WEBVTT - Why Everyone's Experience Of Inflation Is So Different 0:00:10.840 --> 0:00:14.040 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:14.080 --> 0:00:18.680 I'm Tracy Alloway and I'm Joe. Wasn't so Joe. We're 0:00:18.720 --> 0:00:24.640 recording this episode on July, and we have just thirty 0:00:24.680 --> 0:00:28.640 minutes ago gotten the latest US inflation data. It's come 0:00:28.680 --> 0:00:32.480 in a lot higher or hotter than expected. I think 0:00:32.720 --> 0:00:35.640 headlines c p I came in at like five point 0:00:35.760 --> 0:00:39.360 four percent and core inflation was four point five percent. 0:00:39.440 --> 0:00:43.160 It was expected to be something like four percent for June. 0:00:44.479 --> 0:00:47.839 And we're sort of watching the reactions come in in 0:00:47.960 --> 0:00:52.000 real time, um from the cell side, analysts and on 0:00:52.240 --> 0:00:56.400 social media, and it's amazing how you're getting these sort 0:00:56.400 --> 0:00:59.920 of two distinct camps. So on the one hand, everyone 0:01:00.040 --> 0:01:02.360 is looking at the same data, but everyone seems to 0:01:02.400 --> 0:01:05.080 be reaching vastly different conclusions. So on the one hand, 0:01:05.120 --> 0:01:07.840 you have people who say this is still transitory. A 0:01:07.880 --> 0:01:10.760 lot of the strength is in uh, certain segments that 0:01:10.800 --> 0:01:13.160 have seen these supply bottlenecks that we've been talking about. 0:01:13.440 --> 0:01:15.720 And on the other hand, you have people who are saying, well, 0:01:15.880 --> 0:01:19.040 this is starting to look very worrying and maybe something 0:01:19.040 --> 0:01:24.679 more permanent. Right, there's no question that the intensity of 0:01:24.720 --> 0:01:27.120 the CPI gains that we've seen really over the last 0:01:27.160 --> 0:01:31.959 three months have been higher, hotter than economists had expected. 0:01:32.440 --> 0:01:34.760 It seems to be lasting a little bit longer. So 0:01:34.760 --> 0:01:36.920 on the one hand, you can say, Okay, that's worrisome. 0:01:37.200 --> 0:01:39.000 On the other hand, when you dig into the guts 0:01:39.080 --> 0:01:42.119 of the report, it still looks like there's an argument 0:01:42.120 --> 0:01:45.680 for transitory. So a huge component of this is still 0:01:45.920 --> 0:01:49.160 used cars, which haven't slowed down. You know, not long ago, 0:01:49.200 --> 0:01:51.400 we were never talking about used cars is an important 0:01:51.480 --> 0:01:53.920 inflation category. Now is something like a third of the 0:01:53.960 --> 0:01:58.640 game or of the game was used cars. Other categories 0:01:58.680 --> 0:02:03.640 specifically related to reopening are pushing things higher. So I 0:02:03.720 --> 0:02:06.000 kind of think it's like an impasse, like no side 0:02:06.000 --> 0:02:08.840 will be totally satisfied, because the people who are convinced 0:02:08.880 --> 0:02:12.000 that there's all transitory could point to the sub indexes 0:02:12.040 --> 0:02:14.200 of the sub numbers whereas the people who are saying 0:02:14.200 --> 0:02:16.920 this is a start of a real problem point to 0:02:16.960 --> 0:02:19.560 the headlines that are hotter than expected several months in 0:02:19.600 --> 0:02:22.640 a row. Now, Yeah, it's kind of like CPI is 0:02:22.680 --> 0:02:27.680 the ultimate exercise in confirmation bias, Like there's something for everyone, Um, 0:02:27.720 --> 0:02:30.559 whether you're looking at the headline numbers or the sub components. 0:02:30.600 --> 0:02:33.640 But I mean, I say that, And one of the 0:02:33.680 --> 0:02:36.320 things I've been thinking about a lot lately is this 0:02:36.480 --> 0:02:39.519 idea that you know, the saying that inflation is always 0:02:39.520 --> 0:02:44.320 an everywhere a monetary phenomenon, which I don't necessarily disagree with, 0:02:44.440 --> 0:02:48.480 but I feel like it's also a human phenomenon. And 0:02:48.800 --> 0:02:52.519 you're seeing that in this discrepancy between these two camps 0:02:52.520 --> 0:02:55.359 of people looking at the inflation numbers, and you're also 0:02:55.440 --> 0:02:59.880 starting to see it in terms of inflation expectations themselves. 