Inflation perceptions - seems like consumer know better than the Fed

 

The Fed seems to view that it has turned the corner on inflation, yet we are still above target. The PCE inflation has been rising for the last three months and is above 2.5%. The CPI has also been rising for the last 3 months with the current number at 2.9%. The problem has not been solved, and we see to be in a sticky period of inflation above target. It appears as though September was an outlier, and the Fed made a mistake at cutting 50 bps in September. 

A recent survey looked at how consumer think about inflation and there seems to be strong opinions on the negative aspects of inflation. See "Why Do We Dislike Inflation?". Consumer clearly believe that it diminishes purchasing power and wages do not seem to match the increases in inflation. Hence, there must be costly adjustments to budgets and behavior especially for low-income groups. Inflation hurts financial assets and reduces savings and there is little trust that wages will keep up with the price changes. The anger about inflation is directed both at government and business with the government being over 3 times more likely where the anger is placed. Consumers also think that inflation hurst our international reputation, decreases political stability, and decreases social cohesion. This is some very interesting food for thought and suggests that the Fed and government in general should more closely listen to consumer views.

Risk attitudes differ across countries

 

Why don't we see more venture capital investing in Europe? One simple reason is that investors may be more risk averse in Europe relative to the US. See "Cross-country differences in risk attitudes toward financial investments" for some interesting comparisons across countries. Two conclusions were drawn on micro data across 15 countries. One there are significant differences in risk aversion, and two, these subjective risk preferences have much greater explanatory power on risky holdings than measures of market performance and volatility. The following graphs provide a good picture of the differences across countries. For a specific benefit, there is less perceived risk for those in the US versus many other countries. This is for all levels of perceived benefit. Additionally, the predicted financial risk attitude for the US is higher than many other countries.

These differences help explain why many start-ups find financing in the US. There is a greater willingness to take risk.

Inflation preferences - The big disconnect

There is a large disconnect between the inflation preferences of consumers and those of the central bank. The general population would like to see lower inflation - much lower than the 2% target, so it is no surprise that current inflation rate is not making consumers happy. Consumers have a preference for inflation at .2% which is lower than the magic 2% of central bankers. See the paper "Inflation Preferences". 

Consumers focus on the fact that inflation reduces real wages and that it also reduces the purchasing power of their money balances. Both as good strong economic arguments. So if consumers have a strong preferences for lower inflation, why does the Fed persist with its view that 2% is the necessary target especially when consumers are not making judgments that are irrational? 

So, what should the Fed do given this strong consumer preferences for lower inflation? The authors realize that the Fed has two choices: one, adapt to the preferences of consumers and bring down the inflation target, or two, influence consumer preferences by educating them on the benefits of having higher inflation. 

This is a weird paper that seems to advocate that the Fed just needs to inform consumers that their life would be better if they suffered an erosion of their real wages and purchasing power because it would make the Fed job easier to reach their dual mandate of controlled inflation and full employment. Consumers just need to be educated on why the consistent pain in losing purchasing power is better than higher unemployment. I want to see Chairman Powell talk to the America people and tell them it is necessary for them to accept the Fed preferences over their own view and experience.

A book that provides structure on cultural wars of today

 

I have been trying to better understand the cultural dynamics that have caused significant conflict in the US and beyond. As an economist, I spend my time worrying about debt, inflation, and growth, yet the news media focus is often on cultural issues as the driver of thinking.  I need a text to help navigate what is going on without the usual left or right bias. I was recommended, We Have Never Been Woke; The Cultural Contradictions of a New Elite and was surprised by the different perspective of the author.

The foundation idea is that a new “woke” elite uses the language of social justice to gain more power and status for themselves and their enhanced elite status does not translate into help for the marginalized and disadvantaged. It is a cynical perspective, yet to resonates with the simple view that most individuals are interested in their own status and power first and helping others second. 

Language can generate status and serve as an exclusionary mechanism. Status and elitism may only serve to further generate social and economic inequality. Is that always the case? Certainly not, yet the good intentions for being a social justice advocate embedded in language and symbols may also have the impact of creating more status for individuals without helping those that need it most. Musa al-Gharbi writes a book that that is richly detailed and footnoted and unfortunately, sometimes filled with jargon, yet his argument is compelling, albeit sad.

The focus on the Eurasian continent

 

Hal Brands provides s history of the geopolitics associated with the Eurasian continent over the last 100 years. While the history was interesting and a quick read, it centered more the European politics during the 20th century and now the switch to a focus on China. It did not spend much time on the development of the Russian empire which has always focused on trying to dominate the Eurasian continent. 

Now it is China who is trying to dominate this land mass. To some degree the US is a digression to this long struggle and core Europe is also a marginal player in these geopolitical dynamics. 

This is a Russia-China story first and world politics story second. In an effort to protect its western border, Russia has made a pact with China, yet solving one problem will create a new problem on its eastern reaches. There is a new partner mix between Russia and China that will define the next decade of the 21st century. 

Unfortunately, most analysts do not seem to be overly concerned about this changing balance which will impact the supply of key natural resources. Brand provides a nice recap of Eurasian politics, but it does not stretch the imagination of what is and what will be.