1 00:00:10,400 --> 00:00:13,720 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:13,760 --> 00:00:16,880 Speaker 1: I'm Tracy Alloway and I'm Joe. Wisn't thal Joe. I 3 00:00:17,320 --> 00:00:20,319 Speaker 1: feel like I'm gonna jinx things by saying this, But 4 00:00:21,239 --> 00:00:25,000 Speaker 1: it feels like inflation is maybe starting to come down 5 00:00:25,040 --> 00:00:27,880 Speaker 1: a little bit at least it's not accelerating. Let's put 6 00:00:27,920 --> 00:00:30,800 Speaker 1: it that way. Well, here's how Here's what I've been 7 00:00:30,840 --> 00:00:33,120 Speaker 1: thinking about, which is that for the last year, the 8 00:00:33,200 --> 00:00:36,880 Speaker 1: last year and a half, we've done all of these episodes. 9 00:00:37,000 --> 00:00:40,960 Speaker 1: I'm like supply chains and disruptions for this so that reason, 10 00:00:41,080 --> 00:00:45,239 Speaker 1: and all of the various times we've used the term 11 00:00:45,280 --> 00:00:48,720 Speaker 1: perfect storm to describe certain things in certain industries, perfect 12 00:00:48,760 --> 00:00:51,839 Speaker 1: storm of perfect storms. My guess right now, you know, 13 00:00:51,880 --> 00:00:56,680 Speaker 1: in January, is that episodes will be a little less 14 00:00:56,680 --> 00:00:59,400 Speaker 1: dominated by these topics. That would be my guest. I'm 15 00:00:59,440 --> 00:01:01,760 Speaker 1: guessing that this year we do a few fewer perfect 16 00:01:01,760 --> 00:01:04,720 Speaker 1: storm episode. I think that's right. But I think, you know, 17 00:01:04,800 --> 00:01:07,040 Speaker 1: we we spoke a lot about what it was that 18 00:01:07,080 --> 00:01:09,960 Speaker 1: people didn't see coming when it comes to inflation. Why 19 00:01:10,000 --> 00:01:12,280 Speaker 1: did a lot of economists get it wrong? Why was 20 00:01:12,360 --> 00:01:14,600 Speaker 1: the inflation that was supposed to be transitory? You know, 21 00:01:14,680 --> 00:01:17,720 Speaker 1: maybe it was transitory in the sense that it was narrow, 22 00:01:18,319 --> 00:01:21,680 Speaker 1: you know, not a big sort of like macro unleashed inflation, 23 00:01:21,920 --> 00:01:24,160 Speaker 1: but it definitely stuck around longer than a lot of 24 00:01:24,200 --> 00:01:27,960 Speaker 1: people expected. And so every time we have these big 25 00:01:28,040 --> 00:01:32,640 Speaker 1: questions like why aren't we better at forecasting inflation, it 26 00:01:32,720 --> 00:01:35,960 Speaker 1: provides an opportunity to maybe learn something and start thinking 27 00:01:36,040 --> 00:01:39,000 Speaker 1: about it in a slightly different way. Well, yeah, absolutely, 28 00:01:39,240 --> 00:01:41,840 Speaker 1: And I would say there's really two things that I 29 00:01:41,880 --> 00:01:45,679 Speaker 1: feel are unanswered by all of the conversations that we've 30 00:01:45,720 --> 00:01:49,200 Speaker 1: had in the last year. So one is still like, 31 00:01:49,680 --> 00:01:52,639 Speaker 1: is inflation like a macro or a micro thing didn't 32 00:01:52,680 --> 00:01:57,320 Speaker 1: happen because a few categories really had some disruptions and 33 00:01:57,320 --> 00:02:00,920 Speaker 1: then spilled elsewhere, And therefore it's not really about fiscal 34 00:02:01,000 --> 00:02:05,160 Speaker 1: or monetary policy specifically. And be okay, we do have 35 00:02:05,560 --> 00:02:09,160 Speaker 1: very high inflation right now, even if there's evidence coming down, 36 00:02:10,000 --> 00:02:12,640 Speaker 1: what tools, like, if it is the case that a 37 00:02:12,680 --> 00:02:16,000 Speaker 1: lot of it is related to disruptions and chip shortages 38 00:02:16,160 --> 00:02:19,880 Speaker 1: and freezes in Texas, etcetera, what are the tools that 39 00:02:19,919 --> 00:02:22,240 Speaker 1: are best to address that, because it is important to 40 00:02:22,280 --> 00:02:25,560 Speaker 1: get inflation down. But on the other hand, there's a 41 00:02:25,560 --> 00:02:27,919 Speaker 1: pretty good argument that if the issue is some sort 42 00:02:27,960 --> 00:02:30,960 Speaker 1: of disruption at the ports or whatever, that sort of 43 00:02:30,960 --> 00:02:34,799 Speaker 1: like strict blunt instruments like raising rates rates aren't necessarily 44 00:02:34,840 --> 00:02:37,440 Speaker 1: the best approach to dealing with that kind of where 45 00:02:37,560 --> 00:02:40,440 Speaker 1: raising rates won't grow more trees to turn into lumber 46 00:02:40,520 --> 00:02:43,079 Speaker 1: and like that, or more births at the ports or 47 00:02:43,120 --> 00:02:45,200 Speaker 1: anything like that. So I'm so glad you said that 48 00:02:45,280 --> 00:02:47,440 Speaker 1: because today we are going to be speaking with one 49 00:02:47,480 --> 00:02:50,440 Speaker 1: of our Odd Lots favorites, and she has just written 50 00:02:50,480 --> 00:02:53,800 Speaker 1: a new paper which she says is inspired by some 51 00:02:53,840 --> 00:02:56,280 Speaker 1: of the conversations that we've had on Odd Lots, but 52 00:02:56,360 --> 00:02:59,359 Speaker 1: it's also just really interesting because it presents a new 53 00:02:59,520 --> 00:03:05,080 Speaker 1: sort of third way potentially of thinking about inflation, not transitory, 54 00:03:05,280 --> 00:03:09,360 Speaker 1: not persistent, a new more interesting third option, and that 55 00:03:09,560 --> 00:03:13,600 Speaker 1: maybe could help us think about ways of accepting, Yes, 56 00:03:13,760 --> 00:03:17,040 Speaker 1: inflation is real, it is a problem, but that some 57 00:03:17,080 --> 00:03:19,960 Speaker 1: of these blunt instruments that just treat inflation as a 58 00:03:20,000 --> 00:03:22,280 Speaker 1: function of there's too much money in the economy, we 59 00:03:22,360 --> 00:03:25,160 Speaker 1: need there to be less. Maybe there are better approaches 60 00:03:25,400 --> 00:03:28,640 Speaker 1: than just this sort of like blunt monetary approaches to 61 00:03:28,720 --> 00:03:32,040 Speaker 1: addressing them. Absolutely, So without further ado, we are going 62 00:03:32,120 --> 00:03:35,000 Speaker 1: to be speaking today to Isabella Vabor. She has, of 63 00:03:35,040 --> 00:03:39,480 Speaker 1: course a economics professor over at the University of Massachusetts Amherst, 64 00:03:39,520 --> 00:03:42,720 Speaker 1: and you might remember her from from some previous episodes. 65 00:03:43,000 --> 00:03:45,040 Speaker 1: So Isabella, thank you so much for coming back on 66 00:03:45,040 --> 00:03:48,440 Speaker 1: odd Lots. Thank you so much for having me. It's 67 00:03:48,440 --> 00:03:52,400 Speaker 1: a pleasure. Thank you. So the paper is called Inflation 68 00:03:52,560 --> 00:03:57,160 Speaker 1: in Times of overlapping emergencies systemically significant prices from an 69 00:03:57,200 --> 00:04:00,480 Speaker 1: input output perspective. But I just want to get you 70 00:04:00,520 --> 00:04:02,920 Speaker 1: to say on camera that this is inspired by all 71 00:04:05,920 --> 00:04:08,160 Speaker 1: it is. I mean, I have been listening to your 72 00:04:08,160 --> 00:04:10,800 Speaker 1: podcast or through the pandemic um and as you were 73 00:04:10,880 --> 00:04:14,520 Speaker 1: just saying, obviously you have been tracing all these price 74 00:04:14,560 --> 00:04:17,760 Speaker 1: shocks that have been rippling through the economy. So um, 75 00:04:17,800 --> 00:04:21,039 Speaker 1: this paper is trying to come up with the framework 76 00:04:21,120 --> 00:04:25,800 Speaker 1: to trace these shocks and ripple effects in a somewhat 77 00:04:25,800 --> 00:04:29,839 Speaker 1: more aggregate and possibly less fine print, but maybe a 78 00:04:29,880 --> 00:04:34,440 Speaker 1: little bit more like formal kind of fashion. I love 79 00:04:34,480 --> 00:04:38,159 Speaker 1: that the most self serving first question we've ever asked 80 00:04:38,200 --> 00:04:41,520 Speaker 1: on an interview, What is you know, what what is 81 00:04:42,000 --> 00:04:45,840 Speaker 1: an input output approach mean? Because my understanding is that 82 00:04:45,880 --> 00:04:50,000 Speaker 1: this is actually like a very old idea in economics. 