Types of inflation
Feb. 16th, 2011 03:05 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksWith 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.
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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.
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no subject
Date: 2011-02-16 04:09 pm (UTC)In some ways we really haven't come far from the 1200s, because the poor are hit hardest by the increase in fuel and food prices - and both, certainly here in the US, are noticeably on the increase (the balance between the two is an interesting dynamic; conversion of crop production to be fuel instead of food is taking place because of fuel price inflation, but that drives food price inflation, so there's going to eb an interesting feedback cycle there that will, I suspect, require some strict governmental controls at some point). At some point, realism in product pricing has to set in - frankly, the idea that we can buy green beans or strawberries at any time of year because they can be flown half way around the world has to become a nonsense, it's simply not an efficient economic model for the long term. Here in small-town America, it's noticeable that there is some movement toward relocalising food supply, but it's tough going because it comes up against the corporate clout of WalMart (whose produce is of highly variable quality, and not generally cheap - sadly, the response of most people to this is to buy far less healthy food instead, rather than try and grow their own or support the local farmer's market: it does seem that the US is following the UK down the "convenience food" route of prepared meals, which didn't use to be such a big factor over here, mostly because fast-food restaurants are so prevalent and cheap).
And I agree, as well, that it is all about perception, not reality - the whole financial system since the 80s has been that way, I fear, to the extent that we are now in a situation where you can't tell people certain things about the economy because it would cause complete panic and collapse. To have allowed economies to get to a state where reality cannot be allowed to intrude is unhealthy, to put it mildly (insane, to put it moer bluntly).
Whether the growth in Asian economies can do something to prop up the Western ones remains to be seen. It's ultimately in their interest to let "us" down to earth as gently as possible. The Chinese, as far as I can see, continue to try and operate a very difficult balancing act in their influence on the US economy; the US doesn't like it, but has no leverage, and ultimately should (arguably) be grateful that the Chinese are sensible enough not to precipitate a dollar collapse, which is something they now have the power to do - just as they COULD shore up the US economy more than they do, but to their own developmental detriment.
We live in interesting times.
Let them eat flat-screen TVs!
Date: 2011-02-17 02:43 pm (UTC)Let them eat flat-screen TVs! Have you seen the rate at which the price of these things is coming down?
I have a certain amount of sympathy for the MPC's predicament. A lot of the inflation is due to circumstances beyond their control. When the VAT rate hike drops out in January (though we are on a trend of bumping it up by 2.5 percentage points each January - surely the maths is even easier at 50% than 20%?) we should see the trend reverse, depending on how raw material prices are doing.
Would hiking interest rates have an effect on consumer demand for things like wheat? Cotton, yes; petrol, maybe (drivers won't give up driving until petrol is at £10 a litre, and even then ....)
Bring on rampant inflation, I say, at least until my fixed rate mortgage deal runs out in about 2017.
BTW, "impact" is still only a noun, isn't it? I think the increase in its use as a pseudo-verb is because people are unsure of the difference between "effect" and "affect".
Johnny H.
Re: Let them eat flat-screen TVs!
Date: 2011-02-18 04:00 pm (UTC)I agree with you that it's a tad ungainly, but there we are.
No idea what Brian (it is Brian, isn't it?) is wittering on about re. the unsustainability of shipping green beans halfway around the world. It may offend his ecosensibilities, but for the life of me I can't see why it should be any more unsustainable than, say, central heating.
You Don't Need That!
Re: Let them eat flat-screen TVs!
Date: 2011-02-19 07:47 pm (UTC)"Impinge" has a similar – indeed, virtually identical – sound effect, but once again it seems to lack the physical sense of "impact". In this particular instance, I'd be perfectly happy with any of the three, TBH. I think that "impact" has made its way into general English language usage as a verb. But perhaps I read too much hack American blogging.
Re the stupidity of flying green beans from Kenya in February, I think that Brian's (valid) point is that one can have a nicer lifestyle by eating in tune with the seasons – the very seasonality of food adds to the pleasure, whereas eating the same thing all year round "because you like it" leads to tedium.
