Opposite Neel Kashkari’s Analysis, ‘Surge Pricing’ Has Nothing to Do with Inflation

“Our models seem ill equipped to handle a fundamentally different source of inflation, specifically, in this case, surge pricing inflation.” That’s what Minneapolis Fed president Neel Kashkari wrote the other day in an attempt to explain what some imagine inflation to be. New York Times
NYT
Fed watcher Jeanna Smialek referred to Kashkari’s description as “UberUBER
surge pricing.” And so it goes. The expert class continues to mistake higher prices for inflation.

Missed by Kashkari and Smialek is that their very descriptions show why what they imagine inflation to be quite simply is not. To see why, imagine summoning an Uber on a Friday night only to see that the typical $12 ride to the bar is in fact $36. If so, the Uber customer logically has $24 fewer dollars to buy drinks, food, or even Uber transportation home. This person might take the subway instead.

Economics is defined by trade-offs, and a higher price born of rising demand for one good logically signals lower prices elsewhere. In instances when one or many goods and services are under-supplied relative to demand, the latter is a signal that other goods and services remain on the proverbial shelf longer before they’re cleared by the market via lower prices.

Kashkari added that he didn’t think the Fed’s “models” would “have come anywhere close to forecasting 7 percent inflation,” but the very notion of “7% inflation” completely misses the point. Depending on the basket of goods used to measure alleged pricing pressures, inflation is either rising or falling all the time. Figure that Dell Computer and Gap came out of the tragic lockdown aftermath with excess inventory, not to mention that unsold inventory more broadly is presently at record highs. Well, of course. See above.

From “surge pricing” Kashkari then tacked to “wage growth.” He wrote that “nominal wage growth has grown to 5 percent or more, which is inconsistent with our 2 percent inflation target given recent trend productivity growth.” Books. Could. Be. Written about Kashkari’s central planning conceit alone. Imagine trying to manage wages from the halls of the Fed! Alas, brevity is called for in opinion pieces, in which case it will be said that even if we defined inflation as Kashkari imagines it as a consequence of demand, rising wages would logically signal reduced spending power elsewhere. See above yet again. A rising price here signals a falling price elsewhere.

After which, Kashhkari ignores that wages are generally a consequence. Of investment, specifically. Investors seek productivity, and can surely find it in ways that Kashkari and the Fed’s models cannot. Higher wages follow higher investment. Investment is all about producing more goods and services at costs that continue to decline. In other words, higher prices are by definition “transitory” as market actors seek ways to produce more for less. Rather than bemoan higher wages as not consistent with laughable inflation targets, Kashkari should embrace them as a sign that the productive are hard at work trying to bring prices down.

Kashkari then called for a higher Fed funds rate of 5.4 percent in order to “bring the economy back into balance.” Wrong again. An economy is always “in balance” given the basic truth that demand springs from supply. Always, always, always. Which means rate hikes have nothing to do with inflation, not to mention that the only closed economy is the world economy. Assuming the Fed were even capable of cutting off or slowing credit growth, what it would “take” would be made up for in seconds by global sources. Figure that most dollars already circulate overseas….

Which means Kashkari’s alleged solutions are toothless, and really aren’t even solutions. That is so because inflation is a currency devaluation. Nothing else. In Kashkari’s case none of his fixes have anything to do with shoring up the dollar, which means they have nothing to do with inflation. Plus the dollar hasn’t been weak in recent years as is, thus calling into question the inflation narrative. See above again. Higher prices are not necessarily inflation.

Really the only true thing written by Kashkari was about the Fed being “ill equipped.” That’s correct. Inflation is a currency phenomenon. The only problem is that the dollar’s exchange value isn’t part of the Fed’s portfolio, and never has been. In short, the Fed only has a role in the inflation discussion insofar as inflation itself is wholly redefined. Which Kashkari is plainly trying to do. Too bad no one is noticing.