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Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast.

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Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't so Joe. We're

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Speaker 1: recording this episode on July, and we have just thirty

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Speaker 1: minutes ago gotten the latest US inflation data. It's come

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Speaker 1: in a lot higher or hotter than expected. I think

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Speaker 1: headlines c p I came in at like five point

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Speaker 1: four percent and core inflation was four point five percent.

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Speaker 1: It was expected to be something like four percent for June.

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Speaker 1: And we're sort of watching the reactions come in in

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Speaker 1: real time, um from the cell side, analysts and on

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Speaker 1: social media, and it's amazing how you're getting these sort

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Speaker 1: of two distinct camps. So on the one hand, everyone

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Speaker 1: is looking at the same data, but everyone seems to

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Speaker 1: be reaching vastly different conclusions. So on the one hand,

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Speaker 1: you have people who say this is still transitory. A

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Speaker 1: lot of the strength is in uh, certain segments that

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Speaker 1: have seen these supply bottlenecks that we've been talking about.

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Speaker 1: And on the other hand, you have people who are saying, well,

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Speaker 1: this is starting to look very worrying and maybe something

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Speaker 1: more permanent. Right, there's no question that the intensity of

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Speaker 1: the CPI gains that we've seen really over the last

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Speaker 1: three months have been higher, hotter than economists had expected.

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Speaker 1: It seems to be lasting a little bit longer. So

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Speaker 1: on the one hand, you can say, Okay, that's worrisome.

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Speaker 1: On the other hand, when you dig into the guts

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Speaker 1: of the report, it still looks like there's an argument

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Speaker 1: for transitory. So a huge component of this is still

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Speaker 1: used cars, which haven't slowed down. You know, not long ago,

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Speaker 1: we were never talking about used cars is an important

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Speaker 1: inflation category. Now is something like a third of the

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Speaker 1: game or of the game was used cars. Other categories

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Speaker 1: specifically related to reopening are pushing things higher. So I

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Speaker 1: kind of think it's like an impasse, like no side

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Speaker 1: will be totally satisfied, because the people who are convinced

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Speaker 1: that there's all transitory could point to the sub indexes

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Speaker 1: of the sub numbers whereas the people who are saying

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Speaker 1: this is a start of a real problem point to

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Speaker 1: the headlines that are hotter than expected several months in

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Speaker 1: a row. Now, Yeah, it's kind of like CPI is

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Speaker 1: the ultimate exercise in confirmation bias, Like there's something for everyone, Um,

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Speaker 1: whether you're looking at the headline numbers or the sub components.

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Speaker 1: But I mean, I say that, And one of the

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Speaker 1: things I've been thinking about a lot lately is this

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Speaker 1: idea that you know, the saying that inflation is always

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Speaker 1: an everywhere a monetary phenomenon, which I don't necessarily disagree with,

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Speaker 1: but I feel like it's also a human phenomenon. And

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Speaker 1: you're seeing that in this discrepancy between these two camps

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Speaker 1: of people looking at the inflation numbers, and you're also

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Speaker 1: starting to see it in terms of inflation expectations themselves.

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Speaker 1: So for instance, if you look at the breakdown of

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Speaker 1: survey respondents by age, you can see that older people

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Speaker 1: are a lot more worried about inflation at the moment

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Speaker 1: than younger people, which is kind of interesting. Yeah, I mean,

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Speaker 1: I think instead of, you know, they say it's always

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Speaker 1: a monetary phenomenon, but look, I don't think there's an

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Speaker 1: obvious monetary link to be drawn between say, anything that

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Speaker 1: the FED has done recently and the fact that use

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Speaker 1: car prices continue to have this bottleneck and part due

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Speaker 1: to a chip shortage as a result from our over

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Speaker 1: alliance on t SMC and the virus and so forth. So,

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Speaker 1: but what I do think and what I think you're

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Speaker 1: getting it too, is that there is a tremendous political

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Speaker 1: valence to all inflation. And if you are young and

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Speaker 1: you're able to be flexible in your consumption and lifestyle patterns,

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Speaker 1: maybe inflation doesn't infect you affect you so much. If

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Speaker 1: you're older, if you're on a fixed income, it could

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Speaker 1: be a greater problem. If you're a urban professional who

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Speaker 1: likes to eat uh, to put laburrito balls and take

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Speaker 1: an uber to work, You're probably not thrilled with the

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Speaker 1: cost of an uber these days, and you want the

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Speaker 1: FED to hike. So a lot of it is sort

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Speaker 1: of like personal it's formed by one consumption pattern. There's

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Speaker 1: a political nature, and I think these headline CPI numbers

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Speaker 1: that we get no one feels them like no one,

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Speaker 1: Everyone's like, that's not my experience that things are. Everyone

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Speaker 1: is sort of a subjective experience of what kind of

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Speaker 1: inflation is happening in the economy. Yeah, exactly, Subjective is

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Speaker 1: the key words. So I'm glad to say that we

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Speaker 1: are going to be getting into the subjectivity of inflation

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Speaker 1: on this episode, and we have the perfect person to

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Speaker 1: discuss it. We have someone who basically wrote a seminal

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Speaker 1: paper on inflation experiences back in and she's been updating

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Speaker 1: her thesis with new research, and we're going to get

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Speaker 1: into that. I'd like to welcome Ulrika Malmind onto the show.