0:03:00.040 --> 0:03:03.040 So for instance, if you look at the breakdown of 0:03:03.480 --> 0:03:07.519 survey respondents by age, you can see that older people 0:03:07.720 --> 0:03:10.840 are a lot more worried about inflation at the moment 0:03:10.960 --> 0:03:14.440 than younger people, which is kind of interesting. Yeah, I mean, 0:03:15.120 --> 0:03:17.040 I think instead of, you know, they say it's always 0:03:17.040 --> 0:03:19.760 a monetary phenomenon, but look, I don't think there's an 0:03:19.760 --> 0:03:24.080 obvious monetary link to be drawn between say, anything that 0:03:24.120 --> 0:03:25.960 the FED has done recently and the fact that use 0:03:26.040 --> 0:03:29.320 car prices continue to have this bottleneck and part due 0:03:29.360 --> 0:03:32.079 to a chip shortage as a result from our over 0:03:32.120 --> 0:03:35.440 alliance on t SMC and the virus and so forth. So, 0:03:35.680 --> 0:03:37.480 but what I do think and what I think you're 0:03:37.480 --> 0:03:40.520 getting it too, is that there is a tremendous political 0:03:40.680 --> 0:03:45.640 valence to all inflation. And if you are young and 0:03:45.720 --> 0:03:49.120 you're able to be flexible in your consumption and lifestyle patterns, 0:03:49.160 --> 0:03:52.320 maybe inflation doesn't infect you affect you so much. If 0:03:52.320 --> 0:03:55.120 you're older, if you're on a fixed income, it could 0:03:55.160 --> 0:03:59.000 be a greater problem. If you're a urban professional who 0:03:59.040 --> 0:04:02.120 likes to eat uh, to put laburrito balls and take 0:04:02.160 --> 0:04:04.800 an uber to work, You're probably not thrilled with the 0:04:04.840 --> 0:04:06.560 cost of an uber these days, and you want the 0:04:06.560 --> 0:04:09.119 FED to hike. So a lot of it is sort 0:04:09.120 --> 0:04:13.000 of like personal it's formed by one consumption pattern. There's 0:04:13.000 --> 0:04:16.480 a political nature, and I think these headline CPI numbers 0:04:16.480 --> 0:04:19.600 that we get no one feels them like no one, 0:04:19.839 --> 0:04:23.160 Everyone's like, that's not my experience that things are. Everyone 0:04:23.240 --> 0:04:25.440 is sort of a subjective experience of what kind of 0:04:25.440 --> 0:04:29.560 inflation is happening in the economy. Yeah, exactly, Subjective is 0:04:29.560 --> 0:04:32.479 the key words. So I'm glad to say that we 0:04:32.560 --> 0:04:36.040 are going to be getting into the subjectivity of inflation 0:04:36.160 --> 0:04:38.919 on this episode, and we have the perfect person to 0:04:39.320 --> 0:04:43.000 discuss it. We have someone who basically wrote a seminal 0:04:43.240 --> 0:04:48.800 paper on inflation experiences back in and she's been updating 0:04:48.800 --> 0:04:51.520 her thesis with new research, and we're going to get 0:04:51.520 --> 0:04:55.599 into that. I'd like to welcome Ulrika Malmind onto the show. 0:04:55.720 --> 0:04:58.680 She's a professor of economics and finance over at the 0:04:58.760 --> 0:05:03.599 University of Cali Conia. Welcome, Thank you so much. I'm 0:05:03.640 --> 0:05:07.279 excited to be here. We're excited to have you so 0:05:07.480 --> 0:05:11.000 UM we just had the CPI numbers come in. UM, 0:05:11.440 --> 0:05:14.599 I guess, I guess. My first question is when you 0:05:14.720 --> 0:05:18.000 started looking at inflation, or at least when you published 0:05:18.360 --> 0:05:23.000 this paper called Learning from Inflation Experiences back in you 0:05:23.160 --> 0:05:27.839 sort of looked at this issue from a very different angle, 0:05:28.480 --> 0:05:32.000 from a human experience angle, And I'm just curious what 0:05:32.240 --> 0:05:40.000 sparked your interest in pursuing that line of investigation. UM. Yeah, 0:05:40.040 --> 0:05:44.400 that's actually a really good question, in particular given that 0:05:44.480 --> 0:05:47.839 my earlier research was actually not on inflation, but on 0:05:47.880 --> 0:05:51.560 stock market experiences, the Great Depression and how it, you know, 0:05:51.680 --> 0:05:54.800 generated this generation of depression babies shying away from the 0:05:54.839 --> 0:05:59.040 stock market. But truth be told, it was actually inflation 0:05:59.160 --> 0:06:01.760 that first room me into that. UM. As you may 0:06:01.800 --> 0:06:04.880 have detected by now, I'm German, and my coutha on 0:06:04.920 --> 0:06:09.000 that first paper, Stefanaga is also German, and I remember 