The Wall Street Journal points to a fascinating study today. Three researchers took a look at recent inflation expectations among Democrats and Republicans. Here it is:
Democrats maintained relatively stable inflation expectations the entire time. By contrast, Republican inflation expectations skyrocketed literally on the day Joe Biden won the 2020 election—long before actual inflation appeared.
But that's not all. The authors say that these inflationary expectations actually turned into inflation:
We find strong positive and significant effects of inflation expectations on inflation itself.... A one percentage-point increase in 1-year or 5-year inflation expectations lead to a 1.3 or 2.3 percentage point increase in inflation, respectively.
The Journal decided to check this out, and their conclusion is that it seems to be true:
Every state that voted Republican has high inflation. That's fairly remarkable—though I'd feel more confident in the result if I could see this same analysis for previous elections.
If this study is correct, it means that a great deal of our recent inflationary surge was literally due to Republican hysteria over the election of Joe Biden. In fact, the authors calculate what actual inflation would have been if everyone had instead acted like Democrats:
They figure that inflation would have topped out around 5% and would currently be at 1.7%.
I'm not sure what to think about this. The results seem too big to be true, and the authors take some shortcuts that might be iffy. That said, I don't have the econometric chops to evaluate the paper properly. I'd sure like someone else to do it, though. If the paper is right, we're paying a huge price for the Trump/Fox-induced economic panic that continues to infest Republican voters.
Upper middle class republicans were happy to pay the going rate for all their junk and vacations. Fun times.
It’s time for Mr. Drum to tell us all how he plans to get through the coming trump presidency. 4 years? 8? What does he expect to happen? Nothing? Something? Catastrophe? Prosperity?
What’s next?
"... Catastrophe? Prosperity? .."
It will be somewhere between the current North Korea and Russia.
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If they expect more inflation, doesn’t that give the price gougers cover when they raise prices?
I tend to agree with jimmy. Greedflation is all about how much price inflation you can get away with. If people expect 5% in a year then go ahead and raise your prices 6% even if all of your overhead is unchanged. If everyone is expecting no inflation and you're the only one who raises his prices then you're going to hear a lot of complaining. It's all about the optics.
Greedflation?
In business you set your prices to what the market will bear regardless of the inflation rate. Deliberately pricing below what consumers are willing to pay makes no sense, unless you want your competitors to thrive while you decline. Over 50% of small businesses fail within five years and only 30% survive to their 10th year.
As far as the WSJ piece, I suppose both red state businesses and consumers could have simultaneously got it in their heads that higher prices made their world’s make sense. It’s a strange notion though that this could occur.
In business you set your prices to what the market will bear regardless of the inflation rate.
I think your "regardless of the inflation rate" is off. While I believe the "greedflation" thesis has been overdone, it seems plausible to me that an "extra" one or two point price hike is easier to get past consumers in an economy characterized by 7% inflation than one characterized by 2% inflation. In short, the market will tend to bear more aggressive price hikes when the overall price index is rising more briskly. Individual price increases are more easily drowned out by the background noise of higher inflation. And lots of individual price hikes aggregated means...uh...higher inflation. It tends to be a self-reinforcing feedback loop.
Deliberately pricing below what consumers are willing to pay makes no sense
Very true. But again, it seems intuitive to me that consumers are willing to pay higher prices for a given good when the prices of most or nearly all other goods tend to be rising more briskly (especially if their wages are likewise rising). I think we know something like this can happen, because if inflation is sufficiently high and prolonged, inflationary expectations rise accordingly, and this gets embedded into the economy. That's what happened in the 1970s. What exactly does this "embedding" process entail? Most economists talk of consumer and business psychology. I'm not suggesting it explains everything, but what some people are calling "greedflation" is likely part of it.
I think we've clearly been able to dodge the hyperinflation bullet this time. And this is partly because of Fed action. But I do think we've seen a degree of "inflation expectation embedding" transpire over the last few years (just not nearly to the same extent we saw in the 1970s).
The Lefties rather than engage in economics are engaged in Just So Stories to avoid grappling with real side effects of an excesss liquidity from stimulation
Econometric analyses as reported on in the Financial Times have not shown significant above supply chain margins over time except in the energy sector.
So while petrol companies do seem to have acted in the moustache twirling stereotype of the Left here, actual net numbers show the rest of the economy operating in response to supply chain price rises.
None of this has any hope of getting into their heads of course.
The Righties rather than engage in democracy are engaged in following a so-called leader that knows much less about how the economic system or anything related to how civilization actually works than I did when I was not smarter than a fifth grader because I was 11-years-old and still in grade five.
None of this has any hope of getting into their heads of course.
"…an excesss liquidity from stimulation."
Would that be like donnie's tax cuts?
Yes excess liquidity from the entire package of efforts.
Trumps and Bidens.
Cash is cash.
the fact you reply this way merely highlights the Political nature of your understanding rather than an economic one.
Sorry, this is BS.
You can operate an economy on different principles than "charge the highest price you can possibly get right now". I accept that is how our economy is presently run, but there is no iron-clad law of "economics" that means it must work this way.
