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But here is why I doubt that inflation will look like the most serious concern facing the nation a year or two from now:
Quote:
Originally Posted by Tiny
I'm just sitting back and taking this in. It's always educational when you and LL engage here. Your thoughts about the Fed causing asset price inflation and the spendthrift politicians causing consumer price inflation are interesting.
As you know, another frequently cited cause of inflation right now, especially by the Biden administration and Congressional Democrats, is a broken supply chain, low inventories, and higher demand coming out of COVID. That's the basis for their argument that inflation will be transitory, and you've mentioned it too.
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Here's a quick rundown of why -- within the next 12-24 months -- inflation could recede sharply, unlike in the 1970s. An entirely different set of dynamics is driving it.
Immediately after World War II ended, we saw what could have been called the mother of all supply capacity issues, and U.S. businesses needed time to completely revamp factories and production patterns to even begin to catch up.
Needless to say, supply of consumer goods was severely constricted during the war. Almost everything was in short supply -- and many items were strictly rationed if available at all. At the same time, the household saving rate was as high as 25% during some of the war years. People were urged to be patriotic and buy "war bonds." The nation had a deep pool of savings and little opportunity to spend them.
Men who fought in WWII came home, got married, started families, bought cars, and bought homes or leased apartments. Demand for almost everything shot through the roof. Refrigerators, washing machines, furniture, radios, TV sets (new then!), cars, you name it.
It took a while for U.S. industrial capacity to shift from guns, ammunition, tanks, airplanes, etc. to cars, appliances, and other civilian goods. But, understandably, they put on a full-court press to get it done. As has so often happened throughout history, supply shortages turned into something of a glut after massive pent-up demand was satisfied. Inflation raged in 1946-47 (at much higher rates than today), but disappeared in 1949 when the U.S. entered a short deflationary recession.
Although the causes are completely different, we now have a similar household savings/supply imbalance. According to some estimates, personal bank balances are $2-2.5 trillion greater than the pre-pandemic trend owing to massive covid relief packages which greatly exceeded pandemic-induced salary and wage deficits. Inflation rates will remain elevated while pent-up demand is satisfied during the supply chain's return to normalcy. Then consumption will slow sharply and inflation rates will likely return to trend in the sort of low-growth trajectory our economy has been following for many years.
So, in my view the "rate of change of the rate of change" in the inflation numbers will itself be changing soon enough, and accelerating to the downside. (Think second derivative.)
The biggest challenges for politicians will occur if the electorate's perception is that wage increases aren't keeping up with the total increase in the consumer price level during the period of higher-than-trend inflation.
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then CM can go off on a tangent!)
