S1: So, Jordan, do you want to know what I love about talking about inflation?
S2: I mean, I’m all ears. I’m really curious. What do you love?
S1: Jordan Weissmann. He’s the Slate star I call up when I’ve got questions about the economy. I love. The news clips
S3: are much harder than expected. Inflation reports, shocking markets and even the Fed. And we pay more for everything we buy in every store for heating, more for cooling our homes. Who wins here? The bad guys and the enemies of America.
S1: They’re just so delightfully unhinged. All right,
S3: folks. Inflation volcano has erupted.
S1: It’s like the volcano has erupted.
S2: I like this metaphor, like inflation as the Yellowstone super volcano, Yellowstone caldera. We’ve all been we’ve all been hearing about it for so long and now it’s finally exploding.
S1: If you watch enough CNBC, you’ll see the story about inflation play out in a bunch of different ways as a story about worried investors and CEOs, as a personal finance story from Wall Street to Main Street to Washington, everyone is talking about inflation, which is having a real I want to pick apart the way the inflation story is being told right now by talking about this segment I saw on CNBC. They had a reporter go out and see how inflation is impacting you day to day.
S4: The average gourmet coffee drink is four dollars and eighty five cents, up eight percent compared to last year. Yeah. Then go buy some orange juice, which is up twenty one percent in the past two years due to tighter supplies in the United States and Mexico. Is that
S2: What’s really frustrating about all of the examples you just gave is that all of those are things that kind of bounce up and down, right. Like going so high. Inflation is a weird story right now. And this is sort of the story. It’s actually a very small handful of categories, mostly related to transportation, that are driving a really outsized share of inflation. And those categories are used cars, new cars, rental cars and airfares. Those four categories are basically drove half the inflation in May. The reasons for those things are all sort of quirky. And they have to do with this bizarre point. We are in the recovery from the pandemic and the kind of strange supply chain issues that have popped up.
S1: And you’ve been unfazed by these numbers from the beginning. The Fed has two and plenty of financial types. I mean, you said traders yawned off these numbers.
S2: Right. And that’s one of the most interesting stories right now, is that as pundits have become more and more frantic about inflation, markets have actually gotten less and less frantic about it. Great. Watching CNBC gives you one impression of what the financial world thinks about inflation right now. And actually looking at the bond markets gives you a total different picture.
S1: Today on the show, we’ll talk about who’s frantic about inflation and why and whether it’s time for you to start panicking to a Mary Harris. You’re listening to what next? Stick around. Jordan says the debate about inflation right now is actually simpler than you might think.
S2: So I think there are a few different arguments going on that you kind of need to separate from each other. The big one about inflation is, is this beginning of a persistent problem? Is inflation going to take off and then continue to rise? Is it going to accelerate in the future or is this transitory? And the Federal Reserve is very much going to come down on the transitory side of things that they or, you know, transitory, kind of a fancy way of saying temporary. It’s just a blip. It’s something we’re dealing with because we’re in this weird period, you know, where the pandemic is kind of coming to a close. And eventually, you know, we’re going to it’s sort of like the economy has woken up after a fitful night’s sleep and it’s still shaking off the grogginess. That’s one argument. Is it transitory or is it or are we seeing something? You know, it’s going to become persistent. And then there’s this other argument is like regardless of whether or not it’s persistent or transitory, what’s actually causing inflation right now? And those two things are related, but they’re not totally the same. On the one side, it’s well, it’s supply chain issues, right? The stuff I’ve talked about with cars or airline fares. And then the other side is, is people saying, well, it’s actually all this government spending, all the coronavirus aid, combined with the fact that wages are going up because it’s a very tight labor market. And then, you know, they say that these factors could lead to people to expect inflation to be higher in the future. And so that will become a self-fulfilling cycle. So I think these are kind of the two main arguments you have to keep in mind. Why is it happening and is it going to last?
S1: It sounds like we don’t have answers to either of those questions.
S2: I mean, you know, if you had to ask me, I would say it’s mostly transitory and a lot of it is just the weirdness of the moment, all the weird supply chain issues with, you know, some some wages, you know, thrown in. I don’t want to downplay the extent to which inflation can, you know, really suck for some people. Yeah, there is a chance that this year prices are going to rise a little faster than wages overall. Right. Like that is that is a real possibility. And so people are going to end up a little poorer in real terms. And that sucks. You know, people aren’t going to be happy about that. You know, that is the question is whether that possibility is is so terrible that the Federal Reserve should essentially move quicker in order to in order to prevent it from happening.
