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Orangeflea215 t1_it7v1te wrote

Reply to comment by pattydo in [OC] Inflation rate and nominal interest rate by giteam

You entirely missed the point of that comment. Raising interest rates won’t reverse any inflation that’s already taken place, but it absolutely will slow down the rate of future inflation.

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pattydo t1_it7vcai wrote

Fair point. Still though, interest rates are going to do very very little to gas prices and food, two of the main drivers of inflation. And if they do, it's likely because people are starving.

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Orangeflea215 t1_it7w8ws wrote

I’m not convinced. You don’t think a decrease in overall economic activity will result in a decrease in fuel consumption (i.e. demand for fuel)?

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pattydo t1_it7x90l wrote

Not to a large degree, no. There are way too many other factors causing it right now. The amount of activity it would have to cut would be a disaster.

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AftyOfTheUK t1_it7z696 wrote

>Not to a large degree, no. There are way too many other factors causing it right now. The amount of activity it would have to cut would be a disaster.

You don't need a large cut to make a significant impact. Even a 5% fall would be incredibly notable.

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pattydo t1_it7zkyu wrote

And OPEC would probably just cut production a little and keep the price the same. Or russia would destroy another pipeline.

Even still, a 5% decrease in global demand for oil is massive.

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AftyOfTheUK t1_it8a4cc wrote

>And OPEC would probably just cut production a little and keep the price the same.

You appear to be talking about gas prices at the pump.

I'm talking about consumption levels. When people buy fewer services and go on fewer trips/holidays, they use less fuel.

Very different things.

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pattydo t1_it8ao7d wrote

>You don’t think a decrease in overall economic activity will result in a decrease in fuel consumption?

If you wanted to change the subject you should have specified.

But yeah, consumption can pretty easily be reduced without impacting price. Our markets are too concentrated and barriers too high.

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AftyOfTheUK t1_it8hl22 wrote

>If you wanted to change the subject you should have specified.

I didn't change the subject.

Someone asked:

>I’m not convinced. You don’t think a decrease in overall economic activity will result in a decrease in fuel consumption (i.e. demand for fuel)?

You responded:

>Not to a large degree, no.

You knew what the subject was, as you were discussing it before I even entered the discussion.

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pattydo t1_it8i6m2 wrote

Oh, I didn't articulate my point well. My bad.

Yes, a decrease in overall economic activity will result in a decrease fuel consumption. That doesn't mean it will lead to a decrease in fuel price.

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AftyOfTheUK t1_it8scg7 wrote

Indeed it doesn't. But to reign in inflation we need to reduce economic activity. Fuel prices are weakly correlated with economic activity so may or may not follow that trend depending on other determining factors.

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pattydo t1_it8slr1 wrote

I mean, no we don't? Just because the Fed only has a hammer doesn't mean the problem has to be a nail. This is not the best way to fix it, and is probably one of the worst.

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shhalahr t1_it7ygzc wrote

I'd think there are more factors. I mean, if people continue to go grocery shopping on the same schedule, but just buy less with each trip, that can slow overall economic activity without significantly impacting fuel demand.

Similarly, people that can't work from home still have to make it to work.

Or perhaps the economic downturn causes businesses closer to where most people live to shut down and now they gotta get all the way to the other side of town to get their necessities at the big box store that is now their only option.

Fuel demand can certainly stay the same or even increase while demand for most other things goes down.

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Orangeflea215 t1_it7zhl5 wrote

But you’re just thinking about households. Manufacturing and shipping far outpace households for fuel consumption, and thus have a larger impact on fuel prices.

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-casper- t1_it82lz0 wrote

The Fed looks at core-CPI ex food and gas, which is still way higher than they want.

They can’t curb supply side, so they are trying to curb demand side. Another side to this is that they want to dampen the labor market which helps reduce wage-spiral inflation a bit

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pattydo t1_it83rus wrote

Yeah, when all you have is a hammer, everything looks like a nail.

>Another side to this is that they want to dampen the labor market which helps reduce wage-spiral inflation a bit

But like Powell has said (and is backed up), unemployment and inflation no longer have a strong relationship.

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-casper- t1_it8535w wrote

Hmm, but with inflation that leads to higher interest rates, higher interest rates means cost of borrowing becomes more expensive, this leads to less capital raising by companies (leading to less ventures and reduction in hiring) and for companies on the fringe, they won’t be able to raise capital to maintain (potentially) headcount / opex.

We may be at a weird time where with covid and baby boomers retiring, the surplus of jobs to job seekers can counteract this (which may be what Powell is referring to) but the above should hold — unless the vast majority of companies in the US right now are well capitalized, which seems unlikely

I could be missing something. Higher rates to cost of borrowing reductions may definitely lag a bit

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pattydo t1_it85qrw wrote

Interest rates absolutely impact employment numbers. It's that employment numbers doesn't have much of an impact on inflation. It makes sense when like, 50% of inflation is caused by corporate profits.

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-casper- t1_it87err wrote

It may not be directly related to employment, but if consumer sentiment goes down (which is definitely related to employment), and people think storms are ahead, they probably start to reduce spending (especially on things like travel, etc) which curbs demand side and should bring down prices

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pattydo t1_it87rzq wrote

That's the theory. It's just not really happening anymore for many reasons (market concentration likely one of the main ones)

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-casper- t1_it8892i wrote

Hmm that’s an interesting/good point

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Orangeflea215 t1_it9fmqf wrote

Is there any evidence that it's bidirectional? Powell made the claims you've referenced with regard to open market operations/low interest rates/low unemployment not resulting in increased inflation over the past decade, but I don't see any reason that that would necessarily imply that raising interest rates/high unemployment wouldn't still exert deflationary pressure.

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pattydo t1_itkwvlc wrote

The link that is broken is unemployment and inflation, and yes there's evidence for that. That's not to say raising interest rates can't fix inflation. It's that, IMO, it would do very little for this inflation.

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Orangeflea215 t1_itlde56 wrote

Yes, the Phillips curve, I’m aware. I’m not sure that you’ve understood my question. My point was that interest rates have been kept near zero (and unemployment correspondingly low) for well over decade with little deviation, so it’s unlikely there’s any empirical evidence that an increase in unemployment won’t still have an impact on the inflation rate (because aside from the year or so post-covid, there hasn’t really been one). So to rephrase, sure, there’s evidence that low unemployment rates aren’t driving inflation as you would traditionally expect, but is there any evidence that an increase in unemployment isn’t still linked to a decrease in the inflation rate?

Of course, that’s all irrespective of the fact that the Phillips curve is an oversimplification and changes in the labor market are hardly the only means by which a change in the interest rate might mediate inflation. It’s not like open market operations don’t affect the money supply.

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pattydo t1_itlmi3x wrote

Wouldn't a low interest rate with changing unemployment be a pretty decent indicator that the link isn't very strong?

>so it’s unlikely there’s any empirical evidence that an increase in unemployment won’t still have an impact on the inflation rate

It's not no impact, it's just a lot less of one than in the past.

>but is there any evidence that an increase in unemployment isn’t still linked to a decrease in the inflation rate

Yes. When unemployment spiked in ~2010 but inflation was at 1%

There's just so so much more monetary policy and economic forces that impact inflation these days.

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Orangeflea215 t1_itloxpl wrote

>Wouldn't a low interest rate with changing unemployment be a pretty decent indicator that the link isn't very strong?

You still haven’t understood my argument.

> Yes. When unemployment spiked in ~2010 but inflation was at 1%

I’m not sure what you meant to say but that’s perfectly in line with what the Phillips curve would suggest.

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