Here are the opening paragraphs of Jeffrey Snider’s most recent offering at RealClearMarkets:
If you had the ability to compute the long-run stable price level from nothing more than the long run trend of money velocity and a good idea of what potential GDP should be, tied together with a money supply you can count, then any prediction of or for inflation would simply compare current price levels to this calculation. Because price levels must converge at the long run trend any temporary deviation from it would force current prices to adjust predictably over time.
Should current price levels end up below the long run, inflation is inevitable. That is, prices must accelerate from their low current state to reach the more stable longer-term equilibrium.
What follows is a brief history of rather futile attempts by economists over the last 150 years to understand the money supply (M) and its velocity (V). Like all of Mr. Snider’s posts, it’s quite dense and may require some pondering to understand but, also like all of Mr. Snider’s posts, I found it quite worthwhile. It didn’t tell me anything I didn’t already know but it did present it in a compact form.
TL;DR: if inflation is transitory, it will take it a while to transit.
Before I wade through it, does he attempt to explain why velocity changes, or just observe that such studies are difficult? That’s the key issue.
Set aside whether it is transitory and how long. We wont know until it is over. What policies would we enact to change things. AFAICT the two major issues are the supply chain and labor. What policies would we enact to create more semiconductors quickly? What do we do to improve transportation which seems to be buggered at multiple places. Lack of drivers, lack of trucks/chassis, lack of warehouse space/workers, lack of space at terminals, etc.
On the labor side we had a record number of job quits in September. This is after the UE payments stopped. We dont know how to keep people working let alone get new people working.
I am not seeing how the FED raising rates helps with any of this so what else could be done.
Steve
My impression is that although the issues causing bottlenecks are widespread their intensity is not widespread and that much of the problem is in the Ports of Los Angeles and Long Beach. I would, for example, suspend the regulations against stacking containers imposed by the State of California by executive order until the backup of ships trying to unload reaches some manageable level. It doesn’t need to be completely eliminated just reduced. I would also suspend the state regulation that limits the ability of independent truckers to pick up containers in those ports.
Independent truckers are scab labor, next year’s welfare recipients.
Pay the freight.
If that’s really the road to go, bring in Mexican truckers, basically American freight lines with Mexican hubs.
The data contradicts this is mainly a ports/supply chain and labor issue.
Rent isn’t effected by either yet it is up 4% yoy according to CPI and more current-time based measurements show it is up 15%. Selling prices of houses is up by 18%.
Then there is energy which goes through Houston and refineries on the gulf coast. Yet energy; natural gas, oil, coal(!) are up 100%+ yoy.
Or semiconductors. It isn’t ports and labor that have caused GPU prices to double; it’s bitcoin having diverted substantial production.
US ports and US labor certainly don’t explain why China PPI is up over 12% yoy.
El-Erian made the point that idiosyncratic shortages is what broad based inflation looks like at the micro-level. But the macro-level explanation is excessive demand; and that is likely rooted in fiscal and monetary policy. Of course, no one in Washington would ever admit that if they want to keep their jobs.