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.
Sean Paul Kelley
@Bruce Wilder: I am not 100% sure. But I will say this: if it’s non-linearity leads to a smaller weighting in the basket, then hedonics is complete and utter bullshit. There has been a 300% price rise in memory chips, not GPUs, just plain old RAM, SDRAM, DRAM, etc. . . If that price spike is not reasonably reflected in the Core PCE measure then hedonics is completely fraudulent and invalid.
elkern
There’s another problem with that hedonic model & Moore’s Law: it assumes that increases in computer speed and memory imply (proportional?) increases in overall utility.
Every 5-7 years, when my PC breaks and I’m forced to “upgrade”, I find that O/S (and software) bloat eats up most of the 2^x increases in machine speed and memory. The same is true of cell phones; why should I care about 5G when my mouth only runs at .01G?
Every year, Microsoft “upgrades” MS Office (and charges more); but it’s all bells & whistles – everything that really matters worked just fine in Lotus and Word Perfect!
I guess Game Consoles actually “need” the extra speed & RAM, but I’d still say the utility provided to Society by some Incel playing GTA or WoW is exactly the same as when I wasted hours playing Lode Runner on my friend’s Apple 2E (0 = 0).
To be fair, business uses really did need more speed and RAM than was available 30 years ago, but again, much of the increase got wasted by software bloat, sloppiness, and the weight of Security required when everything is web-integrated. (More anecdata: every time my bank “upgrades” their ATM sotware, it takes longer to get money out).
And now AI is the black hole devouring all the speed and power we can give it. Sure, there are useful applications for Robotics, but all that “compute” is mostly used to create slop faster & cheaper.
Of course, the other important use of all this “progress” is the huge databases used to track us useless eaters…
Sean Paul Kelley
@elkern: excatly why I loathe hedonics.
spud
and walla, the fed has completely ignored import inflation, which keen, mitchell, and hudson have all said is a cause of inflation to.
the idiot carter thought high interest rates would cool inflation, wrong, we almost had a depression.
so that fed tool was never a tool, but some idiotic monetary buffoonery.
nixon fell for it. he was told by freidman that imports would lower prices, they did not, reagan also fell for it.
Critics argue that Milton Friedman’s views on imports and competition are overly simplistic, as they assume that free markets operate under conditions of perfect competition, which is often not the case in modern capitalism. They contend that large corporations can manipulate market conditions, leading to monopolistic practices that undermine the benefits of competition he advocates.
WordPress sapirjournal.org
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https://www.bls.gov/news.release/ximpim.nr0.htm
U.S. Import and Export Price Indexes summary
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Steve Keen argues that free trade can lead to inflation by creating imbalances in trade deficits and surpluses, which can destabilize economies. This perspective is part of his broader critique of neoclassical economic theories.
taxresearch.org.uk macrovoices.com
Steve Keen’s Perspective on Free Trade and Inflation
Steve Keen posits that free trade can contribute to inflation by creating significant imbalances in trade deficits and surpluses. This perspective challenges traditional neoclassical economic theories, which often overlook the potential destabilizing effects of such imbalances.
Mechanisms of Inflation through Free Trade
Keen’s argument can be broken down into several key points:
Trade Imbalances: Free trade can lead to persistent trade deficits for some countries, which may result in inflationary pressures as these countries struggle to balance their accounts.
Economic Instability: The resulting trade imbalances can destabilize economies, leading to fluctuations in currency values and increased prices for imported goods.
Critique of Neoclassical Economics: Keen’s views highlight the limitations of neoclassical economics, which often assumes that markets will self-correct without considering the real-world complexities of trade dynamics.
Keen’s insights suggest that policymakers should be cautious about the effects of free trade agreements. The potential for inflation and economic instability necessitates a more nuanced approach to trade policy, considering the long-term impacts on national economies.
In summary, Keen’s critique emphasizes the need to recognize the risks associated with free trade, particularly regarding inflation and economic balance.
macrovoices.com taxresearch.org.uk
Trade deficits can lead to increased consumption and economic activity, but they may also indicate underlying issues like low savings rates. Conversely, trade surpluses can reflect strong export performance but may also lead to currency appreciation, making exports more expensive.
Council on Foreign Relations intereconomics.eu
Steve Keen argues that neoclassical economics relies on flawed assumptions like equilibrium, ignores private debt and money creation by banks, and uses oversimplified models, while he promotes systems dynamics and differential equations to better capture economic complexity.
brockpress.com
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https://michael-hudson.com/2026/03/inflation-first-deflation-next/
“When countries cannot pay their foreign debts — and the Global South has enormous foreign debts falling due, all in dollars — what do they do? The IMF says: impose austerity. Make labour poorer and poorer until you can pay the debts. That’s today’s junk economics, and it goes back to David Ricardo’s bullionism.
