WEBVTT - Isabella Weber on the Big Rethink of Inflation 0:00:10.119 --> 0:00:13.400 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:13.480 --> 0:00:14.760 I'm Tracy Alloway and. 0:00:14.640 --> 0:00:15.560 I'm Joe Wisenthal. 0:00:16.079 --> 0:00:18.680 Joe, do you remember the episode we did. I think 0:00:18.680 --> 0:00:21.080 it was just a couple months ago with the core 0:00:21.160 --> 0:00:25.799 BOO strategist Samuel Rhines about companies are telling us the 0:00:25.840 --> 0:00:27.360 real reason they're raising prices. 0:00:27.440 --> 0:00:30.120 Yeah, there was great episode that sort of helped me 0:00:30.280 --> 0:00:33.279 like analyze like corporate earnings calls from then on and 0:00:33.320 --> 0:00:36.520 really like think about particularly in the consumer space, where 0:00:36.520 --> 0:00:39.200 he had this thesis that companies are like very explicitly 0:00:39.240 --> 0:00:43.200 willing to sacrifice volume expansion in favor of higher prices 0:00:43.200 --> 0:00:43.920 and higher margin. 0:00:44.159 --> 0:00:48.280 Right, he called it price over volume. And since that episode, 0:00:48.320 --> 0:00:51.200 so we actually wrote an article based on that episode 0:00:51.280 --> 0:00:53.960 and we had a lot of quotes from Sam. We 0:00:54.120 --> 0:00:58.680 also cited a research paper from an Odd Lot's favorite, 0:00:58.800 --> 0:01:02.400 Isabella Weber, and we talked about this phenomenon. We called 0:01:02.400 --> 0:01:06.200 it excuse flation. So this idea that companies are using 0:01:06.280 --> 0:01:10.120 all these one off emergencies as an excuse to raise prices. 0:01:10.520 --> 0:01:14.959 But since then, this whole idea has exploded into the 0:01:14.959 --> 0:01:19.679 public consciousness in various ways under different umbrella terms. So 0:01:19.840 --> 0:01:24.240 Isabella used the term seller's inflation. I've seen like profit 0:01:24.560 --> 0:01:28.480 led inflation, creedflation, although I think that's a bad term 0:01:28.520 --> 0:01:31.440 for it personally, but it's everywhere now, right. 0:01:31.520 --> 0:01:34.160 And it's funny because it's one of these things where 0:01:34.480 --> 0:01:38.200 you know, economists are sort of like scandalized by sort 0:01:38.200 --> 0:01:41.480 of alternative ideas about inflation. And it's like they have 0:01:41.560 --> 0:01:43.880 certain things like some people say money, so they say 0:01:44.000 --> 0:01:47.000 like labor costs and wages, but like it feels like 0:01:47.040 --> 0:01:49.840 on Wall Street there's kind of less mystery. It's like, no, 0:01:49.880 --> 0:01:52.120 they're like, at least you know, according to people read 0:01:52.160 --> 0:01:54.920 the calls. It's like, no, they're telling us they're willing 0:01:54.960 --> 0:01:57.600 to push price, and I guess the question is like, 0:01:57.720 --> 0:01:59.800 you know, well, there's lots of follow on questions, but 0:02:00.200 --> 0:02:03.080 I think there's some really interesting policy ramifications from some 0:02:03.120 --> 0:02:04.640 of this identification. 0:02:04.160 --> 0:02:06.720 Totally, And it is funny. It's not PEPSI isn't talking 0:02:06.760 --> 0:02:09.520 about like, oh, the money supply is increasing, therefore we're 0:02:09.600 --> 0:02:12.760 raising our prices. They're talking very explicitly about, well, we 0:02:12.880 --> 0:02:16.240 have these one off reasons maybe to raise our prices, 0:02:16.280 --> 0:02:17.840 and so we're going to see how far we can 0:02:17.880 --> 0:02:21.600 take it to the consumer so anyway, everyone is talking 0:02:21.600 --> 0:02:24.160 about this, whether you call it gre inflation, excuse flation, 0:02:24.280 --> 0:02:28.200 profit led inflation, seller's inflation. We need to go back 0:02:28.240 --> 0:02:30.880 to one of our favorite guests, Yes, who's done a 0:02:30.919 --> 0:02:34.240 lot of academic work on this topic. We specifically cited 0:02:34.280 --> 0:02:36.040 her work in the piece that we did. We're going 0:02:36.080 --> 0:02:37.400 to be speaking with Isabella Weber. 