The New York Times suggests that rising insurance costs help to explain stubbornly high inflation:
“Insurance of various different kinds — housing insurance, but also automobile insurance, and things like that — that’s been a significant source of inflation over the last few years,” Jerome H. Powell, the Federal Reserve chair, said during congressional testimony last week. “And it’s to do with a million different factors.”
Vehicle insurance is the one adding notably to overall inflation, said Omair Sharif, founder of the research firm Inflation Insights. Part of the increase in car insurance comes from the fact that parts and replacement vehicles have become a lot more expensive over recent years, and that is slowly feeding through to insurance premiums, he said.
These comments confuse relative and absolute prices. More expensive auto parts might cause the relative price of auto insurance to rise, but they do not cause a rise in the overall cost of living.
There are cases where “supply shocks” cause both an increase in the relative price of one good, and also an increase in the overall Consumer Price Index. That occurs when the adverse supply shock reduces real output—say a sharp cutback in global oil production. For any given rise in nominal spending, lower real output leads to a higher price level.
But that is not what is happening in the US. Recent economic growth has been quite robust. Inflation remains above the Fed’s 2% target because nominal GDP growth is running at 5.8% over the past year, way too high.
In any economy, some prices will rise faster than others. Instead of singling out the prices of various goods and services, the Fed needs to look in the mirror. We have high inflation because monetary policy has pushed NGDP growth up to a rate that is not consistent with “price stability” (even if defined as 2% inflation.) The Fed is the institution that created the high inflation of the 2020s, not supply chain problems. The excess inflation since 2019 is very similar in magnitude to the excess NGDP growth.
READER COMMENTS
Thomas L Hutcheson
Mar 14 2024 at 11:27am
Yes. But the really interesting question is how much of the over-target inflation was useful in facilitating re establishment of equilibrium relative prices when some nominal prices do not adjust well and how much was unforced error?
TMC
Mar 15 2024 at 11:25am
What nominal prices did not adjust well? That’s typically a short term issue where we’ve had low inflation rates for quite a while.
Thomas L Hutcheson
Mar 15 2024 at 6:58pm
Well, we have had low inflation but the amount of relative price change needed is related to the size of the shock. COVID was a pretty bid shock. Still, you’re welcome to think most was unforced error.
Craig
Mar 14 2024 at 12:07pm
“We have high inflation because monetary policy has pushed NGDP growth up to a rate that is not consistent with “price stability” (even if defined as 2% inflation.) The Fed is the institution that created the high inflation of the 2020s, not supply chain problems. The excess inflation since 2019 is very similar in magnitude to the excess NGDP growth. ”
I suppose a chicken/egg question here. This statement seems to suggest that inflation is caused by excess NGDP growth. Am I interpreting that correctly? If so I must say I would’ve tended to have gone the opposite way I would’ve said something along the lines of NGDP growth is higher than real GDP growth because of ‘excess’ inflation or really ANY inflation, I suppose, no?
Scott Sumner
Mar 14 2024 at 12:46pm
“NGDP growth is higher than real GDP growth because of ‘excess’ inflation or really ANY inflation, I suppose, no?”
This isn’t the right way to think about it. Of course it’s true that the gap between NGDP and RGDP growth is inflation. But the problem today is not that NGDP growth is higher than RGDP growth, it’s that it’s higher than what would be appropriate. Thus rapid NGDP growth is an indicator that monetary policy is the key problem. If we had 4% NGDP growth and 0.5% RGDP growth (implying 3.5% inflation) then I’d say supply bottlenecks were the primary problem.
Thomas L Hutcheson
Mar 15 2024 at 7:05pm
You could just as well say that INFLATION was excessive. It is inflation that the Fed is supposedly targeting flexibly. NGDP is the arithmetical result of how well the Fed manages its mandates, inflation and employment.BTW I posted a “note” on this over at Substack but have not seen any comments. 🙁
Don Geddis
Mar 14 2024 at 12:48pm
You’re confusing an accounting identity with causality. It is true that NGDP = real GDP + inflation. So as a matter of accounting, yes, “NGDP growth is higher than real GDP growth because of … inflation”. That’s basically a matter of definition.
But it doesn’t tell you anything about causality, about what decisions and actions are possible, and what are the consequences of those choices. In this case, the decision-making body is the central bank (US Federal Reserve), and the arbitrary choice is the growth in the quantity of the money supply (monetary base). The Fed can choose any value for the size of the money supply; it’s just a number. That choice controls NGDP. That choice has only limited impact on real GDP. So it’s best instead to think of your accounting identity as: inflation = NGDP – real GDP, where the Fed determines NGDP (based on monetary policy), but the economy determines real GDP.
