This is a moderately technical economics paper describing a new method for modeling inflationary impacts of price shocks in various sectors of the economy. The results are interesting because they...
This is a moderately technical economics paper describing a new method for modeling inflationary impacts of price shocks in various sectors of the economy.
The results are interesting because they refute many of the political assumptions in the news about managing inflation through monetary policy (interest rates, currency supply, etc.) and controlling government debt.
Abstract:
In the overlapping global emergencies of the pandemic, climate change and geopolitical confrontations, supply shocks have become frequent and inflation has returned. This raises the question of how sector-specific shocks are related to overall price stability. This paper simulates price shocks in an input–output model to identify sectors which present systemic vulnerabilities for monetary stability in the United States. We call these prices systemically significant. We find that in our simulations the pre-pandemic average price volatilities and the price shocks in the COVID-19 and Ukraine war inflation yield an almost identical set of systemically significant prices. The sectors with systemically significant prices fall into four groups: energy, basic production inputs other than energy, basic necessities, and commercial infrastructure. Specifically, they are “Petroleum and coal products,” “Oil and gas extraction,” “Utilities,” “Chemical products,” “Farms,” “Food and beverage and tobacco products,” “Housing,” and “Wholesale trade.” We argue that in times of overlapping emergencies, economic stabilization needs to go beyond monetary policy and requires institutions and policies that can target these systemically significant sectors.
Tl;dr: The most significant sectoral variables for overall inflation are energy (energy costs propagate to all other sectors), housing, and food. To control inflation, it's more effective to target supply and demand in the relevant price-shock sectors than to apply financial repression throughout the economy with attendant unemployment.
Personal opinion from a very amateur economics spectator:
I love renewables, but the hard truth is that the developed nations are still 50 - 90+% reliant on fossil fuels for multiple economic sectors, including agriculture, transport, manufacturing, etc. After the post-pandemic economic restart and Russia's invasion of Ukraine, the U.S. suffered less overall inflation than Europe and many other countries. It's nearly self-sufficient in fossil fuels and food. But we're still seeing the impacts of multiple price shocks and shortages, and it's not going to get better any time soon.
The U.S. Strategic Petroleum Reserve and rising natural gas production buffered some of the Russia-Ukraine price shock. The SPR is currently only half full because there's been no governmental demand to make U.S. producers take the less-lucrative job of refilling it. Prepare for OPEC+ to play politics by cutting oil supply further this year, ostensibly as a way to protest U.S. involvement in Israel's Gaza bloodbath. It's also interesting that the U.S. has intervened in Ukraine's war strategy to preserve Russia's ability to supply world markets with oil and gas.
Housing costs represent at least half of current U.S. inflation. They're very sticky in the absence of direct government intervention. Market-rate housing has been in chronic and worsening shortage for decades. The mobility of labor demand means some cities experience sudden in- and out-migrations, worsening market pressures. Lower-cost, higher speed construction techniques are only now being adopted. Further government action against rental real estate cartels would be nice.
U.S. current CPI food costs for the past 12 months show stabilization at a desirable 2.2% inflation rate, but this doesn't reflect the known impending price shocks. Food prices are vulnerable to climate change, war, and other catastrophes. There's less reserve capacity in wheat production due to the devastation in Ukraine. Bird 'flu will raise poultry and egg (and maybe beef/dairy) prices this year. Cocoa price is spiking due to droughts, and coffee price is also rising from climate and disease.
Other material inputs for manufacturing are in short supply or increasingly subject to protectionist tariffs - steel, copper, rare earth metals, nickel... Again, expect upward price pressures on cars, construction materials, household goods, and other items.
U.S. government debt would be very manageable with even a moderate rise in taxation. Is this politically possible? I'm not holding my breath.
I don't think we're going to see a decade of 1970's-style stagflation, but interest rates aren't coming down any time soon. Despite rising unionization, there isn't enough coordinated labor power for a wage/price spiral. Less human labor is required for manufacturing than during that era. I'd hope that the current interest rates don't suppress the hoped-for recapitalization of U.S. manufacturing and housing. Fortunately, the marginally accurately named Inflation Reduction Act will provide some anti-recessionary employment support. High CoL regions like California and New York may see a little relaxation in costs with ongoing layoffs in the tech and banking sectors.
Some of the most important takeaways imo: fossil fuel industry is the single biggest driver of inflation market systems are not ready for large disruptive events like the 2022 war in Ukraine or...
