Economics
Opinion Article
INVITED EDITOR
Editorial from
Tim Purcell
November 16, 2022
4. Quality education

4. Quality education

Ensure access to inclusive, quality and equitable education and promote lifelong learning opportunities for all.
LEARN MORE

Charts of the Month - December '21

The Lykeion author Tim Purcell talks us through Inflation, A Generational Shift in Fund Flows, Looking Forward to the US Dollar and Oil, and a Little Lykeion Fun

Topic of the Year: Inflation

Not all inflation is created equal.

We want to set the record straight because even the smart people, the ones we look up to, are conflating terminology and adding to the confusion.

We need to look at inflation as two separate but related phenomena:

1) Consumer Price Inflation (CPI), and

2) Asset Inflation.

Consumer Price Inflation (CPI)

This is the one that generates most of the noise. It simply highlights the changes in prices of a basket of goods and services that are “representative” of a normal consumption profile for the average consumer (though it glaringly excludes booze). This is governed, broadly, by the supply of and demand for those goods and services. Simple.

Let’s look at the demand side first.

Personal Consumption Expenditures (PCE) is a good proxy for the demand for goods and services in an economy. Currently, PCE is significantly above the post-GFC trendline.

The gap on the chart above may not look like much, but it’s ~$1.3 trillion of excess demand above trend or about 4.8% of US GDP.

What’s driving this excess demand?

Depends which tribe you ask:

  • Fed haters will say excessive Monetary Policy.
  • Government haters will say irresponsible Fiscal Policy.
  • Sociologists will say we’re acting like a bunch of caged animals just re-released into the wild and are blowing through our money ‘just to feel something again’.

The correct answer is some combination of all the above, but the definite wrong answer is to simply say that excess demand comes from only one of the above.

As we’ll see below:

  1. Loose monetary policy has driven up asset prices, creating more wealth, which increases demand (something economists refer to as the wealth effect – your house or stock portfolio is worth 30% more, and so you feel comfortable buying a new car).
  2. Fiscal stimulus in the form of direct payments, unemployment support, and child tax credits has increased the amount of disposable income to the middle class, which also increases demand.
  3. The post-lockdown YOLO spending, again, increases demand.

Now on to supply.

This is easier to figure out, and we don’t even need any words to do it (although FRED just released an ‘investigative’ look into semiconductor shortage).

Below is an aerial shot of the LA/Long Beach port, which is the largest in the US.

These bottlenecks are taking place all over the world.

Sorry Jen Psaki, this has nothing to do with the mean meat producers being greedy or the oil conglomerates restricting supply.

The uncomfortable truth (most truths are uncomfortable), is that this post-COVID world is seeing above trend demand at the same time supply of inputs (semiconductors), finished products (Christmas stuff), and labor are all constrained, and the confluence of these forces is what’s driving Consumer Price Inflation to these concerning levels (the last reading was 6.8% annualized rate of change).

Higher demand (temporarily) and lower supply (temporarily). Again, simple.

Asset Price Inflation

This is the broad rise in prices of assets like stocks, bonds, real estate, Bitcoin, and art.

Now, enter the Fed haters.

This article was originally puplished on The Lykeion. You can subscribe to their newsletter here to access the full article.

Tim Purcell
LEARN MORE
SHARE

Keep reading

Unintended consequences of infrastructure development: sewerage diffusion and early-life mortality in Peru

Under the theme of Economic Development in Africa, the NOVAFRICA@Nova SBE seminar series hosts a variety of international speakers. This seminar invited Antonella Bancalari, LSE and IFS.

Economics at the Service of People

The NOVAFRICA’s vision of the Nobel Prize in Economics in 2011. A deserved distinction for tackling the most important challenges in fighting poverty. NOVAFRICA celebrates being part of this movement since 2011.

The gender gap at the top: The role of networks

Here you can read the work by José Tavares, in co-authorship with Sharmin Sazedj (Banco de Portugal), in VoxEU. They analyze through data from Portuguese firms the role of professional networks in the gender pay gap among top executives.

“NOVAFRICA Sustainable Development Talks” podcast episode with Jonathan Weigel

"Optimal Assignment of Bureaucrats: Evidence DRC", with Jonathan Weigel, University of California

THE CHOICES OF

Zona de Impacto: Mentalities evolved; however, women are still discriminated in the job market. Why?

Statistics are known. Women have a higher qualification rate than men, but they receive less (for the same jobs) and are more precarious. When it is time to reach roles of responsibility, they have a harder life (and, as the companies get bigger, the worse it is). The topic is old, solutions take a long time to produce effects, and this worries the youth. Marta Everard and Rita Mendes, students at NovaSBE and members of the club Women on Board, explain how they perceive their labor’s future

Subscribe our weekly newsletter

By subscribing to the Nova SBE Role to Play newsletter, you can stay up-to-date on the latest articles posted on the website.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

We all have a role to play

We are on a mission to be a community dedicated to the development of talent and knowledge that impacts the world.

With just ten years to go, an ambitious global effort is underway to deliver the 2030 promise. We want to take a stand and we are calling on our community to showcase how they are contributing to the 17 Sustainable Development Goals, whilst influencing more and more people to unravel their role to play.

Here, you will find four different ways your ideas can flourish, dialogue can be enhanced, and action can take place. You can choose one or all four, and Nova SBE will be there to support you all the way and guarantee tangible change.

We all have a role to play, and this is your way in.