WEBVTT - How To Understand the Inflation We’re Seeing Right Now 0:00:10.920 --> 0:00:14.440 Hello, and welcome to another episode All of the Odd 0:00:14.480 --> 0:00:20.479 Lots podcast. I'm Joe Wisenthal. Unfortunately, my my colleague Tracy Alloway, 0:00:20.560 --> 0:00:24.480 she is off today, so it's just me. But regardless, 0:00:24.560 --> 0:00:29.400 I'm very excited about today's conversation. Nonetheless, so a couple 0:00:29.440 --> 0:00:32.720 of the big themes this year that we've been talking about, 0:00:33.120 --> 0:00:36.560 and they're pretty intimately linked. We've been talking a lot 0:00:36.600 --> 0:00:40.519 about supply chain and supply chain disruptions, and we started 0:00:40.920 --> 0:00:43.360 talking about those, I think at the end of last year, 0:00:43.560 --> 0:00:45.800 very early this year. I mean, we've really been talking 0:00:45.840 --> 0:00:49.319 about them since the beginning of the pandemic, but they 0:00:49.360 --> 0:00:53.360 haven't gone away, and I think arguably in some cases 0:00:53.600 --> 0:00:57.120 they continue to compound and get worse, and there is 0:00:57.160 --> 0:01:00.640 not a day go by where there's not some type 0:01:00.640 --> 0:01:03.800 of shortage that emerges. And I think the latest thing 0:01:03.840 --> 0:01:07.080 I saw this week is that fertilizer prices are going up, 0:01:07.120 --> 0:01:10.280 and there's droughts and Brazil and that's causing cause your 0:01:10.280 --> 0:01:13.440 prices to go up. And there's no wind these days 0:01:13.440 --> 0:01:16.760 in the UK, so that's causing energy prices to go up. 0:01:16.760 --> 0:01:19.240 So in addition to the pandemic, all kinds of things 0:01:19.280 --> 0:01:22.280 are going on. We know that by and large, there 0:01:22.360 --> 0:01:26.080 is this sort of characterization of the elevated inflation that 0:01:26.120 --> 0:01:29.959 we've seen so far is being transitory. A lot of 0:01:29.959 --> 0:01:33.000 people are not satisfied with what that word actually means 0:01:33.160 --> 0:01:36.160 or how that's defined. We know that under the Fed's 0:01:36.200 --> 0:01:39.440 new framework there is a greater willingness to tolerate some 0:01:39.600 --> 0:01:43.640 inflation overshoot in an aim to get back to maximum 0:01:43.720 --> 0:01:46.840 employment or a full employment. But then there is also 0:01:46.880 --> 0:01:51.360 a debate about how how the current supply chain driven 0:01:51.480 --> 0:01:54.880 inflation plays into that. So there are so many sort 0:01:54.920 --> 0:01:59.640 of like macro and micro themes which we've been discussing 0:01:59.640 --> 0:02:02.680 a lot of odd lots intersected. So I'm very excited 0:02:02.720 --> 0:02:05.840 about sort of exploring all of that. We really have 0:02:06.040 --> 0:02:10.680 like two perfect guests to discuss it. They're actually colleagues, 0:02:11.000 --> 0:02:13.720 and we're going to have a nice macro chat that 0:02:13.919 --> 0:02:17.600 hopefully helps us understand what's actually happening right now and 0:02:17.680 --> 0:02:20.880 what we should be looking ahead to next. My guests 0:02:20.919 --> 0:02:23.640 for this week are Julia Coronado, she's the founder and 0:02:23.800 --> 0:02:28.000 president of Macro Policy Perspectives, as well as Laura rosn 0:02:28.080 --> 0:02:30.960 Or Warburton, who is a founding partner and the senior 0:02:31.000 --> 0:02:36.400 economist also macro policy perspective. Very excited, uh for this conversation. 0:02:36.880 --> 0:02:39.480 I expect I will be learning quit a bit. So 0:02:39.800 --> 0:02:42.560 Julia and Laura, thank you so much for joining us. 0:02:43.400 --> 0:02:46.760 Oh it's our pleasure. Thanks. Yeah, great to be here. 0:02:47.400 --> 0:02:50.240 So why don't we kick it off. Let's just dive 0:02:50.280 --> 0:02:53.400 into the inflation question and either of you can take this. 0:02:54.120 --> 0:02:57.120 Lots of debate about what you know, we have this 0:02:57.240 --> 0:03:01.480 elevated inflation, It doesn't you know, maybe rolling over a 0:03:01.520 --> 0:03:04.040 little bit, but not particularly fast. And like I said, 0:03:04.560 --> 0:03:08.040 every single day there's some it's like the shortage of 0:03:08.080 --> 0:03:10.239 the day, something I hadn't even thought about this week. 0:03:10.280 --> 0:03:13.320 Like I said, I think it's like fertilizer prices, which 0:03:13.320 --> 0:03:15.679 of course is not going to help the food situation 0:03:15.919 --> 0:03:20.080 at all. How would what do you characterize where we're 0:03:20.160 --> 0:03:24.600 at or how you're thinking about inflation right now? Well, 0:03:24.800 --> 0:03:29.400 we've had a huge shock and we're sort of parsing 0:03:29.440 --> 0:03:34.280 through what we're learning about the nature of these inflationary impulses. 