in general

Inflation is a general rise in prices. ..not just one or two items, because the price of just about anything rises and falls according to regular (meaning, for example, with the seasons or the business cycle) rhythms, but prices overall.

What makes inflation bad is that it messes with long-term planning, like companies building factories or individuals saving for retirement.

Steady inflation at a low level (like 2% or 3% annual price increases) is, in the consensus economic view, the best possible situation. Price stability is a practical impossibility without potential disastrous wage and price controls, as the 1970s taught us, and deflation (falling prices) is the worst, as the Great Depression of the 1930s showed.

I wrote a post a few months ago in which I tried to show that the current situation is nowhere near as bad as it was during the 1970s.

right now

Inflation is now running at a bit above a 7% annual rate. Economists seem to think that about half of this is the result of higher wages and the increased cost of raw materials. The other half can be broken out, I think, into two parts:

–retailers having unusually high-cost inventory. This is the result of the “I’ll pay anything” mentality of getting raw materials or finished goods during the peak shortage period just to have something on the shelves to sell or of incorrectly thinking that the shortage period would go on longer than it has, and

–price gouging. For example, my wife and I are in California visiting relatives. Both back home and here, Chobani yogurt is $.85 a cup in Costco. That’s up from $.75 a year ago. In supermarkets back home, a cup is maybe $1.25–$1.00 if the expiration date is getting close. At the Ralph’s across the street, it’s $1.60. At a Japanese supermarket I went to with my son-in-law, it was $1.99. I can’t imagine what the price at Gelson’s is.

At the gas station down the street, regular is $6.70 a gallon. A quarter mile away, the price is $5.70, even though the cheaper station is much nearer the freeway.

are price peaking?

There’s some evidence:

–crude oil prices have been falling recently, even though we’re in what is normally the seasonal peak period for demand. Yes, maybe the Covid situation in China is part of the reason, but still…

–used car prices are down by about 10% from their peak in March and yoy comparisons are beginning to turn negative

–layoffs appear to be starting both in tech and in the entertainment industry

next year? is the key question, I think

For price increases to be a serious issue problem, they can’t be just one-off. They have to recur.

We know that, ex pandemic times, the trend growth of the domestic working population is >1% per year; productivity growth, basically increases in the skill of the workforce or in the tools workers use, will likely be close to the usual zero. If so, the trend in real growth in the US will likely continue to fall short of 1% …which makes it hard for me to see fertile ground for runaway price expansion.

Overall real growth in the US was 5.7% in 2021, and will likely be >2% this year. The Conference Board is projecting zero real growth in 2023. The last two years, then, are similar to the pre-pandemic situation, in which the Fed was persistently unable to get inflation to stay at or above 2% yearly.

If not inflation, what will be the key issues for the domestic stock market next year?

More tomorrow.