Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't so Joe. We're
Speaker 1: recording this episode on July, and we have just thirty
Speaker 1: minutes ago gotten the latest US inflation data. It's come
Speaker 1: in a lot higher or hotter than expected. I think
Speaker 1: headlines c p I came in at like five point
Speaker 1: four percent and core inflation was four point five percent.
Speaker 1: It was expected to be something like four percent for June.
Speaker 1: And we're sort of watching the reactions come in in
Speaker 1: real time, um from the cell side, analysts and on
Speaker 1: social media, and it's amazing how you're getting these sort
Speaker 1: of two distinct camps. So on the one hand, everyone
Speaker 1: is looking at the same data, but everyone seems to
Speaker 1: be reaching vastly different conclusions. So on the one hand,
Speaker 1: you have people who say this is still transitory. A
Speaker 1: lot of the strength is in uh, certain segments that
Speaker 1: have seen these supply bottlenecks that we've been talking about.
Speaker 1: And on the other hand, you have people who are saying, well,
Speaker 1: this is starting to look very worrying and maybe something
Speaker 1: more permanent. Right, there's no question that the intensity of
Speaker 1: the CPI gains that we've seen really over the last
Speaker 1: three months have been higher, hotter than economists had expected.
Speaker 1: It seems to be lasting a little bit longer. So
Speaker 1: on the one hand, you can say, Okay, that's worrisome.
Speaker 1: On the other hand, when you dig into the guts
Speaker 1: of the report, it still looks like there's an argument
Speaker 1: for transitory. So a huge component of this is still
Speaker 1: used cars, which haven't slowed down. You know, not long ago,
Speaker 1: we were never talking about used cars is an important
Speaker 1: inflation category. Now is something like a third of the
Speaker 1: game or of the game was used cars. Other categories
Speaker 1: specifically related to reopening are pushing things higher. So I
Speaker 1: kind of think it's like an impasse, like no side
Speaker 1: will be totally satisfied, because the people who are convinced
Speaker 1: that there's all transitory could point to the sub indexes
Speaker 1: of the sub numbers whereas the people who are saying
Speaker 1: this is a start of a real problem point to
Speaker 1: the headlines that are hotter than expected several months in
Speaker 1: a row. Now, Yeah, it's kind of like CPI is
Speaker 1: the ultimate exercise in confirmation bias, Like there's something for everyone, Um,
Speaker 1: whether you're looking at the headline numbers or the sub components.
Speaker 1: But I mean, I say that, And one of the
Speaker 1: things I've been thinking about a lot lately is this
Speaker 1: idea that you know, the saying that inflation is always
Speaker 1: an everywhere a monetary phenomenon, which I don't necessarily disagree with,
Speaker 1: but I feel like it's also a human phenomenon. And
Speaker 1: you're seeing that in this discrepancy between these two camps
Speaker 1: of people looking at the inflation numbers, and you're also
Speaker 1: starting to see it in terms of inflation expectations themselves.
Speaker 1: So for instance, if you look at the breakdown of
Speaker 1: survey respondents by age, you can see that older people
Speaker 1: are a lot more worried about inflation at the moment
Speaker 1: than younger people, which is kind of interesting. Yeah, I mean,
Speaker 1: I think instead of, you know, they say it's always
Speaker 1: a monetary phenomenon, but look, I don't think there's an
Speaker 1: obvious monetary link to be drawn between say, anything that
Speaker 1: the FED has done recently and the fact that use
Speaker 1: car prices continue to have this bottleneck and part due
Speaker 1: to a chip shortage as a result from our over
Speaker 1: alliance on t SMC and the virus and so forth. So,
Speaker 1: but what I do think and what I think you're
Speaker 1: getting it too, is that there is a tremendous political
Speaker 1: valence to all inflation. And if you are young and
Speaker 1: you're able to be flexible in your consumption and lifestyle patterns,
Speaker 1: maybe inflation doesn't infect you affect you so much. If
Speaker 1: you're older, if you're on a fixed income, it could
Speaker 1: be a greater problem. If you're a urban professional who
Speaker 1: likes to eat uh, to put laburrito balls and take
Speaker 1: an uber to work, You're probably not thrilled with the
Speaker 1: cost of an uber these days, and you want the
Speaker 1: FED to hike. So a lot of it is sort
Speaker 1: of like personal it's formed by one consumption pattern. There's
Speaker 1: a political nature, and I think these headline CPI numbers
Speaker 1: that we get no one feels them like no one,
Speaker 1: Everyone's like, that's not my experience that things are. Everyone
Speaker 1: is sort of a subjective experience of what kind of
Speaker 1: inflation is happening in the economy. Yeah, exactly, Subjective is
Speaker 1: the key words. So I'm glad to say that we
Speaker 1: are going to be getting into the subjectivity of inflation
Speaker 1: on this episode, and we have the perfect person to
Speaker 1: discuss it. We have someone who basically wrote a seminal
Speaker 1: paper on inflation experiences back in and she's been updating
Speaker 1: her thesis with new research, and we're going to get
Speaker 1: into that. I'd like to welcome Ulrika Malmind onto the show.