0:02:37.480 --> 0:02:39.160 I'm psyched on set all. 0:02:39.200 --> 0:02:43.560 Right, Isabella Weber, economics professor at University of Massachusetts Amherst. 0:02:43.600 --> 0:02:45.040 Thank you so much for coming back. 0:02:44.919 --> 0:02:47.079 On Thanks so much for having me back. And it's 0:02:47.080 --> 0:02:48.760 a true passion to be in person. 0:02:48.919 --> 0:02:50.160 Yeah, this is this is a tree. 0:02:50.160 --> 0:02:52.359 I didn't realize up until like five minutes ago that 0:02:52.360 --> 0:02:53.560 you were gonna be outset. I think we're going to 0:02:53.639 --> 0:02:53.920 look at the. 0:02:55.720 --> 0:02:58.040 First time we're actually meeting in person. Have you been 0:02:58.160 --> 0:03:02.360 surprised at all by how quickly this seems to have become. 0:03:02.680 --> 0:03:05.079 I hesitate to call it mainstream because people are still 0:03:05.080 --> 0:03:07.000 debating it, but it's in the Wall Street Journal, it's 0:03:07.000 --> 0:03:09.919 in New York Times, certainly in Bloomberg coverage. 0:03:10.960 --> 0:03:11.160 Yeah. 0:03:11.200 --> 0:03:14.160 I think it has been very surprising, especially since some 0:03:14.200 --> 0:03:17.239 of the key data on the profit margins actually already 0:03:17.280 --> 0:03:19.480 came out in the fourth quarter of twenty twenty one. 0:03:19.760 --> 0:03:22.280 So and you guys have actually been covering that at 0:03:22.280 --> 0:03:25.600 the time. You were covering the profit margin explosion that 0:03:25.720 --> 0:03:28.840 happened at the same time as inflation started to take off. 0:03:29.000 --> 0:03:32.360 And in this by now probably infamous Guardian piece that 0:03:32.400 --> 0:03:36.760 I wrote, I actually started by saying, there is so 0:03:36.920 --> 0:03:40.760 far pretty much undiscussed phenomenon, which is an explosion of 0:03:41.000 --> 0:03:44.440 profit margins that coincides with inflation, and we should take 0:03:44.440 --> 0:03:47.040 a closer look at that. So I think in many ways, 0:03:47.080 --> 0:03:49.720 when our paper came out at the beginning of this year, 0:03:50.160 --> 0:03:52.960 it has kind of been something that had been going 0:03:52.960 --> 0:03:55.240 on for a long time, and companies have been saying 0:03:55.240 --> 0:03:57.800 this on earnings calls for a long time. The groundwork 0:03:57.840 --> 0:04:00.200 folks have been calling this out for a long time time, 0:04:00.480 --> 0:04:01.680 but now it really took off. 0:04:01.760 --> 0:04:06.360 So I guess one of my questions and have many, 0:04:06.520 --> 0:04:08.480 is you know, there are different factors that people talk 0:04:08.520 --> 0:04:12.320 about driving inflation, and obviously the tight labor market, fest 0:04:12.320 --> 0:04:15.600 wage growth, high levels of consumer demand, a lot of 0:04:15.600 --> 0:04:18.680 the supply chain bottlenecks that we've talked about over the 0:04:18.760 --> 0:04:20.919 years on the show, the supply side factors. 0:04:21.360 --> 0:04:22.560 Why is it important. 0:04:22.920 --> 0:04:25.320 That's sort of it to sort of like think about 0:04:25.440 --> 0:04:28.200 correct identification of different causes. 0:04:29.360 --> 0:04:32.840 Yeah, I mean when economists talk about causation, they have 0:04:33.000 --> 0:04:35.200 very high standards, right, So I'm not yet there to 0:04:35.279 --> 0:04:38.200 say like what I did. It's like a cause analysis. 0:04:38.240 --> 0:04:40.080 Just to put this out there, it's kind of a disclaimer. 