![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
Types of inflation
Feb. 16th, 2011 03:05 pmWith Mervyn King wittering on about how CPI inflation was only at 4.1% last month, rather than the 1% level predicted by the Monetary Policy Committee 12 months earlier, because of "external factors" (although one does wonder how these external factors can account for some 15 months of under-predicting inflation levels), I thought I would mention a rather good book called The Great Wave by David Hackett Fisher. I suspect that it might have been a PhD turned into a book, because there's about 350 pages of text and graphs, followed by 200 pages of source material.
Fisher raises some interesting points about inflation, not least the fact that different types of inflation hurt and help different parts of society.
I think that this point has been missed by many of the analysts today, who have focues instead on RPI, CPI, stripping out this, stripping out that, and so on. Indeed I heard one wag this morning on Wake Up To Money (who was against raising rates) talking about the inflation rate after stripping out food prices – which struck me as a fraction excessive.
So, perhaps instead of asking the question "what is the rate of inflation?" we should instead be asking the question "what type of inflation is it?". This is really a matter of added granularity. If price increases are not uniform across the sample "basket of goods" then different groups of people will be experiencing different levels of inflation.
Taking this as the starting point, it seems to me that the most similar "great wave" in the past to what we have experienced recently has been the first wave, from about 1200 to about 1340, although there is one exception (to which I shall return).
This first wave was, Hackett theorizes, brought about by an increase in population and the end of cheap fuel. The cheap fuel in question was wood, and forests in many parts of Europe were being emptied. The increase in population was a result of a few decades of stability and relative prosperity. Net result, more children need feeding, and the price of food and fuel goes up.
At this time the price of what we might call "white goods" was stable. The equivalent of a washing machine in the 12th century is taken by Fisher to be an iron skull cap. This was worn by merchants and many others as protection against other irate citizens.
So, the people who suffered during the first great wave were those at the lower end of the scale -- those who spent most of their money on food and fuel. Those higher up the pecking order suffered less, because the price of non-staple goods remained fairly flat. This resulted in a shift in wealth from "labourers" to "rentiers". It was a good time to be a money-lender or a landlord. Not such a good time to be a blacksmith or a farrier.
However, the Black Death added an interesting twist to the end of this, because all of a sudden the inflation shifted dramatically, with the balance shifting back decisively to labourers (who were now in short supply) and away from landlords (because demand had, unaccountably, slackened off).
How does this impact us today? Well, a big difference between now and then is the more widespread existence of debt. But the nature of price increases is the same. The more you are near the breadline, the more you are being hit by inflation. There is clearly a transfer of wealth going on, with large-scale debtors likely to be the long-term winners.
There's another side to inflation which I think the MPC and most analysts have missed. This is that the ordinary consumer doesn't approach prices in the way that classical economists (or Keynesians) think he or she does. I think that the "mindset" about inflation moves in fits and starts, and that consumers tend to "notice" it either when they buy an infrequently purchased product that isn't always upgrading (season tickets, car insurance, pairs of trousers, shoes) or if they buy a frequently purchased product, but they are not the member of the household who normally buys it. E.G, if a husband only does the weekly shop once every six months, then he will notice changes in prices more than the wife who does it 25 weeks out of 26.
As we get to 5.1% RPI, this begins to be noticed. While with fuel it's a matter of the cost of filling up, with a half a dozen eggs it's a matter of "blimey, they were much less than that in June". If you get a number of these items coming on top of each other in rapid succession, then I think that this makes the inflation "embedded" in the mind of the consumer. And once you are there, you have the basis of the "vicious spiral" that can only be broken with a hell of a lot of pain.
For those of you who weren't around in the 1970s, one example of this was that if you bought a car new, then by the time you came to trade it in, you would get more money than you paid for it in the first place. Of course, the new car that you wanted to buy to replace it would be four times as much.
________________
Fisher raises some interesting points about inflation, not least the fact that different types of inflation hurt and help different parts of society.
I think that this point has been missed by many of the analysts today, who have focues instead on RPI, CPI, stripping out this, stripping out that, and so on. Indeed I heard one wag this morning on Wake Up To Money (who was against raising rates) talking about the inflation rate after stripping out food prices – which struck me as a fraction excessive.
So, perhaps instead of asking the question "what is the rate of inflation?" we should instead be asking the question "what type of inflation is it?". This is really a matter of added granularity. If price increases are not uniform across the sample "basket of goods" then different groups of people will be experiencing different levels of inflation.
Taking this as the starting point, it seems to me that the most similar "great wave" in the past to what we have experienced recently has been the first wave, from about 1200 to about 1340, although there is one exception (to which I shall return).
This first wave was, Hackett theorizes, brought about by an increase in population and the end of cheap fuel. The cheap fuel in question was wood, and forests in many parts of Europe were being emptied. The increase in population was a result of a few decades of stability and relative prosperity. Net result, more children need feeding, and the price of food and fuel goes up.
At this time the price of what we might call "white goods" was stable. The equivalent of a washing machine in the 12th century is taken by Fisher to be an iron skull cap. This was worn by merchants and many others as protection against other irate citizens.
So, the people who suffered during the first great wave were those at the lower end of the scale -- those who spent most of their money on food and fuel. Those higher up the pecking order suffered less, because the price of non-staple goods remained fairly flat. This resulted in a shift in wealth from "labourers" to "rentiers". It was a good time to be a money-lender or a landlord. Not such a good time to be a blacksmith or a farrier.
However, the Black Death added an interesting twist to the end of this, because all of a sudden the inflation shifted dramatically, with the balance shifting back decisively to labourers (who were now in short supply) and away from landlords (because demand had, unaccountably, slackened off).
How does this impact us today? Well, a big difference between now and then is the more widespread existence of debt. But the nature of price increases is the same. The more you are near the breadline, the more you are being hit by inflation. There is clearly a transfer of wealth going on, with large-scale debtors likely to be the long-term winners.
There's another side to inflation which I think the MPC and most analysts have missed. This is that the ordinary consumer doesn't approach prices in the way that classical economists (or Keynesians) think he or she does. I think that the "mindset" about inflation moves in fits and starts, and that consumers tend to "notice" it either when they buy an infrequently purchased product that isn't always upgrading (season tickets, car insurance, pairs of trousers, shoes) or if they buy a frequently purchased product, but they are not the member of the household who normally buys it. E.G, if a husband only does the weekly shop once every six months, then he will notice changes in prices more than the wife who does it 25 weeks out of 26.
As we get to 5.1% RPI, this begins to be noticed. While with fuel it's a matter of the cost of filling up, with a half a dozen eggs it's a matter of "blimey, they were much less than that in June". If you get a number of these items coming on top of each other in rapid succession, then I think that this makes the inflation "embedded" in the mind of the consumer. And once you are there, you have the basis of the "vicious spiral" that can only be broken with a hell of a lot of pain.
For those of you who weren't around in the 1970s, one example of this was that if you bought a car new, then by the time you came to trade it in, you would get more money than you paid for it in the first place. Of course, the new car that you wanted to buy to replace it would be four times as much.
________________