Speaker 1: She's a professor of economics and finance over at the
Speaker 1: University of Cali Conia. Welcome, Thank you so much. I'm
Speaker 1: excited to be here. We're excited to have you so
Speaker 1: UM we just had the CPI numbers come in. UM,
Speaker 1: I guess, I guess. My first question is when you
Speaker 1: started looking at inflation, or at least when you published
Speaker 1: this paper called Learning from Inflation Experiences back in you
Speaker 1: sort of looked at this issue from a very different angle,
Speaker 1: from a human experience angle, And I'm just curious what
Speaker 1: sparked your interest in pursuing that line of investigation. UM. Yeah,
Speaker 1: that's actually a really good question, in particular given that
Speaker 1: my earlier research was actually not on inflation, but on
Speaker 1: stock market experiences, the Great Depression and how it, you know,
Speaker 1: generated this generation of depression babies shying away from the
Speaker 1: stock market. But truth be told, it was actually inflation
Speaker 1: that first room me into that. UM. As you may
Speaker 1: have detected by now, I'm German, and my coutha on
Speaker 1: that first paper, Stefanaga is also German, and I remember
Speaker 1: us talking in the hallways of the university about why
Speaker 1: the Germans, including us, have always been so obsessed with
Speaker 1: inflation and had inflation concerns, etcetera, and us tracing it
Speaker 1: back to that traumatic experience experience of many Germans of
Speaker 1: the German hyper inflation. Um So it was indeed long
Speaker 1: lasting effects of living through an inflation and how it
Speaker 1: affects your beliefs and world views that drew me into that.
Speaker 1: I very much hope we won't have to draw parallels
Speaker 1: from the current inflation spike. That's that's interesting. I mean,
Speaker 1: obviously I've heard that my whole career, that you know,
Speaker 1: you look at German uh fiscal policies, you look at
Speaker 1: the official German stand towards the ECB typically and I'd
Speaker 1: always cited exactly what you say, that there is the history,
Speaker 1: the shared memory of the hyperinflation, which we've talked about
Speaker 1: on the past episode, and that continues to inform German
Speaker 1: perspectives on macro policy till this day. And I've always wondered, like,
Speaker 1: is that a myth or is that it just so
Speaker 1: story or is it is that an oversimplification of things?
Speaker 1: How much can you expand on that a little bit further?
Speaker 1: What is the manner view which this traumatic episode of
Speaker 1: the past continues to inform public sentiment and public policy today?
Speaker 1: How what's the transmission mechanism there? Um? That is an
Speaker 1: excellent question as well, And to be really honest, it
Speaker 1: is a little bit outside of the data I've actually studied,
Speaker 1: because I have indeed studied the inflation you have personally experienced,
Speaker 1: And how say, talking about today's events, and you know,
Speaker 1: pointing out that some older generations might be more concernt
Speaker 1: than some younger ones, attributing it maybe to different lifestyles,
Speaker 1: and I would you know, want to make you pause
Speaker 1: and say no, But it also might reflect what if
Speaker 1: personally lived through those younger folks might not have a
Speaker 1: vivid memory of the nineteen eighties. So you're quite right
Speaker 1: to question me about the you know, German hiphire inflation
Speaker 1: almost hundred years ago, and and Germany has had quite
Speaker 1: stable price increases, price levels throughout the last you know, decades,
Speaker 1: So how is that possible? Well, increasingly I am getting
Speaker 1: deeper into the underlying, underlying neuroscience of what kind of
Speaker 1: events do get deeply engraved in our memory and transmission
Speaker 1: from generation to generation can happen? Stories, vivid stories matter.
