: https://www.collaborativefund.com/blog/the-fed-isnt-printing...

But the St Louis fed also publishes a disclaimer at the bottom of their graph about it: https://fred.stlouisfed.org/series/M2

Just throwing this in the air: in the 1970, getting off the gold standard made it possible to take much more debt in varied ways. This probably enabled the rich and the corporations to drain a much larger part of the economy for themselves.

Also throwing this in the air: debt might not actually increase productivity unless it's explicitly only used for productive purposes. Even then it seems dubious. The whole argument of using debt to build a business smells funny.

Right now if you look, people who have access to cheap debt, are buying assets with it. A lesser version of this has been probably going on for decades.

I've been researching this topic independently over the last year and about 70% of what I've researched is presented beautifully within this article. What a great post.

The only thing I would try to add that she left off was just the Fed's power[0] over this entire topic. It's mentioned slightly with interest rates dropping, but they play such a pivotal role, together with the yield curve, that it needs to be mentioned.

The Fed has the power to have a yield curve inversion, which drops the amount of broad money available, which creates a recession, which has people lose their jobs, which depresses CPI inflation. Once the loss of jobs occur, they drop interest rates back to where they were and along we go for another cycle.

[0]: https://fred.stlouisfed.org/graph/?g=AzYM

> Inflation: During periods of moderate to high inflation, gold and commodities tend to do extremely well. Equities outperform bonds more often than not, but it depends on the type of equities and their starting valuations, and therefore have a huge variance. Real estate does well, mainly because leverage attached to it gets melted away from inflation. Bonds do poorly in inflationary environments.

The article doesn't talk specifically about gold, but I believe it should. From this chart, you can see that gold started an upward trend in price pre-pandemic that peaked in August of last year, and has since declined noticeably:

https://www.tradingview.com/symbols/XAUUSD/

Gold is supposed to be the canary in the coal mine for inflation. The slightest whiff of inflation is supposed to send the price soaring, usually led by gold mining stocks.

This hasn't happened. As the price of copper, lumber, other base commodities, houses, used cars, and possibly even labor, has surged, gold has barely budged.

What does gold's lackluster performance so far say about the future direction of inflation?

That's the question people worried about (hyper)inflation should be asking themselves.

Many in the gold market claim that the price is being manipulated by central banks, by the paper derivatives market, an other forces.

But it's very hard to believe that literally every other commodity is flying to the moon while gold is stuck in the basement due to "manipulation."

Something isn't adding up here.

Seems like a solid, albeit somewhat dry explanation of inflation. I love concrete examples of how inflation impacts people’s lives, and there are a few that really helped clarify my understanding of inflation that I like to point others to now.

1) https://www.npr.org/sections/money/2015/12/02/458222801/epis.... A great Planet Money episode about how Brazil combatted hyperinflation by just replacing their currency.

2. https://slate.com/business/1998/08/baby-sitting-the-economy..... A Paul Krugman Slate article about a 1978 journal article that uses the example of a babysitting coop to illustrate the way that the monetary supply can have ramifications on the real economy.

3. And the Money Kept Rolling In (and Out) https://www.amazon.com/dp/1586483811/ref=cm_sw_r_cp_api_glt_.... A much longer read, but this is book about the economic crisis in Argentina is one of my favorite economics books, and also teaches you a lot about the international monetary system as well.

As usual, an amazing article by Lyn Alden. I love her work. One of my favorite articles of last year was this: https://www.lynalden.com/fraying-petrodollar-system/

The section on owner's equivalent rent (OER) is worth finding in the long article: OER accounts for about 1/3 of the CPI. However, when you view OER in light of the housing bubble around 2006, CPI was negligibly affected.

IMHO, it is a large signal that CPI fails to accurately describe consumer inflation for a large segment of the population.

I've believed for a bit of time now that the only real reason for the FED to pursue a 2% inflation goal (and I personally believe inflation is far higher than 2%) is to reduce the US's increasing debt burden over time.

If the debt were far lower and more manageable, inflation wouldn't be as necessary a goal as a mechanism to try and reduce its actual value over time.

