by qtrinh3
Inflation just doesn’t measure prices of consumers’ goods and services. It measures the loss of your purchasing power. Prices can vary, and for some items such as food and energy, they can be more volatile. However, even with supply chain disruption and lockdown, when prices go up in some things they usually go down in others to offset. Before QEs, PPP, bailouts, extended unemployment benefits, student loan forgiveness, credit card debts, etc., US consumers have a fixed income so they must balance their needs accordingly. But we discover that we can print our way to prosperity.
Since the 1960 – 2022, inflation rate has averaged 3.8% per year in the US. “An item that cost 100 dollars in 1960 costs 1,003.96 dollars at the beginning of 2023.” [https://www.worlddata.info/america/usa/inflation-rates.php\].
This year 2023 inflation rate will be 3.4% which is slightly lower than the average, but last year it was 8% which is much higher than the average. From the 90’s to now, we have been averaging closer to 2% which is about half the long term average. This has allowed the FED to cut interest rates from the teens to pretty much 0% and have inflated asset bubbles of epic proportions. So the question is why did inflation rates go down so low from the 60 years average and what do we expect going forward.
There are 3 main reasons
- Cheap foreign labor costs (Looking at you CHINA!!!)
- Cheap energy costs
- Technology and globalization
Cheap Labor
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Yes, this is not about bashing China. All Asian countries are guilty of devaluing their currency to help make their exports cheaper. However, China is where we offshore most of our manufacturing base and destroy the middle class in the so-called Trump states. This has helped push prices of goods down offsetting the rise in prices of services which cannot be offshore. Try ordering your burger made in China.
Cheap Energy
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In 1991, the Soviet Union collapsed. Technically we won the war and Russia is our “friend” now. This facilitated the flood of oil and natural gas from Russia and helped suppress the prices of energy globally. In 1990, the price of oil was around $20 per barrel. In 2023, it was $71 per barrel. Regardless of the political rhetoric BS, oil prices have only gone up 1.5% per year over 33 years. Inflation is not caused by the evil fossil companies but by services!
Oil Prices are down 10% YoY
Technology and Globalization
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Shale technology has enabled the US to become top exporters of energy. This helps lower transportation costs and with the advent of super container ships, we were able to build cheaply in one place halfway around the globe and ship it anywhere. And with our powerful non-woke navy, we just F**K anyone that tries to block shipping (looking at you Iran!!!). This again has lowered the prices of goods and kept inflation in check for 30+ years.
NOW what you ask?
- China labor is no longer cheap. Its population is declining and labor cost is about 20x higher than in 2000. Yes we can move the factories to cheaper Asia countries like Vietnam, Thailand, etc., and heaven forbid, moved it back to the US. But the ultra cheap, sweatshop labor costs are over.
- As you know, we are no longer “friends” with Russia. With the ways things are going in Ukraine, it’s a complete stalemate which favors Russia which has more resources. Regardless who wins though (No I’m not a Putin puppet), cheap energy from Russia is no longer viable as we don’t want to support its war efforts. Even if they win, they will just move on to the next non-NATO country (looking at you Moldova!!!).
- Technology and globalization are great for the coastal states. Not so much for the fly-over states. The development of software which is a high value added job has enriched and created so many billionaires over the last 15 years and the slave labor cost of making the hardware in Asian countries help push profits margins to record high. We even offshore our chips industry so now South Korea and Taiwan make like 90% of our most advanced chips! Yes, countries that border unfriendly countries that want to conquer them anytime now. This is obviously not desired so we got the CHIPS act that will onshore some of the chip manufacturing here in the US. However, this will come at a higher cost. Globalization only works with freedom of passage. The US navy now can’t even stop a bunch of wag tag, camel humping terrorist group Houthi! We need to shoot down more $500 drones with $2 million dollars missile with DEI stickers on it. Combined with the Panama Canal drying up with no more water just makes shipping more expensive!
Conclusion
The FED goal of getting inflation down to 2% is a pipe dream. Going from 8% to 3.4% was easy. The solution to high prices is high prices and people just cut back a little. However, the US consumers and the US economy have adjusted to the high prices and higher interest rates (note rates still low by all historical measures!). It’s like if my ideal weight is 150 and I am 300 pounds. Losing 100 pounds is easy, stop eating too much and start exercising right? However, the last 50 pounds will be much harder because the body has adjusted and losing excessive pounds is much easier. Outside of a severe recession that caused the government to stop deficit spendings, this will never happen (debt increased by a trillion in 3 months and deficit spending by 500 billion last quarter). The inflation, measured by CPI, will be sticky from 3% – 4% for the next decade or so. Interest rates must be kept above inflation rates, otherwise, inflation will shoot back up over 5% again!
Why listen to me? I was the only Mofo here who said there will be no recession in 2023. I was right. I also said no rate cuts in 2023 and I was right too. Just remind m
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