Speaker 1: You know what also matters media? How much podcast news, organization,
Speaker 1: social media, etcetera. Are highlighting the inflation will have a
Speaker 1: big impact on how much this will be engraved in
Speaker 1: our memory. But here we're just at the beginnings. We're
Speaker 1: getting to the deep underpinning from your science and ubsformation
Speaker 1: and so on as we speak. I hope I have
Speaker 1: more to say on that soon. So why don't we
Speaker 1: get into some of your research and talk about what
Speaker 1: you just pointed out? This idea that there's a difference
Speaker 1: between people's experiences versus their personal inflation baskets. So it
Speaker 1: might be that older people who are on a fixed
Speaker 1: income UM and whose major expenditure or whose major source
Speaker 1: of revenue comes from you know, bond payments or something
Speaker 1: like that, UM, they don't like inflation, they fear it.
Speaker 1: But it might also be that they're the ones that
Speaker 1: remember periods of inflation like the nineties seventies versus younger people.
Speaker 1: So I guess I'm curious, like, could you describe that
Speaker 1: UM effect in detail? And also can you describe how
Speaker 1: you disaggregated those two things in your study? Yeah, happy
Speaker 1: to do that. So let me start by saying both
Speaker 1: are at work. Both mechanisms you just pointed out, UM
Speaker 1: differences between your personal inflation, your personal consumption basket and
Speaker 1: the associated inflation UM compared to mine places significant role.
Speaker 1: And then difference differences and experiences we have made over
Speaker 1: our lives so far. So starting from the ladder which
Speaker 1: some of my research you referred to earlier builds on,
Speaker 1: I literally looked at when people was using US data,
Speaker 1: but we have since then done also non US studies.
Speaker 1: But so I literally looked in the Michigan survey of
Speaker 1: consumers when people are born, what has been the inflation
Speaker 1: over their lifetime so far, and then asked, um, does
Speaker 1: that predict their inflation expectations looking into the future. And
Speaker 1: it turns out yes, that personal inflation experiences are really powerful.
Speaker 1: Your lifetime average inflation so to speak, is really powerful
Speaker 1: in predicting what you think future inflation will be. And
Speaker 1: this is just taking aggregate inflation experiences. So we are
Speaker 1: not yet at those personal consumption baskets. Now. Just to
Speaker 1: complete the picture here, economists would immediately say, well, you
Speaker 1: know these my the information as symmetries. I'm not reading,
Speaker 1: you know, the back page of the Economist, or not
Speaker 1: following as much as you guys the new CPI numbers
Speaker 1: coming out, and so this just reflects that I'm not
Speaker 1: aware of it. Well, what I then like to do
Speaker 1: is to point people to our study of f o
Speaker 1: MC members, right the Federal Reserve bankers, of all the
Speaker 1: data at their fingertips and even for them personal experiences,
Speaker 1: just taking their birth here, calculating their lifetime average inflation
Speaker 1: experience in the aggregate is really powerful in predicting their
Speaker 1: semi annual forecasts of inflation to Congress. So that's at work.
Speaker 1: And then the second point is definitely also at work.
Speaker 1: If I am able to get exactly um, your consumption basket,
Speaker 1: or let's take a big chunk of it, let's take
Speaker 1: your grocery shopping and look at inflation that occurs in there,
Speaker 1: it has significant influence on your predictions about future inflation.