0:04:40.120 --> 0:04:41.520 But I think this is kind of part of the 0:04:41.640 --> 0:04:44.480 challenge that we face because we are in a really 0:04:44.600 --> 0:04:48.960 unprecedented moment in the world, in the economy, in the 0:04:48.960 --> 0:04:51.480 global economy, right, and inflation is kind of part of 0:04:51.520 --> 0:04:55.040 that whole unprecedented moment. So you are getting these pieces 0:04:55.040 --> 0:04:56.880 of data that are coming out and you kind of 0:04:56.920 --> 0:05:00.680 have to reason on them. However incomplete the data might be. 0:05:01.240 --> 0:05:04.000 And if you just look at it from the perspective 0:05:04.040 --> 0:05:07.200 of your standard inflation paradigm, then you basically just look 0:05:07.240 --> 0:05:10.200 at money supply, aggregate demand, and maybe wages, and you 0:05:10.200 --> 0:05:12.119 don't look at all these other stuff that you guys 0:05:12.120 --> 0:05:15.160 have been reporting about four months and months and months, right, 0:05:15.360 --> 0:05:17.719 But if you sit in a corporate boardroom, then you 0:05:17.760 --> 0:05:20.360 are actually looking at all this other stuff. So then 0:05:20.400 --> 0:05:24.159 from your perspective, prices present themselves as something very different. 0:05:24.240 --> 0:05:27.080 So what we are doing with this research, I think, 0:05:27.240 --> 0:05:30.040 is to kind of say, let's take the information that 0:05:30.080 --> 0:05:34.200 we have, however incomplete it still may be, and try 0:05:34.240 --> 0:05:37.400 to make sense why we are seeing what we are seeing. 0:05:37.480 --> 0:05:40.200 What we are seeing is that on earnings calls time 0:05:40.240 --> 0:05:43.600 and again, corporate leaders are saying that they can take 0:05:43.680 --> 0:05:46.440 pricing and that they can increase prices in ways that 0:05:46.480 --> 0:05:48.920 they might not even have expected, and that they can 0:05:49.040 --> 0:05:52.240 increase prices even when volumes are going down, which is 0:05:52.320 --> 0:05:55.840 just against the logic of basic supply demand right where 0:05:55.880 --> 0:05:58.840 we would expect that demand going up the prices going up, 0:05:58.839 --> 0:06:02.200 and not the other way around. Now you might say, well, 0:06:02.240 --> 0:06:04.599 it's about the bottleneck, and then demand is strong, so 0:06:04.680 --> 0:06:06.960 therefore it's still a demand kind of story. But then 0:06:06.960 --> 0:06:09.080 I would say, well, if I look at their earnings 0:06:09.120 --> 0:06:13.080 calls in the latest quorder right where clearly the bottlenecks 0:06:13.080 --> 0:06:17.040 for the most part have ceased and taking price when 0:06:17.120 --> 0:06:19.599 volumes are going down, then ka, this is also not 0:06:19.720 --> 0:06:22.480 a pure kind of bottleneck type of story. 0:06:22.600 --> 0:06:24.760 Well, maybe just to step back for a second, talk 0:06:24.800 --> 0:06:28.160 to us about what seller's inflation this is the term 0:06:28.200 --> 0:06:31.719 that you use actually is, and how maybe it differs 0:06:32.080 --> 0:06:36.559 to traditional conceptions of greedflation, because this is one reason 0:06:36.560 --> 0:06:38.800 I remember when we were writing that piece shoe, this 0:06:38.880 --> 0:06:41.320 is one reason why I wanted to call it something 0:06:41.520 --> 0:06:44.360 other than greed flation, because it's not like everyone woke 0:06:44.440 --> 0:06:47.160 up in March twenty twenty and suddenly decided to become 0:06:47.160 --> 0:06:47.840 more greed. 0:06:47.680 --> 0:06:50.919 Which is a common critique of like that, yeah, right. 0:06:51.160 --> 0:06:54.080 Yeah, and quite frankly, I think that everybody agrees on that. Like, 0:06:54.160 --> 0:06:56.560 no one is saying that there has been this sudden 0:06:56.800 --> 0:07:00.480 grady impulse where firm leaders just became more greedy than 0:07:00.480 --> 0:07:02.040 they used to be, right, that is just not a 0:07:02.080 --> 0:07:02.640 good theory. 0:07:02.839 --> 0:07:04.720 So the question is, how. 0:07:04.520 --> 0:07:09.160 Can it be that in incredibly concentrated industries we had 0:07:09.320 --> 0:07:14.720 decades of surprising price stability, right, even like deflation in 0:07:15.360 --> 0:07:20.120 some periods, and now in the same highly concentrated kind 0:07:20.160 --> 0:07:23.239 of setup, we suddenly get this price of a volume 0:07:23.360 --> 0:07:24.560 type of pricing behavior. 0:07:24.640 --> 0:07:24.880 Right. 