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Speaker 1: She's a professor of economics and finance over at the

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Speaker 1: University of Cali Conia. Welcome, Thank you so much. I'm

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Speaker 1: excited to be here. We're excited to have you so

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Speaker 1: UM we just had the CPI numbers come in. UM,

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Speaker 1: I guess, I guess. My first question is when you

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Speaker 1: started looking at inflation, or at least when you published

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Speaker 1: this paper called Learning from Inflation Experiences back in you

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Speaker 1: sort of looked at this issue from a very different angle,

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Speaker 1: from a human experience angle, And I'm just curious what

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Speaker 1: sparked your interest in pursuing that line of investigation. UM. Yeah,

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Speaker 1: that's actually a really good question, in particular given that

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Speaker 1: my earlier research was actually not on inflation, but on

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Speaker 1: stock market experiences, the Great Depression and how it, you know,

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Speaker 1: generated this generation of depression babies shying away from the

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Speaker 1: stock market. But truth be told, it was actually inflation

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Speaker 1: that first room me into that. UM. As you may

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Speaker 1: have detected by now, I'm German, and my coutha on

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Speaker 1: that first paper, Stefanaga is also German, and I remember

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Speaker 1: us talking in the hallways of the university about why

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Speaker 1: the Germans, including us, have always been so obsessed with

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Speaker 1: inflation and had inflation concerns, etcetera, and us tracing it

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Speaker 1: back to that traumatic experience experience of many Germans of

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Speaker 1: the German hyper inflation. Um So it was indeed long

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Speaker 1: lasting effects of living through an inflation and how it

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Speaker 1: affects your beliefs and world views that drew me into that.

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Speaker 1: I very much hope we won't have to draw parallels

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Speaker 1: from the current inflation spike. That's that's interesting. I mean,

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Speaker 1: obviously I've heard that my whole career, that you know,

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Speaker 1: you look at German uh fiscal policies, you look at

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Speaker 1: the official German stand towards the ECB typically and I'd

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Speaker 1: always cited exactly what you say, that there is the history,

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Speaker 1: the shared memory of the hyperinflation, which we've talked about

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Speaker 1: on the past episode, and that continues to inform German

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Speaker 1: perspectives on macro policy till this day. And I've always wondered, like,

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Speaker 1: is that a myth or is that it just so

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Speaker 1: story or is it is that an oversimplification of things?

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Speaker 1: How much can you expand on that a little bit further?

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Speaker 1: What is the manner view which this traumatic episode of

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Speaker 1: the past continues to inform public sentiment and public policy today?

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Speaker 1: How what's the transmission mechanism there? Um? That is an

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Speaker 1: excellent question as well, And to be really honest, it

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Speaker 1: is a little bit outside of the data I've actually studied,

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Speaker 1: because I have indeed studied the inflation you have personally experienced,

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Speaker 1: And how say, talking about today's events, and you know,

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Speaker 1: pointing out that some older generations might be more concernt

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Speaker 1: than some younger ones, attributing it maybe to different lifestyles,

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Speaker 1: and I would you know, want to make you pause

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Speaker 1: and say no, But it also might reflect what if

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Speaker 1: personally lived through those younger folks might not have a

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Speaker 1: vivid memory of the nineteen eighties. So you're quite right

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Speaker 1: to question me about the you know, German hiphire inflation

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Speaker 1: almost hundred years ago, and and Germany has had quite

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Speaker 1: stable price increases, price levels throughout the last you know, decades,

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Speaker 1: So how is that possible? Well, increasingly I am getting

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Speaker 1: deeper into the underlying, underlying neuroscience of what kind of

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Speaker 1: events do get deeply engraved in our memory and transmission

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Speaker 1: from generation to generation can happen? Stories, vivid stories matter.

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Speaker 1: You know what also matters media? How much podcast news, organization,

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Speaker 1: social media, etcetera. Are highlighting the inflation will have a

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Speaker 1: big impact on how much this will be engraved in

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Speaker 1: our memory. But here we're just at the beginnings. We're

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Speaker 1: getting to the deep underpinning from your science and ubsformation

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Speaker 1: and so on as we speak. I hope I have

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Speaker 1: more to say on that soon. So why don't we

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Speaker 1: get into some of your research and talk about what

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Speaker 1: you just pointed out? This idea that there's a difference

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Speaker 1: between people's experiences versus their personal inflation baskets. So it

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Speaker 1: might be that older people who are on a fixed

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Speaker 1: income UM and whose major expenditure or whose major source

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Speaker 1: of revenue comes from you know, bond payments or something

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Speaker 1: like that, UM, they don't like inflation, they fear it.

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Speaker 1: But it might also be that they're the ones that

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Speaker 1: remember periods of inflation like the nineties seventies versus younger people.

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Speaker 1: So I guess I'm curious, like, could you describe that

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Speaker 1: UM effect in detail? And also can you describe how

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Speaker 1: you disaggregated those two things in your study? Yeah, happy

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Speaker 1: to do that. So let me start by saying both

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Speaker 1: are at work. Both mechanisms you just pointed out, UM

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Speaker 1: differences between your personal inflation, your personal consumption basket and

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Speaker 1: the associated inflation UM compared to mine places significant role.

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Speaker 1: And then difference differences and experiences we have made over

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Speaker 1: our lives so far. So starting from the ladder which

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Speaker 1: some of my research you referred to earlier builds on,

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Speaker 1: I literally looked at when people was using US data,

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Speaker 1: but we have since then done also non US studies.