Speaker 1: So cool fact here is um that for years we've
Speaker 1: known that women tend to be more pessimistic, so they
Speaker 1: have higher inflation expectations. FED Federal Reserve bankers have known
Speaker 1: that For years, I've always wondered why the women are
Speaker 1: so anxious about inflation. Well, it turns out that if
Speaker 1: you control for grocery shopping so traditional you know, gender
Speaker 1: roles women, that's the grocery shopping, it takes the whole
Speaker 1: gender effect away. So it just comes from groceries being
Speaker 1: so volatile, people anchoring on the price hikes. That explains
Speaker 1: all those gender differences. So this is I think a
Speaker 1: powerful example for your second point. What about gasoline. There's
Speaker 1: I hear people often say that people form their views
Speaker 1: on inflation at the pump. Yes, indeed, so we also
Speaker 1: see that in our data. Other people I've found that
Speaker 1: in their data. You know, my my dreams scenario is
Speaker 1: still one where I get subjects to put on you know,
Speaker 1: Google glass or something like this. I can literally see
Speaker 1: all the prices they look at all day long, and
Speaker 1: I think, um, we would get a really really good
Speaker 1: picture of what their inflation beliefs are currently. So we
Speaker 1: have been focusing on grocery prices because there's fantastic detailed
Speaker 1: data on it. We have some data on gasoline. If
Speaker 1: you combine the two, it comes even more powerful. So
Speaker 1: one of the things I've always wondered is this might
Speaker 1: sound like a weird question, but bear with me, but
Speaker 1: the degree to which inflation expectations actually matter and whether
Speaker 1: or not people do or do not change their behavior
Speaker 1: based on their future expectations of inflation and um, for
Speaker 1: people like I guess Joe and myself, certainly for our
Speaker 1: professional lives, we've experienced pretty low rates of inflation, and
Speaker 1: so it's hard to conceptualize a moment in time where
Speaker 1: if inflation were to spike, what would our consumer respects
Speaker 1: actually be to that, Like, I have no basis for comparison,
Speaker 1: so it's really hard to imagine. Um, I'm just wondering
Speaker 1: what's your take on that. Do inflation expectations actually impact behavior? Yeah? Um,
Speaker 1: this is a question I get not only from you know,
Speaker 1: folks working in the media or even outside in academia
Speaker 1: and media, but even within academia, we are often asking
Speaker 1: ourselves that question. I often get that in referee responses
Speaker 1: to my papers, and it's a it's a very reasonable question.
Speaker 1: Of course, traditional economic models would say, oh, yes, it
Speaker 1: will affect your savings decision, including your retirement saving. It
Speaker 1: might affect your consumption choices. Right, Inflation goes up, we
Speaker 1: should all be spending like crazy because money will be
Speaker 1: worth less in the future. And that's not quite what happened.
Speaker 1: So I just want to pause for a moment and
Speaker 1: say that the standard economic models in academia but also
Speaker 1: in the policy world do implicitly assume there's a strong link,
Speaker 1: and so that goes into all of policy recommendations. Um
Speaker 1: so um. The baseline assumption is there, But is it
Speaker 1: actually true? Well, if we look at decisions of people
Speaker 1: who literally deal with inflation, so as I said, I'm
Speaker 1: studying m f O m C members, members of the
Speaker 1: Federal Market Committee, who you know, decide about interest rates
Speaker 1: and react to to the inflation they see and unemployment rate, etcetera.
Speaker 1: I do see it working there. So for startus. Among
Speaker 1: the professionals, the effect is there that they're overly influenced
Speaker 1: by their personal experiences and are voting to dissent, say
Speaker 1: from the chairperson's proposal if um, you know, their personal
Speaker 1: experiences point them in a different into a different direction.
Speaker 1: Fun fact. Also, I got some data from UM one
Speaker 1: of the big financial firms working in bonds, and they
Speaker 1: are too. I got also their nationality inflation, the French
Speaker 1: and the Germans and the many Americans working there they've
Speaker 1: personally experienced in fact their beliefs and will absolute really
Speaker 1: influenced therefore decision their decision making in the firm. But
Speaker 1: I think you're ultimately your question was more targeted maybe too,
Speaker 1: you know, the person like you and me who's not
Speaker 1: necessarily like actively trading or making policy decisions based on
Speaker 1: inflation numbers. And it is a good question. It is
Speaker 1: to a large extent, and open questions still to be
Speaker 1: shown how it affects savage negotiation, labor market choices, etcetera.
Speaker 1: But what I can say is that, well, not surprisingly,
Speaker 1: personal inflation experiences affect your beliefs about future interest rates.
Speaker 1: So you know, inflation and nominal interest rates are closely linked,
Speaker 1: so it shouldn't come as a big shock. But only
Speaker 1: recently we've been able actually to get the data to
Speaker 1: formally show inflation experiences strongly affect in not only inflation beliefs,
Speaker 1: but correlated with that also nominal interest rate beliefs, and
Speaker 1: then those in turn effect some of the biggest financial
Speaker 1: decisions households make, namely whether to buy or rent a home,
Speaker 1: and conditional on buying, whether you take a fixed rate
Speaker 1: or ARBA rate. So the generations who have had experienced,
Speaker 1: for example, the big hikes end of the nineteen seventies
Speaker 1: n eighty, who were really afraid of that happening again,
Speaker 1: they love fixed rate mortgages. I think the shadows of
Speaker 1: that are still present, and they are forgoing lots of
Speaker 1: money by not using cheaper variable rate mortgages when available.
Speaker 1: So here I would say we do have some first evidence. Yeah,
Speaker 1: I feel like even the children of that generation has
Speaker 1: been like sort of like taught that fixed rate mantra.
