So, inflation. Prices and paychecks go up (though not toe-to-toe), and money loses value because it takes more money to buy the same thing than it took earlier. We hate it when it's high because prices go up, everything's expensive, we can't buy shit. Consumers cry. However, the opposite is just as bad.
Low inflation means prices aren't going up much, or at all. Consumers cheer. Very low inflation, however, close to 0% or even negative (that's deflation), is a problem. If prices start dropping, rational people will hold off from buying stuff because they'll wait for prices to go even lower. That can and will kill businesses because they don't get any revenue when people aren't buying stuff. And when business isn't booming, it can mean layoffs at your local grocery store or something, because business owners also want to save money.
Another thing where inflation has meaning, is debt. Mortgages, leases, etc. Even the 10 bucks you owe a friend. If inflation is high, those debts start having less impact on your money because by then you hopefully got a small raise, and so debts are easier to pay off. Low inflation makes debts bite just as hard, and much harder if deflation happens, because bread being cheaper doesn't mean your mortgage payments will be smaller.
Anyways, quick crash course on inflation done, hope you learned something. More educated Peters pls correct me. Barely educated Peter out.
I think the main difference that people forget: discretionary vs mandatory spending. People are currently being killed by mandatory spending (housing/rent, food, healthcare, gas/transportation) to the point that their discretionary spending is all credit or avoided entirely.
The price gouging since 2019 has been extreme. Companies have inflated prices to what the market can and will bear. Look at fast food; the value proposition has completely collapsed. Automobile prices are insane.
This is the find out phase of FAFO: when no one has any money to buy your shit. You either carve out a niche of consumers who spend more per transaction, or attempt to rebalance towards more consumers and less per transaction.
Unfortunately, consumers are hurt on both sides of our economy (rampant inflation/stagnation of wages, and recession). Those with assets will profit when we print more money, and by buying up the lost assets from the working class at discount prices.
Makes you wonder who the economy is meant to be working for.
The discretionary vs mandatory argument is exactly why all of the deflation fear mongering is bunk.
The country inflated so fast with minimal actual wage increase that it could bear a fairly significant deflation and it would be more of a correction than an issue.
You're thinking of deflation as a singular event where prices just go down and then they're lower and the issue of over-inflation relative to stagnant wages is corrected.
That's not how deflation actually works though. Deflation is often an economic death spiral, and that's because of the reasons for it. Deflation doesn't typically happen as a response to previous inflation.
Deflation usually happens because some part of the economy is collapsing. People stop buying products (yes they still buy basic food if they can, but that's not all the economy needs to function), which leads to reduced production, which leads to layoffs, which further impacts the public's spending power, which leads to even lower purchases, and even lower production, and so on.
It's a vicious cycle that is almost impossible to break out of. It leads to severe economic depressions, which are worse than recessions.
What we need is disinflation (a reduction of the inflation rate), not actual deflation. Deflation is a disaster 99% of the time.
I would argue that the labor market is already running so thin that layoffs would be minimal outside of full on business closures, which seem unlikely given margins.
I think the kids are disillusioned because as much as the system is currently "working", it is producing outcomes that are horrid for subsequent generations. Working 40 hours+ a week to not be able to afford living alone, saving, affording healthcare, or buying things you want.
Not to mention corporations laying off 1,000s, whilst doing stock buy backs.
What's the point of participation if the system excludes you whilst actively participating? You can't budget your way out of the income to expense ratios we currently have; people are falling behind despite participation. There's no incentive to participate when federal policy ONLY helps those with assets. 10 year boom and bust cycles have produced a shrinking share of wealth for the majority, whilst we have massively inflating fortunes for the top micro percentage.
The issue is that when people explain to them why their idiotic suppositions on the supposed benefits of deflation, they don't listen to people who have actual lived experience with it.
