If the economy is strong but prices are up, is it really inflation?

[Buckeyeblue]

Is it possible that costs have been artificially low but now have corrected? For a couple of reasons:

1. Wages have gone up due to higher demand for workers
2. Some of the tariffs that Trump put in place have driven up cost
3. Higher demand for low inventory items
4. Sanctions on Russia

I don't see higher interest rates solving these problems. Sure it might drive down the price of houses and used cars. But day to day stuff won't be driven down by higher rates.

Everyone is comparing what we are going through to 1982. But it's much different. I remember a lot of people getting laid of in 1982.

[Walleye]

1. They used to say,recession is when your neighbor loses their job,depression is when you lose yours

I think it’s just a classic story of tightwads and cheapskates not wanting to pay people what they were actually worth. This certainly doesn’t look like any recession I’ve ever lived through

[unblock]

2. Higher interest rates aren't meant to solve those problems

Higher interest rates are meant to introduce a new problem that has the effect of putting downward pressure on prices in order to crudely maintain more price stability.

Raising interest rates is a very broad and crude weapon. It is not surgical at all. Moreover, it hurts some people and businesses while it helps others, not for any good reason but just because that's the way it works and raising interest rates is a convenient and effective weapon so it gets used.

Most economic problems could be far better managed primarily through legislation, but even in more constructive times, solving such problem in congress is a challenge.


Yes, higher prices are a natural consequence of stellar growth, so it should have come as no surprise when we had a 6-7% growth rate.

Now that gdp is slightly negative, the fed would be wise to wait and see if inflation persists or fades, but "wait and see" hasn't been popular in fed circles for decades.

[onecaliberal]

3. Higher rates is not the answer.

The Feds are going to cause a recession.
Not addressing the core issues. Namely corporate record profits.

[inthewind21]

19. Corporate

record profits as well as gas prices would go down if demand slowed. Those profits aren't just magically appearing. And intrest rates have been too low for too long.

[onecaliberal]

23. The profits are coming from the outrageous prices they're charging.

Dumps trade policy is still screwing us. The supply chain problems are not helping.

[ForgedCrank]

4. The issue is

that the economy is not strong. We have logged shrinkage 2 quarters in a row now.
I want to be optimistic, but this is not a good sign, especially when coupled with supply shortages and skyrocketing costs.

[Buckeyeblue]

5. Is it realistic that the economy just continues to grow

If a strong economy goes flat or shrinks just a little bit does that mean the economy is bad? Or does that mean maybe people just don't need as much. The housing market was unrealistic so at some point that has to slow down, because not everyone needs a new house.

[ForgedCrank]

6. We could call

that optimistic thinking. But some would call it whistling past the graveyard.
If I knew which was true, I'd be rich already. All I can do is hope you are right, this is normal, and that it will pass in short order.
Higher interest rates will certainly squelch things, but will it be enough? Raising rates is not so much unlike burning down your house to get rid of a bed-bug infestation. The action comes with consequences, it's a toss-up which direction is worse, and there's questions if it will even be enough to stop this slide.
Right now, things aren't looking very good.

[inthewind21]

20. That's

the whole point of interest rate hikes.

[ForgedCrank]

22. Yea, that's

kind of what I said.

[Dysfunctional]

7. If the cost of living goes up faster than income, I would call it inflation,

but I am not an expert.

[JohnSJ]

8. All your points are right on, but most of the price increase is due to the increase in energy

prices.

They have been steadily dropping, so we will see what the numbers look like in the next couple of cycles

[KPN]

9. The reaons are different as you say; and it is really inflation -- which is a general rise in

prices coupled with a decline in the purchasing power of money. Those both are present. Laying off workers was a consequence of inflation in 1982, but the inflation actually started years earlier under Johnson and extended over the next decade plus (the Great Inflation), reaching it's peak at about 13% in about 81/82 . Large scale layoffs could possibly still occur with this round of inflation -- we don't know. There are at least two other big differences this time around though. First, the Fed Reserve is much more aggressive in dealing with inflation this time around using fed reserve interest rate increases early on and tightening money supply. The 2nd is we've
had historically low rates since, especially recently -- in part through Fed Reserve interventions (increasing the money supply and lowering fed rates). As a result, I think there is a lot more confidence in the Fed politically today unlike the 70s when Johnson and Nixon both pressured the Fed to not intervene with rate hikes out of fear it would slow the economy too much so the fed didn't.