Speaker 1: So it's like, even for myself and I own a house,
Speaker 1: just like the idea of like, you know, all I've
Speaker 1: experienced all my life basically is lower and lower rate.
Speaker 1: But still the idea of like thirty year fixed rate
Speaker 1: being the most responsible thing to do feels very Uh
Speaker 1: that that feels like a very powerful force exerted on me. Okay,
Speaker 1: you find these cohort effects where there's sort of these
Speaker 1: clear links between the experience that someone had, whether it's
Speaker 1: an interest rates, whether it's on inflation, and their personal behaviors.
Speaker 1: To what degree should policymakers internalize them? Because we know,
Speaker 1: like from the FED perspective, they put a lot of
Speaker 1: weight on inflation expectations, and they often ascribe mythical powers,
Speaker 1: it seems like, to the public's inflation expectations and the
Speaker 1: importance of keeping them so well anchored. But if inflation
Speaker 1: expectations are so subjective and so heterogeneous across different parts
Speaker 1: of the population by age, demographic experience, and so forth,
Speaker 1: how much power do they really have as an economic force.
Speaker 1: I think that goes back to the previous question. To
Speaker 1: some extent um. I think the FED should continue to
Speaker 1: spend a lot of time on figuring out how these
Speaker 1: inflation expectations actually translate into economic decision making, and how
Speaker 1: our standard economic models are actually wrong and many respect
Speaker 1: So I'm totally with you and and questioning that. However,
Speaker 1: I would not say that, oh, because they're so heterogeneous,
Speaker 1: we should throw up, you know, throw our hands at
Speaker 1: the air and say, well, what can we do here? There?
Speaker 1: This mythical representative agent whom we are targeting doesn't exist.
Speaker 1: You use the word courts before, and I think that's
Speaker 1: a good clue. Certain chords have experienced, say the nineteen
Speaker 1: seventies and nine eighty hikes peak inflation, that's haven't And
Speaker 1: that comes with different ages. So it's the younger generation,
Speaker 1: as you're saying in the intern today, which is less
Speaker 1: concerned about this inflation, and that's the generation that will
Speaker 1: likely be borrowing and um going for the new houses.
Speaker 1: So the older generation is instead the one that's providing um,
Speaker 1: this liquidity in the market. So where do we see
Speaker 1: the shortage right now? What do we want to encourage
Speaker 1: who's looking for jobs? Um? You know, rather than saying oh,
Speaker 1: we actually target this median investor or a media and consumer,
Speaker 1: or saying oh, we can't do anything because it's so heterogeneous,
Speaker 1: thinking by courts, thinking by where the needs are, the
Speaker 1: unemployment concerns, etcetera. I think it's the way forward. I mean,
Speaker 1: again a related question, but do you think that policymakers
Speaker 1: actually look at demographics when they're looking at inflation expectations? Like,
Speaker 1: to what degree do you think they're trying to break
Speaker 1: down an inflation survey by subjective experience? Well, I don't
Speaker 1: work in the policy world. Although I enjoy the interactions
Speaker 1: I have, I don't want to give the completely oversimplified
Speaker 1: impression that nobody is looking at breakdowns by by age.
Speaker 1: I mean you you guys started today's podcast UM that way,
Speaker 1: and I know UM people are highly aware of that
Speaker 1: as well, in terms of UM accounting for where these
Speaker 1: people come from, what their experience has been, and therefore
Speaker 1: what their fears are likely going to be. I personally
Speaker 1: think they're still too little. So there's some aspect of
Speaker 1: looking by age, as you are pointing out, but then
Speaker 1: we tend to attribute everything to age specific life cycle
Speaker 1: specific effects. Oh, the older generation investing more in bonds,
Speaker 1: consuming out of bond in calm, etcetera. No, but it
Speaker 1: matters whether that older generation lift through the peak or not.
Speaker 1: Is kind of way I would like to push things towards.
Speaker 1: Why is inflation so political? I mean, there's there's many
Speaker 1: ways to measure the economy, and there's numerous data points
Speaker 1: to sort of get fields for the forces and pressure
Speaker 1: is exerted on the economy at the time. Inflation is one.