0:06:09.040 --> 0:06:13.840 us talking in the hallways of the university about why 0:06:13.960 --> 0:06:18.480 the Germans, including us, have always been so obsessed with 0:06:18.560 --> 0:06:22.560 inflation and had inflation concerns, etcetera, and us tracing it 0:06:22.600 --> 0:06:27.479 back to that traumatic experience experience of many Germans of 0:06:27.520 --> 0:06:30.960 the German hyper inflation. Um So it was indeed long 0:06:31.080 --> 0:06:33.640 lasting effects of living through an inflation and how it 0:06:33.680 --> 0:06:36.560 affects your beliefs and world views that drew me into that. 0:06:37.000 --> 0:06:39.240 I very much hope we won't have to draw parallels 0:06:39.680 --> 0:06:43.320 from the current inflation spike. That's that's interesting. I mean, 0:06:43.320 --> 0:06:45.760 obviously I've heard that my whole career, that you know, 0:06:45.839 --> 0:06:49.640 you look at German uh fiscal policies, you look at 0:06:50.040 --> 0:06:54.880 the official German stand towards the ECB typically and I'd 0:06:54.960 --> 0:06:57.960 always cited exactly what you say, that there is the history, 0:06:58.480 --> 0:07:01.839 the shared memory of the hyperinflation, which we've talked about 0:07:01.839 --> 0:07:05.720 on the past episode, and that continues to inform German 0:07:05.760 --> 0:07:10.720 perspectives on macro policy till this day. And I've always wondered, like, 0:07:11.120 --> 0:07:12.520 is that a myth or is that it just so 0:07:12.680 --> 0:07:16.680 story or is it is that an oversimplification of things? 0:07:16.720 --> 0:07:19.320 How much can you expand on that a little bit further? 0:07:19.440 --> 0:07:23.000 What is the manner view which this traumatic episode of 0:07:23.040 --> 0:07:29.160 the past continues to inform public sentiment and public policy today? 0:07:29.160 --> 0:07:32.360 How what's the transmission mechanism there? Um? That is an 0:07:32.360 --> 0:07:35.720 excellent question as well, And to be really honest, it 0:07:35.760 --> 0:07:39.880 is a little bit outside of the data I've actually studied, 0:07:40.160 --> 0:07:44.800 because I have indeed studied the inflation you have personally experienced, 0:07:45.160 --> 0:07:48.960 And how say, talking about today's events, and you know, 0:07:49.040 --> 0:07:52.040 pointing out that some older generations might be more concernt 0:07:52.080 --> 0:07:55.480 than some younger ones, attributing it maybe to different lifestyles, 0:07:55.480 --> 0:07:57.280 and I would you know, want to make you pause 0:07:57.360 --> 0:08:00.120 and say no, But it also might reflect what if 0:08:00.160 --> 0:08:02.280 personally lived through those younger folks might not have a 0:08:02.320 --> 0:08:05.160 vivid memory of the nineteen eighties. So you're quite right 0:08:05.200 --> 0:08:08.520 to question me about the you know, German hiphire inflation 0:08:08.560 --> 0:08:11.600 almost hundred years ago, and and Germany has had quite 0:08:11.600 --> 0:08:16.840 stable price increases, price levels throughout the last you know, decades, 0:08:16.880 --> 0:08:20.679 So how is that possible? Well, increasingly I am getting 0:08:20.760 --> 0:08:26.080 deeper into the underlying, underlying neuroscience of what kind of 0:08:26.120 --> 0:08:30.600 events do get deeply engraved in our memory and transmission 0:08:30.600 --> 0:08:35.160 from generation to generation can happen? Stories, vivid stories matter. 0:08:35.400 --> 0:08:40.440 You know what also matters media? How much podcast news, organization, 0:08:40.520 --> 0:08:43.560 social media, etcetera. Are highlighting the inflation will have a 0:08:43.640 --> 0:08:45.960 big impact on how much this will be engraved in 0:08:46.000 --> 0:08:48.880 our memory. But here we're just at the beginnings. We're 0:08:48.920 --> 0:08:52.760 getting to the deep underpinning from your science and ubsformation 0:08:52.840 --> 0:08:55.040 and so on as we speak. I hope I have 0:08:55.080 --> 0:08:58.080 more to say on that soon. So why don't we 0:08:58.120 --> 0:09:01.559 get into some of your research and talk about what 0:09:01.640 --> 0:09:03.920 you just pointed out? This idea that there's a difference 0:09:04.000 --> 0:09:09.720 between people's experiences versus their personal inflation baskets. So it 0:09:09.800 --> 0:09:11.959 might be that older people who are on a fixed 0:09:12.000 --> 0:09:16.120 income UM and whose major expenditure or whose major source 0:09:16.120 --> 0:09:19.280 of revenue comes from you know, bond payments or something 0:09:19.320 --> 0:09:22.120 like that, UM, they don't like inflation, they fear it. 0:09:22.520 --> 0:09:25.240 But it might also be that they're the ones that 0:09:25.360 --> 0:09:30.400 remember periods of inflation like the nineties seventies versus younger people. 