It think it's more so that older generations have more to lose, and thus protect said system. You have assets: housing, retirement accounts, etc. Younger generations are suffering under said system, own little to nothing, and would like the outcomes to change - preferably asap. The gap between compensation and costs are not the same as when previous generations were the same age/place in life. It isn't budgeting. It isn't will. It isn't lack of trying.
Shouting "deflation bad!" when someone is pointing out that the purchasing power of the many has shrunk significantly due to inflation, does little to address the underlying issue/causes, or that a correction of prices (in theory) would actually benefit the majority of consumers.
It amounts to "line must go up, line go down - bad. No other option, sorry." There has to be a major correction to something to improve the quality of life for people. Pick one: increased wages, reduced costs, increased entitlements.
Everyone screaming about inflation says they would love if prices go down, but you ask any of them if they'd be willing to take a huge pay cut or get laid off from their job to see grocery prices go down and none of them are going to make that trade. But these kids seem incapable of making that conceptual connection.
I just want to point out that during the Biden years, wages, especially for the lower order of jobs, increased way faster than inflation.
And despite this, young people decided to swing towards Trump in 2024 in a iirc 10 point shift right.
And what did that accomplish? Things are so much worse than they were 2 years ago. Turns out throwing a brick at "the system" won't magically make things better. Asking for things to 'change' doesn't necessarily mean the change will be positive.
I didn't even think of it but you're right. The prices are insanely high, at least partially due to greed. Meanwhile wages climb slow or not at all, also at least partially due to greed.
The on-the-nose note about the economy being geared towards the rich is sad, but true. For the rich folk it's life on easy mode, and for the rest of us it's suffering until the law changes and is enforced properly to help even those who aren't rich. But changes are unlikely to happen because those who pass the laws are mostly bought by the rich folk to vote in a way that benefits the rich folk. Screws the little guy, but that's how it is.
Protectionist policy for specific industries (reducing import competition) doesn't help the consumer pricing either. Wages have not kept up with inflation (since 2019 30% vs. 15-16%).
It's the difference between debt/assets that benefit from inflation, or cash, which is devalued from inflation. Gen Z/Gen A are being priced out of their own future (housing, families, assets) while being told they're not working hard enough (when their take home isn't enough to afford renting a 2 bedroom).
Or, you know, pricing goods to provide maximum profit within the current market, just as they have pretty much always been. Point is, the "greed" has always been there, it's the market conditions that have changed.
Spending has kept up in the mandatory spending bucket. Consumers cannot cut spending from this category regardless.
I don't disagree there's a large divide between who is spending on surplus goods vs. basic life necessities currently. And there is a growing cc/consumer debt that should worry everyone.
I've already addressed your point in my previous response: I think what we're seeing is a division into niches - companies would rather target specific consumers at elevated prices than a lot of consumers at lower prices.
Yep - targeting specific markets is the ideal. You have an individual who is willing to spend the money and is a captive audience. Social media has made this even worse, and now you do customer profiles to the nth degree of granularity.
And it’s easier too. Would you like to spend $1K to blanket target 1MM people with a 1% likelihood or spend $100 on a target market ok 100K people with a 10% likelihood to spend. I’m simplifying but it is the move to purchase that is the hardest for consumer based businesses (movement through AIDA).
> The price gouging since 2019 has been extreme. Companies have inflated prices to what the market can and will bear.
So by "gouging" you mean, businesses raising prices to provide maximum profits, just as they have for 1000s of years? Do people really think that companies are just a little greedier now than they were 10 years ago? Or can we be adults and recognize that this is simply the result of market conditions and inflation?
Yeah, the critical thing people often don't understand is that the economics definition of inflation is only half of what people are often talking about when they use it colloquially. To an economist, the increase of prices (including wages, because that's just a price for labor) and the reduction of real wages (i.e. how much your wages actually buys) are two separate phenomena that have different causes. They just tend to be linked because of psychological factors; it's easier for your boss to just not give you a raise then it is for him to reduce your wages. This is an actual, useful distinction to make when you are trying to understand and work through what causes these phenomena, even if it the distinction kind of doesn't matter to everyone else.