0:03:34.320 --> 0:03:37.800 I mean, a lot of what we're seeing is one 0:03:37.840 --> 0:03:40.480 of the biggest is a reflection of one of the 0:03:40.520 --> 0:03:45.880 biggest shifts in relative demand that we've ever seen. So 0:03:45.960 --> 0:03:52.720 one of the big shocks in the COVID crisis was not, uh, 0:03:52.800 --> 0:03:55.720 just COVID itself and the shutdown of the global economy, 0:03:55.760 --> 0:03:59.080 but it completely changed what consumers spent their money on. 0:04:00.360 --> 0:04:04.119 So by virtue of being locked away at home and 0:04:04.200 --> 0:04:07.440 everything being shut down, a huge chunk of your budget 0:04:07.560 --> 0:04:10.280 got freed up. The the money that you spend on 0:04:10.440 --> 0:04:15.680 personal care and entertainment and travel was suddenly unlocked and 0:04:15.760 --> 0:04:18.200 you were sitting there at home, and so you started 0:04:18.320 --> 0:04:23.000 ordering things. Uh. So we saw this gigantic shift from 0:04:23.080 --> 0:04:26.520 services spending too good spending in the middle of a 0:04:26.640 --> 0:04:30.320 huge recession, and of course we've never seen anything like that. 0:04:30.440 --> 0:04:34.120 So on the other side of the equation, producers were 0:04:34.200 --> 0:04:39.400 preparing for the worst. Uh. They followed their recession playbook playbooks, 0:04:39.520 --> 0:04:42.960 So they shut down production, they cleared out inventories, they 0:04:43.000 --> 0:04:46.839 canceled orders. So the combination of those two things led 0:04:46.880 --> 0:04:51.400 to the just gigantic surge in goods prices. You know, 0:04:51.680 --> 0:04:56.520 it was not the typical recession. Typical recessions, goods spending 0:04:56.560 --> 0:04:59.760 gets hit really hard and services spending is more resilient, 0:04:59.800 --> 0:05:03.800 And we saw exactly the opposite. Uh, and so producers 0:05:03.839 --> 0:05:08.160 were caught off guard and had to scramble to restart 0:05:08.200 --> 0:05:12.960 operations and restart supply chains. And then of course consumers 0:05:13.279 --> 0:05:16.960 were delivered several trillions of dollars into their bank accounts 0:05:17.000 --> 0:05:23.040 almost instantaneously. By April, disposable income was above uh pre 0:05:23.160 --> 0:05:25.719 COVID levels, even though age and salary income was a 0:05:25.760 --> 0:05:29.240 trillion dollars below. So consumers had money to spend and 0:05:29.279 --> 0:05:32.040 they could only spend it on goods, and so that 0:05:32.040 --> 0:05:37.239 that has just led to just tremendous bottlenecks and supply chains, 0:05:37.680 --> 0:05:41.360 and that's probably the primary factor. And if that were 0:05:41.400 --> 0:05:45.880 the only factor, then the whole transitory narrative would probably 0:05:45.960 --> 0:05:50.160 be unfolding as expected. And I think the best example 0:05:50.240 --> 0:05:53.560 of this is lumber, something that you've covered in your podcasts. 0:05:54.360 --> 0:05:57.200 You know, it's not subject to all of the global 0:05:57.880 --> 0:06:01.560 supply chains and container issue as in you know, COVID 0:06:01.640 --> 0:06:04.960 disruptions to the same degree as other goods. So it's 0:06:05.000 --> 0:06:08.839 already returned. You know, they've ramped up production, they've lumbers 0:06:08.839 --> 0:06:13.839 getting delivered, prices have fallen, you know, case solved, but 0:06:13.960 --> 0:06:17.920 there's these other frictions. COVID itself keeps it's just this 0:06:18.120 --> 0:06:22.839 rolling series of port shutdowns, factory shutdowns, and it keeps coming. 