0:07:25.360 --> 0:07:28.480 And what we are arguing in our paper is that 0:07:28.600 --> 0:07:33.600 there's basically different components that coordinate price hikes in ways 0:07:33.680 --> 0:07:38.280 in which they could not be coordinated without these emergencies happening. 0:07:38.680 --> 0:07:41.080 So one prominent thing is a cost shock. 0:07:41.200 --> 0:07:43.800 I mean, we have had gigantic cost shocks coming out 0:07:43.800 --> 0:07:47.000 of energy, right, that kind of stand a signal to firms, Okay, 0:07:47.000 --> 0:07:50.440 now is the time to increase prices, which means that 0:07:50.480 --> 0:07:53.119 they can be fairly sure that their competitors are also 0:07:53.160 --> 0:07:55.680 increasing prices, because the way that they are pricing is 0:07:55.960 --> 0:07:58.920 to protect their profit margins. So the first goal is 0:07:58.920 --> 0:08:01.600 to make sure that they profit margins are not going 0:08:01.680 --> 0:08:03.720 to collapse, which means that if costs go up, they 0:08:03.840 --> 0:08:04.280 are going to. 0:08:04.320 --> 0:08:05.200 Increase their prices. 0:08:05.280 --> 0:08:07.800 Now, this is like kind of the most benign form 0:08:07.840 --> 0:08:11.280 of coordination, but they can also be bottlenecks that can 0:08:11.320 --> 0:08:14.960 then coordinate pricing behavior, and that can coordinate this pricing 0:08:15.000 --> 0:08:18.600 behavior even when the actual bottleneck might already start to cease, 0:08:18.680 --> 0:08:21.080 because there's still this signal to the whole sector that 0:08:21.560 --> 0:08:25.560 something different is going on. And then there is I guess, 0:08:25.600 --> 0:08:28.720 the component that the excuse flation label is getting at, 0:08:29.000 --> 0:08:32.480 or from the perspective of the consumers, it's also more 0:08:32.760 --> 0:08:35.720 legitimate to see prices going up when there are clear 0:08:35.800 --> 0:08:38.080 reasons why they're going up. But if you imagine you 0:08:38.120 --> 0:08:41.600 go to your favorite coffee shop every day, and then 0:08:41.800 --> 0:08:44.439 from one day to the next, the coffee costs twice 0:08:44.440 --> 0:08:47.560 as much. Then you would probably say like, oh, somehow 0:08:47.600 --> 0:08:49.400 the guy who's running the coffee shop went nuts. 0:08:49.520 --> 0:08:49.640 Right. 0:08:49.960 --> 0:08:52.360 If this guys has been telling you over and over 0:08:52.360 --> 0:08:54.679 again that they are expecting a rent increase, and then 0:08:54.720 --> 0:08:56.720 you come back and the price of coffee goes up, 0:08:56.760 --> 0:08:59.520 you'll probably go like, oh, yeah, of course makes sense, right, 0:09:00.160 --> 0:09:03.480 something like this. But on a sectoral, global level, I 0:09:03.520 --> 0:09:06.079 think has been going on, for example, in the food 0:09:06.120 --> 0:09:08.559 sector where no one can judge. I mean, you had 0:09:08.559 --> 0:09:12.320 this amazing episode on grain prices and prices of food 0:09:12.400 --> 0:09:15.120 items that use grain, right, And I mean as a consumer, 0:09:15.160 --> 0:09:17.640 I don't know how much is the cost component of 0:09:17.720 --> 0:09:20.040 grain in my pasta, right or my bread? But if 0:09:20.080 --> 0:09:23.320 I hear on the news in the radio on TV 0:09:23.440 --> 0:09:26.000 that grain prices are exploding and I see pasta price 0:09:26.080 --> 0:09:28.800 going up, it kind of makes sense. So there is, 0:09:29.120 --> 0:09:33.760 in other words, also a component of legitimacy in pricing behavior. 0:09:33.840 --> 0:09:33.920 Right. 0:09:34.000 --> 0:09:36.120 It's something that in economic theory we have a very 0:09:36.120 --> 0:09:39.440 hard time capturing. It's not like people walk around with 0:09:39.520 --> 0:09:42.480 a budget constraint and a given set of preferences on 0:09:42.520 --> 0:09:45.240 their mind, and like robots, they react in the price 0:09:45.280 --> 0:09:47.320 that they see, But they look at the context. Right, 0:09:47.440 --> 0:09:50.080 So if in normal times or if normal times, there 0:09:50.080 --> 0:09:53.439 are basically two things that would constrain firms in their 0:09:53.480 --> 0:09:56.559 pricing behavior. On the one hand, competition, that is, fear 0:09:57.000 --> 0:09:59.600 of losing market shares to their competitors, right, which would 0:09:59.600 --> 0:10:03.439 happen they start hiking prices and kind of a unilateral action. 