The political environment today is allowing the Fed to be more aggressive earlier. Partly because the Fed rate was so low already, but we still have a lot of room to move on Fed rates before we get anywhere near the borrowing rates that prevailed in the later 70s early 80s.

So definitely inflation in my opinion, but it could be very different this time and actually could be a lot better than the early 80s experience.

[Sympthsical]

10. Yes, it's inflation. Yes, it's a recession.

Sometimes it's best to put the lipstick down once the pig is out of the pen.

Inflation has eaten all the wage increases. In fact, workers are making less now than they were last year comparatively.

It's called the "real wage" which measures wage vs prices.

Note the chart:

https://fred.stlouisfed.org/series/LES1252881600Q

See that down direction?

[jimfields33]

12. Thank you!

I’m glad for a realistic view. Look, it’d be great if the economy were great. It’s not. We have a long rough road ahead. Pretending or rewriting definitions are not going to change reality.

[Sympthsical]

14. It's blatantly pissing me off

People are hurting - our working class base is hurting - and people want to play word games to pretend it's not happening?

We're standing out there telling people they're not experiencing what they're experiencing.

What kind of electoral strategy is this? I get having a low opinion of the average voter, but they are not that monumentally stupid. They know how much is in their checking account at the end of the week.

I'm not a political figure. I will never run for office, I will never work in politics in any capacity. So I don't have to use Happy Talk to pretend a turd is a toblerone.

[jimfields33]

18. So true!

[Buckeyeblue]

25. I'm in southwest Michigan and it doesn't seem to me that this is a recession

Places are still hiring. I see people out spending money. Yes, things are more expensive but I don't see it slowing people down. I work for a big bank that is struggling to fill open positions.

[48656c6c6f20]

15. How long have you been a NBER member?

I wasn't aware that they had declared a recession.

[Sympthsical]

16. I'm not a denialist

We used to hate those types, when facts are presented and they are what they are, no matter how much we wish they were not.

Weird how that's starting to flip around.

[Baggies]

24. Correct

The Democratic Party line should be :

“It’s a recession on our watch. We own it. But vote us back in and we’ll fix it.”

That reflects both the reality people are experiencing and announces a solution.

[C_U_L8R]

11. It could be called Profit Taking

[mathematic]

13. Interest rates are being raised to "neutral" not "slow down"

Higher interest rates won't solve supply chain issues and they're not intended to. Interest rates are being raised because they were stimulating an economy that was already experiencing high inflation. The Fed is raising rates to neutral to ensure low rates don't contribute to higher, sustained inflation.

On the right, people are talking about the 2 quarter recession rule of thumb as if we're in the Second Great Depression. Nobody needs to tell anybody on DU that you shouldn't listen to these guys.

However, on the left, people are talking about raising interest rates as if it will cause a Second Great Depression. It won't. I'm here telling you not to listen to those pundits.

Unemployment has declined since the start of the year and so-called "recession". This would be the first recession in history where unemployment declined. Interest rates are at 2.5%. If you're old then you know that that is still lower than interest rates have been for probably 90% of your life. The economy can handle 2.5% interest rates without falling off a cliff. If we do enter a recession it won't be because of interest rates, it will be because of high inflation and supply chain shortages.

Here's that graph of unemployment and recessions, btw:
https://fred.stlouisfed.org/series/UNRATE
Jan '22 4.0
Jun '22 3.6

[inthewind21]

21. When I bought

my first house in 1992, I was ecstatic that I got a 7.75 interest rate. That was almost unheard of. Interest rates have been too low for too long.