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Speaker 1: But so I literally looked in the Michigan survey of

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Speaker 1: consumers when people are born, what has been the inflation

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Speaker 1: over their lifetime so far, and then asked, um, does

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Speaker 1: that predict their inflation expectations looking into the future. And

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Speaker 1: it turns out yes, that personal inflation experiences are really powerful.

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Speaker 1: Your lifetime average inflation so to speak, is really powerful

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Speaker 1: in predicting what you think future inflation will be. And

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Speaker 1: this is just taking aggregate inflation experiences. So we are

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Speaker 1: not yet at those personal consumption baskets. Now. Just to

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Speaker 1: complete the picture here, economists would immediately say, well, you

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Speaker 1: know these my the information as symmetries. I'm not reading,

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Speaker 1: you know, the back page of the Economist, or not

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Speaker 1: following as much as you guys the new CPI numbers

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Speaker 1: coming out, and so this just reflects that I'm not

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Speaker 1: aware of it. Well, what I then like to do

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Speaker 1: is to point people to our study of f o

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Speaker 1: MC members, right the Federal Reserve bankers, of all the

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Speaker 1: data at their fingertips and even for them personal experiences,

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Speaker 1: just taking their birth here, calculating their lifetime average inflation

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Speaker 1: experience in the aggregate is really powerful in predicting their

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Speaker 1: semi annual forecasts of inflation to Congress. So that's at work.

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Speaker 1: And then the second point is definitely also at work.

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Speaker 1: If I am able to get exactly um, your consumption basket,

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Speaker 1: or let's take a big chunk of it, let's take

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Speaker 1: your grocery shopping and look at inflation that occurs in there,

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Speaker 1: it has significant influence on your predictions about future inflation.

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Speaker 1: So cool fact here is um that for years we've

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Speaker 1: known that women tend to be more pessimistic, so they

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Speaker 1: have higher inflation expectations. FED Federal Reserve bankers have known

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Speaker 1: that For years, I've always wondered why the women are

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Speaker 1: so anxious about inflation. Well, it turns out that if

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Speaker 1: you control for grocery shopping so traditional you know, gender

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Speaker 1: roles women, that's the grocery shopping, it takes the whole

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Speaker 1: gender effect away. So it just comes from groceries being

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Speaker 1: so volatile, people anchoring on the price hikes. That explains

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Speaker 1: all those gender differences. So this is I think a

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Speaker 1: powerful example for your second point. What about gasoline. There's

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Speaker 1: I hear people often say that people form their views

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Speaker 1: on inflation at the pump. Yes, indeed, so we also

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Speaker 1: see that in our data. Other people I've found that

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Speaker 1: in their data. You know, my my dreams scenario is

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Speaker 1: still one where I get subjects to put on you know,

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Speaker 1: Google glass or something like this. I can literally see

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Speaker 1: all the prices they look at all day long, and

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Speaker 1: I think, um, we would get a really really good

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Speaker 1: picture of what their inflation beliefs are currently. So we

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Speaker 1: have been focusing on grocery prices because there's fantastic detailed

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Speaker 1: data on it. We have some data on gasoline. If

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Speaker 1: you combine the two, it comes even more powerful. So

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Speaker 1: one of the things I've always wondered is this might

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Speaker 1: sound like a weird question, but bear with me, but

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Speaker 1: the degree to which inflation expectations actually matter and whether

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Speaker 1: or not people do or do not change their behavior

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Speaker 1: based on their future expectations of inflation and um, for

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Speaker 1: people like I guess Joe and myself, certainly for our

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Speaker 1: professional lives, we've experienced pretty low rates of inflation, and

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Speaker 1: so it's hard to conceptualize a moment in time where

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Speaker 1: if inflation were to spike, what would our consumer respects

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Speaker 1: actually be to that, Like, I have no basis for comparison,

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Speaker 1: so it's really hard to imagine. Um, I'm just wondering

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Speaker 1: what's your take on that. Do inflation expectations actually impact behavior? Yeah? Um,

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Speaker 1: this is a question I get not only from you know,

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Speaker 1: folks working in the media or even outside in academia

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Speaker 1: and media, but even within academia, we are often asking

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Speaker 1: ourselves that question. I often get that in referee responses

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Speaker 1: to my papers, and it's a it's a very reasonable question.

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Speaker 1: Of course, traditional economic models would say, oh, yes, it

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Speaker 1: will affect your savings decision, including your retirement saving. It

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Speaker 1: might affect your consumption choices. Right, Inflation goes up, we

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Speaker 1: should all be spending like crazy because money will be

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Speaker 1: worth less in the future. And that's not quite what happened.

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Speaker 1: So I just want to pause for a moment and

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Speaker 1: say that the standard economic models in academia but also

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Speaker 1: in the policy world do implicitly assume there's a strong link,

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Speaker 1: and so that goes into all of policy recommendations. Um

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Speaker 1: so um. The baseline assumption is there, But is it

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Speaker 1: actually true? Well, if we look at decisions of people

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Speaker 1: who literally deal with inflation, so as I said, I'm

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Speaker 1: studying m f O m C members, members of the

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Speaker 1: Federal Market Committee, who you know, decide about interest rates

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Speaker 1: and react to to the inflation they see and unemployment rate, etcetera.

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Speaker 1: I do see it working there. So for startus. Among

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Speaker 1: the professionals, the effect is there that they're overly influenced

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Speaker 1: by their personal experiences and are voting to dissent, say

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Speaker 1: from the chairperson's proposal if um, you know, their personal

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Speaker 1: experiences point them in a different into a different direction.