83 00:04:50,040 --> 00:04:52,440 Speaker 1: But that is some kind of has actually been forgotten, 84 00:04:52,760 --> 00:04:56,039 Speaker 1: is my understanding, And that the sort of like various 85 00:04:56,160 --> 00:04:59,800 Speaker 1: versions of monitorist thinking which sort of treat if prices 86 00:04:59,839 --> 00:05:02,240 Speaker 1: are hive, we want to understand prices, well, just look 87 00:05:02,279 --> 00:05:04,040 Speaker 1: at how much money or how much credit is in 88 00:05:04,080 --> 00:05:07,360 Speaker 1: the economy. Rein that in and you've seen this paper 89 00:05:07,400 --> 00:05:09,360 Speaker 1: seems to be like going back to like an older 90 00:05:09,400 --> 00:05:11,920 Speaker 1: tradition in economics. Can you talk a little bit about 91 00:05:11,960 --> 00:05:14,240 Speaker 1: what this is. Yeah, So, as we said, we tend 92 00:05:14,279 --> 00:05:16,920 Speaker 1: to think about inflation as a micro phenomenon, right, where 93 00:05:16,920 --> 00:05:21,680 Speaker 1: it's basically just about the movement of aggregate measures. Whereas 94 00:05:21,720 --> 00:05:24,080 Speaker 1: what we're trying to do here is to think of 95 00:05:24,520 --> 00:05:30,200 Speaker 1: prices as kind of an interconnected network where since one 96 00:05:30,279 --> 00:05:34,479 Speaker 1: sector's output is another sector's input um, and therefore one 97 00:05:34,520 --> 00:05:38,680 Speaker 1: sector's output prices at the cost of another sector UM, 98 00:05:38,720 --> 00:05:42,320 Speaker 1: you can't kind of trace um the price movements across 99 00:05:42,400 --> 00:05:46,840 Speaker 1: the whole production network, which input out put tables allow 100 00:05:46,920 --> 00:05:50,719 Speaker 1: you to do. So. These tables basically like Rchester the 101 00:05:50,760 --> 00:05:55,920 Speaker 1: relationships of input and outputs across the whole economy. Historically, 102 00:05:56,360 --> 00:06:00,320 Speaker 1: UM input output tables really had a breakthrough during the 103 00:06:00,400 --> 00:06:04,560 Speaker 1: War time UM. Where the question was, how can we 104 00:06:04,800 --> 00:06:10,000 Speaker 1: hit the enemy's UM economy in ways that we kind 105 00:06:10,040 --> 00:06:13,799 Speaker 1: of like, with the minimum number of bombs UM, create 106 00:06:13,880 --> 00:06:19,120 Speaker 1: the maximal damage to really UM, I mean undermine UM 107 00:06:19,440 --> 00:06:22,520 Speaker 1: the enemy economy's ability to even fight a war. I 108 00:06:22,520 --> 00:06:25,159 Speaker 1: mean concretely. Of course, this is mainly about the German 109 00:06:25,160 --> 00:06:29,880 Speaker 1: economy UM, and so therefore it really is a method 110 00:06:30,080 --> 00:06:36,160 Speaker 1: of identifying points UM that are of particular systemic significance 111 00:06:36,200 --> 00:06:38,679 Speaker 1: for the economy as a whole. Back then, the idea 112 00:06:38,800 --> 00:06:42,800 Speaker 1: was to identify these points of vulnerability to UM, I mean, 113 00:06:42,839 --> 00:06:46,119 Speaker 1: as I said, create destruction UM. The idea of our 114 00:06:46,120 --> 00:06:51,320 Speaker 1: papers to say, if we can identify these points of vulnerabilities, 115 00:06:51,680 --> 00:06:55,080 Speaker 1: then we can actually UM kind of UM know what 116 00:06:55,080 --> 00:06:59,440 Speaker 1: what the potential sources of UM of these report effects 117 00:06:59,440 --> 00:07:03,000 Speaker 1: that can create UM macro outcomes UM could be so 118 00:07:03,080 --> 00:07:05,400 Speaker 1: if some prices matter more than others, we want to 119 00:07:05,440 --> 00:07:08,560 Speaker 1: know what these prices are, and input output is one 120 00:07:08,600 --> 00:07:13,720 Speaker 1: method of trying to identify these systemically significant sectors. So 121 00:07:13,880 --> 00:07:16,080 Speaker 1: Tracy might take away from that is that in a 122 00:07:16,160 --> 00:07:21,120 Speaker 1: war it makes more sense to say bomb and oil refinery, 123 00:07:21,120 --> 00:07:23,560 Speaker 1: even a candy factory like it, right, Like if you're 124 00:07:23,600 --> 00:07:25,840 Speaker 1: thinking about, well, what are these sectors that will have 125 00:07:25,920 --> 00:07:29,040 Speaker 1: the biggest ripple effects across the economy, Then that would 126 00:07:29,080 --> 00:07:31,240 Speaker 1: be the implication, Well, maybe we should talk about morale 127 00:07:31,360 --> 00:07:35,120 Speaker 1: in that context. But no, okay, there's another there's another 128 00:07:35,160 --> 00:07:37,760 Speaker 1: analogy um that you use in the paper, which is, 129 00:07:37,880 --> 00:07:42,080 Speaker 1: you know, if you're trying to identify systemically important sources 130 00:07:42,120 --> 00:07:47,120 Speaker 1: of inflation and maybe address them before they start actually 131 00:07:47,160 --> 00:07:51,280 Speaker 1: contributing to price increases, it's kind of like trying to 132 00:07:51,440 --> 00:07:55,720 Speaker 1: identify systemically important banks and then making sure that they, 133 00:07:55,840 --> 00:07:59,520 Speaker 1: you know, hold more regulatory capital or maybe go under 134 00:07:59,600 --> 00:08:02,240 Speaker 1: preempt of stress tests or things like that. Can you 135 00:08:02,280 --> 00:08:05,720 Speaker 1: talk about, maybe, you know, before we get into policy solutions, 136 00:08:05,720 --> 00:08:09,440 Speaker 1: can you talk about how that approach maybe differs to 137 00:08:09,800 --> 00:08:13,760 Speaker 1: traditional ways of thinking about inflation, because you know, in 138 00:08:13,800 --> 00:08:16,280 Speaker 1: my mind, there's really there's the money terrorist view it's 139 00:08:16,280 --> 00:08:18,320 Speaker 1: all about the money supply, and then there's a sort 140 00:08:18,360 --> 00:08:20,600 Speaker 1: of new Canesian view where it's more about you know, 141 00:08:21,120 --> 00:08:23,600 Speaker 1: supply side and capacity and demand and things like that. 142 00:08:23,840 --> 00:08:26,760 Speaker 1: Can you place this new approach in the context of 143 00:08:27,000 --> 00:08:30,680 Speaker 1: those two older um ways of thinking about it so 144 00:08:30,880 --> 00:08:34,960 Speaker 1: as different as like kind of monetarism and new caneskiness 145 00:08:35,800 --> 00:08:40,160 Speaker 1: can be. They share the understanding that inflation is always 146 00:08:40,240 --> 00:08:44,040 Speaker 1: driven by macroeconomic factors. Right now, what we are doing here, 147 00:08:44,240 --> 00:08:48,680 Speaker 1: I mean bond case, it's the distance from from aggregate 148 00:08:48,720 --> 00:08:51,800 Speaker 1: capacity utilization. In the other case, it's more that like 149 00:08:51,920 --> 00:08:55,320 Speaker 1: classic story of too much money chasing too few goods. 