0:10:03.640 --> 0:10:06.320 Then that fear is kind of gone once these price 0:10:06.360 --> 0:10:09.080 hikes start to be more or less coordinated due to 0:10:09.160 --> 0:10:11.080 these emergency situations. 0:10:11.320 --> 0:10:14.120 And the second constraint would be fearing that customers are 0:10:14.160 --> 0:10:14.480 just not. 0:10:14.440 --> 0:10:17.160 Willing to pay these prices, right, like, whether they actually 0:10:17.200 --> 0:10:20.080 can pay these prices or not, they might just be 0:10:20.200 --> 0:10:23.600 deterred if prices suddenly go up for no obvious reason. Now, 0:10:23.880 --> 0:10:25.920 if there are obvious reasons, they seem to be more 0:10:25.920 --> 0:10:29.000 willing to accept these price increases. So therefore, both of 0:10:29.040 --> 0:10:34.079 these constraints quite dramatically softened in this emergency situation that 0:10:34.120 --> 0:10:35.000 we have been living through. 0:10:35.600 --> 0:10:38.840 So some economists might listen to the story and now 0:10:38.880 --> 0:10:43.480 they're head say, yeah, this makes sense. But for whatever reason, 0:10:43.640 --> 0:10:46.240 prices are going up and workers are going to demand 0:10:46.480 --> 0:10:49.280 higher wages to compensate for the higher prices, And you 0:10:49.320 --> 0:10:53.240 get this self sustaining you know, increase more demand, and 0:10:53.640 --> 0:10:56.200 they're like, okay, I can fit this into the typical 0:10:56.240 --> 0:11:01.400 inflation expectation story, and therefore defense should be hiking rates regardless, 0:11:01.440 --> 0:11:06.800 Like why could this fit into a typical inflation expectation story? 0:11:06.920 --> 0:11:08.200 This is how it becomes entrenched. 0:11:08.280 --> 0:11:10.720 Yeah, maybe it's like a different thing than like nineteen 0:11:10.720 --> 0:11:12.880 seventies inflation, but it's still the thing, and ultimately the 0:11:12.920 --> 0:11:14.200 fittest to respond the same way. 0:11:14.880 --> 0:11:15.120 Yeah. 0:11:15.200 --> 0:11:17.880 I mean, first, on the wage part of that story, 0:11:18.080 --> 0:11:21.520 what we are seeing is basically, eventually labor is trying 0:11:21.559 --> 0:11:26.040 to fight back against collapsing real wages as workers are 0:11:26.040 --> 0:11:27.640 basically losing purchasing power. 0:11:27.720 --> 0:11:30.199 Right. But this is a very different story. If you 0:11:30.360 --> 0:11:31.839 have an initial. 0:11:31.679 --> 0:11:34.079 Cost shock that comes from the energy market, that comes 0:11:34.080 --> 0:11:36.960 from commodity markets, comes from shipping and so on, basically 0:11:36.960 --> 0:11:40.400 comes from upstream stuff, and then you have a propagation 0:11:40.480 --> 0:11:43.679 amplification of that shock as firms react by. 0:11:43.920 --> 0:11:46.600 Pricing over volume type of behavior, right, and. 0:11:46.520 --> 0:11:49.480 Then eventually labor goes like wait a minute, like my 0:11:49.600 --> 0:11:52.559 purchasing power has collapsed and I'm trying to fight back 0:11:52.800 --> 0:11:53.760 to regain some. 0:11:53.800 --> 0:11:55.040 Of this lost territory. 0:11:55.400 --> 0:11:58.880 Then this is a reaction to inflation rather than the 0:11:58.880 --> 0:12:02.360 origin of inflation. This really matters for how we think 0:12:02.400 --> 0:12:06.160 about what to do against inflation. But secondly, also, I 0:12:06.160 --> 0:12:09.240 mean when we talk about expectations and expectation anchoring and 0:12:09.320 --> 0:12:11.760 so on, we somehow think that firms look at the 0:12:11.800 --> 0:12:14.520 fat and they kind of like reread these signals from 0:12:14.520 --> 0:12:17.720 the fat to anchor or de anchor the inflation expectations. 