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Speaker 1: Fun fact. Also, I got some data from UM one

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Speaker 1: of the big financial firms working in bonds, and they

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Speaker 1: are too. I got also their nationality inflation, the French

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Speaker 1: and the Germans and the many Americans working there they've

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Speaker 1: personally experienced in fact their beliefs and will absolute really

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Speaker 1: influenced therefore decision their decision making in the firm. But

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Speaker 1: I think you're ultimately your question was more targeted maybe too,

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Speaker 1: you know, the person like you and me who's not

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Speaker 1: necessarily like actively trading or making policy decisions based on

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Speaker 1: inflation numbers. And it is a good question. It is

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Speaker 1: to a large extent, and open questions still to be

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Speaker 1: shown how it affects savage negotiation, labor market choices, etcetera.

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Speaker 1: But what I can say is that, well, not surprisingly,

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Speaker 1: personal inflation experiences affect your beliefs about future interest rates.

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Speaker 1: So you know, inflation and nominal interest rates are closely linked,

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Speaker 1: so it shouldn't come as a big shock. But only

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Speaker 1: recently we've been able actually to get the data to

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Speaker 1: formally show inflation experiences strongly affect in not only inflation beliefs,

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Speaker 1: but correlated with that also nominal interest rate beliefs, and

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Speaker 1: then those in turn effect some of the biggest financial

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Speaker 1: decisions households make, namely whether to buy or rent a home,

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Speaker 1: and conditional on buying, whether you take a fixed rate

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Speaker 1: or ARBA rate. So the generations who have had experienced,

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Speaker 1: for example, the big hikes end of the nineteen seventies

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Speaker 1: n eighty, who were really afraid of that happening again,

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Speaker 1: they love fixed rate mortgages. I think the shadows of

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Speaker 1: that are still present, and they are forgoing lots of

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Speaker 1: money by not using cheaper variable rate mortgages when available.

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Speaker 1: So here I would say we do have some first evidence. Yeah,

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Speaker 1: I feel like even the children of that generation has

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Speaker 1: been like sort of like taught that fixed rate mantra.

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Speaker 1: So it's like, even for myself and I own a house,

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Speaker 1: just like the idea of like, you know, all I've

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Speaker 1: experienced all my life basically is lower and lower rate.

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Speaker 1: But still the idea of like thirty year fixed rate

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Speaker 1: being the most responsible thing to do feels very Uh

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Speaker 1: that that feels like a very powerful force exerted on me. Okay,

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Speaker 1: you find these cohort effects where there's sort of these

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Speaker 1: clear links between the experience that someone had, whether it's

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Speaker 1: an interest rates, whether it's on inflation, and their personal behaviors.

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Speaker 1: To what degree should policymakers internalize them? Because we know,

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Speaker 1: like from the FED perspective, they put a lot of

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Speaker 1: weight on inflation expectations, and they often ascribe mythical powers,

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Speaker 1: it seems like, to the public's inflation expectations and the

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Speaker 1: importance of keeping them so well anchored. But if inflation

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Speaker 1: expectations are so subjective and so heterogeneous across different parts

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Speaker 1: of the population by age, demographic experience, and so forth,

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Speaker 1: how much power do they really have as an economic force.

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Speaker 1: I think that goes back to the previous question. To

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Speaker 1: some extent um. I think the FED should continue to

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Speaker 1: spend a lot of time on figuring out how these

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Speaker 1: inflation expectations actually translate into economic decision making, and how

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Speaker 1: our standard economic models are actually wrong and many respect

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Speaker 1: So I'm totally with you and and questioning that. However,

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Speaker 1: I would not say that, oh, because they're so heterogeneous,

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Speaker 1: we should throw up, you know, throw our hands at

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Speaker 1: the air and say, well, what can we do here? There?

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Speaker 1: This mythical representative agent whom we are targeting doesn't exist.

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Speaker 1: You use the word courts before, and I think that's

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Speaker 1: a good clue. Certain chords have experienced, say the nineteen

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Speaker 1: seventies and nine eighty hikes peak inflation, that's haven't And

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Speaker 1: that comes with different ages. So it's the younger generation,

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Speaker 1: as you're saying in the intern today, which is less

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Speaker 1: concerned about this inflation, and that's the generation that will

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Speaker 1: likely be borrowing and um going for the new houses.

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Speaker 1: So the older generation is instead the one that's providing um,

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Speaker 1: this liquidity in the market. So where do we see

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Speaker 1: the shortage right now? What do we want to encourage

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Speaker 1: who's looking for jobs? Um? You know, rather than saying oh,

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Speaker 1: we actually target this median investor or a media and consumer,

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Speaker 1: or saying oh, we can't do anything because it's so heterogeneous,

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Speaker 1: thinking by courts, thinking by where the needs are, the

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Speaker 1: unemployment concerns, etcetera. I think it's the way forward. I mean,

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Speaker 1: again a related question, but do you think that policymakers

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Speaker 1: actually look at demographics when they're looking at inflation expectations? Like,

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Speaker 1: to what degree do you think they're trying to break

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Speaker 1: down an inflation survey by subjective experience? Well, I don't

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Speaker 1: work in the policy world. Although I enjoy the interactions

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Speaker 1: I have, I don't want to give the completely oversimplified

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Speaker 1: impression that nobody is looking at breakdowns by by age.