Every hyperinflation in history has been caused by the need to pay foreign debt. Germany’s hyperinflation in the 1920s wasn’t caused by government spending on labour or social programs — that’s the myth. It was caused by printing Reichsmarks to throw onto the foreign exchange market to pay reparations. Chile and France had the same hyperinflation pattern.
And this reality is not taught in academic economics. So the graduates who join central banks around the world don’t understand the difference between hyperinflation, regular price inflation, and deflation. Steve and I are essentially persona non grata in polite circles, because what we’re spelling out threatens a very large power grab being put in place much like the Asian balance-of-payments crisis of 1997-1998.”
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https://billmitchell.org/blog/?p=34677
The case against free trade – Part 1
…
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where do a lot of those chips come from?
About 93% of DRAM chips are produced in South Korea, China, and Taiwan, highlighting the significant offshore production of computer chips. The U.S. currently accounts for only about 10% of global chip production.
waferprocess.com itif.org
The production of computer chips, including RAM (Random Access Memory), is heavily concentrated in a few countries. This offshore manufacturing has significant implications for global supply chains.
DRAM Chip Production: Approximately 93% of DRAM chips are produced in South Korea, China, and Taiwan.
U.S. Production: The United States accounts for only about 10% of global chip production.
Major Producers of DRAM Chips
Country Percentage of Global DRAM Production
South Korea Major producer, home to Samsung and SK Hynix
China Rapidly growing, producing over 20% of global output
Taiwan Dominates with over 60% of global chip output
Implications of Offshore Production
Supply Chain Risks: The heavy reliance on a few countries for chip production can lead to vulnerabilities in supply chains, especially during geopolitical tensions or global crises.
U.S. Competitiveness: The U.S. is working to increase its semiconductor manufacturing capacity through initiatives like the CHIPS for America Act, aiming to reduce dependence on foreign production.
This concentration of chip manufacturing in Asia highlights the strategic importance of these regions in the global technology landscape.
waferprocess.com itif.org
Offshore production of computer chips can lead to job displacement in the U.S. and weaken domestic manufacturing capabilities, impacting economic growth and supply chain stability. Additionally, it can increase reliance on foreign suppliers, making the U.S. economy vulnerable to global disruptions.
electrosoftinc.com semiconductors.org
Nearly 93 percent of DRAM chips are produced in South Korea, China, and Taiwan, while the U.S. has seen a significant decline in its semiconductor manufacturing capacity, indicating a risky overdependence on these countries for critical chip production.
Georgetown University itif.org
Relying on offshore sources for chip manufacturing can create major supply chain risks, so production disruptions may cause shortages and ripple effects on jobs and national security. It can also increase vulnerability to geopolitical tensions and to issues affecting global chip supply, such as environmental pressures and forced-labor problems.
exiger.com interface-eu.org
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so we have to pay other peoples prices, and pay for the shipping to boot. anyone who ignores the massive inflationary pressures from free trade, let alone the massive damage to our standard of living. will pee into the wind.
TM
There are three major manufacturers for DRAM who essentially operate as a cartel, and China is still years away from being competitive. All of their fab capacity is being taken up fulfilling orders for hyperscalers to meet the imaginary demand for AI workloads, and the scarcity has tripled consumer grade sticks.
I remember reading a quote from a hardware manufacturer that was asked about how price negotiation goes with the DRAM cartel now: “I call them, they give me a price, and if I say it’s too much they never pick up the phone again.”
This can’t last, but it will also take a long lead time to resolve even if the AI bubble finally dies the death it deserves. It’s been an ongoing point of discussion in my tech circles for a while.
Purple Library Guy
@spud
Pretty good stuff.
“Critics argue that Milton Friedman’s views on imports and competition are overly simplistic, as they assume that free markets operate under conditions of perfect competition, which is often not the case in modern capitalism.”
I think they meant “which has never been the case in history because perfect competition is impossible.”
One thing that tends to get ignored in discussions of free trade is that modern “free trade” regimes are never just about trade. Because it’s CALLED “free trade”, people tend not to notice that it also involves free INVESTMENT, which has huge implications in terms of where the profits end up going, and very un-free “intellectual property” regimes, which allow control by the countries with lots of media companies and patents.
And of course weird unaccountable private pro-corporate “courts” to decide everything in capital’s favour, just to make sure nobody gets any funny ideas.
Sean Paul Kelley
@PLG: the only thing I hate more than hedonics is Milton Friedman.
Carborundum
Computers, telephones and the like are materially less than 1% of total CPI basket weight (not sure exactly what component of the core basket, but probably still under 1%). If that’s the second biggest component of change (I assume after airfares given the reference to petroleum?), I’m inclined to say praise be given what we’ve seen in far more important categories in the not too recent past. (I am, however, less sanguine about the broader impact on the current drunken spree of capital investment.)
Given how small a component of basket weight IT is, I really don’t get too concerned about hedonic adjustments there. I think the place to be concerned is actually adjustment of rent, particularly given the knock-ons of imputing homeowner hosing consumption using rent.
