Just about everyone has missed the second largest driver of core inflation (after petroleum) the Fed must reckon with. The insanely high prices and going higher of memory, you know, RAM, DRAM, SDRAM and the like. We’ll call it ‘chipflation.’
Chris Barber, CEO of a Baltimore based firm that helps small companies with IT says:
“RAM chips that sold for $100 six months ago are an “insane” $300 now, so customers may be better off just buying a new computer. “Parts themselves are just completely out of control,” Barber says. “This is the worst increase I’ve ever seen.”
That kind of price rise all but guarantees inflation, even using Fed based hedonics (don’t ask).
And Bloomberg says:
“Software and computer accessories, which usually trend cheaper as technology improves, were up a record 14.5% in May from a year earlier while the cost of electronic components for producers soared 27%. The memory squeeze will add 0.4 percentage point to headline inflation before it eases.”
I think Bloomberg understates how much pressure “chipflation” is going to increase Core PCE inflation.
Take Apple’s recent price hikes. They are 100% due to the increase in the price of memory.
Does the Fed really have a grip? Because “chipflation” will certainly increase in weight in meaesures like Core PCE inflation:
“Technology hardware (such as laptops, phones, and peripherals) historically acted as a deflationary force. Skyrocketing memory costs have reversed this trend. Analysts at Wolfe Research estimate that rising memory and storage costs alone can add noticeable basis points to Core PCE inflation.”
Why has “chipflation” flown so far under the radar at this point? One word: hedonics.
“Historically, hedonic models accounted for inflation by concluding that if a computer costs the same but processes data twice as fast, the consumer receives an implicit price decrease. Under chipflation, downstream hardware companies (like PC, smartphone, and appliance makers) are choosing to raise prices for devices that offer similar or identical capabilities to previous generations in order to protect margins. This severely slows down the historical trend of increasing “utility per dollar.”
And now this essential model to keepin inflation low is more and more useless. So, the Fed now has to deal with a private credit crisis—deflationary, an energy shock—inflationary and now this inflationary clusterfuck.
Talk about a trifecta!
bruce wilder
surely, the hedonic adjustment is not a linear function of a physical parameter? hedonics is conceptually demand-side value, right? And, doesn’t the shrinking market-basket weight come into it somehow?
i am genuinely confused.