I said rational people, didn't I? That does imply that there are irrational people. The whole branch of behavioural economics exists solely because people are largely irrational and don't make financially sound decisions often.
But like...I can afford my mortgage based on my current salary. So wouldn't prices going down elsewhere mean that I just have...more money to spend? Like - if I make $100 and my mortgage is $20. And bread used to be $2, but now it's $1....I have one extra dollar, right?
If you make 100, and your mortgage is 20, that leaves you with 80. Since bread used to 2 bucks but is now 1, that implies a 50% deflation which would probably bring total collapse but let's ignore that. 80 bucks left over means 80 breads instead of 40. That's great news for you, but the baker who sells you the bread would need to sell twice as many breads to make what he used to make before deflation happened. To cover costs he might have to fire his assistant. Or even close up.
Now let's say after this incident the prices go up again and inflation goes up 100% making breads cost 2 bucks again. Your salary will likely then be 200. But mortgage is still 20. So you are left with 180 bucks, at 2 bucks a bread that's 90 breads. 10 more than you had during the deflation period.
This example can fall apart easily since we assume that wages go up as fast as prices (they don't), and I assumed that the wage of 100 you wrote is pre-deflation. It won't go down during deflation, it's kinda illegal to lower wages for people, at least in my country. But since wages are the price the employer pays for your work, if they can't go down themselves during deflation, when all prices go down, that means the employer effectively overpays everyone while not giving anyone any raises. So he'll lay people off instead. In which case, there's a non-zero chance you're the one getting laid off by your own employer, so you don't make a 100 bucks anymore. And you still have your 20 dollar mortgage. And dinner to bring to the table.
I understand the delay on discretionary purchases... Maybe I'll put off buying an upgrade for my phone, perhaps I'll wait to move house etc...
But groceries? Fuel? Water/sanitation? It's not as if the population can collectively decide to eat nothing for the next year so that they can save some money and eat double next year.
But those discretionary purchases still affect the economy. The companies that sell those discretionary goods and services still need employees. When they make less money they layoff employees who now don’t have income so they don’t spend compounding the effect. Now why should you care about that beyond someone lost their livelihood? Because they will reenter the job market desperat for work, work that will be harder and harder to find. When there a few jobs more people start vying for the few jobs that are left making it so whoever is hiring has more leverage then those who are job seeking. This makes it so they can get away with hiring whoever will work for the least as people will be desperate. After this there are still people who don’t have the work but need the job. This can lead to mandatory purchases becoming impossible as they have no money.
Low inflation also disincentivizes taking on debt (how companies typically grow and hire) compared to high inflation. With inflation present, I will pay back less because that dollar is worth less in 5-10 years. (Interest rates are designed to make up this gap, but interest rates trail the economy anyway, and whether it perfectly matches is unimportant in principle). Importantly, since many companies face the same situation, it creates competition, where I might want to grow more/faster to outpace others who are also growing through debt. Now, if money is deflating, the value of the dollar I just borrowed will get higher each year, and as you add on interest rates, the math starts to not work. I don't want to grow through debt during deflation (in fact that's why they will lower interest rates, even go negative like in Japan and EU for a time to incentivize borrowing and growth).
Yeah sorry the whole people will wait to buy stuff is a huge myth, this never happens.
1 you have staples that people will always need to buy like food.
2 things like new iPhone and new cars prove people will still buy when they know it will be cheaper in the future. In fact they don't just buy the line goes out the door whenever apple release a new phone, don't those people know it will be cheaper if they wait a few months?
Another real world example would be gas prices at the end of Bidens term. Gas prices were going down, deflation, and at the same time gas companies were posting record profits. Because when prices go down people actually buy more stuff not less.
iPhones are a luxury good and a status symbol. Of course people will line up in droves for them. Well-off folk, or dummies who don't understand what a burden debts can be, will buy status symbols just to flex if they care about that kind of stuff to begin with. Irrational behaviour, but fully understood behaviour.