And thus, the Fed (indirectly) controls inflation as well.
vince
Mar 15 2024 at 3:18pm
If the economy, not the Fed, controls RGDP, and inflation is NGDP-RGDP, then how can the Fed control inflation?
Don Geddis
Mar 15 2024 at 6:50pm
This is very simple algebra. It is because the Fed controls NGDP. (Changes to the money supply allow control of total aggregate demand.) Thus, regardless of what happens to RGDP, the Fed can easily choose an appropriate NGDP in order to select the difference NGDP-RGDP … which is just the definition of inflation. This is pretty simple, so perhaps there’s something else that’s confusing you, but it’s hard to tell what.
Kevin Erdmann
Mar 14 2024 at 2:53pm
Non-shelter cpi sharply flattened out in July 2022 and has remained at about 2% for 20 months.
Scott Sumner
Mar 14 2024 at 8:21pm
Yes, but NGDP growth suggests that monetary policy has been too expansionary. Inflation data is not very reliable, with or without housing.
Kevin Erdmann
Mar 14 2024 at 8:50pm
My comment was in response to text in the post referring to inflation as “stubbornly high” and claiming that it is above the Fed’s 2% target.I feel like you must have felt in late 2008. Powell has discussed the problems with the shelter component, and the bls has even started publishing alternative measures. Inflation hasn’t been above 2% since July 2022 when rent is measured in a timely way. And the whole profession is talking, in March 2024, about this pesky inflation that the Fed can’t get down to 2%.
Scott Sumner
Mar 15 2024 at 12:16pm
Back in 2009, I discussed how the CPI was biased due to housing, but it was to confirm that NGDP is the right indicator. In this case, the version of the CPI with housing is a better indication of the excessive growth in nominal spending. Yes, measured housing inflation will come down over the next 12 months, but goods inflation will rise. Inflation will likely remain above 2%, unless NGDP (and wages) slow sharply.
Kevin Erdmann
Mar 15 2024 at 2:43pm
There are the normal reasons why housing is usually not helpful as an input to monetary policy decisions. But, recently, the problem is that the CPI methodology creates a lag. Other indexes that track new rents basically rose and fell with non-shelter CPI. At this point, the CPI rent category is picking up rent increases from last fall that lagged because they reset on an annual schedule.
So, market rental values went up through June 2022. The landlord reset the rent in March 2023 when the lease came up for renewal. The tenant reported to the CPI in July 2023 that their rent had increased over the previous 6 months, and the YoY February 2023 to February 2024 CPI rent measure says inflation is high. In fact, rental values have not behaved any differently than other prices have.
In the current context, the CPI rent measure is just a mechanical shadow of the non-shelter CPI that adds no information and simply produces a lag.
Even if we stipulate that shelter is a useful component, the CPI measure is not giving us current information.
Thomas L Hutcheson
Mar 16 2024 at 4:58pm
Inflation will likely remain above 2%, unless NGDP (and wages) slow sharply.And what should the Fed do to reduce excess NGDP and wage growth? And whatever that is, why not just think of it as getting inflation fully back on target? Why
Fed => less NGDP and wage growth => target inflation,
instead of
Fed => target inflation?
What is the policy difference?
Lizard Man
Mar 14 2024 at 9:19pm
In your opinion, how reliable is super core pce inflation? And if super core pce inflation is at the Fed’s target inflation rate and NGDP growth is still generating inflation above target, why would that be?
Scott Sumner
Mar 15 2024 at 12:17pm
I don’t regard any of those inflation measures as reliable—focus on wages and NGDP.
Lizard Man
Mar 15 2024 at 5:48pm
I thought that super core PCE was wages. Which is why it seems odd to me that NGDP growth is still pretty high, but wage growth is slowing, while overall inflation seems to be settling at around 3%.
Thomas L Hutcheson
Mar 15 2024 at 7:10pm
Or is it the duration of over 0target inflation that suggest that monetary policy has been too expansionary, “too” meaning more than needed to facilitate relative price adjustment, market clearing, and full-ish employment.
TMC
Mar 15 2024 at 11:58am
The Producer Price Index (PPI) out yesterday is showing an increase in inflation (+.6% for the month). We do not have anything under control yet.
spencer
Mar 15 2024 at 1:51pm
“The Pandemic Housing Boom increased the price of starter homes a whopping 45%.” Unless you include asset prices, you mis-judge inflation.
marcus nunes
Mar 15 2024 at 9:34pm
A more nuanced take. Maybe the convergence of the economy is proceeding satisfactoraly!
(81) Is the economy approaching equilibrium? – by Marcus Nunes (substack.com)
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