0:09:30.600 --> 0:09:34.959 So I guess I'm curious, like, could you describe that 0:09:35.280 --> 0:09:38.800 UM effect in detail? And also can you describe how 0:09:38.880 --> 0:09:44.280 you disaggregated those two things in your study? Yeah, happy 0:09:44.320 --> 0:09:46.640 to do that. So let me start by saying both 0:09:46.679 --> 0:09:49.880 are at work. Both mechanisms you just pointed out, UM 0:09:50.000 --> 0:09:55.079 differences between your personal inflation, your personal consumption basket and 0:09:55.120 --> 0:09:59.439 the associated inflation UM compared to mine places significant role. 0:09:59.559 --> 0:10:03.600 And then difference differences and experiences we have made over 0:10:03.640 --> 0:10:08.040 our lives so far. So starting from the ladder which 0:10:08.360 --> 0:10:11.720 some of my research you referred to earlier builds on, 0:10:12.160 --> 0:10:16.560 I literally looked at when people was using US data, 0:10:16.720 --> 0:10:19.360 but we have since then done also non US studies. 0:10:19.440 --> 0:10:22.400 But so I literally looked in the Michigan survey of 0:10:22.400 --> 0:10:26.520 consumers when people are born, what has been the inflation 0:10:27.280 --> 0:10:30.600 over their lifetime so far, and then asked, um, does 0:10:30.640 --> 0:10:35.079 that predict their inflation expectations looking into the future. And 0:10:35.160 --> 0:10:40.720 it turns out yes, that personal inflation experiences are really powerful. 0:10:41.240 --> 0:10:45.480 Your lifetime average inflation so to speak, is really powerful 0:10:45.760 --> 0:10:49.520 in predicting what you think future inflation will be. And 0:10:49.559 --> 0:10:52.360 this is just taking aggregate inflation experiences. So we are 0:10:52.400 --> 0:10:55.680 not yet at those personal consumption baskets. Now. Just to 0:10:55.720 --> 0:10:59.240 complete the picture here, economists would immediately say, well, you 0:10:59.320 --> 0:11:02.680 know these my the information as symmetries. I'm not reading, 0:11:02.840 --> 0:11:06.400 you know, the back page of the Economist, or not 0:11:06.520 --> 0:11:09.720 following as much as you guys the new CPI numbers 0:11:09.800 --> 0:11:12.280 coming out, and so this just reflects that I'm not 0:11:12.360 --> 0:11:14.960 aware of it. Well, what I then like to do 0:11:15.040 --> 0:11:16.920 is to point people to our study of f o 0:11:17.080 --> 0:11:20.040 MC members, right the Federal Reserve bankers, of all the 0:11:20.120 --> 0:11:25.040 data at their fingertips and even for them personal experiences, 0:11:25.120 --> 0:11:28.600 just taking their birth here, calculating their lifetime average inflation 0:11:28.640 --> 0:11:32.640 experience in the aggregate is really powerful in predicting their 0:11:32.720 --> 0:11:36.960 semi annual forecasts of inflation to Congress. So that's at work. 0:11:37.400 --> 0:11:40.480 And then the second point is definitely also at work. 0:11:40.559 --> 0:11:45.400 If I am able to get exactly um, your consumption basket, 0:11:45.480 --> 0:11:47.440 or let's take a big chunk of it, let's take 0:11:47.440 --> 0:11:51.600 your grocery shopping and look at inflation that occurs in there, 0:11:52.080 --> 0:11:56.000 it has significant influence on your predictions about future inflation. 