0:12:17.760 --> 0:12:19.800 I'm not saying none of this is going on, but 0:12:19.840 --> 0:12:22.240 when I am reading the earnings calls, I don't see 0:12:22.240 --> 0:12:24.280 them talk about the fat a lot. I see them 0:12:24.360 --> 0:12:27.720 talk about what their competitors are doing. I see them 0:12:27.760 --> 0:12:30.880 talk about rational pricing environments. I see them say things 0:12:30.920 --> 0:12:34.080 like this new force measure, like the winter storm, Alliot, 0:12:34.080 --> 0:12:37.880 this has made our pricing environment even more conducive. So 0:12:37.960 --> 0:12:41.160 they are looking at their immediate environment. They are looking 0:12:41.240 --> 0:12:44.920 at our customers accepting of these price increases, which is 0:12:44.920 --> 0:12:48.559 a completely different set of expectations than what we think 0:12:48.600 --> 0:12:51.200 of when we talk about expectations in this kind of 0:12:51.480 --> 0:12:53.760 central bank center type of factory. 0:13:10.720 --> 0:13:14.480 So throughout economic history, I mean, the classic worry about 0:13:14.480 --> 0:13:18.080 inflation has always been this wage price spiral that you 0:13:18.160 --> 0:13:21.320 kind of just outline. But if that's not what's happening here, 0:13:21.480 --> 0:13:24.520 or if it's not the actual cause of higher prices, 0:13:24.600 --> 0:13:27.439 if instead we have, like I guess, a profit price 0:13:27.840 --> 0:13:31.000 spiral of some sort, what should we do, like what 0:13:31.200 --> 0:13:34.680 actually arrests this behavior, Because again, if you listen to 0:13:34.720 --> 0:13:38.080 the company earnings calls, you can see the executives talking 0:13:38.120 --> 0:13:41.960 about how surprised they've been, about how strong customer demand 0:13:42.240 --> 0:13:45.560 has been, how far they've been able to push up prices, 0:13:45.679 --> 0:13:48.920 and also you see the share price reactions they're getting 0:13:48.960 --> 0:13:52.560 rewarded for raising prices. So it seems like there's very 0:13:52.559 --> 0:13:56.200 little incentive or a catalyst for this to actually stop. 0:13:56.480 --> 0:13:59.760 Absolutely, And I would actually say that the investors expectations 0:13:59.760 --> 0:14:03.040 and is another set of expectations that's probably more immediate 0:14:03.559 --> 0:14:06.640 from the perspective of people taking pricing decisions. 0:14:06.720 --> 0:14:06.960 Right. 0:14:07.080 --> 0:14:10.120 When representatives of let's say Morgan Stanley, just to pick 0:14:10.160 --> 0:14:13.520 a random example here are asking questions on earning scores 0:14:13.520 --> 0:14:17.200 about pricing, they are also asking on behalf of a 0:14:17.240 --> 0:14:20.080 player that is actually going to invest quite substantial amounts 0:14:20.120 --> 0:14:21.520 of money, right, So there's that. 0:14:21.440 --> 0:14:23.840 Layer to the expectations story too. 0:14:24.320 --> 0:14:27.760 But to actually go to your question, I think, first 0:14:27.840 --> 0:14:31.640 of all, we need to stop these impulses, right, I 0:14:31.640 --> 0:14:34.640 mean these like gigantic cost shocks. 0:14:34.160 --> 0:14:36.800 That then coordinate these kind of price hikes. 0:14:36.840 --> 0:14:40.080 If they can be arrested kind of in the onset, 0:14:40.520 --> 0:14:44.240 that I think would have made a huge difference. I 0:14:44.280 --> 0:14:47.120 think something like the strategic Pictronum Reserve, which of course 0:14:47.160 --> 0:14:50.880 eventually was mobilized in twenty twenty two. If that had 0:14:50.920 --> 0:14:54.080 been mobilized sooner, because there was a mindset on the 0:14:54.120 --> 0:14:57.560 part of policymakers to say oil prices going up as 0:14:57.560 --> 0:15:00.240 they started going up in twenty twenty one is a 0:15:00.280 --> 0:15:04.000 problem and has the potential to undermine price stability and 0:15:04.040 --> 0:15:07.400 economic stability, then they might have acted sooner, and they 0:15:07.440 --> 0:15:10.880 might have acted more decisively. Now it's of course not 0:15:11.040 --> 0:15:13.640 