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Goldman View On Inflation


Harris Neck, Georgia

February 25, 2022


Prices keep skyrocketing because of a perfect storm of Americans' stimulus-fueled shopping spree and messed-up supply chains, Goldman says


  • Stimulus helped low-income people the most. That's keeping inflation high, Goldman Sachs' commodities expert said.

  • Low earners are able to lift demand for commodities the most since they're a much larger group.

  • Government aid lifted that cohort's spending, and with supply strained, the hot commodities market is boosting inflation.

Pandemic-era stimulus might've been a double-edged sword for low-income Americans. It helped lift them from the depths of the coronavirus recession, but it's now fueling the high inflation that's chipping away at their earnings, Jeff Currie, global head of commodities research at Goldman Sachs, said.

Shortages of key commodities have played a major role in fueling the highest inflation since 1982. Prices for basic goods like lumber, steel, and gas continue to surge as demand dramatically outpaces supply. That's led to faster inflation throughout the economy.

Higher commodity prices typically force producers to raise their prices, which leads retailers and other businesses selling goods directly to consumers to hike their own prices as they look to protect their profits. A jump in lumber prices, for example, can lead to higher costs for new homes, renovation projects, furniture, firewood, and even the barrels used to store liquor.

The supply issues plaguing commodity markets are unlikely to be solved quickly, as producers worldwide are still struggling to match pre-crisis output. Demand, then, needs to ease for commodity inflation to abate. Yet the massive government support rolled out earlier in the pandemic is standing in the way of such a cooldown, Currie said in a recent Goldman podcast. Stimulus helped lower-income Americans, but that's led to a massive surge in demand for basic goods

The first year of the public health crisis saw Congress approve roughly $5 trillion in fiscal stimulus. Much of the relief targeted Americans hit hardest by the crisis and took the form of direct payments and enhanced unemployment benefits. The stimulus was largely effective at countering financial worries, but the policy's primary targets are now keeping demand at elevated levels, according to Currie.

"Lower-income groups and the disadvantaged groups that policy was focused on are the primary consumers of commodities in old economy goods," Currie said. "If we have policy focused on the lower-income groups, that's what's driving that structural rise in demand." Put simply, there are far more low-income people than wealthy people. Low-income groups are also far more likely to spend cash they're given. When low earners are able to spend more on commodities, they usually do, and their larger numbers are "the only way you get that volumetric demand growth," Currie said.

"Every commodity in history has been driven by the lower-income groups," he added. "What happened after '08/'09? We pulled the carpet out from underneath the lower-income groups ... And what happened in March 2020? All of that reversed with COVID, and what we've seen is that structural rise in demand." The soaring stocks of the 2010s are hurting supply in 2022

The stock market boom seen before the pandemic isn't helping, either. Prior market rallies have seen cash move out of "old economy" sectors as investors rush into trendier and more attractive assets, leaving less investment in more basic consumer goods, Currie said. That serves as kindling for a commodities "supercycle." Where commodity demand holds strong, underinvestment leads to strained supply. That trend was seen in the 1970s and the dot-com boom of the early 2000s, and it's happening again, according to the bank. The big-tech market rally that ended in early 2020 pulled cash away from the industries key to supplying commodities. Now the country is struggling to reverse course and bring supply back up to snuff, Currie said.

"When you saw the bump in demand from the COVID stimulus, what it did is it exposed just how severe those supply constraints are. It doesn't matter if we're talking about metals, oil, agriculture. They're all underinvested."



Relatedly, the following article from Reuters is from last February:


Powell's Econ 101: Jobs not inflation. And forget about the money supply

WASHINGTON (Reuters) - In a congressional hearing dominated by talk of the pandemic and what may be needed to heal the economy from its effects, Fed Chair Jerome Powell on Tuesday had a subtle message for U.S. senators evaluating their options.


Toss out the college textbooks, because the world has changed.


The unemployment rate? Forget it. The Fed only cares about the number of people working and how to get it higher, not an age-old statistic that, for all its familiarity, overlooks a key group, namely those who stopped looking for work during the pandemic and need to be brought back.


Inflation? Not a problem anytime soon. Queried by Democratic U.S. Senator Mark Warner about the need to make "a sizeable investment" in U.S. infrastructure, Powell set aside classic concerns of hefty government borrowing driving up prices and responded "this is not a problem for this time as near as I can figure."


The money supply? No longer relevant, Powell, 68, told Republican U.S. Senator John Kennedy, 69, about the once-important measures of cash and easily spent assets that was a central focus for the Fed in the past.


"When you and I studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth," Powell said, referring to one main measure of the money in public hands. "Right now ... M2 ... does not really have important implications. It is something we have to unlearn I guess."


There has been a lot of unlearning these days at the Fed and the economic academy, on everything from basic economic relationships to the hazards - or not - of mountainous government debt. Even before the pandemic the central bank was reassessing one of its core ideas - that when the unemployment rate was low, inflation would be high, and vice versa.


The idea led past central bankers to worry whenever the jobless rate fell below a certain point, and to start itching for rate increases that would slow the economy and fend off the coming inflation. It also put people out of work.


That concept was pretty much thrown overboard as of August: Whatever drives inflation, the Fed concluded - and there is plenty of disagreement about what that is - a low unemployment rate is no longer considered part of it.


The unemployment rate itself may even have become passe. It measures the number of people working divided by the number of people working or looking for work. What it does not count, though, are the people out of the labor market - retirees, for example, but also, and of more concern, women who abandoned careers to care for family during the pandemic.


When the Fed considers its goal of maximum employment these days, Powell said, "we don't just mean the unemployment rate, we mean the employment rate," measured against the population as a whole and aspiring to "high levels of participation."

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