Speaker 1: Obviously employment is another. All that we get, we get
Speaker 1: fresh data points every day. There's something about inflation that
Speaker 1: captures people's imagination. It makes people angry. People form full
Speaker 1: identities out of their stance on inflation. In your work,
Speaker 1: do you have any insight into what it is about
Speaker 1: this particular number that sets people off. This is so
Speaker 1: interesting because as a German, I would think, oh, it's
Speaker 1: so much less political in this country compared to where
Speaker 1: I'm from, right, so I mean in in Germany, definitely,
Speaker 1: the tabloid would have as headlined discussion about inflation policies
Speaker 1: of the European Central Bank and why they disagree with those.
Speaker 1: Um So, so that's a really interesting perspective already. But
Speaker 1: um nevertheless, I think you are right. It might be
Speaker 1: it's a pretty technical measure, and it is, it does
Speaker 1: play a fairly large role. Nevertheless, I don't have research
Speaker 1: on that. My personal suspicion from you know, having worked
Speaker 1: a lot with the data, having read a lot, is
Speaker 1: it has this aspect of making assets you certain assets
Speaker 1: you own potentially less valuable while others not. It it
Speaker 1: generates some kind of inequality and how much people are
Speaker 1: affected by the outcomes of a crisis. So people holding
Speaker 1: real estate, gold stock less of acted than others, and
Speaker 1: I think that sometimes trigger us an additional degree of
Speaker 1: these tensions. But yeah, I'd be curious to find out
Speaker 1: what others think. I wanted to talk about some of
Speaker 1: your recent work as well, and you've been applying a
Speaker 1: lot of the things you've learned in this paper to
Speaker 1: policymakers themselves. And I think this is absolutely fascinating because
Speaker 1: in your latest work, I think you found that f
Speaker 1: o MC members personal experience with inflation affects their expectations
Speaker 1: for inflation so much so that you can actually kind
Speaker 1: of predict where they're going to go better than some
Speaker 1: more traditional UM forecast methods. So could you maybe walk
Speaker 1: us through that and also how you got the idea
Speaker 1: to look at this particular topic. Well, to be completely honest,
Speaker 1: what had been irking me UM is that economist, and
Speaker 1: I think to some extent also people working in the
Speaker 1: policy world, had been very fast to attribute any kind
Speaker 1: of experience effect. To use the term we've coined two
Speaker 1: informational asymmetries. So just as I as I stated earlier, UM,
Speaker 1: if somebody who has lived through the German hyper inflation
Speaker 1: or the higher inflation in the seventies nineteen eighty in
Speaker 1: the in the US, if that person tends to be
Speaker 1: more pessimistic about a future inflation numbers being rather high,
Speaker 1: then UM in condoms are quick to jump to the
Speaker 1: conclusion that they're informational frictions. Not everybody has all the
Speaker 1: information data at their fingertips. Hence UM those personal experiences
Speaker 1: as just data we are aware of. And that explains
Speaker 1: why personal experience affect your beliefs. To draw a finer
Speaker 1: distinction between your personal experiences affecting you so strongly because
Speaker 1: they're differently anchored in your brain versus, oh, without experience,
Speaker 1: you just don't have the knowledge, you're not aware of it.
Speaker 1: I was really drawn to the idea to basically hone
Speaker 1: in on the experts on the people as far as
Speaker 1: I imagine you know the FMC members lives they have,
Speaker 1: and on their desk in front of them all the
Speaker 1: inflation numbers anybody would ever want to see. There's no
Speaker 1: informational asymmetry whatsoever, and UM now they're ready to run
Speaker 1: and make forecasts about future inflation. And so to show,
Speaker 1: even for those UM experts that they are strongly affected
Speaker 1: by their personal experiences is what really drew me into
Speaker 1: that topic. But what were the actual findings? Because I
Speaker 1: found the link that you found between members personal inflation
Speaker 1: history and sort of predicting or forecasting how they might
Speaker 1: react to monetary conditions, that was really striking. So the
Speaker 1: first step is simply to relate personal experiences to their forecasts. So,
Speaker 1: as you probably know, the FMC members twice a year
Speaker 1: make these um forecasts to Congress about what they think
Speaker 1: inflation will be. You know, various horizons, I say one
Speaker 1: year had horizon under you know their ideal policy. And
Speaker 1: if you plot what members say in these in in
Speaker 1: these semi anormal forecasts against their personal experience UM normalized
Speaker 1: you know, you want to account some word forwards year,
Speaker 1: we're in, etcetera. So we normalized by what their staff
Speaker 1: told them in the green box. So normalized by the
Speaker 1: stuff forecast, you get the most beautiful scatter plot of
Speaker 1: like strongly correlated personal experience and what they say. So
Speaker 1: so that was interesting. Now you go to the actual
Speaker 1: voting behavior. And I was a little nervous of doing
Speaker 1: this analysis. I mean, one thing is to look at
Speaker 1: a hundred thousands millions of US consumers and their inflation
Speaker 1: expectations and how they maybe choose their fixed versus variable
Speaker 1: rate mortgage, where I have a lot of variation in
Speaker 1: ancient experience versus you know, even at this day and age,
Speaker 1: pretty much somewhat older male white members of the for
Speaker 1: m C. But luckily there was some hit origin Eatey.