As this article discusses a bit, inflation is a great way to rob the middle and lower class of value in a way that the upper class is more able to avoid (though not completely) especially due to lack of wage growth at lower levels.

Or perhaps stated in a different context, the target inflation goal might be very different with a much smaller debt.

Now that the US (and many other economies) are addicted to near 0 interest rates, and with all the increased spending (regardless if anyone thinks the spending is "good" or "bad"), I have difficulty seeing how we can dig out of what appears to me as a bit of a hole even with the potential productivity gains the current spending is supposed to spur.

Raise interest rates at this time, and everyone takes a big hit especially as the US is spending a ton more so that's not really an option anytime soon. Keep them low and the only solution to the next economic downturn is to again spend our way out, only furthering the need to keep interest rates close to 0 (making this a bit of a vicious cycle).

No one knows where this ends (I certainly don't and I think any economist who says otherwise is lying whether they know it or not) but the rising cost of the majority of goods that people spend on (health, education, homes and rent) scares me quite a bit as a young adult looking at the next 20 years as I think about wanting to establish my life despite my own luck in having a high paying career in software engineering.

Good article with lots of data. I would like to see data on price increases by category of household expenses broken down by metro region of the US going back 3 or 4 decades.

I feel like nationwide statistics are not very useful once the gap between certain regions gets so wide.

>However, folks who had property with a fixed-rate mortgage going into the 1970s, generally did very well. The house price kept up with inflation, but the mortgage was devalued against inflation, and so home equity went up by quite a bit, along with their wages.

Being a debtor is good when inflation hits, and having an asset that has historically outpaced inflation is doubly good. I believe this is a part of why home prices are rising, people know its going to be a lucrative investment over the coming years, and the downside is minimal at low rates.

Reads like it was written by someone who reads many inflation “truthers,” but is too empirical to believe the hype. Correctly rejects the asset-price inflation theories, which hold that the stock market, Bitcoin, and fine art appreciations are evidence of hidden inflation. Also correctly points out the flaws in CPI, while ignoring the many improved inflation measures, like trimmed mean, the MIT billion price index, or the Fed’s preferred core PCE measure.

This a gem:

> John Williams’ Shadow Stats, for example, calculates that annual price inflation has been around 5-10% for the past decade if it was calculated as it used to be. Interestingly, he has not raised his subscription price for his data at all since at least 2008.

Of course, it's bit of an unfair jab because he might be growing his subscriber base, or isn't getting paying customers but doesn't care.

Didn’t see healthcare.

My dads carefully planned retirement was ruined because he never imagined how expensive it would get.

I pay 1400 a month for a family. Still doesn’t cover a lot.

Downsides aside, won't inflation help exports and keep USD-denominated trade attractive?

It's not like we're the only economy suffering. We might be doing the best of the whole lot.

Has anyone seen any study or discussion of inflation arbitrage? Not in the trivial sense of if you predict inflation borrow and invest, but in the case of viewing a country as multiple separate markets and there being inflation differences between them, which in turn means there is opportunity for arbitrage?

It seems to me like a failure to accept that adjacent markets sharing a currency can have different rates of inflation is a large part of why people are so damned bad at understanding and measuring inflation. The article is a good example, every metric and estimate proposed assumes that there is a single inflation rate for the currency. But if you instead thought of it as one good being trades in multiple different market places, then its obvious that there could be differences in price between these markets which traders could exploit. Critically, unless they did so and doing so was a near perfect market, there would effectively be multiple different prices for the commodity and the textbook use of inflation would be such a shitty model as to be near useless. If you instead asked, how many ingots of currencium would I need to buy a bag of other goods, it would be obvious that this would also require a statement of in market A. I doubt the reason this arbitrage opportunity is entirely missed, but it could be that its unusually hard to exploit. However, I suspect it is partly because even among financially literate people, a currency has one rate of inflation is a common idea.

That said, the single market model where currency has a common price provides shitty predictions. For instance, the strongest counter argument against the apparently obvious statement. SNP500 has not increased more in value in 2020 than 2019, its mostly just inflation, is: No metric of inflation say it has been anywhere near 40% in 2020.