As for prices, not an American so can't say I fully understand it, so I'll concede there, but I will ask if you think people mass buy when prices go lower because they know lower prices won't last long, or is there something else in play? Profit records are a different topic, can't really comment because not enough data. Were they posting record quarterly profits, weekly, monthly, annually, idk. I'd wager the reports are for a longer period of time, which ofc would be record profits when compared to that time period the previous year.
This banks on the assumption people are educated well enough to stop buying when prices go down. This would only happen if it were a very long term trend. Very few people are both educated enough and have the discipline to stop buying in that situation.
So, inflation. Prices and paychecks go up (though not toe-to-toe), and money loses value because it takes more money to buy the same thing than it took earlier. We hate it when it's high because prices go up, everything's expensive, we can't buy shit. Consumers cry.
You're describing it wrong, which confuses people because you're missing the entire upside. It's very important to recognize that the common reddit narrative is wrong and wages/incomes do in fact grow faster than prices:
These are interesting. Thank you for sharing. However, I'm not sure if I'm missing something, but so far I see income growth graphs. These have some interesting insights, but, if possible, adding price change graphs for the time periods of the income growth graphs should paint a better picture.
I'm not saying prices and wages don't always grow toe-to-toe. Theoretically, they can. In some places, they likely do. But as far as I have seen, it's not the case.
From the same time period of 1967-2024, real household income had a cumulative growth of roughly 50%-150%, depending on household, according to the third link you provided.
In that same time, the consumer price index went from 33.4 to 313.7, which is a cumulative growth of 939%.
Now, I could be wrong, but if I'm not, then the purchasing power of the richest households got 6 times weaker since the late 60s. And almost 19 times weaker for the lowest income households.
However, I'm not sure if I'm missing something, but so far I see income growth graphs. These have some interesting insights, but, if possible, adding price change graphs for the time periods of the income growth graphs should paint a better picture.
All of those links include inflation adjustments. It's what the word "Real" means in the titles. The graphs are directly showing HOW MUCH FASTER wages/incomes grow than prices.
Now, I could be wrong, but if I'm not, then the purchasing power of the richest households got 6 times weaker since the late 60s. And almost 19 times weaker for the lowest income households
Ignorance is ok, but please apply some logic to gut-check. If that were true, we'd be boiling our shoes for soup like in the Great Depression, not buying ever-bigger cars and houses.
Ah! I knew something didn't make sense to me. Now it does. So according to the federal data, consumers are less poor now. Yet I doubt people are as happy as they probably should be.
Considering that real wages are adjusted for inflation, which itself is measured by the price index in most cases, could this mean that the price index itself lacks something?
As I understand it, the CPI is an index of all price changes. Begs the question what prices are included, and how they're weighted.
Yet I doubt people are as happy as they probably should be.
I agree with that, and I blame social media misinformation for what we see on this social media platform.
Considering that real wages are adjusted for inflation, which itself is measured by the price index in most cases, could this mean that the price index itself lacks something?
It's certainly not perfect, but mostly it's that individual situations vary a lot. For example, per what I was just discussing with soneone else, it matters a lot for your finances today if you're looking to buy your first home right now vs if you did 20 years ago.
Good question. Truthfully, they are meant to go up. Practically, employers want to save on labour costs and avoid handing out raises like the plague, in most cases. Personal experience.
The word Rational in the economics context is a bit of a weird term, in my opinion. It says that people will take the most efficient and effective solution possible. That is rarely the case, as people are emotional creatures, that's why behavioural economics can exist at all.
However, if prices go up, and we wait for prices to go back down, that may not always happen. In some cases, especially for essential items, the prices never go back down. Exceptions exist (gas comes to mind), but more or less that's how it goes. For example, groceries. There will always be a demand, because everyone needs food. Thus, grocery businesses have no reason to lower prices if consumers are willing to pay what they're quoted. And consumers are willing to pay whatever they're quoted to pay for groceries because they have no choice. What are we gonna do, just not eat?