Speaker 1: And what we found is that if you look at
Speaker 1: even relatively small about one standard deviation increase in personal
Speaker 1: experience point one, sorry percentage points increase in personal inflation
Speaker 1: experience relative to the overall group, that does have significant
Speaker 1: predictive power for your voting behavior. So for your actual
Speaker 1: you know, dissent to the chairperson's proposal in terms of
Speaker 1: what should happen and to interest rate. And as you
Speaker 1: know in this day and age, descents have become less common,
Speaker 1: less less frequent. There was a bit of a of
Speaker 1: a break. But so if you look, for example, at
Speaker 1: the overall frequency in the data of a DABBSH descent,
Speaker 1: it's about you know, two point five or something probability.
Speaker 1: But if I increase your personal and inflation experience by
Speaker 1: about one percentage point, that probability goes down by about
Speaker 1: a quarter. And the exact reverse is true for HAWKERSH descent.
Speaker 1: So that probably somewhat higher about four percent of your
Speaker 1: FMC members are willing to descend. But if I shock you,
Speaker 1: I mean I make you a person that's born at
Speaker 1: a time with somewhat higher inflation experience point one percentage point,
Speaker 1: your quarter or third higher probability of dissenting with the forecast.
Speaker 1: So it has actual impact. Um, you might not turn
Speaker 1: around the ultimate vote, but it does leave a you know,
Speaker 1: it is a statement that's seen by the market. It
Speaker 1: might influence the next proposal the chairperson would be making.
Speaker 1: I do have if you're interested in it's a very
Speaker 1: cool anecdote to add about a German guy. Okay, so
Speaker 1: there's this guy born as Heinrich valik In in Berlin,
Speaker 1: in Germany, nineteen fourteen into a family of bankers, and
Speaker 1: he actually lived through Germany's hyper inflation in nineteen twenties three.
Speaker 1: The family emigrated into the s in the nineteen thirties,
Speaker 1: where he became economist and was a FED governor from
Speaker 1: the mid nineteen seventies to mid nineteen eighties. And by
Speaker 1: then you know Henry Wallick rather than Heinrich Vallei, but
Speaker 1: was a you know, very well regarded member of the Fed,
Speaker 1: and to the best of my knowledge, she still holds
Speaker 1: the record of descents. He descented twenty seven times during
Speaker 1: his tenure on the Federal Reserve Board, which is the
Speaker 1: highest number of descent among all FMC members. And as
Speaker 1: you can imagine, he was very much into the hawkers direction,
Speaker 1: always telling everybody that they don't understand how this can
Speaker 1: happen and the implications, etcetera. And clearly this is a
Speaker 1: super smart person that he knows he's in a different country,
Speaker 1: in a different monetary system, he's in a vastly different
Speaker 1: decade right now, and still he couldn't shake it, and
Speaker 1: that experience just stayed with him. I guess I have
Speaker 1: a sort of like very big picture question as someone
Speaker 1: who looks at the intricacies of inflation and how they
Speaker 1: relate to individual groups of people, what's your take on
Speaker 1: on the current environment. And I realized you're not a
Speaker 1: market watcher, but we we did just have cp I
Speaker 1: come in much hotter than expected. You mentioned the idea
Speaker 1: that the more the media talks about inflation, the more
Speaker 1: people see articles or other people discussing it, the more
Speaker 1: it sort of feeds into inflation expectations themselves. Would you
Speaker 1: expect um this to become a sort of self fulfilling cycle.