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Speaker 1: I mean you you guys started today's podcast UM that way,

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Speaker 1: and I know UM people are highly aware of that

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Speaker 1: as well, in terms of UM accounting for where these

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Speaker 1: people come from, what their experience has been, and therefore

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Speaker 1: what their fears are likely going to be. I personally

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Speaker 1: think they're still too little. So there's some aspect of

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Speaker 1: looking by age, as you are pointing out, but then

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Speaker 1: we tend to attribute everything to age specific life cycle

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Speaker 1: specific effects. Oh, the older generation investing more in bonds,

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Speaker 1: consuming out of bond in calm, etcetera. No, but it

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Speaker 1: matters whether that older generation lift through the peak or not.

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Speaker 1: Is kind of way I would like to push things towards.

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Speaker 1: Why is inflation so political? I mean, there's there's many

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Speaker 1: ways to measure the economy, and there's numerous data points

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Speaker 1: to sort of get fields for the forces and pressure

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Speaker 1: is exerted on the economy at the time. Inflation is one.

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Speaker 1: Obviously employment is another. All that we get, we get

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Speaker 1: fresh data points every day. There's something about inflation that

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Speaker 1: captures people's imagination. It makes people angry. People form full

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Speaker 1: identities out of their stance on inflation. In your work,

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Speaker 1: do you have any insight into what it is about

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Speaker 1: this particular number that sets people off. This is so

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Speaker 1: interesting because as a German, I would think, oh, it's

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Speaker 1: so much less political in this country compared to where

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Speaker 1: I'm from, right, so I mean in in Germany, definitely,

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Speaker 1: the tabloid would have as headlined discussion about inflation policies

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Speaker 1: of the European Central Bank and why they disagree with those.

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Speaker 1: Um So, so that's a really interesting perspective already. But

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Speaker 1: um nevertheless, I think you are right. It might be

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Speaker 1: it's a pretty technical measure, and it is, it does

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Speaker 1: play a fairly large role. Nevertheless, I don't have research

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Speaker 1: on that. My personal suspicion from you know, having worked

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Speaker 1: a lot with the data, having read a lot, is

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Speaker 1: it has this aspect of making assets you certain assets

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Speaker 1: you own potentially less valuable while others not. It it

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Speaker 1: generates some kind of inequality and how much people are

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Speaker 1: affected by the outcomes of a crisis. So people holding

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Speaker 1: real estate, gold stock less of acted than others, and

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Speaker 1: I think that sometimes trigger us an additional degree of

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Speaker 1: these tensions. But yeah, I'd be curious to find out

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Speaker 1: what others think. I wanted to talk about some of

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Speaker 1: your recent work as well, and you've been applying a

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Speaker 1: lot of the things you've learned in this paper to

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Speaker 1: policymakers themselves. And I think this is absolutely fascinating because

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Speaker 1: in your latest work, I think you found that f

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Speaker 1: o MC members personal experience with inflation affects their expectations

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Speaker 1: for inflation so much so that you can actually kind

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Speaker 1: of predict where they're going to go better than some

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Speaker 1: more traditional UM forecast methods. So could you maybe walk

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Speaker 1: us through that and also how you got the idea

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Speaker 1: to look at this particular topic. Well, to be completely honest,

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Speaker 1: what had been irking me UM is that economist, and

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Speaker 1: I think to some extent also people working in the

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Speaker 1: policy world, had been very fast to attribute any kind

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Speaker 1: of experience effect. To use the term we've coined two

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Speaker 1: informational asymmetries. So just as I as I stated earlier, UM,

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Speaker 1: if somebody who has lived through the German hyper inflation

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Speaker 1: or the higher inflation in the seventies nineteen eighty in

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Speaker 1: the in the US, if that person tends to be

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Speaker 1: more pessimistic about a future inflation numbers being rather high,

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Speaker 1: then UM in condoms are quick to jump to the

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Speaker 1: conclusion that they're informational frictions. Not everybody has all the

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Speaker 1: information data at their fingertips. Hence UM those personal experiences

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Speaker 1: as just data we are aware of. And that explains

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Speaker 1: why personal experience affect your beliefs. To draw a finer

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Speaker 1: distinction between your personal experiences affecting you so strongly because

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Speaker 1: they're differently anchored in your brain versus, oh, without experience,

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Speaker 1: you just don't have the knowledge, you're not aware of it.

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Speaker 1: I was really drawn to the idea to basically hone

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Speaker 1: in on the experts on the people as far as

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Speaker 1: I imagine you know the FMC members lives they have,

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Speaker 1: and on their desk in front of them all the

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Speaker 1: inflation numbers anybody would ever want to see. There's no

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Speaker 1: informational asymmetry whatsoever, and UM now they're ready to run

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Speaker 1: and make forecasts about future inflation. And so to show,

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Speaker 1: even for those UM experts that they are strongly affected

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Speaker 1: by their personal experiences is what really drew me into

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Speaker 1: that topic. But what were the actual findings? Because I

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Speaker 1: found the link that you found between members personal inflation

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Speaker 1: history and sort of predicting or forecasting how they might

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Speaker 1: react to monetary conditions, that was really striking. So the

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Speaker 1: first step is simply to relate personal experiences to their forecasts. So,

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Speaker 1: as you probably know, the FMC members twice a year

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Speaker 1: make these um forecasts to Congress about what they think

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Speaker 1: inflation will be. You know, various horizons, I say one

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Speaker 1: year had horizon under you know their ideal policy. And

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Speaker 1: if you plot what members say in these in in

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Speaker 1: these semi anormal forecasts against their personal experience UM normalized

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Speaker 1: you know, you want to account some word forwards year,

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Speaker 1: we're in, etcetera. So we normalized by what their staff