0:11:56.280 --> 0:11:58.760 So cool fact here is um that for years we've 0:11:58.840 --> 0:12:01.040 known that women tend to be more pessimistic, so they 0:12:01.080 --> 0:12:04.480 have higher inflation expectations. FED Federal Reserve bankers have known 0:12:04.520 --> 0:12:07.000 that For years, I've always wondered why the women are 0:12:07.040 --> 0:12:10.959 so anxious about inflation. Well, it turns out that if 0:12:11.000 --> 0:12:14.800 you control for grocery shopping so traditional you know, gender 0:12:14.880 --> 0:12:17.840 roles women, that's the grocery shopping, it takes the whole 0:12:17.840 --> 0:12:21.400 gender effect away. So it just comes from groceries being 0:12:21.480 --> 0:12:25.160 so volatile, people anchoring on the price hikes. That explains 0:12:25.240 --> 0:12:27.520 all those gender differences. So this is I think a 0:12:27.520 --> 0:12:31.440 powerful example for your second point. What about gasoline. There's 0:12:31.640 --> 0:12:35.600 I hear people often say that people form their views 0:12:35.640 --> 0:12:39.640 on inflation at the pump. Yes, indeed, so we also 0:12:39.679 --> 0:12:42.240 see that in our data. Other people I've found that 0:12:42.400 --> 0:12:45.079 in their data. You know, my my dreams scenario is 0:12:45.120 --> 0:12:48.240 still one where I get subjects to put on you know, 0:12:48.360 --> 0:12:51.080 Google glass or something like this. I can literally see 0:12:51.120 --> 0:12:54.160 all the prices they look at all day long, and 0:12:54.240 --> 0:12:56.880 I think, um, we would get a really really good 0:12:56.920 --> 0:13:00.440 picture of what their inflation beliefs are currently. So we 0:13:00.480 --> 0:13:03.959 have been focusing on grocery prices because there's fantastic detailed 0:13:04.040 --> 0:13:07.040 data on it. We have some data on gasoline. If 0:13:07.080 --> 0:13:25.760 you combine the two, it comes even more powerful. So 0:13:25.960 --> 0:13:28.839 one of the things I've always wondered is this might 0:13:28.880 --> 0:13:31.200 sound like a weird question, but bear with me, but 0:13:31.800 --> 0:13:36.400 the degree to which inflation expectations actually matter and whether 0:13:36.520 --> 0:13:39.800 or not people do or do not change their behavior 0:13:40.000 --> 0:13:44.240 based on their future expectations of inflation and um, for 0:13:44.280 --> 0:13:47.720 people like I guess Joe and myself, certainly for our 0:13:47.760 --> 0:13:52.160 professional lives, we've experienced pretty low rates of inflation, and 0:13:52.200 --> 0:13:55.520 so it's hard to conceptualize a moment in time where 0:13:56.000 --> 0:14:00.280 if inflation were to spike, what would our consumer respects 0:14:00.440 --> 0:14:04.559 actually be to that, Like, I have no basis for comparison, 0:14:04.600 --> 0:14:07.720 so it's really hard to imagine. Um, I'm just wondering 0:14:08.160 --> 0:14:15.400 what's your take on that. Do inflation expectations actually impact behavior? Yeah? Um, 0:14:15.440 --> 0:14:18.280 this is a question I get not only from you know, 0:14:18.480 --> 0:14:21.000 folks working in the media or even outside in academia 0:14:21.040 --> 0:14:23.680 and media, but even within academia, we are often asking 0:14:23.720 --> 0:14:26.800 ourselves that question. I often get that in referee responses 0:14:26.880 --> 0:14:30.360 to my papers, and it's a it's a very reasonable question. 0:14:30.680 --> 0:14:34.440 Of course, traditional economic models would say, oh, yes, it 0:14:34.520 --> 0:14:38.120 will affect your savings decision, including your retirement saving. It 0:14:38.200 --> 0:14:41.840 might affect your consumption choices. Right, Inflation goes up, we 0:14:41.880 --> 0:14:44.520 should all be spending like crazy because money will be 0:14:44.560 --> 0:14:47.400 worth less in the future. And that's not quite what happened. 0:14:47.640 --> 0:14:50.040 So I just want to pause for a moment and 0:14:50.120 --> 0:14:53.920 say that the standard economic models in academia but also 0:14:53.960 --> 0:14:58.120 in the policy world do implicitly assume there's a strong link, 0:14:58.520 --> 0:15:01.960 and so that goes into all of policy recommendations. Um 0:15:02.040 --> 0:15:05.240 so um. The baseline assumption is there, But is it 0:15:05.280 --> 0:15:10.520 actually true? Well, if we look at decisions of people 0:15:10.600 --> 0:15:13.720 who literally deal with inflation, so as I said, I'm 0:15:13.760 --> 0:15:16.680 studying m f O m C members, members of the 0:15:16.720 --> 0:15:20.560 Federal Market Committee, who you know, decide about interest rates 0:15:20.600 --> 0:15:24.920 and react to to the inflation they see and unemployment rate, etcetera. 