For Bond Bears, Patience Is A Virtue

Most discussion of the Treasury market coming from people who are not rates strategists involves hoping for or predicting the collapse of the bond market. Nobody likes rates to be this low, and they are an insult to those people who studied Economics 101 and are certain that bond investors have the constitutional right to demand a particular real rate of return.

Agent-Based Model Update

I have advanced my agent-based model project, and I just wanted to comment on what I am hoping to do with the initial model. As I have noted previously, it is a variant of the Monetary Monopoly Model.

Current State

This model has a single traded commodity (food). There are multiple “locations” within the model (currently two), with a single fiat currency. (The locations are currently green circles on a black background, and with sufficient imagination, are planets.)

Primer: Core And Median CPI Justification

One practice of economists that draws a lot of complaints is the use of subsets of the consumer price indices. Most commonly it is core CPI – excluding food and energy – although there are fancier measures like median CPI (which I describe below). Meanwhile, if a component of the CPI rises a lot in a month, commentary will often state things like “if we exclude {whatever had a price spike}, then CPI increased by only 0.2% on the month, instead of 0.5%.” (As should be expected, complaints are only about excluding items that rose quickly, everybody is happy to throw away the effects of items that fall rapidly in price.)

Note: This is an unedited rough draft of a book section. It is the long form version of a discussion I sketched out last week. Right now, I have done the minimal amount of data analysis, but I expect to add a bit more later.

Slicing And Dicing The CPI

The latest CPI report showed a spike in the core measure (excluding food and energy). The core inflation rate has hit a modern record, which has prompted mutterings about monetary debasement in certain quarters of the internet.

The reason why economists look at core inflation is that they want to see the underlying trend. However, stripping out food and energy is not the only way to do it. An alternative technique is to take the median change each month (or strip out the extreme changes). The Cleveland Fed calculates a median CPI series, which was also updated today. Although the monthly change did rise in the latest month, if one creates an index based on the monthly changes, the median CPI is just recovering from a plunge in 2020 (black line in the figure above).

It is entirely reasonable to be unhappy with economists who strip out all the rising prices from price indices to argue that inflation is contained. That said, the median CPI did a decent job of capturing the underlying trend in the modern era, unlike the erratic All Items (headline) CPI measure (red dotted line).

I am biased towards the recent rise in prices being largely transitory, but I am not attempting to forecast inflation. I think the direction of wages will matter than the prices of goods and services. Wage costs have risen, but I am unconvinced that there has been a major structural change in the balance of power between workers and employers.

(Note: I may expand these comments about the median CPI as a book section, but that will take time to appear.)

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(c) Brian Romanchuk 2021

Primer: GDP Deflator

In my upcoming book on inflation, the focus is on consumer price indices, but there are other aggregate prices indices that are of interest. In this article, I discuss the GDP deflator.

Note: This article is an unedited draft of a section in my planned book “What is Inflation?” As the title suggests, the book is meant to be introductory — what inflation is, and not theories about inflation. I hope that it will be fairly easy to finish off, and would be a shorter primer sold at a cheaper price. I was hoping to publish this last week, but events meant that I switched to a summer publishing schedule earlier than planned. (A family of skunks moved in under my shed, and so I had to do some landscaping work to critter proof it. I was forced to concentrate the work last week due to working around weather forecasts.) I hope to stick to at least one article per week, although if it heats up, I might hide inside with the air conditioning and write.

Belated U.S. Jobs Data Comment

I just wanted to make some generic comments on the latest U.S. jobs data that came out last week. My comments are somewhat delayed as I was somewhat groggy from vaccine side effects over the past few days. Although there was some divergence in the data, I tend to look at underlying trends, and those seem to be in a positive direction.

Matthew C. Klein also recently joined Substack, and wrote a lengthier piece on it. If the reader has not already gone through the details of the report, Matthew’s piece is a good place to start.

I will largely not comment on what he wrote, other than the big point he notes: there was a divergence between the Household and Establishment job growth numbers.

Towards A MVP ABM

I have been catching up on some of my programming backlog, and I think I am in position to aim for a minimum viable product (MVP) version of my Python agent-based model (ABM) project. The figure above shows the visible progress made so far — which is not not at first glance an economic simulation. (In case you are wondering, the green balls are planets, and the blue box is supposed to be a spaceship flying between them. Or the balls could be island cities in an ocean at night, and the blue box is a container ship. Whatever.)

The challenge I face with this project is that every single aspect can explode in complexity, and so I can be paralysed by the need to deal with every potential quirk in the simulation. For this reason, I need to force myself to aim at a MVP, and worry about the cut corners later.