150 00:08:55,320 --> 00:08:58,479 Speaker 1: But still it's like trying to locate the the origins 151 00:08:58,520 --> 00:09:01,840 Speaker 1: of inflation on the aggregate level. What we're trying to 152 00:09:01,880 --> 00:09:04,480 Speaker 1: do here is to say, well, if there are micro 153 00:09:04,640 --> 00:09:09,960 Speaker 1: origins of inflation, if shocks to specific sectors can matter 154 00:09:10,120 --> 00:09:14,559 Speaker 1: in ways that they can unleash processes that actually unsettled 155 00:09:14,920 --> 00:09:19,720 Speaker 1: the stability of prices overall, that we want to understand 156 00:09:20,040 --> 00:09:23,079 Speaker 1: what these sectors are. We want to know where these 157 00:09:23,120 --> 00:09:27,800 Speaker 1: points of vulnerability are so that we can react to 158 00:09:28,000 --> 00:09:32,440 Speaker 1: these shocks before they kind of ripple throughout the whole system. 159 00:09:32,760 --> 00:09:35,880 Speaker 1: And as you said, um interest rates are already being 160 00:09:36,000 --> 00:09:40,839 Speaker 1: recognized as a systemically significant kind of price, right That's 161 00:09:40,840 --> 00:09:43,720 Speaker 1: why we have central banks, which of course historically at 162 00:09:43,720 --> 00:09:45,360 Speaker 1: some point was also not the case. So it was 163 00:09:45,400 --> 00:09:50,360 Speaker 1: a historical evolution to recognize the systemic significance of interest rates. 164 00:09:50,440 --> 00:09:52,719 Speaker 1: In some sense, what we are arguing here is to 165 00:09:53,160 --> 00:09:56,320 Speaker 1: um is to say that there are more prices than 166 00:09:56,360 --> 00:10:01,199 Speaker 1: the price of boring money that can acquire systemic significance 167 00:10:01,240 --> 00:10:04,959 Speaker 1: in bays, that can have a very large implications for 168 00:10:05,080 --> 00:10:08,080 Speaker 1: monitor stability. Just a shout, I'll be drawn here on 169 00:10:08,120 --> 00:10:10,560 Speaker 1: the workous of salad Amarova, who has been working on 170 00:10:10,559 --> 00:10:14,440 Speaker 1: systemically significant price what someone else We definitely have to 171 00:10:14,480 --> 00:10:17,960 Speaker 1: have on the podcast at some point. It's so funny 172 00:10:18,000 --> 00:10:20,240 Speaker 1: because you know, of course, and we talked about this 173 00:10:20,320 --> 00:10:23,520 Speaker 1: the last time you're on late last year. You took 174 00:10:23,559 --> 00:10:26,000 Speaker 1: a lot of heat for saying, well, maybe there's a 175 00:10:26,040 --> 00:10:29,320 Speaker 1: time for having some discussion about price controls, and everyone 176 00:10:29,440 --> 00:10:32,560 Speaker 1: freaked out about that. And yet they're like, Okay, now 177 00:10:32,640 --> 00:10:35,160 Speaker 1: let's control the price of money, as if that isn't 178 00:10:35,240 --> 00:10:38,160 Speaker 1: a form of price control. And yet of course central 179 00:10:38,160 --> 00:10:41,960 Speaker 1: banking ultimate price control, the ultimate price control. But you know, 180 00:10:42,160 --> 00:10:45,400 Speaker 1: so I joked, but I guess it's not really joked that, Like, 181 00:10:45,440 --> 00:10:47,840 Speaker 1: there are some areas where it's kind of obvious that 182 00:10:48,280 --> 00:10:51,120 Speaker 1: some sort of some functions in the economy are more 183 00:10:51,160 --> 00:10:54,199 Speaker 1: crucial to other industries than others. So an oil refinery 184 00:10:54,320 --> 00:10:57,400 Speaker 1: is going to be more crucial to other industries than 185 00:10:57,440 --> 00:11:00,719 Speaker 1: a candy factory. But that's obvious. How do you go 186 00:11:00,800 --> 00:11:07,280 Speaker 1: about systematically identifying beyond the sort of really crude examples. 187 00:11:07,600 --> 00:11:10,120 Speaker 1: What is this? This sort of like a rigorous or 188 00:11:10,120 --> 00:11:14,000 Speaker 1: empirical approach to actually identifying what parts of the economy 189 00:11:14,160 --> 00:11:18,160 Speaker 1: are in fact the most likely to have ripple effects elsewhere. So, 190 00:11:18,280 --> 00:11:20,160 Speaker 1: but what we have done in this paper is that 191 00:11:20,200 --> 00:11:23,880 Speaker 1: we have simulated shocks to every industry in the input 192 00:11:23,880 --> 00:11:26,600 Speaker 1: out the table, and just for orientation, seventy one industry. 193 00:11:26,640 --> 00:11:29,480 Speaker 1: So it's not super disaggregated, I mean also not super 194 00:11:29,520 --> 00:11:34,199 Speaker 1: aggregate compared to microeconomic variables, but it's the fairly broad right. 195 00:11:34,520 --> 00:11:37,040 Speaker 1: So we run a shock on each of these sectors, 196 00:11:37,280 --> 00:11:40,680 Speaker 1: and then we simulate how this shock runs through the 197 00:11:40,679 --> 00:11:47,080 Speaker 1: whole economy, reciting in an indirect impact on on on 198 00:11:47,160 --> 00:11:49,680 Speaker 1: the CPI, right, Because if the price of oil goes up, 199 00:11:49,720 --> 00:11:52,160 Speaker 1: the price of plastic goes up, the price of plastic 200 00:11:52,200 --> 00:11:55,080 Speaker 1: toys goes up. So therefore in the CPI you do 201 00:11:55,160 --> 00:11:58,400 Speaker 1: not only have the direct effect of people of people 202 00:11:58,440 --> 00:12:02,280 Speaker 1: consuming fewer or gas, but you also have indirect effects 203 00:12:02,320 --> 00:12:05,880 Speaker 1: of plastic and plastic toys. And then in all sorts 204 00:12:05,880 --> 00:12:08,079 Speaker 1: of packaging and so on. Right, So we are tracing 205 00:12:08,120 --> 00:12:12,160 Speaker 1: this direct and indirect effect that results from a price 206 00:12:12,160 --> 00:12:16,040 Speaker 1: shock in any one individual sector, and we run this 207 00:12:16,280 --> 00:12:20,640 Speaker 1: UM this simulation UM for for every separate sector, so 208 00:12:20,720 --> 00:12:24,800 Speaker 1: that we then get distinct magnitudes that show us whether 209 00:12:24,880 --> 00:12:28,560 Speaker 1: as shocked to UM to to one sector matters more 210 00:12:28,679 --> 00:12:31,319 Speaker 1: in comparison to another sector. In other words, we can 211 00:12:31,360 --> 00:12:34,400 Speaker 1: create a ranking of what we called the total inflation 212 00:12:34,440 --> 00:12:39,280 Speaker 1: impact from a shock in these sectors. Now, UM, with 213 00:12:39,320 --> 00:12:43,880 Speaker 1: the simulation, we basically have three determinants that can render 214 00:12:43,920 --> 00:12:48,120 Speaker 1: a sector systemically significant. The first determinant is the bait 215 00:12:48,240 --> 00:12:52,320 Speaker 1: in the CPI UM, and housing is a great example here. 216 00:12:52,320 --> 00:12:55,160 Speaker 1: Housing is not something that is very upstream and that 217 00:12:55,280 --> 00:12:58,680 Speaker 1: creates a lot of propert effects in other industries, but 218 00:12:58,760 --> 00:13:01,320 Speaker 1: it has a very large bay in the CPI right. 219 00:13:01,360 --> 00:13:04,400 Speaker 1: So therefore UM, if there is a price change in housing, 220 00:13:04,480 --> 00:13:09,160 Speaker 1: it has a pretty large impact on on the CPI UM. 221 00:13:09,320 --> 00:13:14,760 Speaker 1: Something like UM like oil and gas is actually pretty upstream, 222 00:13:14,840 --> 00:13:18,440 Speaker 1: but not as upstream as something like wholesale trade because 223 00:13:18,440 --> 00:13:21,200 Speaker 1: of the ways in which the upstreamness measures are constructed. 