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Speaker 1: told them in the green box. So normalized by the

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Speaker 1: stuff forecast, you get the most beautiful scatter plot of

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Speaker 1: like strongly correlated personal experience and what they say. So

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Speaker 1: so that was interesting. Now you go to the actual

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Speaker 1: voting behavior. And I was a little nervous of doing

431
00:27:06,720 --> 00:27:08,960
Speaker 1: this analysis. I mean, one thing is to look at

432
00:27:09,359 --> 00:27:13,760
Speaker 1: a hundred thousands millions of US consumers and their inflation

433
00:27:14,320 --> 00:27:17,399
Speaker 1: expectations and how they maybe choose their fixed versus variable

434
00:27:17,480 --> 00:27:20,000
Speaker 1: rate mortgage, where I have a lot of variation in

435
00:27:20,040 --> 00:27:23,520
Speaker 1: ancient experience versus you know, even at this day and age,

436
00:27:23,960 --> 00:27:29,080
Speaker 1: pretty much somewhat older male white members of the for

437
00:27:29,280 --> 00:27:32,359
Speaker 1: m C. But luckily there was some hit origin Eatey.

438
00:27:32,359 --> 00:27:35,520
Speaker 1: And what we found is that if you look at

439
00:27:36,040 --> 00:27:41,280
Speaker 1: even relatively small about one standard deviation increase in personal

440
00:27:41,400 --> 00:27:46,119
Speaker 1: experience point one, sorry percentage points increase in personal inflation

441
00:27:46,160 --> 00:27:50,560
Speaker 1: experience relative to the overall group, that does have significant

442
00:27:50,600 --> 00:27:55,080
Speaker 1: predictive power for your voting behavior. So for your actual

443
00:27:55,359 --> 00:27:59,240
Speaker 1: you know, dissent to the chairperson's proposal in terms of

444
00:27:59,280 --> 00:28:01,560
Speaker 1: what should happen and to interest rate. And as you

445
00:28:01,600 --> 00:28:05,600
Speaker 1: know in this day and age, descents have become less common,

446
00:28:05,680 --> 00:28:08,040
Speaker 1: less less frequent. There was a bit of a of

447
00:28:08,119 --> 00:28:10,600
Speaker 1: a break. But so if you look, for example, at

448
00:28:10,600 --> 00:28:14,000
Speaker 1: the overall frequency in the data of a DABBSH descent,

449
00:28:14,440 --> 00:28:18,960
Speaker 1: it's about you know, two point five or something probability.

450
00:28:19,080 --> 00:28:23,000
Speaker 1: But if I increase your personal and inflation experience by

451
00:28:23,040 --> 00:28:27,119
Speaker 1: about one percentage point, that probability goes down by about

452
00:28:27,119 --> 00:28:30,639
Speaker 1: a quarter. And the exact reverse is true for HAWKERSH descent.

453
00:28:30,720 --> 00:28:34,240
Speaker 1: So that probably somewhat higher about four percent of your

454
00:28:34,400 --> 00:28:37,840
Speaker 1: FMC members are willing to descend. But if I shock you,

455
00:28:37,920 --> 00:28:40,280
Speaker 1: I mean I make you a person that's born at

456
00:28:40,280 --> 00:28:44,200
Speaker 1: a time with somewhat higher inflation experience point one percentage point,

457
00:28:44,560 --> 00:28:49,200
Speaker 1: your quarter or third higher probability of dissenting with the forecast.

458
00:28:49,240 --> 00:28:52,440
Speaker 1: So it has actual impact. Um, you might not turn

459
00:28:52,480 --> 00:28:56,040
Speaker 1: around the ultimate vote, but it does leave a you know,

460
00:28:56,360 --> 00:28:58,560
Speaker 1: it is a statement that's seen by the market. It

461
00:28:58,640 --> 00:29:02,840
Speaker 1: might influence the next proposal the chairperson would be making.

462
00:29:03,400 --> 00:29:05,440
Speaker 1: I do have if you're interested in it's a very

463
00:29:05,440 --> 00:29:09,640
Speaker 1: cool anecdote to add about a German guy. Okay, so

464
00:29:09,920 --> 00:29:14,120
Speaker 1: there's this guy born as Heinrich valik In in Berlin,

465
00:29:14,400 --> 00:29:17,640
Speaker 1: in Germany, nineteen fourteen into a family of bankers, and

466
00:29:17,760 --> 00:29:21,400
Speaker 1: he actually lived through Germany's hyper inflation in nineteen twenties three.

467
00:29:21,880 --> 00:29:25,000
Speaker 1: The family emigrated into the s in the nineteen thirties,

468
00:29:25,000 --> 00:29:27,920
Speaker 1: where he became economist and was a FED governor from

469
00:29:27,960 --> 00:29:32,320
Speaker 1: the mid nineteen seventies to mid nineteen eighties. And by

470
00:29:32,320 --> 00:29:35,480
Speaker 1: then you know Henry Wallick rather than Heinrich Vallei, but

471
00:29:36,000 --> 00:29:39,280
Speaker 1: was a you know, very well regarded member of the Fed,

472
00:29:39,920 --> 00:29:42,360
Speaker 1: and to the best of my knowledge, she still holds

473
00:29:42,360 --> 00:29:46,720
Speaker 1: the record of descents. He descented twenty seven times during

474
00:29:46,720 --> 00:29:48,960
Speaker 1: his tenure on the Federal Reserve Board, which is the