Central heating, though perhaps equally "wasteful", is not something that leads to tedium. In the words of someone I once knew who worked in Petticoat Lane Market on a fruit stall for 30 years before I met him: "They say about the cold at 4.30am in the winter -- 'I suppose you get used to it'. It's bollocks. You never get used to it."
Similarly, I never get bored with being warm.
PJ
Re: Let them eat flat-screen TVs!
Date: 2011-02-19 11:46 pm (UTC)At some point, realism in product pricing has to set in - frankly, the idea that we can buy green beans or strawberries at any time of year because they can be flown half way around the world has to become a nonsense, it's simply not an efficient economic model for the long term
means what it means (allowing for the "has to become" thing and the mis-engineered comma thereafter).
There are many "efficient" economic models semi-colon and not a single one that I can think of comma requires a crackpot condemnation of air miles per se period.
What Brian is actually saying is, I think, that he subscribes to a view of the world in which moving food from one point to another is naughty and dangerously expensive. Well, obviously, that's not quite what he's saying. From the greenhouse next door? Sounds good. From the farmer's market down the road? Goody, let's support the folks; after all, they ain't Mexican grease-ball peasants.
But that would be wrong, wouldn't it? Mexican grease-ball peasants are good folk.
Just avoid those slanty eyed bastards from the other side of the world and those nasty edamame things they come up with. Not to mention the "passion fruit." I am not going to let a "passion fruit" near my children, thank you very much. The Church does not allow That Sort Of Thing.
Now, had Brian made the '(valid) point ... that one can have a nicer lifestyle by eating in tune with the seasons – the very seasonality of food adds to the pleasure, whereas eating the same thing all year round "because you like it" leads to tedium,' then I would agree whole-heartedly.
I feel disinclined to agree with the bleeding obvious, simply because all three of us are on the same side here. What Brian actually said was sad, demented, Green gibberish.
On the other hand, I applaud his support for farmers' markets and the like. I don't know which bit of America Brian lives in, but even in the Bay Area (which is quite sophisticated in food terms -- see Angela, etc) the "local food" thing can open your eyes.
Just please don't fuck around with this chintzy notion that a green bean is not a green bean unless it was a grown bean which shouldn't have bean flown bean. I mean, that's just bollocks. As it should be, because I just made it up ... on the other hand, it has a certain appeal.
Re: Let them eat flat-screen TVs!
Date: 2011-02-20 12:04 am (UTC)Are you actually saying that?
Central heating in South East London be damned. Let the walls of the Red Sea cave in on you.
Parboiled, lightly fried in freshly chopped garlic and Normandy (is Normandy good enough for you people? Some of us came from there once. It's a blood thing) butter with a squidge of lime (I grow my own in the back garden, next to the statue of my grandfather) and some freshly-ground pepper, which of course comes from my next-door neighbour's allotment, and I don't even care that she carries her 100 kilogram bulk off to the Canaries five times a year "because it's nice there, innit?" ... well, that's good eating.
Central heating? Tedium? I think you miss my point, possibly by intention. There are calories and there are calories. There is no such thing as a bad calorie.
It's merely a question of whether you can afford the calorie, whether that calorie is generated in a worrying way, and whether you enjoy said calorie more than you would enjoy, say, being force-fed into a Soylent Green ricer.
Which also generates calories.
Re: Let them eat flat-screen TVs!
Date: 2011-02-20 12:10 am (UTC)Have you actually tasted a strawberry in America? At any time of year?
No. I thought not.
Re: Let them eat flat-screen TVs!
Date: 2011-02-20 12:29 am (UTC)I am not one to argue with the seasons. I am quite prepared to wait thirty years for a decent Calvados to mature.
On the other hand, with food? If it's right and it's ripe, I just stuff it into my gob.
Equally enjoyable, either way.
Am I a bad person?