However, if we view this as two different markets, A(capital), B(consumer) where the inflation is different for each. Then any metric which is designed to predict inflation assuming its the same in both would by necessity underestimate one and overestimate the other.

The counterargument would be that if this was the case an efficient market would eliminate the arbitrate opportunity. But thats barely true in the most ideal cases, and its easy enough to come up with such arbitrate opportunities.

For instance, we know that historically, whenever there is inflation, stocks respond quickly, but salaries generally lag behind. This is damned near proof of the multi market model on its own, but a model with more parameters always fits the data better. A sufficient, but not necessary proof would be the existence of insurance contracts for and against inflation in another market priced in the same currency. In short, is there a reason that salary futures aren't a thing?

>My base case going forward continues to be that with the combination of sizable broad money supply growth, along with public opinion pushing the pendulum back away from globalization, consumer price inflation is likely to be higher in the 2020s decade than in the 2010s decade.

The biggest news is that Fed changes its inflation targeting goal. It's now average inflation targeting 2.0%. This means that Fed allows inflation run above 2.0% for some time until average matches the goal.

Another type of inflation: relative inflation. This means inflation of the CPI relative to foreign goods and foreign purchasing power. This take into account the strength of the US dollar. The US has low inflation in this regard.Americans have seen their purchasing power surge relative to much of the developing world, which over the past few years have falling currencies.

>> More specifically, the top 1% of households in the United States have $39.4 trillion in assets and less than $0.8 trillion in debts, which gives them a net worth of $38.6 trillion. So, they have a debt/equity ratio of just 2%. Almost their their entire balance sheet consists of assets. Meanwhile, the bottom 50% of households have $7.6 trillion in assets and $5.1 trillion in debts, resulting in just $2.5 trillion in net worth. So, they have a debt/equity ratio of 200%. Their balance sheets have a lot of debt relative to equity, and almost as much in debt as in assets.

Isn't this statement misleading? I know Jeff Bezos personally doesn't hold any debts but Amazon does. So, if inflation happens, it will indirectly benifit bezos. Hence, Inflation is good for everyone ( Both poor and rich).... Am I missing something?

So many factors going in right now...

Government printing money nonstop. Material shortages (real and manufactured). Demands for increased wages.

It's going to be a bad time to be on fixed income.

> If the government and central bank were to create a trillion new dollars and give the 100 richest people in the country an extra $10 billion each with that money, what would they spend it on? All of their physical needs and desires are met many times over already.

Rich people are rich because they invest when they can instead of spending. Poor people spend because they think that's what rich people do and they want to feel rich. Expecting rich people to suddenly behave like poor people makes no sense.

These wealthy people would invest the money, likely by buying up other businesses that didn't get the handout.

Time to buy gold.

Curious about the yacht pictured in the article. Appears to be owned by the Emir of Qatar.

inflation 150 years is not enough history. inflation is part of game theory.

After talking so much about inflation we will surely have inflation. It’s a self-fulfilled profecy. I am going to issue a debit.

M2/Population https://twitter.com/SMT_Solvers/status/1391506520488153091/p...

That is an unprecedented hockey stick.

So far it's a lot of words and graphs with a tenuous grip on reality in a few places:

> There are, however, some groups in lower income brackets that do poorly in inflationary environments. If someone doesn’t have a lot of money and lives on a fixed income in retirement, they have a lot of vulnerability to inflation. Those sorts of folks should consider owning inflation hedges to protect their lifestyle, if they expect that high levels of inflation have a reasonable probability of occurring.

If you think someone in a low tax bracket on fixed income has the spare money to invest in anything, you're not understanding the words "low income" or "fixed."

> Capital had political control from the late 1800s through the 1920s. Labor had political control from the 1930s through the 1970s. Capital again had political control from the 1980s through the 2010s. I’m not sure what’s next but signs are increasingly pointing towards labor regaining some influence, and it’s a topic I continue to monitor.

What?