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Why Has There Been So Little Consumer Price Inflation?

Why Has There Been So Little Consumer Price Inflation?

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3 years ago

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Every once in a while economists want to go out on a limb with their models and publicly make forecasts on what the future rate of price inflation will be. The current COVID-19 lockdown is no exception. Many economists have warned us of potentially very high rates of price inflation, because monetary stimulus on a massive scale meets a negative supply shock. Others are afraid that the monetary and fiscal stimuli won’t be strong enough to compensate for the drop in private spending, resulting in a deflationary spiral. More often than not, both parties are wrong.

It seems important to ask what it is that they try to forecast and how closely connected it is to monetary policy interventions. When we look at the consumer price inflation rates in the eurozone, there really has not been much going on over the past decades, despite a rather activist monetary policy. Since 1999, the average annual inflation rate, measured by the Harmonised Index of Consumer Prices (HICP), has been about 1.65 percent. The rate for any one year never went above 3.2 percent—the value reached in 2008—and was negative only once, in 2015, at –0.6 percent. So, all in all that’s a fairly narrow band, and the average aligns rather nicely with the Eropean Central Bank’s (ECB) stated target, although some economists would like to see it even closer to 2 percent.

Figure 1: Year-on-Year Percentage Change from January of the Previous Year to January of the Respective Year
M2 and Real GDP Gap
Sources: ECB, IMF. The explanatory gap is defined as the growth rate of M1 minus the growth rates of the HICP and real GDP.

In contrast, the eurozone's M1 monetary aggregate has grown at an average annual rate of 7.59 percent over the same period (1999–2020), which means that it has much more than quadrupled, whereas consumer prices have only grown by a bit more than 40 percent. One would not expect all of the monetary expansion to translate into proportional price inflation, but the observed gap is surprisingly large and persistent. Real economic growth according to official numbers hardly fills it. Real GDP has grown by merely 32 percent since 1999, or by an average annual rate of 1.35 percent. A back-of-the-envelope calculation by which we subtract both the average real growth rate and the average rate of consumer price inflation from the average growth rate of the money stock M1 leaves us with an explanatory gap of about 4.6 percent per year. Where does the money go if it is not absorbed by higher unit prices for consumer goods or a larger real output?

Well, there are essentially two possible explanations. First, there may have been increases in the reservation demand for money. Put differently, there may have been a substantial decrease in the velocity of money. Indeed, if one believes that the quantity equation—PY = MV, where P is the HICP, Y is real GDP, and M is the money stock M1—accurately relates the empirical magnitudes considered, then yes, velocity (V) must have taken up the slack. But since velocity here is merely residual, it explains the entire gap simply by definition, which is to say that it does not explain anything at all. There surely are changes in the reservation demand for money, but should they be so persistently positive every year? And why should they be so high (see Figure 1)? 

The second possibility is that inflationary pressures actually materialize outside of consumer goods industries, most notably in the markets for long-term assets, such as stocks and real estate. This would imply that the HICP inflation measure grossly underestimates the general rate of price inflation. The surge of asset price inflation over the past decades has been widely documented, and this clearly matters to the average household. When asset prices rise it becomes harder to attain any given level of real wealth if you are not there already.

Figure 2: HICP Inflation Rates and the Median Inflation Perceptions in the Euro Area since 2004
Inflation Perceptions HICP
Source: Business and consumer survey database, European Commission.

The answer lies most likely in some combination of these two causes and some other factors. But the second cause—inflationary pressures outside of consumer goods industries—seems to be the more important one. It is especially important if we want to evaluate how well average citizens are actually doing. And it turns out that if we listen to what they have to say, we find a rather interesting empirical result.

Since 2004, the European Commission has published survey data on inflation perceptions. Figure 2 shows how those perceptions compare to the HICP inflation measure from 2004–19, the period for which data on inflation perceptions is available. The geometric average of the median perceived inflation rate over this time was 6.57 percent. Over the same period, the measured HICP inflation rate was 1.57 percent. So, on average, median perceived inflation has been 5 percentage points higher than the official rate of consumer price inflation. The average explanatory gap as defined above has been 4.8 percentage points, which is remarkably close to what the median respondent in the survey perceives to be the difference between actual and measured inflation (5 percentage points). The difference between perceptions and official numbers fills the gap quite nicely.

Now, it is very likely that perceptions are upward biased,1 but it is hard to believe that they completely miss the mark. The overall inflationary pressure does not seem to be covered by the official HICP numbers. In fact, the latter tend to be rigid relative to asset prices. This, among other things, has given monetary policymakers comfortable wiggle room for engaging in ever more expansionary measures without failing to remain below the 2 percent target. But it is not true that price inflation is generally low. It simply happens outside of the official numbers, and most people feel it.

  • 1. Notice that we looked at the median instead of the average perception, precisely for the reason that the distribution is right skewed, with outliers toward extremely high perceived inflation rates.

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International

Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.

Published

52 mins ago

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May 28, 2023

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Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

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That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.

  

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Government

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans…

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3 hours ago

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May 28, 2023

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'Kevin Caved': McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans have been outright rejecting the debt ceiling deal which raises it by roughly $4 trillion for two years, doesn't provide sticking points sought by the GOP.

In short, Kevin caved according to his detractors.

Some Democrats aren't exactly pleased either.

"None of the things in the bill are Democratic priorities," Rep. Jim Himes (D-CT) told Fox News Sunday. "That's not a surprise, given that we're now in the minority. But the obvious point here, and the speaker didn't say this, the reason it may have some traction with some Democrats is that it's a very small bill."

*  *  *

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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Government

“Hard Pass”: Here’s What’s In The Debt Ceiling Deal Republicans Are About To Nuke

"Hard Pass": Here’s What’s In The Debt Ceiling Deal Republicans Are About To Nuke

After President Biden and House Speaker Kevin McCarthy (R-CA)…

Published

5 hours ago

on

May 28, 2023

By

"Hard Pass": Here's What's In The Debt Ceiling Deal Republicans Are About To Nuke

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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