224 00:13:21,600 --> 00:13:24,760 Speaker 1: But for oil and gas UM you have very large 225 00:13:24,920 --> 00:13:27,559 Speaker 1: price movements. So the magnitude of the shocks that we 226 00:13:27,760 --> 00:13:32,360 Speaker 1: use UM are either using average volatilities UM in the 227 00:13:32,600 --> 00:13:35,920 Speaker 1: in the two decades before the pandemic, or using the 228 00:13:35,960 --> 00:13:38,880 Speaker 1: actual price change in the pandemic and in the context 229 00:13:38,920 --> 00:13:41,640 Speaker 1: of the Ukraine War. So in oil and gas we 230 00:13:41,679 --> 00:13:45,480 Speaker 1: actually had very large price movements already before the pandemic 231 00:13:45,679 --> 00:13:48,880 Speaker 1: and then again during the pandemic UM and in the 232 00:13:48,880 --> 00:13:51,679 Speaker 1: context of the war. So here the drivers would be 233 00:13:52,000 --> 00:13:55,720 Speaker 1: kind of all three components the importance UM in terms 234 00:13:55,720 --> 00:14:00,120 Speaker 1: of indirect effects, creating a relatively large total the eight 235 00:14:00,200 --> 00:14:05,000 Speaker 1: in the CPI UM the large price movements and relatively 236 00:14:05,120 --> 00:14:08,400 Speaker 1: upstream even though not as upstream as hole sate trade, 237 00:14:08,440 --> 00:14:13,560 Speaker 1: where it's for holes trade, it's really basically because of 238 00:14:13,600 --> 00:14:16,880 Speaker 1: the upstream nous of that sector. And then in the pandemic, 239 00:14:16,880 --> 00:14:20,040 Speaker 1: of course we also had fairly large price movements there. 240 00:14:20,560 --> 00:14:22,960 Speaker 1: But before the pandemic the price movements in hole say 241 00:14:23,040 --> 00:14:26,040 Speaker 1: trade would have been much smaller than in in something 242 00:14:26,080 --> 00:14:28,640 Speaker 1: like oil and gas extraction. Right, So it's it's these 243 00:14:28,680 --> 00:14:32,080 Speaker 1: three dimensions that we are capturing in in UM in 244 00:14:32,080 --> 00:14:35,240 Speaker 1: creating this ranking. So just on this point, can I 245 00:14:35,280 --> 00:14:38,880 Speaker 1: just press you when it comes to identifying the systemically 246 00:14:38,960 --> 00:14:43,640 Speaker 1: important industries or I think you call them ubiquitous industries. Like, 247 00:14:43,840 --> 00:14:47,760 Speaker 1: how do you just just aggregate their weight in the 248 00:14:47,800 --> 00:14:52,920 Speaker 1: inflation indusseries versus the extent to which they matter for 249 00:14:53,040 --> 00:14:56,120 Speaker 1: other prices, Because I'm sure there will be some people 250 00:14:56,160 --> 00:14:59,960 Speaker 1: who listen to this and say, like, well, obviously, energy 251 00:15:00,040 --> 00:15:02,880 Speaker 1: and you know, maybe some consumer goods and things like 252 00:15:02,920 --> 00:15:04,680 Speaker 1: that have a higher weight in the c p I. 253 00:15:04,800 --> 00:15:07,360 Speaker 1: And so that's why you're getting these results. If you 254 00:15:07,960 --> 00:15:10,440 Speaker 1: look at the paper, which I'm not expecting anyone to do, 255 00:15:11,600 --> 00:15:15,760 Speaker 1: we can we can distinguish between a direct and an 256 00:15:15,760 --> 00:15:20,520 Speaker 1: indirect effect. Right, So what our direct inflation impact is 257 00:15:20,680 --> 00:15:22,800 Speaker 1: is just the weight in the CPI, Right, this is 258 00:15:22,840 --> 00:15:26,240 Speaker 1: just giving you this is what the CPI shows us 259 00:15:26,440 --> 00:15:30,280 Speaker 1: UM is the weight of UM of the change in 260 00:15:30,440 --> 00:15:34,200 Speaker 1: save petroleum in core products UM for the change in 261 00:15:34,240 --> 00:15:37,840 Speaker 1: the CPI UM. But then there's this addition is share, 262 00:15:38,280 --> 00:15:42,560 Speaker 1: which we call the indirect effect, which comes from tracing 263 00:15:43,000 --> 00:15:48,480 Speaker 1: the indirect price UM movements that reside from this initiative 264 00:15:48,480 --> 00:15:51,200 Speaker 1: shock in say petroleum in core products. Now, of course 265 00:15:51,280 --> 00:15:55,840 Speaker 1: we have to make assumptions on how industries UM hand 266 00:15:56,040 --> 00:16:00,520 Speaker 1: over um UH cost increases, right, and be in the paper, 267 00:16:00,600 --> 00:16:03,880 Speaker 1: we make two distinct assumptions. One is that it's just 268 00:16:03,960 --> 00:16:08,280 Speaker 1: a pastor of one, so firms just have a cost 269 00:16:08,320 --> 00:16:11,480 Speaker 1: increase and just passed us on to their customers. The 270 00:16:11,520 --> 00:16:15,000 Speaker 1: second assumption that we make is to say, um, what 271 00:16:15,040 --> 00:16:18,560 Speaker 1: if firms actually don't just pass on the cost, but 272 00:16:18,640 --> 00:16:21,840 Speaker 1: they actually want to protect their profit margins. Now, if 273 00:16:21,840 --> 00:16:24,520 Speaker 1: their cost goes up, go up, and they were to 274 00:16:24,640 --> 00:16:28,280 Speaker 1: increase prices by just the amount of the increasing costs, 275 00:16:28,320 --> 00:16:30,720 Speaker 1: their profit margin would go down, right, So what if 276 00:16:31,280 --> 00:16:34,280 Speaker 1: what if they actually protect their profit margins are therefore 277 00:16:34,560 --> 00:16:39,960 Speaker 1: increase prices by more than the increase in costs um. 278 00:16:40,000 --> 00:16:43,800 Speaker 1: So this then gives us different magnitudes of the total effect, 279 00:16:44,200 --> 00:16:48,160 Speaker 1: but we find that the rankings are relatively stable independent 280 00:16:48,240 --> 00:16:51,880 Speaker 1: of these different assumptions that we are making. And the 281 00:16:51,920 --> 00:16:54,800 Speaker 1: CPI that we are using here is a synthactic CPI, 282 00:16:55,040 --> 00:16:56,960 Speaker 1: because of course we have to break it down to 283 00:16:57,520 --> 00:17:01,080 Speaker 1: UM these seventy one industries that we half UM. So 284 00:17:01,120 --> 00:17:04,159 Speaker 1: it's it's it's it's not the CPI that you're downard 285 00:17:04,200 --> 00:17:06,760 Speaker 1: from the b A UM if you just look for CPI, 286 00:17:06,880 --> 00:17:08,560 Speaker 1: but it's a CPI that you get from the b 287 00:17:08,680 --> 00:17:11,000 Speaker 1: A if you look into it put out for Tavist. 288 00:17:27,840 --> 00:17:30,479 Speaker 1: You know, something I'm interested in, and I don't know 289 00:17:30,520 --> 00:17:33,720 Speaker 1: if it's something you've specifically looked at, but it sort 290 00:17:33,720 --> 00:17:35,600 Speaker 1: of reminds me of this, Like, you know, we talked 291 00:17:35,640 --> 00:17:38,199 Speaker 1: a lot about or economists have talked a lot in 292 00:17:38,200 --> 00:17:42,120 Speaker 1: the last year about goods versus services. Inflation is if 293 00:17:42,200 --> 00:17:45,440 Speaker 1: these are like two distinct categories of types of things 294 00:17:45,440 --> 00:17:47,400 Speaker 1: that people buy, that you can draw a bright line 295 00:17:47,440 --> 00:17:49,399 Speaker 1: and say, Okay, goods have gone down, but service is 296 00:17:49,400 --> 00:17:52,200 Speaker 1: still up. But it seems to me that any good 297 00:17:52,280 --> 00:17:56,040 Speaker 1: that we buy is also implicitly a bundle of services 298 00:17:56,080 --> 00:17:58,240 Speaker 1: that need to go into the You know, if I 299 00:17:58,280 --> 00:18:01,399 Speaker 1: buy a refrigerator, well, there's some sort of service person 300 00:18:01,440 --> 00:18:05,400 Speaker 1: who helped delivery deliver the furniture. Um, and there are 301 00:18:05,400 --> 00:18:08,400 Speaker 1: services for you know, the truck driver whatever it is. 302 00:18:09,000 --> 00:18:13,280 Speaker 1: Does your approach the sort of input output approach sort 303 00:18:13,320 --> 00:18:16,679 Speaker 1: of Um, I'm trying to think exactly the way to 304 00:18:16,680 --> 00:18:18,960 Speaker 1: phrase it, But in your view, does it offer a 305 00:18:19,000 --> 00:18:22,600 Speaker 1: more useful way of thinking about categories of goods beyond 306 00:18:22,640 --> 00:18:25,080 Speaker 