Yeah I understand the basic arguments, but if you go just a tad extreme it falls apart pretty quickly. Sure, consumers will pay what they can for groceries because they “have to” but if you change bread to $15 a loaf tomorrows, I promise you people will begin doing their own gardening etc. same goes for pretty much every other resource.
As they should. In the current time, it's almost always beneficial to just grow your own or find ways to cut costs, leaving businesses without their profits. Even if not for cost-saving reasons, having your own supply is usually healthier too. Don't know what they spray tomatoes with to last as long as they do in stores, but pretty much anyone can grow a few tomatoes on a window sill. And I support that.
Uhhhh, it won't hurt less. Unless your debt payments' interest rate part is pegged to inflation rate for some unknown-to-me reason. In my experience, debts have their interest rate pegged only at the moment of signing it. I googled it and noticed that variable-rate debts exist, but they're in the minority. If your debt's interest rate is fixed, then inflation is irrelevant to you in a direct sense and the only way it will hurt less is to have higher income. If we're talking about living in general, yeah, then inflation impacts you and your debt because your purchases are impacted, leaving you with less.
Generally ideal inflation rate is about 2-3%, anything more is too much, and anything less might slow the economy too much. At least that's the theory. Currently USA has a 3.5% ish inflation rate. Not an economist to tell you if that's bad or not.
That can and will kill businesses because they don't get any revenue when people aren't buying stuff. And when business isn't booming, it can mean layoffs at your local grocery store or something, because business owners also want to save money
Right, but not all the businesses. So in the "short term" (which depends), some businesses will close, but some will remain and people will have to buy from the remaining ones. These businesses would be able to hire more people, so they can serve their customers better.
However, since businesses and people are spread out, it could be that closing up a local shop means an entire area of people (however big that may be) would no longer be able to get their goods and services. So its possible that they'd have to move to an area where there is still a business that provides what they need.
Is deflation considered a short term pain for long term gain in the economics world?
Not an economist, can't tell you if it's good or not, but existing examples show that deflation isn't exactly long term gain. Japan has been in a deflation trap for a while, and they're not exactly better off. They've been in deflation for decades and their GDP barely grew. Wages lowered, consumption lowered, foreign competitors surpassed Japanese companies...
Maybe the steps they're taking to mitigate deflation are the reason they can't get through it already. Not sure. But deflation doesn't feel permamnent. It feels like "eventually", "society" benefits from it. Idk
This is the most common bs.. People WILL spend because they live, eat and want to travel. Its a bullshit excuse of corrupt government to print money. Inflation is just an extremely sneaky hidden tax that makes the rich richer and poor poorer
155
u/BalticHorndog 7h ago
Hi. Barely educated Peter here.
So, inflation. Prices and paychecks go up (though not toe-to-toe), and money loses value because it takes more money to buy the same thing than it took earlier. We hate it when it's high because prices go up, everything's expensive, we can't buy shit. Consumers cry. However, the opposite is just as bad.
Low inflation means prices aren't going up much, or at all. Consumers cheer. Very low inflation, however, close to 0% or even negative (that's deflation), is a problem. If prices start dropping, rational people will hold off from buying stuff because they'll wait for prices to go even lower. That can and will kill businesses because they don't get any revenue when people aren't buying stuff. And when business isn't booming, it can mean layoffs at your local grocery store or something, because business owners also want to save money.
Another thing where inflation has meaning, is debt. Mortgages, leases, etc. Even the 10 bucks you owe a friend. If inflation is high, those debts start having less impact on your money because by then you hopefully got a small raise, and so debts are easier to pay off. Low inflation makes debts bite just as hard, and much harder if deflation happens, because bread being cheaper doesn't mean your mortgage payments will be smaller.
Anyways, quick crash course on inflation done, hope you learned something. More educated Peters pls correct me. Barely educated Peter out.