only about oil. It's also about gas are the sources 0:15:13.640 --> 0:15:16.680 of energy. It's about other forms of raw materials, and 0:15:17.160 --> 0:15:20.840 importantly about grain. I think for grain, actually we ideally 0:15:20.880 --> 0:15:24.520 would need some sort of a coordinated international buffer stock, 0:15:24.560 --> 0:15:27.040 which is an idea that Keane's had for the Bretton 0:15:27.080 --> 0:15:30.240 Woods Institutions, something that he wanted to see as one 0:15:30.240 --> 0:15:33.000 of the breton Was institutions, but that did not materialize, 0:15:33.000 --> 0:15:35.640 and there have been proposers like this in the seventies, 0:15:35.680 --> 0:15:38.720 when I mean, obviously they were also very major commodity 0:15:39.120 --> 0:15:40.640 price cycles. 0:15:40.200 --> 0:15:41.200 Going on at the time. 0:15:41.280 --> 0:15:44.320 So I think these type of ideas are pretty important. 0:15:44.440 --> 0:15:47.520 And they are important not only like looking back and saying, oh, yeah, 0:15:47.560 --> 0:15:50.040 the last three years, somehow we'ren't great, but now we 0:15:50.080 --> 0:15:51.040 are back to normal life. 0:15:51.040 --> 0:15:52.040 So this is a nicet for. 0:15:52.320 --> 0:15:54.600 Editor of Anicdotter or something like this, but they're important 0:15:54.600 --> 0:15:57.320 because we are living in an age of overlapping emergency 0:15:57.800 --> 0:16:01.160 and as far as I understand, people in the grain 0:16:01.240 --> 0:16:05.000 market are saying things like we are basically one major 0:16:05.080 --> 0:16:07.960 weather event away from another price bike in grain, right, 0:16:08.400 --> 0:16:11.480 and if there are bad harvests that are related to 0:16:11.640 --> 0:16:14.640 climate change happening much faster than many of us might 0:16:14.680 --> 0:16:18.320 have thought, tipping points being reached much sooner than climate 0:16:18.320 --> 0:16:21.760 scientists to stay projected not that long ago, or then 0:16:21.760 --> 0:16:24.880 I think this is something that is quite likely to happen. 0:16:25.000 --> 0:16:27.160 So what I'm thinking about here is really a form 0:16:27.200 --> 0:16:31.880 of economic disaster preparedness, so that we have shock absorbers 0:16:32.040 --> 0:16:35.520 where shocks to these systemically important things like grain, like 0:16:35.640 --> 0:16:38.880 energy can be absorbed locally so that we don't even 0:16:38.920 --> 0:16:42.480 get this gigantic impulse in the first place. Now for 0:16:42.600 --> 0:16:47.560 this propagation and amplification that comes as firms react to 0:16:47.640 --> 0:16:50.320 these shocks, I think what we basically need is some 0:16:50.360 --> 0:16:54.160 sort of a binfall profits tax that would kick in 0:16:54.240 --> 0:16:57.040 whenever there is a major emergency, because we have now 0:16:57.120 --> 0:17:01.360 learned that in these emergencies, these pretexts that happen can 0:17:01.480 --> 0:17:05.040 present situations where prices can go up very quickly. And 0:17:05.160 --> 0:17:08.080 I think that if corporate leaders had to learn this 0:17:08.080 --> 0:17:11.240 this time, then next time around they have a playbook 0:17:11.240 --> 0:17:14.840 in hand, right, they know how price over volume works, 0:17:15.240 --> 0:17:18.080 they know what to look for, they know what they 0:17:18.080 --> 0:17:21.040 did last time. And if this is a coordination issue 0:17:21.080 --> 0:17:23.639 in the sense that it depends on what your competitors 0:17:23.640 --> 0:17:25.840 are doing, and last time it worked out really well 0:17:25.880 --> 0:17:29.000 because everybody kind of implicitly agreed to be doing exactly that, 0:17:29.160 --> 0:17:31.920 then next time around they just have to look back 0:17:31.920 --> 0:17:33.040 at what they did last time. 0:17:34.119 --> 0:17:38.600 Winfall profits tax. How does that fight inflation? 