1: just or sort of would seem to me like these 307 00:18:25,320 --> 00:18:28,400 Speaker 1: arbitrary distinctions between between the types of things that get 308 00:18:28,400 --> 00:18:32,560 Speaker 1: bought in the economy. Good question, Yeah, great question. UM. 309 00:18:33,640 --> 00:18:37,520 Speaker 1: I mean I would of course say yes, thank you, 310 00:18:37,920 --> 00:18:41,879 Speaker 1: thank you for saying that. A great ka. Sorry, keep going, UM. 311 00:18:41,880 --> 00:18:45,080 Speaker 1: To be sure, services are part of the input out 312 00:18:45,080 --> 00:18:47,520 Speaker 1: put tables, and we actually find that they are pretty 313 00:18:47,640 --> 00:18:50,600 Speaker 1: upstream because of the fact that you just described, right, 314 00:18:50,720 --> 00:18:54,480 Speaker 1: because it's like some form of even like small administrative 315 00:18:54,520 --> 00:18:57,720 Speaker 1: service UM involved in pretty much everything. So if we 316 00:18:57,760 --> 00:19:01,680 Speaker 1: talk about it administ sorry, if we talk about upstream sectors, 317 00:19:01,680 --> 00:19:05,119 Speaker 1: we tend to think about physical stuff like oil and 318 00:19:05,119 --> 00:19:08,919 Speaker 1: gas or matters or candicurstans on, right. But what we 319 00:19:09,160 --> 00:19:11,560 Speaker 1: actually see when we do the analysis that is that 320 00:19:11,760 --> 00:19:16,479 Speaker 1: some that some services are very upstream. Now, the price 321 00:19:16,560 --> 00:19:21,960 Speaker 1: movements in services are relatively small on average over time 322 00:19:22,000 --> 00:19:25,480 Speaker 1: because they are very much UM tied to wages, right, 323 00:19:25,480 --> 00:19:28,240 Speaker 1: and wages tend to move much less than let's say, 324 00:19:28,280 --> 00:19:32,480 Speaker 1: commodity prices. Right. So therefore, when we run these shocks, 325 00:19:32,840 --> 00:19:37,119 Speaker 1: the service sectoris even though um they are pretty upstream, 326 00:19:37,600 --> 00:19:41,240 Speaker 1: end up not being very important for the general movement 327 00:19:41,720 --> 00:19:47,160 Speaker 1: of prices in in this model because just the initial 328 00:19:47,200 --> 00:19:50,359 Speaker 1: shock um is so small. If we model the shock 329 00:19:50,600 --> 00:19:55,160 Speaker 1: um based on magnitudes of past price movements and price 330 00:19:55,200 --> 00:20:00,520 Speaker 1: movements in the in the in the the COVID nineteen inflation. Now, 331 00:20:00,920 --> 00:20:03,119 Speaker 1: I do think that this kind of dust give us 332 00:20:03,160 --> 00:20:08,320 Speaker 1: a different way of distinguishing um categories of of of 333 00:20:08,320 --> 00:20:11,400 Speaker 1: of sectors if you want so, because the idea here 334 00:20:11,400 --> 00:20:14,840 Speaker 1: really is to say, Okay, we don't care if it's services, 335 00:20:14,960 --> 00:20:18,240 Speaker 1: or if it's commodities, or if it's processed goods, or 336 00:20:18,240 --> 00:20:21,120 Speaker 1: if it's manufacturing of whatever it might be. But all 337 00:20:21,160 --> 00:20:24,640 Speaker 1: that we care about is um the importance of this sector. 338 00:20:24,800 --> 00:20:27,399 Speaker 1: It's if you want so, it's centrality in relation to 339 00:20:28,200 --> 00:20:32,800 Speaker 1: all other sectors, and in relation to people, it's um 340 00:20:33,240 --> 00:20:37,320 Speaker 1: um uh consumption patterns. Right. So what we find then 341 00:20:37,520 --> 00:20:42,600 Speaker 1: is that the sectors that we identify systemically significant basically 342 00:20:42,640 --> 00:20:46,400 Speaker 1: in three groups. So it's like basic necessities stuff like housing, 343 00:20:46,560 --> 00:20:49,960 Speaker 1: food forms that of course produce a lot of food 344 00:20:50,400 --> 00:20:54,000 Speaker 1: utilities um, and of course also energy. And then basic 345 00:20:54,080 --> 00:20:58,760 Speaker 1: production inputs stuff like the fosil fields that we haven't 346 00:20:58,760 --> 00:21:01,440 Speaker 1: really talked about but also can a good products um. 347 00:21:01,480 --> 00:21:05,480 Speaker 1: And then kind of like basic circulation infrastructure, so things 348 00:21:05,520 --> 00:21:09,560 Speaker 1: like always say trade right, which is critical for commerce. 349 00:21:09,560 --> 00:21:13,439 Speaker 1: It's a kind of a basic commercial infrastructure. So I 350 00:21:13,480 --> 00:21:16,040 Speaker 1: do think that this does give us a different way 351 00:21:16,040 --> 00:21:20,280 Speaker 1: of kind of UM distinguishing the nature of different sectors. 352 00:21:20,359 --> 00:21:25,399 Speaker 1: So once you've identified these systemically important industries, you know, 353 00:21:25,600 --> 00:21:31,760 Speaker 1: these ubiquitous industries for inflation, things like basic necessities housing, farms, 354 00:21:31,800 --> 00:21:36,960 Speaker 1: food and utilities, and energy, how does that inform the 355 00:21:37,480 --> 00:21:42,840 Speaker 1: policy response. So the idea here is that because these 356 00:21:42,960 --> 00:21:47,240 Speaker 1: UM centers are so important that if there are large 357 00:21:47,720 --> 00:21:51,200 Speaker 1: price movements in these sectors that have this has implications 358 00:21:51,400 --> 00:21:56,240 Speaker 1: way beyond these specific sectors. We should be paying more 359 00:21:56,280 --> 00:21:59,119 Speaker 1: attention to what is happening in these sectors. So the 360 00:21:59,160 --> 00:22:03,840 Speaker 1: first occasion is to say we need more monitoring capacity. 361 00:22:03,840 --> 00:22:06,920 Speaker 1: Why do we need more monitoring capacity? Because we are 362 00:22:06,960 --> 00:22:10,600 Speaker 1: living in some sort of a age of overlapping emergencies 363 00:22:10,720 --> 00:22:13,520 Speaker 1: right where UM we have, of course a pandemic that 364 00:22:13,600 --> 00:22:16,520 Speaker 1: is not over looking for example, at what's happening in 365 00:22:16,600 --> 00:22:20,080 Speaker 1: China and how this UM impact global production networks, but 366 00:22:20,160 --> 00:22:23,840 Speaker 1: also looking at climate change and you're a great episode 367 00:22:23,840 --> 00:22:26,520 Speaker 1: on the Mississippi River and how this is a kind 368 00:22:26,560 --> 00:22:31,560 Speaker 1: of just making a whole UM sector. In this case, 369 00:22:31,600 --> 00:22:35,080 Speaker 1: of course grain UM and other commodities m gryan to 370 00:22:35,119 --> 00:22:38,840 Speaker 1: a hold UM. But we also have these massive geopolitical 371 00:22:39,000 --> 00:22:42,480 Speaker 1: tensions that can have huge implications for the ways in 372 00:22:42,520 --> 00:22:46,199 Speaker 1: which production is organized globally. So in other words, it 373 00:22:46,280 --> 00:22:50,680 Speaker 1: seems very likely from my perspective that more shocks maybe 374 00:22:50,760 --> 00:22:53,360 Speaker 1: in the pipeline. Of course, no one wants these shocks, 375 00:22:53,400 --> 00:22:57,200 Speaker 1: and everybody is hoping that things will be calm and stable. UM. 376 00:22:57,240 --> 00:23:01,680 Speaker 1: But um. But like from the perspective of the dynamics 377 00:23:01,680 --> 00:23:05,840 Speaker 1: of overlapping emergencies, even if inflation is now easing and 378 00:23:06,040 --> 00:23:07,960 Speaker 1: it seems like in the next couple of years these 379 00:23:08,040 --> 00:23:11,719 Speaker 1: kind of shocks UM are likely to keep coming. So 380 00:23:11,760 --> 00:23:14,640 Speaker 1: if that is the case, you kin't want to have 381 00:23:14,800 --> 00:23:17,399 Speaker 1: capacity on