0:15:25.440 --> 0:15:28.320 I do see it working there. So for startus. Among 0:15:28.400 --> 0:15:31.520 the professionals, the effect is there that they're overly influenced 0:15:31.520 --> 0:15:35.960 by their personal experiences and are voting to dissent, say 0:15:36.040 --> 0:15:39.840 from the chairperson's proposal if um, you know, their personal 0:15:39.840 --> 0:15:42.560 experiences point them in a different into a different direction. 0:15:43.160 --> 0:15:47.400 Fun fact. Also, I got some data from UM one 0:15:47.440 --> 0:15:50.280 of the big financial firms working in bonds, and they 0:15:50.280 --> 0:15:54.040 are too. I got also their nationality inflation, the French 0:15:54.080 --> 0:15:56.640 and the Germans and the many Americans working there they've 0:15:56.720 --> 0:16:00.280 personally experienced in fact their beliefs and will absolute really 0:16:00.320 --> 0:16:03.800 influenced therefore decision their decision making in the firm. But 0:16:03.880 --> 0:16:07.280 I think you're ultimately your question was more targeted maybe too, 0:16:07.400 --> 0:16:10.240 you know, the person like you and me who's not 0:16:10.640 --> 0:16:14.400 necessarily like actively trading or making policy decisions based on 0:16:14.480 --> 0:16:17.600 inflation numbers. And it is a good question. It is 0:16:17.920 --> 0:16:20.240 to a large extent, and open questions still to be 0:16:20.280 --> 0:16:24.480 shown how it affects savage negotiation, labor market choices, etcetera. 0:16:24.760 --> 0:16:28.840 But what I can say is that, well, not surprisingly, 0:16:29.680 --> 0:16:34.240 personal inflation experiences affect your beliefs about future interest rates. 0:16:34.640 --> 0:16:37.880 So you know, inflation and nominal interest rates are closely linked, 0:16:37.880 --> 0:16:40.040 so it shouldn't come as a big shock. But only 0:16:40.080 --> 0:16:42.280 recently we've been able actually to get the data to 0:16:42.360 --> 0:16:47.200 formally show inflation experiences strongly affect in not only inflation beliefs, 0:16:47.240 --> 0:16:50.680 but correlated with that also nominal interest rate beliefs, and 0:16:50.720 --> 0:16:54.200 then those in turn effect some of the biggest financial 0:16:54.240 --> 0:16:57.520 decisions households make, namely whether to buy or rent a home, 0:16:57.640 --> 0:16:59.840 and conditional on buying, whether you take a fixed rate 0:16:59.920 --> 0:17:03.520 or ARBA rate. So the generations who have had experienced, 0:17:03.560 --> 0:17:06.720 for example, the big hikes end of the nineteen seventies 0:17:06.880 --> 0:17:10.879 n eighty, who were really afraid of that happening again, 0:17:11.440 --> 0:17:14.560 they love fixed rate mortgages. I think the shadows of 0:17:14.600 --> 0:17:18.359 that are still present, and they are forgoing lots of 0:17:18.400 --> 0:17:22.000 money by not using cheaper variable rate mortgages when available. 0:17:22.080 --> 0:17:25.040 So here I would say we do have some first evidence. Yeah, 0:17:25.080 --> 0:17:28.760 I feel like even the children of that generation has 0:17:28.840 --> 0:17:32.240 been like sort of like taught that fixed rate mantra. 0:17:32.440 --> 0:17:35.280 So it's like, even for myself and I own a house, 0:17:35.600 --> 0:17:37.880 just like the idea of like, you know, all I've 0:17:37.920 --> 0:17:40.760 experienced all my life basically is lower and lower rate. 0:17:41.000 --> 0:17:43.600 But still the idea of like thirty year fixed rate 0:17:43.640 --> 0:17:48.320 being the most responsible thing to do feels very Uh 0:17:48.440 --> 0:17:52.560 that that feels like a very powerful force exerted on me. Okay, 0:17:52.960 --> 0:17:55.920 you find these cohort effects where there's sort of these 0:17:55.960 --> 0:17:59.800 clear links between the experience that someone had, whether it's 0:17:59.760 --> 0:18:03.520 an interest rates, whether it's on inflation, and their personal behaviors. 0:18:04.200 --> 0:18:07.479 To what degree should policymakers internalize them? Because we know, 0:18:07.600 --> 0:18:10.320 like from the FED perspective, they put a lot of 0:18:10.320 --> 0:18:14.880 weight on inflation expectations, and they often ascribe mythical powers, 0:18:14.920 --> 0:18:17.439 it seems like, to the public's inflation expectations and the 0:18:17.480 --> 0:18:21.240 importance of keeping them so well anchored. But if inflation 0:18:21.320 --> 0:18:26.640 expectations are so subjective and so heterogeneous across different parts 0:18:26.680 --> 0:18:29.920 of the population by age, demographic experience, and so forth, 0:18:30.320 --> 0:18:33.280 how much power do they really have as an economic force. 