The Romans were astounded when they encountered (literal) markets to their east where prices where not fixed. Why? Because their economy operated on a cost+ basis.
We *choose* to allow the "charge as much as you can" model to continue, but we are not required to. The full cost of this model is rarely taken into account - while it definitely has some benefits in terms of loosely modelling resource scarcity, it has some major downsides too that are generally ignored except in special circumstances (e.g. greedflation, exploding real estate costs).
Tell me how Trump and Biden's stimulus drove inflation in Europe.
Weird, was it a 'just so' story that profits went through the roof?
This is one of those "Bless your heart" posts.
Or unless you are trying to take market share from a competitor. I’m old enough to remember when companies thought that gaining market share was a worthwhile goal.
One of the major factors in the amount people are willing to pay is the price suppliers are asking. For instance, if the cheapest gasoline in town is $4.00 a gallon, people are willing to pay $4.00 a gallon. If some gas stations are offering gasoline at $3.50 a gallon, very few people will be willing to pay $4.00.
Asking a lower price than your competitors doesn't just get you market share, it directly affects the price people are willing to pay. Setting prices at the highest amount people are willing to pay only works if you have a local monopoly.
Yeah, this. Greedflation was a thing partially because of this apparent hysteria - narratives matter because they give cover.
Not according to proper numbers, ex Energy (petrol)
Hmm...gas prices and real estate prices were a big part of the inflation we got. Gas prices disproportionately affect wide-open far-flung red states more than blue states. And a good chunk of the real estate boom was remote workers moving out of cities into rural areas.
It seems like those 2 things would be more likely drivers of the difference than GOP panic.
Buying a house is considered an investment, so mortgages do not show up in inflation numbers. Rents are definitely included, but I don’t know if the rural rental market made that much of a difference. As for gas, it definitely makes a difference. But the longest commute times are in blue states like New York and California where people sit in traffic for hours. So maybe it’s not the commute times as much as it is the gas guzzling trucks that people won’t give up in those red states. I dunno. But yeah, GOP panic seems a stretch.
Housing cost does make it into inflation numbers.
Republicans are what fraction of the population? Expectation of inflation among that fraction of consumers is enough to wish inflation into existence?
The Seven Cs are with us always:
Correlation in confirmation is cause.
Correlation in contradiction is coincidence.
Clearly.
I’m skeptical. Expectations supposedly cause consumers to make major purchases sooner, “before prices go up”. One would expect to see that in durable-goods sales volumes and prices. Last I looked, nothing special happened in that sector.
I blame Trump's tax cuts....
Republican (and Republican leaning) people account for at least a third of the population, and much higher (or lower) in any given place.
The question is what would be the mechanism? During the pandemic, there were runs on some items, e.g. toilet paper, that really were not is short supply until everyone decided to stock up immediately. If you feel inflation will lower your buying power, you'll stock up now. That can affect consumer goods and food prices. Not sure how it would translate to major purchases, e.g. cars or housing. Of course, this is just speculation...
They had already stocked up during the pandemic.
Actually things like that toilet paper situation are more complicated than it might appear. It's probably a very consistent (other than brand changing) market with very inflexible demand. Yes, people saw the shelves half empty, had heard about the shortage, and bought a bunch of whatever was left.
But they were also using a lot more at home because they weren't going to work. Different supply chains past the production phase, somewhat different products (more one ply recycled, some in those giant rolls) packaged differently (maybe a hundred rolls in one big box, no retail bar codes etc.) So the retail-ready supply was also pretty inflexible, at least in the short term, and the short term could be months.
Meanwhile workers at every phase getting sick for two weeks or quitting to stay at home or for some being sick longer or dying.
Inflation expectations are certainly a factor that Central Banks watch relative to an input into inflationary pressure **after such is triggered** - expectations alone are not analysed as a driver.
Given the inflationary expectations of Republicans over the past decades and as the inflation deniers of the 'progressive' hard-Left here were pounding on about being wrong consistently up to this point, it is rather (assuming the article is being correctly presented, not having access to WSJ) fantasy to analyse inflation expectations causing inflation
Enabling once real factors triggered, yes, causing no. A catalyser once excess liquidity chasing too few services and goods kicked into gear inflation would be a sensible potential effect - catalysts do not cause something but do accelerate and intensify.
1/3. Republicans are 1/3 of the population
You are correct. 1/3 does indeed meet the definition of a fraction.
Fascinating stuff, although I will note that lots of other countries also experienced an inflationary burst.
Excellent point.
That plainly punctuates the pernicious power of GOP purchase price prognostications...
I heard an interview with a Fratelli d'Italia (Georgia Meloni's party) guy who was blaming Italy's inflation on Biden.
WSJ piece said US inflation would have still hit 5%. But yes, that is still lower than most of Europe at the time.
The entire world did.
Sure, but did they seem inflationary and profit rises that continued?
Just because it's elsewhere doesn't mean it's in a specific place.
Like, pretty much all of them. Even inflation averse Germany. I think Japan went from deflation to slight inflation for the first time in forever (don't make me look it up though.)
