What’s your take on the economy?

I’m seeing the numbers but they don’t square at all with what I’m seeing here on the ground.

What am I missing?

quote:

Originally posted by Steve Miller:

I’m seeing the numbers but they don’t square at all with what I’m seeing here on the ground.

Trying to understand what you‘re seeing … how is what you see on the ground not squaring with what numbers you see?

Meat/poultry is down by half or more where I shop. Tires for the car are going to cost about the same as they did several years ago. Housing prices are leveling off. Gas is down almost $1/gallon over the last month.

Is it that the official numbers haven’t kept pace with the changes?

The leveling off (and decreases) in many basic commodities prices will affect July's CPI numbers, and we won't hear about that until mid-August. I expect the annualized inflation rate to decline from recent highs. But there are other things at work in service industries that haven't yet leveled or slowed. Most everybody expects that the worst of the surge is past, at least for now. Energy prices could spike again in fall if Mr. Putin continues to lay waste to Ukrainian cities.

Mr. Powell may jack up rates another percent soon in order to cause a recession before November ... I mean, in order to ensure that inflationary expectations don't get baked in.

quote:

Originally posted by Piano*Dad:
The leveling off (and decreases) in many basic commodities prices will affect July's CPI numbers, and we won't hear about that until mid-August. I expect the annualized inflation rate to decline from recent highs. But there are other things at work in service industries that haven't yet leveled or slowed. Most everybody expects that the worst of the surge is past, at least for now. Energy prices could spike again in fall if Mr. Putin continues to lay waste to Ukrainian cities.

Mr. Powell may jack up rates another percent soon in order to cause a recession before November ... I mean, in order to ensure that inflationary expectations don't get baked in.

Thanks for this.

I’ve been trying to make sense of the way inflation is being reported. I had understood that gas and food prices were not included in the core inflation rate because they’re so volatile, but it looks like WaPo includes these commodities in their reporting - possibly to make the situation look as bad as possible. One article I just read says core inflation is 5.6% - high but not hair in fire high. Is one number more useful than the other? Is the fact fuel and grocery prices are dropping indicative of better times ahead?

On the Fed rate hikes thing, I’ve read maybe too much about Paul Volker. Is it really necessary to wreck the (most excellent) employment rate to contain inflation? Will 6% or 7% home mortgage rates really bring the country to its knees? Historically speaking those rates look pretty good - am I missing something?

Yes, "core" inflation measures exclude volatile food and energy prices.

Here is a good history of core inflation from the Bureau of Economic Analysis website (via the St. Louis Fed):

FRED web page


But real people don't just feel core inflation. Low and middle income people feel energy and food prices especially hard. This is why the GOP (and WSJ) happily harp on it, to pull some more lunch pail Joes away from Joe. On the other hand, if these volatiles do come down in price in the fall, or stay down, that will help Democrats fend off the attacks by hammering home how much gas costs are down "over the last three months."

The Fed is keen to avoid a repeat of 1981. Their attention is focused on peoples' expectations. They want to make sure that we don't walk down the path of self-fulfilling expectations. Powell does NOT want to have to repeat Volker's behavior in 1981.

His problem, however, is that the Fed really only has a hammer (interest rates), so ...

The US economy is a series of highly interconnected markets. Some are much more interest sensitive than others. Housing is one such market. No, 6% mortgage rates won't bring the country to its proverbial knees, but it could bring about a significant decline in new construction. That would disproportionately affect low-ish wage workers and low-ish wage home buyers (who are most interest sensitive). It could also have a very differential effect across localities and states. But the Fed's hammer, as I said, isn't very sensitive.

Gas prices are down a buck a gallon here.

OTOH I noticed that a bunch of stuff went up at Aldi. The house brand canned pumpkin that was 89 cents is up to $1.29, and Libby's went from $2.09 to $2.62. Prices on other Aldi items I buy seem stable.

Which is why economists distinguish between "inflation" and "changes in relative prices." Gas going down relative to pumpkin is the same thing as saying that pumpkin goes up in price relative to gas. Neither tells us much about "inflation" which is a sustained increase in all or most prices. Changes in relative price are what lead people to substitute more of this for some of that, and for firms to produce less of this and more of that. Changes in relative price tell people what is more scarce and less scarce, and give them the incentive to act accordingly. So saith Econ 101.

P*D, that all makes sense, but it seems to me that maybe gas should be in a separate category?

I can choose not to buy pumpkin, or substitute ingredients or brands to the price of my preferred items go up.

But I can't decide to buy pumpkin when gas prices are too high.

So when the price of gas goes down, it seems to me that it makes a much bigger difference, if nothing else on my perception as a consumer.

I didn't mean to imply a correlation between the the price of pumpkin and the price of gas. Just a couple of prices that jumped out at me recently.

The pumpkin has been of interest to me because I buy it regularly for the dog. Most of the (cheaper) private label brands have not been available for some time, which I've found puzzling...

was kinda wondering why you were so familiar with pumpkin prices at this time of year...

...add to that... I totally rely on Costco to bake my pumpkin pies for me....

quote:

Originally posted by ShiroKuro:
P*D, that all makes sense, but it seems to me that maybe gas should be in a separate category?

I can choose not to buy pumpkin, or substitute ingredients or brands to the price of my preferred items go up.

But I can't decide to buy pumpkin when gas prices are too high.

So when the price of gas goes down, it seems to me that it makes a much bigger difference, if nothing else on my perception as a consumer.

Well, no. Not a "separate category." The CPI already weights items by how important they are to the average budget, so a change in gas prices has a much bigger effect on the CPI than does a similar % change in ... ah, pumpkin prices!

On substitution, what you've said in intuitive language is that the elasticity of substitution between pumpkin and gas (%change in pumpkin consumption for a given %change in the price of a gallon of gas) is zero. People don't buy more pumpkin when gas prices go up. But they DO commute less, take other forms of transportation (bus/train/etc, and drive fewer miles overall. That's an empirical assertion, and of course it's probably true!

But the elasticity of substitution catches many things that people find non-intuitive. When the price of hamburger goes up, people buy more steak. That idea drives many freshmen batty, because they think of a single item and a one-time purchase and say, "hey, when hamburger meat gets more expensive people would never buy something that's even pricier like steak!" And they would be wrong, because people can adjust the proportion of goods they buy over longer periods of time. Eat two fewer hamburger meals per month and have one additional steak dinner instead. That too is an empirical question, but some people do substitute more expensive things (consumed less often) for less expensive things when the price of the less expensive things go up.

More Econ 101 ...

Looks like this may have something to do with higher pumpkin prices.

Pumpkin and the drought

quote:

Originally posted by Steve Miller:
Looks like this may have something to do with higher pumpkin prices.

Pumpkin and the drought

Ah, yes...it's coming back to me now....I remember hearing about the shortage last autumn and was surprised when I got a totally huge and perfect pumpkin for like five bucks at Costco.

I'm from Illinois. We're the pumpkin capital of the US. Guess we export what we grow to be canned elsewhere.