0:18:34.240 --> 0:18:36.439 I think that goes back to the previous question. To 0:18:36.520 --> 0:18:40.639 some extent um. I think the FED should continue to 0:18:40.720 --> 0:18:44.200 spend a lot of time on figuring out how these 0:18:44.240 --> 0:18:49.640 inflation expectations actually translate into economic decision making, and how 0:18:49.720 --> 0:18:53.760 our standard economic models are actually wrong and many respect 0:18:53.840 --> 0:18:57.560 So I'm totally with you and and questioning that. However, 0:18:57.760 --> 0:19:01.480 I would not say that, oh, because they're so heterogeneous, 0:19:01.560 --> 0:19:03.600 we should throw up, you know, throw our hands at 0:19:03.640 --> 0:19:05.640 the air and say, well, what can we do here? There? 0:19:05.720 --> 0:19:10.920 This mythical representative agent whom we are targeting doesn't exist. 0:19:11.560 --> 0:19:14.600 You use the word courts before, and I think that's 0:19:14.600 --> 0:19:18.520 a good clue. Certain chords have experienced, say the nineteen 0:19:18.600 --> 0:19:24.520 seventies and nine eighty hikes peak inflation, that's haven't And 0:19:24.640 --> 0:19:28.480 that comes with different ages. So it's the younger generation, 0:19:28.560 --> 0:19:31.440 as you're saying in the intern today, which is less 0:19:31.520 --> 0:19:35.680 concerned about this inflation, and that's the generation that will 0:19:35.760 --> 0:19:39.880 likely be borrowing and um going for the new houses. 0:19:40.119 --> 0:19:44.320 So the older generation is instead the one that's providing um, 0:19:44.359 --> 0:19:47.840 this liquidity in the market. So where do we see 0:19:47.880 --> 0:19:50.280 the shortage right now? What do we want to encourage 0:19:50.720 --> 0:19:55.240 who's looking for jobs? Um? You know, rather than saying oh, 0:19:55.359 --> 0:19:58.720 we actually target this median investor or a media and consumer, 0:19:59.200 --> 0:20:01.880 or saying oh, we can't do anything because it's so heterogeneous, 0:20:02.200 --> 0:20:05.240 thinking by courts, thinking by where the needs are, the 0:20:05.359 --> 0:20:10.320 unemployment concerns, etcetera. I think it's the way forward. I mean, 0:20:10.600 --> 0:20:13.880 again a related question, but do you think that policymakers 0:20:14.040 --> 0:20:19.960 actually look at demographics when they're looking at inflation expectations? Like, 0:20:20.040 --> 0:20:22.480 to what degree do you think they're trying to break 0:20:22.520 --> 0:20:29.200 down an inflation survey by subjective experience? Well, I don't 0:20:29.240 --> 0:20:32.240 work in the policy world. Although I enjoy the interactions 0:20:32.320 --> 0:20:36.720 I have, I don't want to give the completely oversimplified 0:20:37.119 --> 0:20:40.720 impression that nobody is looking at breakdowns by by age. 0:20:40.840 --> 0:20:43.800 I mean you you guys started today's podcast UM that way, 0:20:43.840 --> 0:20:46.280 and I know UM people are highly aware of that 0:20:46.400 --> 0:20:52.040 as well, in terms of UM accounting for where these 0:20:52.080 --> 0:20:55.880 people come from, what their experience has been, and therefore 0:20:56.000 --> 0:20:59.360 what their fears are likely going to be. I personally 0:20:59.359 --> 0:21:02.560 think they're still too little. So there's some aspect of 0:21:02.800 --> 0:21:05.080 looking by age, as you are pointing out, but then 0:21:05.119 --> 0:21:09.359 we tend to attribute everything to age specific life cycle 0:21:09.600 --> 0:21:13.840 specific effects. Oh, the older generation investing more in bonds, 0:21:13.960 --> 0:21:16.679 consuming out of bond in calm, etcetera. No, but it 0:21:16.760 --> 0:21:20.879 matters whether that older generation lift through the peak or not. 0:21:21.359 --> 0:21:23.600 Is kind of way I would like to push things towards. 