the side of the state to be able 382 00:23:17,440 --> 00:23:21,480 Speaker 1: to monitor these sectors that are so important in UM 383 00:23:21,560 --> 00:23:24,840 Speaker 1: in in ways that allow you to react to these 384 00:23:24,880 --> 00:23:30,919 Speaker 1: shocks before they kind of create these huge cascading effects 385 00:23:31,200 --> 00:23:34,080 Speaker 1: throughout the whole economy, and you then actually get some 386 00:23:34,119 --> 00:23:39,960 Speaker 1: sort of potentially more generalized kind of inflation UM. Beyond 387 00:23:40,080 --> 00:23:42,800 Speaker 1: monitoring capacity, of course, not enough to watch. You want 388 00:23:42,840 --> 00:23:45,640 Speaker 1: to be able to kind of step in and stabilize, 389 00:23:45,760 --> 00:23:50,000 Speaker 1: right and UM here then UM, I think the big 390 00:23:50,040 --> 00:23:54,320 Speaker 1: shift in in policy think that emergence from this paper 391 00:23:54,640 --> 00:23:58,240 Speaker 1: is that once we go on the sector level, we 392 00:23:58,320 --> 00:24:02,400 Speaker 1: kind of leave the world of more or less homogeneous 393 00:24:02,400 --> 00:24:05,320 Speaker 1: aggregates where we can talk about interest rates up at 394 00:24:05,359 --> 00:24:07,800 Speaker 1: one percent or down by one percent or point five 395 00:24:07,880 --> 00:24:11,040 Speaker 1: or point seven five or whatever. But it's like pretty 396 00:24:11,520 --> 00:24:14,720 Speaker 1: one dimension, right, and pretty clear that there's a one 397 00:24:14,760 --> 00:24:18,240 Speaker 1: dimension that we can measure in very clear ways quantitatively 398 00:24:18,400 --> 00:24:22,280 Speaker 1: in percentage points, very straightforward. If we now think about 399 00:24:23,200 --> 00:24:27,639 Speaker 1: the prices of chemicals or um the stability of the 400 00:24:27,720 --> 00:24:31,600 Speaker 1: flow of goods and holes trade and therefore the prices 401 00:24:31,880 --> 00:24:35,320 Speaker 1: attached to hols trade or the prices of commodities, we 402 00:24:35,560 --> 00:24:39,399 Speaker 1: enter the word of qualitative differences. Right, we enter the 403 00:24:39,440 --> 00:24:45,360 Speaker 1: word of the last uh two years of odd lots 404 00:24:45,400 --> 00:24:49,840 Speaker 1: episodes right where you have been unpacking this incredible amount 405 00:24:49,880 --> 00:24:55,440 Speaker 1: of detail on the qualitative differences that have huge quantitative 406 00:24:55,560 --> 00:25:02,679 Speaker 1: implications for pricing. But that required quiet um an extraordinary 407 00:25:02,720 --> 00:25:07,680 Speaker 1: extent of understanding of the specific specifics of these sectors. 408 00:25:07,720 --> 00:25:11,840 Speaker 1: So to be able to react to shocks in these sectors, 409 00:25:12,040 --> 00:25:14,879 Speaker 1: I think one would really need quite a bit of 410 00:25:14,960 --> 00:25:18,640 Speaker 1: capacity that is quite tailored to these sectors. So there's 411 00:25:18,680 --> 00:25:23,280 Speaker 1: no like kind of um uh one solution that does 412 00:25:23,280 --> 00:25:27,600 Speaker 1: at all if you think about housing versus um oil refineries, 413 00:25:27,640 --> 00:25:31,199 Speaker 1: you would obviously need a very different kind of policy approach, Right, 414 00:25:31,480 --> 00:25:34,800 Speaker 1: So this then means that kind of these and I mean, 415 00:25:34,800 --> 00:25:37,800 Speaker 1: there is a lot of capacity out there, but it 416 00:25:37,880 --> 00:25:41,680 Speaker 1: needs to be connected back to the question of macroeconomic 417 00:25:41,720 --> 00:25:44,600 Speaker 1: and monetary stability. It's always so funny to me that 418 00:25:44,640 --> 00:25:47,359 Speaker 1: there exists a data point on the terminals that the 419 00:25:47,440 --> 00:25:52,800 Speaker 1: FED monitors called capacity utilization. Is if there's is if 420 00:25:52,840 --> 00:25:56,280 Speaker 1: the concept of industrial capacity could ever be homogenized in 421 00:25:56,320 --> 00:25:59,560 Speaker 1: a single index of like here's your finding capacity, here's 422 00:25:59,560 --> 00:26:02,959 Speaker 1: apartment capacity, here's capacity to make cars. Like it just 423 00:26:03,000 --> 00:26:05,000 Speaker 1: like sort of blows my mind that that's like a 424 00:26:05,320 --> 00:26:08,159 Speaker 1: that that could ever be boiled down to a single number. 425 00:26:08,280 --> 00:26:10,199 Speaker 1: Let me ask you a random question. Is there a 426 00:26:10,280 --> 00:26:12,440 Speaker 1: sector or a part of the economy that in your 427 00:26:12,480 --> 00:26:17,600 Speaker 1: research surprised you as having more ripple effects across other 428 00:26:17,720 --> 00:26:20,240 Speaker 1: prices than you might have expected that maybe people I 429 00:26:20,240 --> 00:26:22,680 Speaker 1: mean oils obvious, right, we all know that everything needs 430 00:26:22,760 --> 00:26:25,760 Speaker 1: energy or whatever, but other sectors that maybe people don't 431 00:26:25,800 --> 00:26:29,080 Speaker 1: think of that have outside effects. Generally speaking, I would 432 00:26:29,119 --> 00:26:32,880 Speaker 1: say that the results are not terribly surprising, which might 433 00:26:32,960 --> 00:26:35,520 Speaker 1: make you say like, Yeah, then why I bothered modeling, 434 00:26:36,480 --> 00:26:39,240 Speaker 1: to which I would answer, well, it is nice to 435 00:26:39,320 --> 00:26:42,560 Speaker 1: kind of be able to capture these aggregate effects and 436 00:26:42,600 --> 00:26:45,760 Speaker 1: trace them in a systematic way throughout the economy. One 437 00:26:45,760 --> 00:26:47,960 Speaker 1: of the sectors that I think is quite interesting is 438 00:26:48,080 --> 00:26:51,440 Speaker 1: chemical products, like, which is just in everything, right, It's 439 00:26:51,480 --> 00:26:58,000 Speaker 1: like as ubiquitous almost as UM as as fossive feuds. UM, 440 00:26:58,119 --> 00:27:02,680 Speaker 1: and UM is incredibly important and apparently it's also important 441 00:27:02,960 --> 00:27:07,520 Speaker 1: not only like from a quantity perspective of composition of production, 442 00:27:07,560 --> 00:27:10,840 Speaker 1: but also from a from a price perspective. So this 443 00:27:10,880 --> 00:27:14,520 Speaker 1: is one that I personally hadn't hadn't thought about as much. UM. 444 00:27:14,840 --> 00:27:17,679 Speaker 1: I think holds trade kind of came very much to 445 00:27:18,359 --> 00:27:21,159 Speaker 1: UM to the top of our minds in the pandemic, 446 00:27:21,280 --> 00:27:26,159 Speaker 1: But our simulations for before the pandemic UM also show 447 00:27:26,560 --> 00:27:30,920 Speaker 1: that holes trade was already pretty important, which again is 448 00:27:30,960 --> 00:27:34,359 Speaker 1: something that I think, like from the pre COVID mindset, 449 00:27:34,440 --> 00:27:36,840 Speaker 1: would not have been something that I would necessarily have 450 00:27:37,400 --> 00:27:42,560 Speaker 1: associated with thinking about inflation. Sorry, really, what do you what? 451 00:27:42,720 --> 00:27:45,400 Speaker 1: Hole shield trade? Man? You said, what do what specifically 452 00:27:45,440 --> 00:27:48,120 Speaker 1: you're talking about? Yeah, so holds the trade again, Like 453 00:27:48,200 --> 00:27:50,680 Speaker 1: this is actually one of the points where probably the 454 00:27:50,760 --> 00:27:53,880 Speaker 1: level of aggregation can become a problem. I mean generally speaking, 455 00:27:53,920 --> 00:27:57,399 Speaker 1: it's stuff like logistics, but also whole say traders, I 456 00:27:57,440 --> 00:28:00,840 Speaker 1: mean any kind of company that that provide that that 457 00:28:01,040 --> 00:28:22,200 Speaker 1: basically does Whoway say merchandising, right, which yeah, so Isabelle 458 00:28:22,200 --> 00:28:24,679 Speaker 1: it can I ask one thing you mentioned in your paper. 