475
00:29:49,000 --> 00:29:52,360
Speaker 1: highest number of descent among all FMC members. And as

476
00:29:52,360 --> 00:29:55,480
Speaker 1: you can imagine, he was very much into the hawkers direction,

477
00:29:55,840 --> 00:29:59,160
Speaker 1: always telling everybody that they don't understand how this can

478
00:29:59,240 --> 00:30:02,560
Speaker 1: happen and the implications, etcetera. And clearly this is a

479
00:30:02,600 --> 00:30:05,600
Speaker 1: super smart person that he knows he's in a different country,

480
00:30:05,640 --> 00:30:09,560
Speaker 1: in a different monetary system, he's in a vastly different

481
00:30:09,560 --> 00:30:12,720
Speaker 1: decade right now, and still he couldn't shake it, and

482
00:30:12,800 --> 00:30:15,920
Speaker 1: that experience just stayed with him. I guess I have

483
00:30:16,200 --> 00:30:19,560
Speaker 1: a sort of like very big picture question as someone

484
00:30:19,560 --> 00:30:24,320
Speaker 1: who looks at the intricacies of inflation and how they

485
00:30:24,360 --> 00:30:28,040
Speaker 1: relate to individual groups of people, what's your take on

486
00:30:28,120 --> 00:30:31,920
Speaker 1: on the current environment. And I realized you're not a

487
00:30:32,000 --> 00:30:34,680
Speaker 1: market watcher, but we we did just have cp I

488
00:30:34,760 --> 00:30:39,040
Speaker 1: come in much hotter than expected. You mentioned the idea

489
00:30:39,160 --> 00:30:42,880
Speaker 1: that the more the media talks about inflation, the more

490
00:30:43,000 --> 00:30:47,000
Speaker 1: people see articles or other people discussing it, the more

491
00:30:47,040 --> 00:30:51,280
Speaker 1: it sort of feeds into inflation expectations themselves. Would you

492
00:30:51,360 --> 00:30:56,040
Speaker 1: expect um this to become a sort of self fulfilling cycle.

493
00:30:57,920 --> 00:31:01,560
Speaker 1: That is a very good question. Currently, I I happen

494
00:31:01,640 --> 00:31:04,360
Speaker 1: to still be in the camp, which is, you know,

495
00:31:04,760 --> 00:31:10,720
Speaker 1: watching how different unusual components of the inflation basket. And

496
00:31:10,880 --> 00:31:15,200
Speaker 1: Joe mentioned the used car market, for example, having an

497
00:31:15,200 --> 00:31:20,120
Speaker 1: overproportional influence UM given all their supply and demand disruptions

498
00:31:20,200 --> 00:31:23,400
Speaker 1: due to COVID nineteen, which is kind of trying to

499
00:31:23,440 --> 00:31:26,760
Speaker 1: get into kind of a smoother flow. Again, I'm personally

500
00:31:26,800 --> 00:31:29,640
Speaker 1: thinking there are lots of frictions which are having influences

501
00:31:29,800 --> 00:31:34,600
Speaker 1: right now. So I'm currently still thinking that things will

502
00:31:34,920 --> 00:31:37,040
Speaker 1: you know, have to be looked at again in a

503
00:31:37,080 --> 00:31:41,000
Speaker 1: couple of months. But obviously in particular with all these

504
00:31:41,080 --> 00:31:45,440
Speaker 1: um uh support government support, there is a real concern.

505
00:31:45,960 --> 00:31:48,120
Speaker 1: Going back to the theme we had in the beginning,

506
00:31:48,760 --> 00:31:52,600
Speaker 1: I do think that if this remains the main news

507
00:31:52,920 --> 00:31:58,160
Speaker 1: story over the next month, it might end up accelerating

508
00:31:58,160 --> 00:32:00,800
Speaker 1: in terms of the impact on people's anchoring in memory

509
00:32:00,880 --> 00:32:03,280
Speaker 1: and the vividness and how much they are taking into

510
00:32:03,320 --> 00:32:07,160
Speaker 1: a count. If instead other things positive or negative, if

511
00:32:07,200 --> 00:32:10,959
Speaker 1: you know, talk about the data variant, etcetera, UM starting

512
00:32:10,960 --> 00:32:13,720
Speaker 1: to dominate the news cycle, I would expect this to

513
00:32:14,280 --> 00:32:18,640
Speaker 1: have a less long lasting effect on people's inflation fears

514
00:32:18,680 --> 00:32:21,960
Speaker 1: and economic decision making. I think that's probably where I

515
00:32:22,000 --> 00:32:27,600
Speaker 1: currently stand. All Right, Well, we got a fascinating conversation,

516
00:32:27,880 --> 00:32:31,560
Speaker 1: and I really do urge anyone listening to check out

517
00:32:31,640 --> 00:32:35,160
Speaker 1: some of your research on the topic as we enter

518
00:32:35,600 --> 00:32:38,240
Speaker 1: this very very heated well we're already in it, this

519
00:32:38,440 --> 00:32:43,160
Speaker 1: very heated period of discussion over the future of price increases.

520
00:32:43,280 --> 00:32:47,120
Speaker 1: Thank you so much. You're welcome. This was really fun.