Speaker 1: That is a very good question. Currently, I I happen
Speaker 1: to still be in the camp, which is, you know,
Speaker 1: watching how different unusual components of the inflation basket. And
Speaker 1: Joe mentioned the used car market, for example, having an
Speaker 1: overproportional influence UM given all their supply and demand disruptions
Speaker 1: due to COVID nineteen, which is kind of trying to
Speaker 1: get into kind of a smoother flow. Again, I'm personally
Speaker 1: thinking there are lots of frictions which are having influences
Speaker 1: right now. So I'm currently still thinking that things will
Speaker 1: you know, have to be looked at again in a
Speaker 1: couple of months. But obviously in particular with all these
Speaker 1: um uh support government support, there is a real concern.
Speaker 1: Going back to the theme we had in the beginning,
Speaker 1: I do think that if this remains the main news
Speaker 1: story over the next month, it might end up accelerating
Speaker 1: in terms of the impact on people's anchoring in memory
Speaker 1: and the vividness and how much they are taking into
Speaker 1: a count. If instead other things positive or negative, if
Speaker 1: you know, talk about the data variant, etcetera, UM starting
Speaker 1: to dominate the news cycle, I would expect this to
Speaker 1: have a less long lasting effect on people's inflation fears
Speaker 1: and economic decision making. I think that's probably where I
Speaker 1: currently stand. All Right, Well, we got a fascinating conversation,
Speaker 1: and I really do urge anyone listening to check out
Speaker 1: some of your research on the topic as we enter
Speaker 1: this very very heated well we're already in it, this
Speaker 1: very heated period of discussion over the future of price increases.
Speaker 1: Thank you so much. You're welcome. This was really fun.
Speaker 1: Thanks for having me. Thank you. That was great. Yeah, appreciative, So, Joe,
Speaker 1: I found that conversation really really interesting, And again, at
Speaker 1: a time when we have this sort of polarized perception
Speaker 1: of the future of inflation, it's really nice to dig
Speaker 1: into some of the details behind how people are actually
Speaker 1: thinking about this topic. Yeah, I thought that was super
Speaker 1: interesting about like even fo of C members you could
Speaker 1: sort of anticipate their own policy actions simply based on
Speaker 1: their own experiences. There lived experiences with inflation, and I
Speaker 1: think that goes a long way in explaining why this
Speaker 1: one number is like such a lightning rod. Like everyone
Speaker 1: has different experiences with pricing. Everyone is different consumption baskets,
Speaker 1: everyone has different periods where interest rates affected them negatively
Speaker 1: or positively in one way. And it's uh, the way
Speaker 1: people like carry through that for years really profound. Yeah, um,
Speaker 1: I mean to your point, I think at the beginning
Speaker 1: of the discussion, everyone sort of either benefit or loses
Speaker 1: out from different price movements, and there's so many of
Speaker 1: them and so many factors at play that it's sort
Speaker 1: of difficult to disaggregate them all and also difficult to
Speaker 1: come up with as Ulrico was saying this sort of
Speaker 1: mythical representative inflation survey, responded, The one other thing I
Speaker 1: thought was really remarkable in there was this idea that
Speaker 1: um gender differences in inflation perceptions could be knocked down
Speaker 1: so quickly just by eliminating grocery shopping. Like I had
Speaker 1: no idea that that effect was so pronounced. That was
Speaker 1: really interesting. And then you wonder, it's like, Okay, who
Speaker 1: get gas more often? Because you hear that gas is
Speaker 1: often a big factor. But it really does like think
Speaker 1: like if you listen to like J. Powell, they're putting
Speaker 1: so much emphasis on these so called like inflation expectations
Speaker 1: or the importance of keeping expectations anchored and so forth.
Speaker 1: But then you look at like, well, what are the
Speaker 1: foundations of these inflation expectations that are supposedly so important
Speaker 1: to policy? And it seems so like arbitrary and subjective
Speaker 1: in many cases, like where they were formed and so
Speaker 1: On the one hand, maybe they're powerful, but on the
Speaker 1: other hand, like, well, we're certainly put it a lot
Speaker 1: of weight on some things that are like very nebulous
Speaker 1: and random, right, and quite desperate at that. All right,
Speaker 1: shall we leave it there, Let's leave it there. Okay,
Speaker 1: this has been another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe wi Isn't though. You can
Speaker 1: follow me on Twitter at the Stalwart. Follow our guest
Speaker 1: Rique Malmandier. Her handle is at umal Men. Follow our
Speaker 1: producer Laura Carlson. She's at Laura M. Carlson. Follow the
Speaker 1: Bloomberg head of podcast, Francesca Levi at Francesca Today, and
Speaker 1: check out all of our podcast at Bloomberg under the
Speaker 1: handle add podcast. Thanks for listening to