Richard Cantillon was an Irish banker and fraudster (but I repeat myself) in France who wrote the Essay On Commerce In General. This book became foundational for much of the French Enlightenment conception of economics.
One of the famous ober dicta of this book is the so-called Cantillon Effect, that beloved excuse to pretend Real Wages mean something.
The idea is simple. The values of consumer goods are proportional to each other with a constant of proportionality depending on technology. If one class of people get an injection of money (say, The Rich), then the nominal price of the goods they consume goes up. But values are proportional so all prices go up. Bailing out bankers therefore raises the price of bread. Inflation #actually shifts consumption from the poor to the rich.
The Cantillon Effect is the tendency for the injection of dollars at the top of the wealth scale to cause a decline in the value of dollars.
The above chart is USD vs Euro and one can clearly see the dollar rising during stimulus time. We have therefore recently seen a wonderful demonstration of the Cantillon Effect. As the stimulus pumped money into the bottom, the value of the dollar rises.
But wait, what about Bidenflation? As the value of dollar rose against the Euro (and more generally the usdx), US headline inflation also went up! This is the opposite of a Cantillon effect!
Is the value of the dollar going up or down? Because the value of the dollar on two different indexes (CPI vs USDX) are telling different stories, it is necessary to go into the constructions at least a tad.
The CPI is the weighted average of a basket of goods meant to model what the characteristic urban American consumer buys: cheeseburgers, used cars and of course owners equivalent rent of residences (I buy three every day!).
The USDX is the geometric mean of the price in dollars of the Euro, the Yen, the Pound, the Krona, the Franc and the Canadian Dollar.
The change in the CPI was driven primarily by changes in the changes in prices in energy (especially gasoline) and vehicles (especially used cars). These changes are due to a miscalled recession in 2021, so in a cosmic sense they could be blamed on the stimulus. After all, if there was a recession they would have been right to liquidate fleets!
There is an old theory that this kind of misallocation must screw with interest rates, causing general economic distress. This has not occurred.
Instead, the misallocation has been unwinding through the time rate of profit. Entrepreneurs are bringing on circulating capital and hiring labor. Far from being hurt as the Cantillon effect suggests, labor is doubly blessed. Not only are they buying more because of the cash injection but also the labor market has tightened.
To sum up, high CPI growth is a function to the high turnover rate which is the recovery. Circulating capital - used cars and labor - are scarce relative to fixed capital.
Now, you might notice this is a purely capital story: households aren’t bidding up used cars because of $2K stimulus.
The is not that CPI is bad or fake. It is definitely a price index. The question isn’t “Is it a *consumer* price index?” but whether there is a such thing as a consumer price. That CPI right now is dominated by capital market dynamics should make us question the sharpness of distinction between consumption commodities and input commodities as they are currently embodied in official statistics. Is this the old fallacy of degree of roundaboutness?
This is a question I leave to the discourse.