459 00:28:24,960 --> 00:28:28,639 Speaker 1: You talk about the possibility of minimum inventory requirements. So 460 00:28:28,760 --> 00:28:31,320 Speaker 1: if you know that a specific industry or thing is 461 00:28:31,400 --> 00:28:34,879 Speaker 1: important from an inflation perspective, maybe we should build in 462 00:28:35,240 --> 00:28:38,840 Speaker 1: additional inventory, some resilience into the system. And this is 463 00:28:39,520 --> 00:28:42,840 Speaker 1: you know, inventories. Um. The idea of business is moving 464 00:28:42,880 --> 00:28:45,280 Speaker 1: to just in time and maybe being a little bit 465 00:28:45,280 --> 00:28:48,800 Speaker 1: more vulnerable to big shocks and demand. This is almost 466 00:28:48,800 --> 00:28:52,280 Speaker 1: classic odd thoughts territory. And it seems like the difficulty 467 00:28:52,360 --> 00:28:56,560 Speaker 1: there is how do you encourage companies to build up 468 00:28:56,640 --> 00:29:01,000 Speaker 1: that extra capacity in their system when maybe their incentives 469 00:29:01,040 --> 00:29:04,000 Speaker 1: are more skewed towards you know, just making money and 470 00:29:04,280 --> 00:29:08,120 Speaker 1: profits and short term things. How do you actually go 471 00:29:08,120 --> 00:29:12,320 Speaker 1: about doing that? How realistic is it? Yeah? Absolutely great question, um? 472 00:29:12,360 --> 00:29:15,000 Speaker 1: And I think that um. I mean, if it is 473 00:29:15,000 --> 00:29:18,680 Speaker 1: about making money and some of the companies that have 474 00:29:19,160 --> 00:29:23,720 Speaker 1: experienced bottomnecks actually have experience that they have managed to 475 00:29:24,240 --> 00:29:27,360 Speaker 1: increase their prices and ways that rendered them even more 476 00:29:27,440 --> 00:29:30,560 Speaker 1: profitive with them before the pandemic. Right, so then your 477 00:29:30,640 --> 00:29:35,000 Speaker 1: incentive of of increasing your inventory it might actually be 478 00:29:35,080 --> 00:29:38,240 Speaker 1: pretty low because you think, like in normal times, UM, 479 00:29:38,280 --> 00:29:41,360 Speaker 1: I don't wanna have inventories because I want to be 480 00:29:41,640 --> 00:29:44,040 Speaker 1: as efficient as I can be. And then if shocks hit, 481 00:29:44,120 --> 00:29:48,320 Speaker 1: if everybody is kind of um running this same model, 482 00:29:48,400 --> 00:29:51,480 Speaker 1: like all competitors in one in one segment running this 483 00:29:51,600 --> 00:29:53,800 Speaker 1: same model, so then they all don't have a lot 484 00:29:53,840 --> 00:29:57,600 Speaker 1: of inventories, then there's this exactor white UM supply change 485 00:29:57,600 --> 00:30:00,760 Speaker 1: shock which all allows them to high prices and base 486 00:30:00,800 --> 00:30:03,120 Speaker 1: in which they could not hide prices at normal times 487 00:30:03,160 --> 00:30:05,920 Speaker 1: because now they kind of had this mutual knowledge of 488 00:30:06,120 --> 00:30:10,760 Speaker 1: UM of of of shortage UM. So and then they 489 00:30:10,840 --> 00:30:13,840 Speaker 1: end up being actually in a pretty good position, which 490 00:30:13,880 --> 00:30:16,200 Speaker 1: we have seen in some of the sectors that have 491 00:30:16,360 --> 00:30:23,120 Speaker 1: experienced extreme UH impacts on their supply change during the pandemic. Right, So, therefore, 492 00:30:23,240 --> 00:30:26,080 Speaker 1: we somehow need a way to get out of this. 493 00:30:26,280 --> 00:30:29,400 Speaker 1: And I think because of what I just laid out, 494 00:30:29,480 --> 00:30:34,640 Speaker 1: it's not clear that companies by themselves would necessarily increase 495 00:30:34,720 --> 00:30:39,560 Speaker 1: the inventories space. Um that that that sufficiently prevent this situation, 496 00:30:40,240 --> 00:30:42,080 Speaker 1: at least not to the extent as it would be 497 00:30:42,120 --> 00:30:45,720 Speaker 1: like kind of um socially desirable or desirable from a 498 00:30:45,760 --> 00:30:50,840 Speaker 1: more like macroeconomic kind of standpoint. How to do it practically? Again, Like, 499 00:30:50,920 --> 00:30:55,160 Speaker 1: I really see this paper as providing a framework and 500 00:30:55,240 --> 00:30:58,240 Speaker 1: kind of starting a conversation, and I think to get 501 00:30:58,280 --> 00:31:00,840 Speaker 1: to the question of how to do it practical, one 502 00:31:00,960 --> 00:31:04,080 Speaker 1: really has to start. I'm talking to people who understand 503 00:31:04,520 --> 00:31:08,040 Speaker 1: inventory management and companies rather than me like kind of 504 00:31:08,080 --> 00:31:10,480 Speaker 1: as the arm to economists coming up with some some 505 00:31:10,640 --> 00:31:14,080 Speaker 1: sort of fix all the inventories of US corporations and 506 00:31:14,280 --> 00:31:16,960 Speaker 1: one type of approach. We're almost out of time. I 507 00:31:17,000 --> 00:31:20,640 Speaker 1: have one very short question, but you know, we did 508 00:31:20,680 --> 00:31:23,160 Speaker 1: an episode recently and it was pointed out by one 509 00:31:23,160 --> 00:31:25,040 Speaker 1: of our guests of the way a lot of economists 510 00:31:25,040 --> 00:31:27,160 Speaker 1: think is that if the price of gas goes down, 511 00:31:27,240 --> 00:31:30,560 Speaker 1: for example, that doesn't improve inflation because the sort of 512 00:31:30,600 --> 00:31:33,320 Speaker 1: general equilibrium, Well, that's more money in people's podcasts, and 513 00:31:33,320 --> 00:31:36,360 Speaker 1: they're just going to spend more on haircuts now, or 514 00:31:36,400 --> 00:31:39,960 Speaker 1: they're just gonna spend more on cars. Why is a 515 00:31:40,040 --> 00:31:42,520 Speaker 1: limit to how many haircuts, yeah, right, or maybe they'll 516 00:31:42,520 --> 00:31:45,400 Speaker 1: spend more on going out to eat, okay, so uh 517 00:31:45,480 --> 00:31:47,880 Speaker 1: and then it doesn't really get us anywhere. Like what 518 00:31:47,920 --> 00:31:50,480 Speaker 1: do you say? I'm just curious your response to that. 519 00:31:50,480 --> 00:31:54,080 Speaker 1: That's like, okay, you target a sector, great, you target energy, great, 520 00:31:54,080 --> 00:31:55,800 Speaker 1: But then everything is cheaper, people have more money and 521 00:31:55,800 --> 00:31:59,160 Speaker 1: they spend elsewhere, and you don't get anywhere. Why should 522 00:31:59,240 --> 00:32:01,920 Speaker 1: that not? Is that not a fatal flaw of your approach? 