Some of the most important takeaways imo:
fossil fuel industry is the single biggest driver of inflation
market systems are not ready for large disruptive events like the 2022 war in Ukraine or the 2020 covid pandemic and do not adequeately protect critical infrastructure
you cant fix supply push inflation by fucking with the demand valve (interest rates)
CPI calculation as it exists is wildly inaccurate because it just throws away things that are volatile (even though these are frequently big inflation drivers)
the economy is very interrelated, and inflation in some sections has an outsize effect because costs percolate upward through the supply chain (this is why fossil fuels are such a big inflation driver - everything runs on crude)
The first 2 are especially important. It's why the energy transition is so important. Even if you don't give a shit about the environment it's just simply good economics. The bit about how we need to change some parts of the economy to be more resilient to supply shocks was also interesting - basically saying 'we need a bit more of a command economy in these areas that are particularly load-bearing' because if they don't maintain appropriate inventory levels then the supply shocks cascade and drive widespread inflation.
This is a moderately technical economics paper describing a new method for modeling inflationary impacts of price shocks in various sectors of the economy.
The results are interesting because they refute many of the political assumptions in the news about managing inflation through monetary policy (interest rates, currency supply, etc.) and controlling government debt.
Abstract:
Tl;dr: The most significant sectoral variables for overall inflation are energy (energy costs propagate to all other sectors), housing, and food. To control inflation, it's more effective to target supply and demand in the relevant price-shock sectors than to apply financial repression throughout the economy with attendant unemployment.
Personal opinion from a very amateur economics spectator:
I love renewables, but the hard truth is that the developed nations are still 50 - 90+% reliant on fossil fuels for multiple economic sectors, including agriculture, transport, manufacturing, etc. After the post-pandemic economic restart and Russia's invasion of Ukraine, the U.S. suffered less overall inflation than Europe and many other countries. It's nearly self-sufficient in fossil fuels and food. But we're still seeing the impacts of multiple price shocks and shortages, and it's not going to get better any time soon.
The U.S. Strategic Petroleum Reserve and rising natural gas production buffered some of the Russia-Ukraine price shock. The SPR is currently only half full because there's been no governmental demand to make U.S. producers take the less-lucrative job of refilling it. Prepare for OPEC+ to play politics by cutting oil supply further this year, ostensibly as a way to protest U.S. involvement in Israel's Gaza bloodbath. It's also interesting that the U.S. has intervened in Ukraine's war strategy to preserve Russia's ability to supply world markets with oil and gas.
Housing costs represent at least half of current U.S. inflation. They're very sticky in the absence of direct government intervention. Market-rate housing has been in chronic and worsening shortage for decades. The mobility of labor demand means some cities experience sudden in- and out-migrations, worsening market pressures. Lower-cost, higher speed construction techniques are only now being adopted. Further government action against rental real estate cartels would be nice.
U.S. current CPI food costs for the past 12 months show stabilization at a desirable 2.2% inflation rate, but this doesn't reflect the known impending price shocks. Food prices are vulnerable to climate change, war, and other catastrophes. There's less reserve capacity in wheat production due to the devastation in Ukraine. Bird 'flu will raise poultry and egg (and maybe beef/dairy) prices this year. Cocoa price is spiking due to droughts, and coffee price is also rising from climate and disease.
Other material inputs for manufacturing are in short supply or increasingly subject to protectionist tariffs - steel, copper, rare earth metals, nickel... Again, expect upward price pressures on cars, construction materials, household goods, and other items.
U.S. government debt would be very manageable with even a moderate rise in taxation. Is this politically possible? I'm not holding my breath.
I don't think we're going to see a decade of 1970's-style stagflation, but interest rates aren't coming down any time soon. Despite rising unionization, there isn't enough coordinated labor power for a wage/price spiral. Less human labor is required for manufacturing than during that era. I'd hope that the current interest rates don't suppress the hoped-for recapitalization of U.S. manufacturing and housing. Fortunately, the marginally accurately named Inflation Reduction Act will provide some anti-recessionary employment support. High CoL regions like California and New York may see a little relaxation in costs with ongoing layoffs in the tech and banking sectors.
Some of the most important takeaways imo:
The first 2 are especially important. It's why the energy transition is so important. Even if you don't give a shit about the environment it's just simply good economics. The bit about how we need to change some parts of the economy to be more resilient to supply shocks was also interesting - basically saying 'we need a bit more of a command economy in these areas that are particularly load-bearing' because if they don't maintain appropriate inventory levels then the supply shocks cascade and drive widespread inflation.