S1: By all accounts, it looks like the Fed does not plan to make any moves here, in part because of what we’re seeing in the bond market. Despite rising inflation, investors there seem untroubled.
S2: And, you know, there are a few different measures that show actually the traders and investors are getting less worried about inflation than they may have been last month. For one, Treasury yields have actually started to fall. Right.
S1: So what does that mean?
S2: Just think of it as the return on a Treasury bond rate. If your yield is what you get back every every month or a year from the government if you decide to loan it money. If investors expected inflation to rise a lot in the future, you would also expect Treasury yields to go up for the simple reason that people would want the return on their bond investment to keep up with rising prices so they retain the value of their investment. Investors think, oh, well, we’re going to see a three four percent inflation in the next ten years. You would see Treasury yields rise instead. Treasury yields have actually, after kind of rising earlier in the year, have been falling. And there are also other measures that, you know, that people look at in the market that is kind of signaling the same thing.
S1: Does this really just mean that Jerome Powell, the Fed chair, is like the Pied Piper, like he’s because he’s been saying from the beginning, like, don’t be concerned, don’t be. I got this. I’m on it. And it sounds like all of the markets are just kind of like, that’s cool. We’ll follow that guy.
S2: Well, there’s there’s sort of a chicken and an egg issue here, too, because when it comes to Treasury yields, right. Like the way the bond market is moving, some people would say the reason you’re not seeing yields go up is because they don’t expect the Fed to raise interest rates because Trump is saying they’re not going to raise interest rates and because they’re not raising interest rates. You’re not seeing, you know, market interest rates go up. So how much of that is really the explanation? What’s going on? I don’t know for sure, but that’s probably part of it. I think it’s more that people are probably looking at the inflation numbers that are coming in and thinking, you know, our used car prices are really going to continue surging for the next 12 months. Probably not. Our airline price is going to continue surging for two years or five years. Probably not, because right now they’re just in this period of adjustment.
S1: I should say, when you wrote about this, you did promise me that Happy Holidays will be here again.
S2: We did promise. Yeah. Mean and
S1: Jordan, I am expecting you to roll up in a car with a bow on it when this is all over
S2: you. So, I mean, and so this is this is the thing is, why is it that car prices are going up right now? Is it because of some generalized maccracken? Atomic force that is causing oil prices to rise, or is it something specific to the auto industry? It seems like it’s the latter, right?
S1: Well, I know we’ve talked about that a little bit, so I want to ask you about something different. Sure. Which is. I’m wondering how does the labor force factor into inflation concerns, like I saw one analyst saying if workers keep holding out like not taking jobs and employers have to raise wages, that’s going to push up costs even more. So are we seeing the labor market influence prices or do we know
S2: there’s probably some of that going on? And wages are supposed to be classically are considered like, you know, the force behind a lot of inflation, right? It is. Wages go up. And so employers, you know, if if unemployment goes to low, wages will go up and so on. Employers are going to have to raise prices in order to, you know, keep making money and keep making a profit. And that’s going to lead to inflation. And, you know, that’s that’s just kind of textbook. But, you know, is that the main thing that’s happening right now? There’s definitely some of that say in the services industry, or are there probably some of that in the service industry? Because you definitely have seen wages starting to rise and that’s because they’ve been having trouble, you know, hiring. It’s a very competitive labor market. And you’ve heard the complaints about that, I’m sure, on the local news and in newspapers all over the country. You know, right now, employers are saying that they can’t find enough people to hire because unemployment benefits are still too generous. Right. We still have these three hundred dollar a week unemployment benefits that were designed for the pandemic. And they say that’s keeping people sitting at home who, you know, people would rather collect a check than go work at a coffee shop or at a restaurant if they can make the same amount of money. Some of that’s probably going on. There are also issues around, you know, whether or not families can find child care and whether or not everyone has been vaccinated feels comfortable going back to work. But the bottom line is it’s competitive. Labor market wages are going up and that’s probably pushing up prices a bit.
S1: So I think I think what was interesting here is that we can measure inflation like we can see it happening with all these metrics we have. But it doesn’t seem like there’s a good way to predict whether the inflation is going to be a problem. Like I look around and the metric that a lot of analysts are using to decide whether they should be worried about inflation is whether other people around them are worried, like how is the bond market doing? How is my friend, the CEO, looking at it? And so everyone’s kind of looking around at each other. And that seems problematic because that’s very influenced by all sorts of factors that have nothing to do with, like real measures. They’re just how you doing?