523 00:32:02,120 --> 00:32:04,080 Speaker 1: I mean this is the famous I mean one of 524 00:32:04,120 --> 00:32:08,680 Speaker 1: the famous fretument frequent quotes also where he's saying exactly 525 00:32:08,680 --> 00:32:13,400 Speaker 1: what you just said. We were back to monitor, Yeah, yeah, 526 00:32:13,440 --> 00:32:15,200 Speaker 1: I mean that's the kind of brings you back to 527 00:32:15,240 --> 00:32:19,360 Speaker 1: the question of how firms are setting prices, right, um, 528 00:32:19,440 --> 00:32:22,040 Speaker 1: And if we are in a situation where we have 529 00:32:22,360 --> 00:32:26,600 Speaker 1: very highly concentrated um corporate structures, which I think is 530 00:32:26,640 --> 00:32:31,080 Speaker 1: a fairly fair descriptions of large parts of the American economy, 531 00:32:31,520 --> 00:32:36,600 Speaker 1: then we can actually see that that the demand response, sorry, 532 00:32:36,600 --> 00:32:40,240 Speaker 1: that the price response to demand is surprisingly small. In 533 00:32:40,280 --> 00:32:44,240 Speaker 1: many cases, the prices are actually quite surprisingly stable. I mean, 534 00:32:44,240 --> 00:32:47,360 Speaker 1: if you think back to the two decades decades before 535 00:32:48,000 --> 00:32:51,560 Speaker 1: covid Um, where of course there have been periods of 536 00:32:51,920 --> 00:32:55,840 Speaker 1: more demand and less demandents on, but prices were surprisingly stable, right, 537 00:32:55,840 --> 00:32:58,200 Speaker 1: and everybody was a kind of surprising. Why are price 538 00:32:58,280 --> 00:33:03,640 Speaker 1: is so stable? Well because in a very concentrated sectors, 539 00:33:04,040 --> 00:33:08,360 Speaker 1: firms tend to UM to compete over market share, UM, 540 00:33:08,440 --> 00:33:13,440 Speaker 1: compete over conquering new segments of markets, UM, compete over 541 00:33:13,520 --> 00:33:17,880 Speaker 1: cutting costs, and so on, less than UM than using 542 00:33:17,960 --> 00:33:22,640 Speaker 1: any kind of small increase in demand by immediately raising prices. Right, 543 00:33:22,680 --> 00:33:25,240 Speaker 1: Because if you raise prices in your competitor doesn't raise 544 00:33:25,320 --> 00:33:27,680 Speaker 1: prices because both of you are price makers and not 545 00:33:27,800 --> 00:33:31,600 Speaker 1: price takers, then UM, that can actually harm you. So 546 00:33:31,720 --> 00:33:35,560 Speaker 1: therefore UM in in in the kind of institution setting 547 00:33:35,600 --> 00:33:38,560 Speaker 1: that we find ourselves in, UM, I don't think it's 548 00:33:38,640 --> 00:33:43,680 Speaker 1: clear that UM, if people spent less on gas, then 549 00:33:43,720 --> 00:33:47,360 Speaker 1: immediately the prices of everything else that they are UM 550 00:33:47,360 --> 00:33:49,280 Speaker 1: assuming are going up. And I also don't think that 551 00:33:49,320 --> 00:33:52,400 Speaker 1: this is something that we see empirically, that the price 552 00:33:52,440 --> 00:33:56,360 Speaker 1: of gas andoy going down, the inflation in other parts 553 00:33:56,360 --> 00:34:02,120 Speaker 1: of the economy suddenly like going up by any large margins. Isabella, 554 00:34:02,160 --> 00:34:03,960 Speaker 1: We're going to have to leave it there, but thank 555 00:34:04,000 --> 00:34:06,200 Speaker 1: you so much for coming on. Odd lots You're definitely 556 00:34:06,240 --> 00:34:07,959 Speaker 1: one of our favorites. And I'm not just saying that 557 00:34:08,000 --> 00:34:12,280 Speaker 1: because you've translated the past two years into actual academic research. UM. 558 00:34:12,320 --> 00:34:31,120 Speaker 1: Fascinated discussion. Thank you, Thanks Isabella. That conversation was great, UM, 559 00:34:31,120 --> 00:34:33,080 Speaker 1: and the paper is definitely worth a read, although I 560 00:34:33,120 --> 00:34:35,319 Speaker 1: know Isabella said she didn't think anyone was actually going 561 00:34:35,360 --> 00:34:38,000 Speaker 1: to read it. One thing I was thinking is it 562 00:34:38,080 --> 00:34:40,560 Speaker 1: does kind of go back to remember some of the 563 00:34:40,600 --> 00:34:44,560 Speaker 1: conversations we had with Stephanie Kelton on modern monetary theory, 564 00:34:44,640 --> 00:34:48,640 Speaker 1: and you know, her solution was, well, we need instead 565 00:34:48,680 --> 00:34:51,960 Speaker 1: of reducing spending, like maybe we identify where the bottlenecks 566 00:34:52,000 --> 00:34:55,920 Speaker 1: are happening and we increased capacity or try to increase capacity. 567 00:34:56,239 --> 00:34:59,000 Speaker 1: And my criticism of that was it's difficult to do 568 00:34:59,080 --> 00:35:02,759 Speaker 1: it in real time. But I think studies like this 569 00:35:02,920 --> 00:35:07,040 Speaker 1: maybe go some way towards identifying where to look, right. 570 00:35:07,320 --> 00:35:11,520 Speaker 1: I think this use of input output tables and Isabella 571 00:35:11,600 --> 00:35:13,840 Speaker 1: said it is actually a very old thing that you 572 00:35:13,960 --> 00:35:16,680 Speaker 1: never hear mainstream economists talk about. I don't you know, 573 00:35:17,080 --> 00:35:20,320 Speaker 1: it could be is like very useful idea and like, okay, 574 00:35:20,400 --> 00:35:22,880 Speaker 1: it's like difficult. Sure, it's a lot more difficult to 575 00:35:23,120 --> 00:35:26,439 Speaker 1: identify critical sectors, and it is to just raise rates 576 00:35:26,440 --> 00:35:29,840 Speaker 1: when CPI comes in higher than expected. But it's doable. 577 00:35:30,040 --> 00:35:33,279 Speaker 1: And I did read the paper. But when I say 578 00:35:33,320 --> 00:35:35,399 Speaker 1: I read the paper, what I mean is I read 579 00:35:35,440 --> 00:35:39,920 Speaker 1: the first four pages, skipped over the forty pages of equations. 580 00:35:40,120 --> 00:35:42,120 Speaker 1: You have to see the intro and then the conclusions. 581 00:35:42,200 --> 00:35:44,480 Speaker 1: So I read the I read the intro, I skipped 582 00:35:44,520 --> 00:35:47,440 Speaker 1: over like all the equations and Greek symbols or whatever, 583 00:35:47,520 --> 00:35:50,880 Speaker 1: and then the conclusion, and I thought it was really interesting. 584 00:35:51,280 --> 00:35:54,239 Speaker 1: And I think, like I suspect and maybe as a 585 00:35:54,280 --> 00:35:56,719 Speaker 1: result of all this, the pandemic and everything, there might 586 00:35:56,760 --> 00:36:00,400 Speaker 1: be renewed interest in this sort of like pretty vigorous 587 00:36:00,400 --> 00:36:04,200 Speaker 1: approach to identifying critical sectors and how they distribute prices 588 00:36:04,239 --> 00:36:07,440 Speaker 1: across the ecomptment exactly this. I would be really disappointed 589 00:36:07,480 --> 00:36:09,600 Speaker 1: if we came out of the past two or three 590 00:36:09,680 --> 00:36:12,919 Speaker 1: years without a sort of like new way of thinking 591 00:36:12,920 --> 00:36:16,520 Speaker 1: about inflation, or at least maybe an additional dimension. Yeah, 592 00:36:16,760 --> 00:36:18,520 Speaker 1: all right, shall we leave it there. Let's leave it there. 593 00:36:18,800 --> 00:36:21,600 Speaker 1: This has been another episode of the ad Thoughts podcast. 594 00:36:21,640 --> 00:36:24,080 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 595 00:36:24,120 --> 00:36:26,440 Speaker 1: Tracy Alloway and I'm Joe, why isn't Though? You can 596 00:36:26,480 --> 00:36:29,520 Speaker 1: follow me on Twitter at the Stalwart. Follow our guest 597 00:36:29,640 --> 00:36:33,040 Speaker 1: Isabella Vaber. She's at Isabella and Vaber, and check out 598 00:36:33,040 --> 00:36:38,520 Speaker 1: her paper, Inflation in times of overlapping emergencies systemically significant 599 00:36:38,560 --> 00:36:42,600 Speaker 1: prices from an input output perspective. Follow our producers Carmen 600 00:36:42,680 --> 00:36:47,279 Speaker 1: Rodriguez at Carmen Armand and Dash Bennett at Dashbot. And 601 00:36:47,400 --> 00:36:50,000 Speaker 1: check out all of our podcasts as Bloomberg under the 602 00:36:50,040 --> 00:36:54,200 Speaker 1: handle at podcasts and for more odd Lots content, go 603 00:36:54,239 --> 00:36:58,040 Speaker 1: to Bloomberg dot com slash odd Lots, where we post transcripts. 604 00:36:58,080 --> 00:37:01,360 Speaker 1: Tracy and I blog right away. Weekly newsletter every Friday. 605 00:37:01,440 --> 00:37:04,279 Speaker 1: Go there, subscribe to it, get it in your inboxes. 606 00:37:04,400 --> 00:37:05,160 Speaker 1: Thanks for listening.