0:21:24.480 --> 0:21:27.600 Why is inflation so political? I mean, there's there's many 0:21:27.640 --> 0:21:32.159 ways to measure the economy, and there's numerous data points 0:21:32.160 --> 0:21:34.560 to sort of get fields for the forces and pressure 0:21:34.640 --> 0:21:37.840 is exerted on the economy at the time. Inflation is one. 0:21:38.359 --> 0:21:42.320 Obviously employment is another. All that we get, we get 0:21:42.320 --> 0:21:46.040 fresh data points every day. There's something about inflation that 0:21:46.240 --> 0:21:49.640 captures people's imagination. It makes people angry. People form full 0:21:49.680 --> 0:21:53.520 identities out of their stance on inflation. In your work, 0:21:53.560 --> 0:21:55.800 do you have any insight into what it is about 0:21:55.880 --> 0:22:00.840 this particular number that sets people off. This is so 0:22:00.960 --> 0:22:04.160 interesting because as a German, I would think, oh, it's 0:22:04.200 --> 0:22:07.800 so much less political in this country compared to where 0:22:07.800 --> 0:22:11.320 I'm from, right, so I mean in in Germany, definitely, 0:22:11.400 --> 0:22:15.800 the tabloid would have as headlined discussion about inflation policies 0:22:15.840 --> 0:22:19.480 of the European Central Bank and why they disagree with those. 0:22:19.840 --> 0:22:24.080 Um So, so that's a really interesting perspective already. But 0:22:24.280 --> 0:22:26.959 um nevertheless, I think you are right. It might be 0:22:27.400 --> 0:22:31.000 it's a pretty technical measure, and it is, it does 0:22:31.080 --> 0:22:34.800 play a fairly large role. Nevertheless, I don't have research 0:22:34.840 --> 0:22:37.800 on that. My personal suspicion from you know, having worked 0:22:37.800 --> 0:22:39.680 a lot with the data, having read a lot, is 0:22:40.320 --> 0:22:45.840 it has this aspect of making assets you certain assets 0:22:45.880 --> 0:22:49.600 you own potentially less valuable while others not. It it 0:22:49.680 --> 0:22:53.199 generates some kind of inequality and how much people are 0:22:53.240 --> 0:22:56.320 affected by the outcomes of a crisis. So people holding 0:22:56.359 --> 0:23:01.120 real estate, gold stock less of acted than others, and 0:23:01.200 --> 0:23:04.800 I think that sometimes trigger us an additional degree of 0:23:05.119 --> 0:23:08.320 these tensions. But yeah, I'd be curious to find out 0:23:08.359 --> 0:23:28.080 what others think. I wanted to talk about some of 0:23:28.119 --> 0:23:31.840 your recent work as well, and you've been applying a 0:23:31.880 --> 0:23:35.159 lot of the things you've learned in this paper to 0:23:36.000 --> 0:23:40.320 policymakers themselves. And I think this is absolutely fascinating because 0:23:40.400 --> 0:23:43.600 in your latest work, I think you found that f 0:23:43.720 --> 0:23:50.879 o MC members personal experience with inflation affects their expectations 0:23:50.880 --> 0:23:54.760 for inflation so much so that you can actually kind 0:23:54.760 --> 0:23:57.879 of predict where they're going to go better than some 0:23:57.960 --> 0:24:01.720 more traditional UM forecast methods. So could you maybe walk 0:24:01.800 --> 0:24:04.719 us through that and also how you got the idea 0:24:04.800 --> 0:24:10.560 to look at this particular topic. Well, to be completely honest, 0:24:11.160 --> 0:24:16.159 what had been irking me UM is that economist, and 0:24:16.240 --> 0:24:18.520 I think to some extent also people working in the 0:24:18.560 --> 0:24:25.200 policy world, had been very fast to attribute any kind 0:24:25.240 --> 0:24:29.200 of experience effect. To use the term we've coined two 0:24:29.520 --> 0:24:33.680 informational asymmetries. So just as I as I stated earlier, UM, 0:24:33.720 --> 0:24:37.200 if somebody who has lived through the German hyper inflation 0:24:37.400 --> 0:24:40.720 or the higher inflation in the seventies nineteen eighty in 0:24:40.760 --> 0:24:43.840 the in the US, if that person tends to be 0:24:44.160 --> 0:24:49.280 more pessimistic about a future inflation numbers being rather high, 0:24:49.440 --> 0:24:52.040 then UM in condoms are quick to jump to the 0:24:52.040 --> 0:24:55.040 conclusion that they're informational frictions. Not everybody has all the 0:24:55.040 --> 0:24:59.760 information data at their fingertips. Hence UM those personal experiences 0:24:59.800 --> 0:25:03.280 as just data we are aware of. And that explains 0:25:03.640 --> 0:25:08.399 why personal experience affect your beliefs. To draw a finer 0:25:08.480 --> 0:25:14.120