521
00:32:47,280 --> 00:33:02,080
Speaker 1: Thanks for having me. Thank you. That was great. Yeah, appreciative, So, Joe,

522
00:33:02,240 --> 00:33:05,920
Speaker 1: I found that conversation really really interesting, And again, at

523
00:33:05,920 --> 00:33:09,640
Speaker 1: a time when we have this sort of polarized perception

524
00:33:09,880 --> 00:33:12,680
Speaker 1: of the future of inflation, it's really nice to dig

525
00:33:12,720 --> 00:33:16,760
Speaker 1: into some of the details behind how people are actually

526
00:33:16,800 --> 00:33:20,000
Speaker 1: thinking about this topic. Yeah, I thought that was super

527
00:33:20,040 --> 00:33:23,480
Speaker 1: interesting about like even fo of C members you could

528
00:33:23,520 --> 00:33:28,200
Speaker 1: sort of anticipate their own policy actions simply based on

529
00:33:28,560 --> 00:33:33,400
Speaker 1: their own experiences. There lived experiences with inflation, and I

530
00:33:33,480 --> 00:33:36,239
Speaker 1: think that goes a long way in explaining why this

531
00:33:36,320 --> 00:33:38,959
Speaker 1: one number is like such a lightning rod. Like everyone

532
00:33:39,040 --> 00:33:43,000
Speaker 1: has different experiences with pricing. Everyone is different consumption baskets,

533
00:33:43,080 --> 00:33:45,880
Speaker 1: everyone has different periods where interest rates affected them negatively

534
00:33:45,920 --> 00:33:49,400
Speaker 1: or positively in one way. And it's uh, the way

535
00:33:49,440 --> 00:33:54,440
Speaker 1: people like carry through that for years really profound. Yeah, um,

536
00:33:54,480 --> 00:33:56,600
Speaker 1: I mean to your point, I think at the beginning

537
00:33:56,640 --> 00:34:01,160
Speaker 1: of the discussion, everyone sort of either benefit or loses

538
00:34:01,200 --> 00:34:04,880
Speaker 1: out from different price movements, and there's so many of

539
00:34:04,880 --> 00:34:07,200
Speaker 1: them and so many factors at play that it's sort

540
00:34:07,200 --> 00:34:10,480
Speaker 1: of difficult to disaggregate them all and also difficult to

541
00:34:10,600 --> 00:34:13,719
Speaker 1: come up with as Ulrico was saying this sort of

542
00:34:13,960 --> 00:34:20,120
Speaker 1: mythical representative inflation survey, responded, The one other thing I

543
00:34:20,120 --> 00:34:22,839
Speaker 1: thought was really remarkable in there was this idea that

544
00:34:23,040 --> 00:34:27,759
Speaker 1: um gender differences in inflation perceptions could be knocked down

545
00:34:27,800 --> 00:34:32,160
Speaker 1: so quickly just by eliminating grocery shopping. Like I had

546
00:34:32,280 --> 00:34:36,840
Speaker 1: no idea that that effect was so pronounced. That was

547
00:34:36,880 --> 00:34:39,520
Speaker 1: really interesting. And then you wonder, it's like, Okay, who

548
00:34:39,520 --> 00:34:41,880
Speaker 1: get gas more often? Because you hear that gas is

549
00:34:41,960 --> 00:34:45,480
Speaker 1: often a big factor. But it really does like think

550
00:34:45,520 --> 00:34:47,760
Speaker 1: like if you listen to like J. Powell, they're putting

551
00:34:47,840 --> 00:34:51,440
Speaker 1: so much emphasis on these so called like inflation expectations

552
00:34:51,520 --> 00:34:54,400
Speaker 1: or the importance of keeping expectations anchored and so forth.

553
00:34:54,719 --> 00:34:56,160
Speaker 1: But then you look at like, well, what are the

554
00:34:56,200 --> 00:35:01,280
Speaker 1: foundations of these inflation expectations that are supposedly so important

555
00:35:01,280 --> 00:35:05,200
Speaker 1: to policy? And it seems so like arbitrary and subjective

556
00:35:05,280 --> 00:35:08,319
Speaker 1: in many cases, like where they were formed and so

557
00:35:08,440 --> 00:35:10,799
Speaker 1: On the one hand, maybe they're powerful, but on the

558
00:35:10,840 --> 00:35:13,080
Speaker 1: other hand, like, well, we're certainly put it a lot

559
00:35:13,560 --> 00:35:16,640
Speaker 1: of weight on some things that are like very nebulous

560
00:35:16,640 --> 00:35:21,080
Speaker 1: and random, right, and quite desperate at that. All right,

561
00:35:22,200 --> 00:35:25,280
Speaker 1: shall we leave it there, Let's leave it there. Okay,

562
00:35:25,560 --> 00:35:28,360
Speaker 1: this has been another episode of the All Thoughts Podcast.

563
00:35:28,400 --> 00:35:31,000
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at

564
00:35:31,000 --> 00:35:33,839
Speaker 1: Tracy Alloway and I'm Joe wi Isn't though. You can

565
00:35:33,880 --> 00:35:37,279
Speaker 1: follow me on Twitter at the Stalwart. Follow our guest

566
00:35:37,520 --> 00:35:41,560
Speaker 1: Rique Malmandier. Her handle is at umal Men. Follow our

567
00:35:41,600 --> 00:35:45,520
Speaker 1: producer Laura Carlson. She's at Laura M. Carlson. Follow the

568
00:35:45,520 --> 00:35:49,560
Speaker 1: Bloomberg head of podcast, Francesca Levi at Francesca Today, and

569
00:35:49,680 --> 00:35:52,319
Speaker 1: check out all of our podcast at Bloomberg under the

570
00:35:52,360 --> 00:36:12,560
Speaker 1: handle add podcast. Thanks for listening to