PeakTrader.com

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PeakTrader said...

Inflation has been grossly overstated, because quality improvements have been grossly understated.

Throughout the U.S. economic boom, in 2002-07, supply easily met demand or exceeded demand, and during the subsequent recession, the destruction of supply was less than the fall in demand. So, the U.S. had low inflation or disinflation, and then deflation, even with commodity prices reaching record highs or at historically high levels compared to other decades.

Moreover, a higher level of inflation would increase saving instead of spending. However, the U.S. had a massive consumption boom, in the 2000s, in part, because of low prices (which induced demand).

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Morganovich said...

peak-

quality adjustments (called hedonic adjustments) are both made only in one direction (assuming all products get better, which is not true) and are also swamped by geometric weightings that substitute lower priced items for higher in the consumption basket as if flank steak were a substitute for rib eye or a banana republic jacket is a replacement for prada. sure, they play the same role by feeding or clothing you, but you are clearly getting an inferior product when you trade down.

saying that you ate hamburger instead of steak because the price of steak went up and that that means prices went down is pretty questionable logic.

also:

your statement about higher inflation driving increased savings is untrue.

first off, price increases in necessities like food, fuel, and shelter do not alter demand much. you still need to eat, commute, obtain and heat shelter.

secondly, if inflation is high, that drives the desire to consume NOW before it becomes more expensive. inflation drives consumption (particularly if real interest rates are low or negative). inflation is a tax on savings.

deflation (as in japan) is what drives high savings and deferred consumption.

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PeakTrader said...

Morganovich, if quality declines, without a greater fall in price, consumers shift to a substitute good, or demand will fall. Bargains increase demand. Otherwise, demand falls.

Dr. Perry has shown spending on housing, food, and clothing relative to income have declined, and it's at or near the all-time low.

Your statement about demand increasing before inflation accelerates is similar to a wage-price spiral. If prices rise without a rise in wages, demand will fall.

The cost of living in Japan remains too high. So, demand is low.

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Morganovich said...
peak-

substituting low quality good for high does not mean there is no inflation. buying a plastic $20 blender vs a $100 steel one is not a perfect substitute. the former wears out in 2 years.

try yo buy a toilet as good as the ones 20 years ago. it's forbidden by law.

clothes used to last ages, now they are disposable.

many, many products are significantly inferior to what they used to be, especially food. you thing the crappy tomatoes at safeway are equivalent to the locally grown vine ripened stuff our grandparents ate? go buy those and you'll see inflation. go buy beef not full of hormones and antibiotics and it's $30/pound.

you argument about the cost of living in japan blocking consumption doesn't make any sense.

if the cost of living is "too high", then how do they save so much?

where dies that money come from? why are they so willing to leave it in near zero yield postal accounts? it's because of deflation.

inflation is a tax on savings. deflation rewards them. you have my statement backwards. i'm saying that expectation of inflation drives consumption. if you think prices will be higher tomorrow, buy now.

the nominal prices of those items have not declined.

are you seriously arguing that the nominal price of housing is near an all time low? or food? that's ludicrous. you are mistaking his analysis of cost as a % of income with inflation.

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PeakTrader said...

Morganovich,

Most consumers would buy the plastic blender for $20 than the steel one for $100, because the steel one is not even close to five times better than the plastic one, and when the plastic one wears out in two years, a better one will be on sale for $20 or less. Also, when the blender was selling at $100, fewer people could afford it.

Clothes have never been a durable good.

In Japan, when you go into the store and your favorite box of cereal is $8, you may not buy it. However, if it falls to $2, you may buy five boxes. So, lower prices induce demand. Also, you buy, because you may expect the price to rise back to $8, which is zero inflation

You're less likely to buy a new car when you believe the price is too high, including relative to your income. So, you may save some or most of the $30,000 instead of spending it all.

If you're worried about inflation, buy TIPS, gold, or commodities.

The real economy is more important than the nominal economy.

Also, you stated: "inflation drives consumption...deflation (as in japan) is what drives high savings "

The causality is consumption drives inflation and saving drives deflation.

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morganovich said...

peak-

the causality flows both ways. inflation expectations also drive demand. if you think that a house is about to get bought, you step in and bid, if you think the market is cold and they will come down, you wait. it's not a purely linear system. cutting the price on your house in dec 2008 did not have the same effect it would in dec 2007.

here are some food prices:

http://data.bls.gov:8080/PDQ/servlet/SurveyOutputServlet;jsessionid=6230241424ca7b4c386c

price of ground beef up around 50% since 2000. that's not inflation?

bread is up 30% in the same period.

http://data.bls.gov:8080/PDQ/servlet/SurveyOutputServlet;jsessionid=62309675262f4f1147e2

but a cheap blender wears out, so you need to buy a new one ever 2 years. over a decade, you'd be better off with the good one. inflation is apples to apples costs. once you add substitution, it becomes a subjective measure.

good quality clothes are still available. they are just more expensive. my j crew sweaters from high school are still in perfect shape 20 years later. the new ones of the same brand are shot
in a just a few. it's because they are LOWER QUALITY.

that never goes into hedonic adjustments.

savings are nominal, not real. US treasuries have negative real interest rates using pre clinton CPI. TIPS are indexed to a CPI that understates inflation. both will lose you money.

on japan, you are falling into the classic trap of trying to eat like an american in tokyo. THAT is very expensive. but it's not that expensive to eat there if you like fish and rice. it's much cheaper than new york.

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PeakTrader said...

Morganovich, you said: "the causality flows both ways. inflation expectations also drive demand. if you think that a house is about to get bought, you step in and bid."

That proves the causality is consumption drives inflation.

However, it should be noted, surpluses and shortages also influence inflation.

I agree food prices, and other commodity prices, are way up, basically because of global demand (developing countries are becoming wealthier, e.g. through the Law of Comparative Advantage).

I stated before, if price falls more than quality, then it's a bargain and induces demand (consumers aren't stupid).

Your belief that the CPI is understated defies the Law of Supply and Demand. based on aggregate data, at least over the past 30 years.

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Anonymous said...

"price of ground beef up around 50% since 2000. that's not inflation?"

Beef is notorious of price fluctuations because of the long lead time. the margins are so thin a farmer can't feed a cow that won't pay out, so they get dumped. then when prices return it takes time to build up the herd.

Expect food prices to climb as China and other nations eat more meat, and food production has to compete with energy production.

A single data point doesn't define a trend.

Seems to me Peak trader is mostly correct, except for buying gold.

That strikes me as pure speculation, suitable for when you really think the walls are coming down and you may need to run.

Otherwise, I prefer to always invest in something that makes something: I'd prefer investing in a gold mine to investing in gold.

"you thing the crappy tomatoes at safeway are equivalent to the locally grown vine ripened stuff our grandparents ate?"

I grow my own for that reason. No inflation here. But Safeway has crappy tomatoes in midwinter when I have none.

Safeway can sell a chicken cheaper than I can feed one. The chicken isn't the same, either,but you don't ahve to live with and kill a chicken.

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PeakTrader said...

Anon, India had a drought, which caused food prices to soar and spilled-over to the rest of the economy causing double-digit inflation.

In India, 43% of income goes to food (9% to transportation and only 8% for housing).