0:17:38.760 --> 0:17:40.199 Because some people would hear that it's like, oh, you're 0:17:40.200 --> 0:17:42.600 going to add taxes, You're going to add cost Maybe 0:17:42.640 --> 0:17:45.879 there's some like redistribution element or punishing the ranch or 0:17:45.880 --> 0:17:46.719 punishing the success. 0:17:46.760 --> 0:17:47.080 What does the. 0:17:47.080 --> 0:17:49.920 Mechanism via which this is an inflation fighting tool. 0:17:50.760 --> 0:17:55.000 Well, it's a mechanism that basically takes away the incentive 0:17:55.359 --> 0:17:58.680 to do a price over volume strategy, right because price 0:17:58.720 --> 0:18:02.080 over volume makes if you can't increase prices so much, 0:18:02.160 --> 0:18:04.800 then even when you are selling less, you still end 0:18:04.880 --> 0:18:08.320 up making more money because you have hike prices so much. 0:18:08.400 --> 0:18:10.800 Right now, of course, there can be situations where price 0:18:10.800 --> 0:18:13.840 over volume happens to just protect profit margins, so a 0:18:13.960 --> 0:18:17.119 winfo profit sex would not have with that, But we 0:18:17.280 --> 0:18:20.280 have seen situations where firms actually have managed to quite 0:18:20.359 --> 0:18:24.119 dramatically increase their margins with this kind of pricing behavior. 0:18:24.160 --> 0:18:26.760 So it would kind of cut off the edge of 0:18:27.240 --> 0:18:29.679 that process, right, would cut off what we are calling 0:18:30.080 --> 0:18:33.480 in our paper amplification. So you have this initial shock, 0:18:33.520 --> 0:18:36.000 and then this shock is actually not just propagated through 0:18:36.000 --> 0:18:39.600 your system, but it's amplified as as it coordinates these 0:18:39.600 --> 0:18:42.800 additional profit increasing price hikes. 0:18:43.600 --> 0:18:47.680 So what do traditional ways of fighting inflation? How do 0:18:47.800 --> 0:18:51.520 they actually play out in a seller's inflation world? So, 0:18:52.119 --> 0:18:55.280 for instance, the FED hikes interest rates in theory, that's 0:18:55.280 --> 0:18:59.400 supposed to curb demand and therefore prices start going down. 0:18:59.480 --> 0:19:02.000 But what's instinct on how that actually plays out in 0:19:02.040 --> 0:19:06.040 a world where companies are the driving force behind prices. 0:19:07.160 --> 0:19:10.080 Yeah, I mean, at best in a very roundabout way. 0:19:10.119 --> 0:19:13.480 I mean, in any cases, it's always a very roundabout instrument. Right, 0:19:13.480 --> 0:19:15.119 we have to keep in mind that this is a 0:19:15.240 --> 0:19:19.280 very very indirect tool of fighting inflation, which, by the way, 0:19:19.840 --> 0:19:21.720 if we are in a situation where we are already 0:19:21.720 --> 0:19:23.560 at the edge of a recession, where we are already 0:19:23.600 --> 0:19:25.480 at the edge of a banking crisis, where we have 0:19:25.560 --> 0:19:27.479 had a pandemic, and we have a war, and now 0:19:27.560 --> 0:19:31.560 let's say we have another major climate shock, and let's 0:19:31.600 --> 0:19:33.680 say we have already hiked interest rates to a point 0:19:33.680 --> 0:19:37.880 where even hawkish people feel like, okay, really shouldn't go higher. 0:19:37.960 --> 0:19:39.680 I mean, what are you going to do, right if 0:19:39.720 --> 0:19:42.160 you have another shock that unleashes this kind of process. 0:19:42.200 --> 0:19:44.200 So, first of all, I would say. 0:19:44.280 --> 0:19:49.119 It's too blunt of a tool to deal with frequent, 0:19:49.600 --> 0:19:53.560 extremely sectorial shocks, as I think they have become more likely. 0:19:53.640 --> 0:19:56.399 Of course, no one hopes that they will happen. I 0:19:56.440 --> 0:19:58.159 don't hope they are happening, but I think they have 0:19:58.240 --> 0:20:00.720 become more likely, So I don't think we are prepared 0:20:01.200 --> 0:20:05.240 to actually achieve price stability with the tools that we 0:20:05.359 --> 0:20:08.080 have in terms of just relying on the center bank. 0:20:08.760 --> 0:20:11.800 I also think that if it is the case that 0:20:12.080 --> 0:20:14.440 there is such a big energy shock, which then center 0:20:14.480 --> 0:20:17.320