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Inflation in goods and services

Published on 25 Comments on Inflation in goods and services

How about yet another different look at inflation? Here is inflation in goods (top) and inflation in services (bottom):

As you can see, inflation in goods has been right around zero for a full year.  Inflation in services has been more stubborn: it's come down from its peak but has remained about 1% above its long-term average for the past six months.

This is what you'd expect from inflation induced by supply chain problems. It would (a) hit goods harder, (b) come down quickly when things ease up, and (c) take a little while longer to come down for services.

That said, back to average for goods and one point above average for services isn't bad. There's only a little more inflation to be squeezed out of the economy.

25 thoughts on “Inflation in goods and services”

  1. bbleh

    Potential Recession Threatens Biden Re-Election
    Low Inflation May Suggest Trouble For US Economy
    Special to The New York Times

    1. MarissaTipton

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    1. TheMelancholyDonkey

      The more reliant something you buy is on human labor, the less it benefits from technological advances. Services, in general, have a higher percentage of their costs tied to human labor than goods do. Therefore, services have higher inflation rates, and become a larger share of GDP, even if the overall mix doesn't change.

    2. Ken Rhodes

      I made up a new abbreviation for this answer: IANAE. Similar to IANAL in usage, I am not an economist, which means (I hope) that although I am not a qualified authority, my opinion is offered here. Having stated that, then...

      I think the difference in pricing for goods vs. labor is that labor costs are much more "sticky." Workers who got a raise when their services were scarce are much less likely to accept a cut later, compared to companies selling hard goods, who have to compete in the marketplace where there are competitors, and where the goods are fungible.

      1. rick_jones

        Thanks - to you and to TheMelancholyDonkey.

        So Kevin's "It was the supply chain, stupid" assertion, while not a bucket without a bottom, doesn't hold as much water nor for as long for services inflation?

          1. rick_jones

            Heh. You probably already know that my opinion is population needs to decrease. Not just in the nation with the highest per-capita emissions on the planet, but on the planet as a whole.

    3. skeptonomist

      While commodity price go by supply and demand, wages are considered to be "sticky". Workers resist wage cuts, although without strong unions they usually cannot get wages to keep up with general inflation, if that is caused by supply shortages (instead of worker shortages). Services have a higher component of labor than most goods.

      The stickiness of wages is one reason that general deflation is rare. Even if inflation is caused by supply shortages, wages go up some, but don't go back down.

  3. rick_jones

    As you can see, inflation in goods has been right around zero for a full year.

    Ten months is a full year? Nearly a full year, sure. Almost a full year, fine. But no, ten months is not a full year.

  4. D_Ohrk_E1

    You state "inflation induced by supply chain problems [...] take a little while longer to come down for services", as if it were Econ orthodoxy.

    I can reason that the lack of willing labor during the start of the pandemic caused a surge in services inflation.

    I can also reason that the rise of deaths led to a shortage of labor and a corresponding rise in services inflation, even as the economy opened up.

    Finally, I can reason that the Fed effective rate caused a decrease in vacancies, weakening pressure on services inflation. It's notable that the acceleration of disinflation occurred after the Feds repeatedly raised their rate.

    But what I can't figure out is how exogenous effects on goods inflation applies to services inflation and why there's a lag. So KD, explain how this mechanism worked.

    1. lower-case

      labor markets aren't completely isolated from the goods market

      i think part of it is people's awareness of the rising cost of living (food,cars,medicine,etc) so they agitate for more pay; if the labor market is tight they'll get some portion of the goods inflation as a COLA

      not necessarily 100%, depending on how tight the labor market is, but with unemployment pretty low labor has more leverage than it would if unemployment was at 8%

      for example, the auto workers just got a decent COLA

      and salaries are typically adjusted once per year (unless you take a new job), so that introduces a lag

      (just my basic econ 101 take on this)

        1. lower-case

          the compensation says "Units: 1982-84 CPI Adjusted Dollars, Seasonally Adjusted" while the core cpi says "Index 1982-1984=100, Seasonally Adjusted"

          so the compensation line is cpi adjusted, and it looks like it's keeping pace with cpi

          (unless i'm misreading something)

          1. D_Ohrk_E1

            You are misreading.

            It means the median wages index is adjusted for inflation.

            It's (median wages) not keeping pace with CPI-services. If you extend the timeline to 10-years, you can see how the pandemic disconnected the two.

            1. lower-case

              the chart you sent has one line for cpi minus food and energy (not cpi services) and another line for weekly real earnings (ie., earnings adjusted for cpi)

              if wages are keeping up with inflation you'd see a horizontal line, which is what's on the chart you linked to

              if you showed raw earnings without the cpi correction earnings would show a positive slope (like the cpi line)

              https://fred.stlouisfed.org/graph/?g=1cXeU

              maybe you meant to send a link that plots cpi services and uncorrected earnings?

        2. lower-case

          btw, the big bump in early 2020 wasn't because of raises, a lot of it was caused by lower paid people leaving the workforce (like fast food, etc) while people with higher compensation stayed in the labor pool (many of whom could work remotely)

          1. D_Ohrk_E1

            As I stated, "I can reason that the lack of willing labor during the start of the pandemic caused a surge in services inflation."

            1. lower-case

              i'm describing a temporary workforce compositional/statistical effect due to mass layoffs (ie., lunch counters shutting down because the surrounding businesses were working remotely) which is different from labor demanding higher wages in a tight labor market

              involuntary mass layoffs aren't the same thing as people asking for more money and taking a voluntary separation if they don't get it

              ###
              In April 2020, the number of unemployed people who were on temporary layoff soared by 16.0 million to 18.0 million, reflecting the effects of the pandemic and efforts to contain it. The sudden influx of people on temporary layoff in April shifted the composition of unemployment drastically, as this group grew to account for more than three-fourths of the total unemployed.

              The total number of unemployed people began to decrease in May—primarily among those on temporary layoff—when economic activity in many areas resumed on a limited basis. Although the number of unemployed people who were on temporary layoff was declining, the number of permanent job losers and the number of unemployed reentrants to the labor force both increased in June.

              In October, the number of permanent job losers, at 3.6 million, surpassed the number of job losers on temporary layoff (3.2 million), and permanent job losers became the largest group among the unemployed. Following a surge in the number of coronavirus cases along with efforts to contain the pandemic, the number of people on temporary layoff increased again in December before receding in January. At the beginning of 2021, those on temporary layoff accounted for about one-fourth of the unemployed, and permanent job losers represented about one-third of the unemployed.

              https://www.bls.gov/opub/ted/2021/temporary-layoffs-remain-high-following-unprecedented-surge-in-early-2020.htm

              1. D_Ohrk_E1

                Again, I did not say that labor demanded higher wages. Employers will incentivize labor with higher wages in order to return.

                The lack of willing labor would fit the need for employers to incentivize w/ higher wages.

    2. jdubs

      Housing is a big part of the PCE services inflation.

      Some of the individual components of the PCE Services index actually include a lot of goods and materials. Airline services, food services and transportation services for example.
      Other components of the services index like Financial Services use current interest rates as a major input.

      1. D_Ohrk_E1

        Then, if more "goods" are included in Services, the two should be closer rather than one significantly lagging the other, right?

  5. Salamander

    Just as most Americans don't understand the difference between a national economy and their "pocketbooks", folks are inclined to think "inflation" refers to current prices. Prices aren't going down, so INFLATION!! And blame the Democrats, because that's what the news always says.

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