S2: You’re actually poking at one of the fundamental, like, kind of funny things about monetary policy and inflation, which is if and the economics of it, which is a lot of it, is just actually supposed to kind of be a confidence game. Right. Like like how does like I mean, not entirely right. Like, they’re like they’re hard, concrete things that are supposed to him, like, you know, like wages that are supposed to influence inflation. But a lot of it really when you look at the theory, is supposed to be what people expect to happen. Right. Economists talk about inflate like this all powerful force known as inflation expectations. Just what do you think what do people think is gonna happen in the future? The reason for that is because, you know, if people think prices are going to rise, if business owners think prices are going to rise, then they will raise their own prices. It’s sort of a self-fulfilling prophecy. That’s that’s that’s the theory. And so if you look at, you know, models of inflation, like most of them include, you know, a little term for inflation expectations. And so, like one of the Fed’s main jobs is to keep inflation expectations in check. And so that’s it’s sort of a big psychological game.
S1: When we come back, if this is a confidence game, why are some economists getting psyched out? Jordan says one reason you might be hearing so much panic about inflation on cable TV these days is because a lot of economists have this memory of what happened the last time prices began rising precipitously. This is back in the 1970s. It’s a memory that’s pretty traumatic.
S2: I think most people, when they think of the 70s, they imagine disco or maybe it’s Watergate or, you know, who knows, maybe it’s David Bowie. I’ll take your pick. But for economists and financial types, it’s stagflation, right? It’s this period where we suffered this really kind of horrible economic malaise, where it was a combination of high inflation and high joblessness. Right. We experienced those two things aren’t really supposed to go together or at least up until then weren’t really supposed to go together for a long time. The assumption was that if inflation was high, it was because there was a very low unemployment rate and that was driving up wages and it was driving up prices. But during the 70s, you had this really nasty situation where you kind of got the worst of both worlds, right, where prices were rising quickly and, you know, jobs were falling. We were we ended up in a recession at one point in the mid 70s. So I think the one thing everyone agrees about when it comes to the 1970s is that it was scarring for a lot of people who lived through it.
S1: The only way to pull out of this inflationary spiral was for the Fed to jack up interest rates and send the country into a recession. Economists like Larry Summers, who served under both Presidents Obama and Clinton, has been warning about overheating the economy for months.
S2: So what happened is that back in March, when the Bush administration was formulating the American rescue plan, its its big covid relief plan, Larry Summers piped up and was like, this is much too big. This is too much money. Like I like government spending. But this this is so much money. It’s going to cause inflation. Like it’s going to cause this is potentially going to destabilize the economy. And, you know, you and you caused this kind of big debate in econ world where a lot of people myself are saying that’s crazy. But, you know, the idea is that essentially this was so much spending that it was going to overheat the economy and that you could, as a result, see inflation expectations become unmoored, that they would that, you know, inflation expectations would start to creep up and it could begin this vicious cycle and then the Fed would have to step in and probably create a recession in order to get control again.
S1: Yeah, the worry here is that the only way to stop inflation is to increase interest rates. And it’s kind of like slamming the brakes on a runaway train, like it’s going to do the job. But it’ll leave a mark right here.
S2: And he will say he will argue that the Federal Reserve has never been able to get a hold of inflation once it got started without causing some of a downturn.
S1: Here’s something I don’t get about this, which is interest rates right now. They’re basically zero. If raising interest rates above zero is going to lead to a recession, aren’t we already screwed?
S2: I think Summers would argue that you would have it once inflation kind of starts getting revived, you would have to raise interest rates pretty high and pretty quickly in order to bring it back down.
S1: So no, like quarter percent raises.
S2: Yeah, but it’s not so much about the amount, right. It’s about the idea that the Fed would have to raise rates enough to noticeably cool down the economy. Right. Like that is just by definition what they would have to do at that point. So no matter how much they’re raising, they would have to do it enough to actually put a dent in the recovery. The counter argument is that, you know, Larry, sort of is sort of laying out this worst case scenario and a lot of things have to go wrong or had to go wrong for it to come true. Like first, you really did need to get this big burst of inflation. Then that big burst of inflation had to become you had to kind of persist. Right. You had to see like people start expecting more inflation in the future and for it to actually come true. And then on top of all that, the Fed would have to overreact and kind of slam the brakes like each of these things would have to happen. And if you didn’t believe any one of those was going to go wrong, I think one of the you know, then it seemed like his thesis was a little bit, well, you know, overheated, not, you know, which is the pun a million people have used by now. And so what’s happening right now is that we’re getting that initial burst of inflation. And so, you know, Summers and some of the people who sympathize with him have already started to kind of do a victory lap and saying, see, we were right. This this threat is real and we have to pay attention to it. And, you know, policymakers should do Xanax. And I think that, you know, it’s still a little premature. But that’s just my take is like we’re literally and, you know, we’re in sort of the first quarter of the ballgame. And so I think it’s just a little early to say who’s right about any of this.