GrimJim
Hedonics has ALWAYS been completely fraudulent and invalid.
Its magic, sorcery properly, of the most wicked and evil sort…
Carborundum
Sorry, one thing that I didn’t initially see upthread – basket weighting is determined based on external data (in our case, the SHS – Survey of Household Spending; not sure what the name of equivalent US data source is). Presumably, we will see an increase in the fraction of household spending going to computer hardware and phones, but this will not be reflected in the CPI basket until the next annual re-weighting.
spud
Keen slams capitalism
https://www.youtube.com/watch?v=WD8fwNqVbGU
It Was Americans Who Screwed America, Not China: Top Economist
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Bill Clinton’s presidency is often criticized for helping weaken U.S. manufacturing by cutting welfare, passing NAFTA, and undermining organized labor—decisions that affected working-class jobs. One analysis also argues that manufacturing job losses accelerated as enforcement of trade laws dropped, even though trade agreements were negotiated and supposed to be enforced.
cepr.net Jacobin
Impact of Bill Clinton on American Manufacturing
Bill Clinton’s presidency is often associated with significant changes that negatively impacted U.S. manufacturing. The following policies are frequently cited:
Welfare Reform: Clinton’s administration made substantial cuts to welfare programs, which critics argue weakened the safety net for working-class families.
NAFTA (North American Free Trade Agreement): This agreement aimed to eliminate trade barriers between the U.S., Canada, and Mexico. However, it is criticized for facilitating job offshoring and undermining organized labor.
Trade Law Enforcement: Although Clinton’s administration negotiated numerous trade agreements, the enforcement of trade laws declined significantly. This lack of enforcement contributed to the loss of manufacturing jobs during and after his presidency.
Consequences of Policies
The consequences of these policies were profound:
Aspect Impact
Welfare Cuts Reduced support for working-class families
NAFTA Increased offshoring of manufacturing jobs
Trade Law Enforcement Accelerated job losses in manufacturing sectors
Manufacturing job losses began during Clinton’s last three years in office and continued after he left. The decline in enforcement of trade laws is seen as a critical factor in this trend, leading to a significant drop in manufacturing employment.
Overall, Clinton’s policies are viewed by many as having contributed to the weakening of the manufacturing sector in the United States, affecting the livelihoods of many workers.
cepr.net Jacobin
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Bill Clinton’s support for NAFTA contributed to significant job losses and outsourcing, which negatively impacted American supply chains. The agreement allowed companies to move production to countries with cheaper labor, undermining domestic manufacturing.
Wikipedia Lumen Learning
Impact of Bill Clinton’s Policies on American Supply Chains
Support for NAFTA
Bill Clinton’s endorsement of the North American Free Trade Agreement (NAFTA) had profound effects on American supply chains. The agreement facilitated the movement of production to countries with lower labor costs, which led to significant job losses in the U.S. manufacturing sector.
Consequences of NAFTA
The following table summarizes the key consequences of NAFTA on American supply chains:
Aspect Impact
Job Losses Estimated net loss of 700,000 jobs in the U.S.
Outsourcing Encouraged companies to relocate production to Mexico and Canada.
Manufacturing Decline Contributed to the decline of domestic manufacturing capabilities.
Economic Dislocation Increased economic instability for workers in affected industries.
Trade Deficit Shifted from a trade surplus with Mexico to a chronic deficit.
Clinton’s policies, particularly regarding free trade, aimed to boost exports and economic growth. However, they inadvertently weakened the bargaining power of American workers and led to a reliance on cheaper foreign labor, which has had lasting effects on the U.S. economy and supply chains. The long-term consequences include increased inequality and a shift in the labor market dynamics, making it challenging for American workers to compete effectively.
Wikipedia epi.org
NAFTA is estimated to have caused the loss of approximately 879,280 U.S. jobs in manufacturing, with many of these being high-wage positions. Additionally, studies indicated that around 14,653 jobs were directly lost in Ohio and 38,325 in Pennsylvania due to NAFTA-related reasons like firm relocations to Mexico.
Wikipedia epi.org
NAFTA contributed to the outsourcing of jobs by allowing companies to relocate production to Mexico, where labor costs were lower. This resulted in an estimated 700,000 U.S. workers being displaced due to increased trade with Mexico under the agreement.
University of California Wikipedia
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as Keen says, if you can’t even make the lab coats, how are you going to make the chips. what clinton did, is really not reversible under our current governance.
Ian Welsh
PPI % is1.1% — the category. I don’t trust inflation stats anyway, as long time readers know.
Edmund
As far as I know, another effect of delivering more functionality for the same price is that GDP is adjusted upwards to account for the increase in goods produced.
Jan Wiklund
And which is the reason of this particular price hike?
Is there a reasonable one, like for example that the Chinese workers finally have got a decent salary? Or is there a middleman somewhere who skims off the cream?
Feral Finster
@Jan: supply and demand. Data centers are eating up chips faster than they can be produced, so the chips go to the highest bidder.