I thought the Wall Street Journal was supposed to be a font of nothing but pro-conservative propaganda?
The WSJ consistently ranks as one of the most trusted news sources. Talking about the news division, not the editorial page writers.
Everyone doesn't think that. Their editorials are often badly propagandistic, but their news reporting has maintained a good reputation even since Rupert Murdoch assumed ownership. I definitely give them credit for this bit of reporting.
But but but... inflation happened in all the other rich countries too! How does Republican panic explain inflation in the EU and the UK and in Canada?
Those countries have their own panickers, I'm sure. They would all have been watching America, and there are sizable conservative factions over there, too.
And a Just So Story starts on the Left...
...And someone ignoring record profits. How did McDonald's double their profit margin in that time span?
The stated hypothesis is that REPUBLICAN expectations of inflation triggered inflation. If you want to suggest instead that right-wing expectations of inflation around the world triggered world-wide inflation, that's more plausible but much harder to test.
I find it much easier to believe that the current waning burst of inflation was caused by covid disruption and word-wide government responses to it.
All right. Well, I believe many factors contributed, especially to the long continuation of extraordinary inflation after the initial burst, which some experts expected to abate more quickly than it did.
I also believe that businesses have more influence over prices than consumers do, and that business people are more Republican than not, and that big businesses act globally. I don't have any studies handy, though.
The researchers limited their primary focus (of effects of inflation expectations) to period of the current administration. As such, they did not extend their Figure 8 (Counterfactual Inflation) beyond it; I think they should have.
If you look at Table 2 (Political Party and Comovement of Expectations with Inflation), you can see the political bias effect in the variables Inflation_PresidentParty (which you expect to be, and is, lower than actual),
Inflation_OppositionParty (which you expect to be, and is, higher than actual).
Beyond the obvious politics-inflation expectation correlation -- and why they should have extended Figure 8 to the Trump administration -- the GOP inflation expectation is closely aligned to actual inflation during Trump's administration, which had floated at or below 2.0%. In that period, Democrats' inflation expectation was roughly 1.25-1.5 points above actual inflation (% change YoY).
So either GOP expectations can exert pressure downward as it does upward (for which there are a couple of possible reasons for this), or we're just seeing the political effects of expectations based on which party is in charge of the White House (and it's just coincidence that inflation has been more closely aligned to GOP expectations through two administrations).
Pondering what it means to say that inflation has been aligned with Republican expectations, considering that the survey question was about inflation going forward, not about what it had been in the past year.
Republicans' year-ahead expectations have mostly aligned with the since-a-year-ago rate at the time they answered the survey. In other words, they have been inclined to believe that whatever inflation had done over the past year, it was going to keep doing that. Only Biden's election made them anticipate something changing, and for several months, their expectations did align with what happened next.
Democrats, on the other hand, have expected future rates to stay near the 2-percent neighborhood. They tended to agree with professionals about that. I'd say the Democrats have been somewhat better (luckier?) at predicting the year-ahead rate since early 2022.
Of course Republicans want to screw up the economy if it means people get unhappy and vote GOP. Look at 2009 after the massive credit bubble burst. No votes for a robust stimulus package* by Republicans in the House and only 3 votes in the Senate (Collins, Snowe, Specter).
This time around, it was Fox News and other hysterics that amplified an existing inflationary trend.
*American Recovery and Reinvestment Act of 2009
Let us all remind ourselves that the credit bubble was only possible because of the Gramm-Leach-Bliley Act of 1999. To his eternal shame, Clinton didn't veto this republican monstrosity, though it would have later passed after Bush took office.
Who knew that National Lampoon cover in 1973 (buy this magazine or this dog gets it) was so prescient. The Republican Party and their voters really feel as if it is the only party that can govern, and they will sabotage a Democratic administration, even at their own expense (see Covid, healthcare, Afghan w/d, etc.) if they are not allowed to rule.
This (to me at least) is not shocking. Plenty of households have 1 member in them (usually daddy) who demands that everything be run their way or they’ll make life absolutely miserable for everyone else in the household. These are the homes that the children usually flee from as soon as they can, or the children turn out to be empty shells of adults when they grow up, unable to run their own households, or the children turn out to be even bigger bastards than the parent who demanded everything be their way in the previous generation.
It doesn’t surprise me then to consider the macro implications of the above: that there’s an entire political party now comprised of people who insist on ruling all the time or destroying everything for everybody if they can’t rule. Back in the day when all of this was coded as “white men controlled everything,” both parties were able to present the illusion of peacefully taking turns ruling. But now that white men obviously control less, the people who miss the white men controlling everything have consolidated into the GOP. We had glimpses of this in the 1960s when people would shut down all the schools, buses, pools, etc rather than share them with Others. Now we’re having it with the entirety of the federal govt.
Interesting analysis. But those "Plenty of households" with authoritarian family models are pretty obviously far more on the right than the left, so Republican. And those people extend their family model into their concept of how a nation should work.
Oooooo - the WSJ link is a gift one that works for people like me who would never subscribe. I don't really see a lot of the HOW side of the issue though.
Anyone?
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