S1: I mean, just to play devil’s advocate here, Larry Summers is not the only one saying this. No, he’s not. The Mohamed El-Erian has started speaking up. Who’s another person who you know, he was thought of as a Fed chair under Trump, but he also worked with President Obama. He’s an economist and he put it this way, which is, you know, the Fed has said we’re not going to have clear signals until the end of the year, early next year about what’s really going on when it comes to inflation. So if I end up making a mistake here, which mistake can I recover from more quickly? And his argument is, if you let the inflation go wild, it’s much harder to recover from than if you quash whatever’s happening right now and sort of get things on a different track sooner rather than later.
S2: Yeah, I mean, what’s weird about that is, you know, Mohamed El-Erian lived through the 2010s, right? I think he wasn’t born yesterday. What do you
S1: mean when you say that?
S2: So after the financial crisis, the Federal Reserve cut rates to zero and they held them there for a long time. And then in 2015, they’re like, OK, I think we’ve had enough of that. It’s time to start normalizing. Let’s get back to let’s get back to regular life. So they hike rates a quarter point. And the idea was to kind of go low and slow so they wouldn’t upset the economy too much. But even that everyone now kind of has agreed actually did have some ripple effects that were a problem. For one, it ended up pushing up the value of the dollar, which ended up hurting a lot of manufacturing industries. The rise in interest rates also made kind of the business community think that interest rates are going to continue rising in the future. And so that kind of affected expectations. And so it had sort of a chilling effect on the economy to a degree. And it’s you know, there was an analysis at one point that suggested. That the Fed may have, you know, reduced job growth by a million, right. Just be with that one little move. And again, you know, butterfly, you know, Janet Yellen flaps her wings like a butterfly and, you know, and change the world. And so, yeah, it’s easy to say, oh, like what? You know, what’s the harm in moving quickly? But there are harms in moving too soon. Yeah.
S1: I mean, what you’re saying is the Larry Summers, the Mohamed El-Erian, they want to be cautious in some kind of way. But actually, we’ve tried that before. And let’s try something different this time because that didn’t work out so well.
S2: It depends on which direction you think the greater risk runs. And it’s just like we just saw what happens when you die too quickly. We just lived through that people. So, you know, let’s try something different here
S1: for Jerome Powell over at the Fed, trying something different is kind of the point. And it has been for a while. Back in August, he announced that he intended to run the economy hot. That meant keeping interest rates low even when inflation seemed a little higher than he wanted. It’s a whole new monetary framework.
S2: The old framework of trying to predict when inflation was going to crop up ahead of time by looking at things like the unemployment rate didn’t seem to be working that well, and so maybe it was time to move to a new model. And so they moved to this new framework in 2020. And so in some ways, we’re seeing the first real test of it. This is the first opportunity for them to show they’re really committed to this new idea. And so as people are yelling and screaming, you have to move. Earlier, the Fed say things like, well, that would just totally, you know, mess up this whole carefully constructed framework we came up with.
S1: It’s so interesting because it sounds like what you’re basically saying is the Fed is making this decision to be more progressive and a bunch of ways. A guy like Larry Summers probably never liked that from the beginning. And now this is a test where Summers has something to beat the Fed over the head with these inflation numbers and sort of stomp his feet. And so it’s a moment for the Fed to either stand its ground or do something different. But it’ll be interesting to see how it plays out.
S2: Yeah, I mean, there is it is to some extent a test of how progressive the Fed has become or how dovish the Fed has become. And as a result, you’re going to see this conflict play out or some people are going to be very nervous and are going to, as a result, hyperventilate on CNBC a lot.
S1: Jordan Weissmann, thank you so much for joining me.
S2: Thank you for having me.
S1: Jordan Weissmann is Slate’s senior business and economics correspondent. And that is the show What Next is produced by Davis, Landolina, Schwartz, Mary Wilson, Carmel Delshad and Danielle Hewitt were helped along each and every day by Alicia Montgomery and Allison Benedikt. And I am Mary Harris. I will catch you back here tomorrow.