0:06:23.080 --> 0:06:26.720 You know, Delta is the latest wave and that's affected 0:06:27.160 --> 0:06:31.800 semis particularly hard. And then increasing frequency of climate events 0:06:31.800 --> 0:06:36.640 the Texas freeze, flooding, fires keep happening, and that's probably 0:06:36.680 --> 0:06:39.880 something that's going to be with us more often. And 0:06:39.880 --> 0:06:42.080 then there were some things, I mean, Laura's pointed out, 0:06:42.120 --> 0:06:44.480 there are some things that were going on even before 0:06:44.800 --> 0:06:49.400 COVID with supply chains that are kind of being revealed 0:06:49.480 --> 0:06:53.479 by this crisis. Laura. But Juliet, before we even get there, 0:06:53.760 --> 0:06:56.599 I just really want to emphasize the first point you made, 0:06:56.760 --> 0:07:00.840 which is this epic shift into me end. You know 0:07:00.880 --> 0:07:04.520 what the global pandemic and all of these social distancing 0:07:04.600 --> 0:07:08.800 policies did was they increased the demand for space, so 0:07:08.880 --> 0:07:13.560 people moved out of urban areas where they needed cars, 0:07:13.600 --> 0:07:18.480 So they needed cars, housing, furniture. These are all very 0:07:18.480 --> 0:07:25.040 cyclical items and they typically fall sharply in recessions UM 0:07:25.200 --> 0:07:28.280 and so I think businesses when they saw a recession 0:07:28.320 --> 0:07:31.520 on the horizon, they were planning for the worst, like 0:07:31.640 --> 0:07:35.520 Julia said, and they actually cut their supply. They tried 0:07:35.560 --> 0:07:39.080 to get rid of inventories. So we started at the 0:07:39.120 --> 0:07:42.440 beginning of this epic shift in demand with way too 0:07:42.520 --> 0:07:47.280 little supply because demand just raged for all of these items. 0:07:47.280 --> 0:07:51.360 And I could say, from from an inflation forecasting perspective, 0:07:51.680 --> 0:07:55.080 you know, one one thing I feel like forecasters got 0:07:55.080 --> 0:07:57.760 wrong is maybe they looked at some of the more 0:07:57.840 --> 0:08:02.760 cyclical prices and inflation, you know, components of inflation at 0:08:02.760 --> 0:08:06.760 the beginning of the pandemic, and they said, Okay, I 0:08:06.760 --> 0:08:11.200 think it's reasonable to expect some you know, vehicle deflation, 0:08:11.280 --> 0:08:14.840 given that that's what we have seen every single cycle. 0:08:15.400 --> 0:08:18.640 And so to get not just a lack of deflation 0:08:18.680 --> 0:08:23.480 in the vehicle sector, but enormous inflation was a huge surprise. 0:08:23.640 --> 0:08:28.640 And I think that was again twofold one was again 0:08:28.720 --> 0:08:32.920 this shift in preferences, preferences that changed the composition of 0:08:32.960 --> 0:08:36.959 demand and to the fiscal stimulus that made it possible 0:08:37.000 --> 0:08:40.080 for consumers to spend more and made them more price 0:08:40.640 --> 0:08:45.080 uh insensitive than they typically are. And and so the 0:08:45.280 --> 0:08:51.199 vehicle sector has been a huge surprise this this time around. 0:08:52.000 --> 0:08:56.280 So you mentioned vehicles, and Julie, you mentioned lumber. Lumber 0:08:56.280 --> 0:09:00.199 has already started to correct vehicles. I don't know, I mean, 0:09:00.520 --> 0:09:03.840 there was some rolling over of the used vehicle prices, 0:09:03.880 --> 0:09:06.800 but not very much. And I actually saw a stat 0:09:06.840 --> 0:09:09.360 that maybe they're already going back up again. We know 0:09:09.440 --> 0:09:15.319 that overall vehicle demand has been impaired by the semiconductor shortage, 0:09:15.360 --> 0:09:19.040 and that doesn't seem to be easing anytime soon. In fact, 0:09:19.160 --> 0:09:21.200 I think every you know, again, it's another one of 0:09:21.200 --> 0:09:23.720 these things where every day there's like another headline about 0:09:23.840 --> 0:09:27.960 some major automobile. Oh, I'm saying that they're not going 0:09:28.000 --> 0:09:32.679 to be able to expand production. We could chalk up 0:09:32.720 --> 0:09:35.040 we could look at vehicles and say, okay, we could 0:09:35.080 --> 0:09:37.840 tell a pretty codid story about what's going on in vehicles? 0:09:38.360 --> 0:09:41.880 Is it spreading? Does this type of inflation that we 0:09:41.880 --> 0:09:44.440 could chalk up to the factors that you've described, which 0:09:44.520 --> 0:09:48.400 is the change in consumption patterns owing to the pandemic, 0:09:49.000 --> 0:09:52.760 plus uh, the increased demand and so forth, is it 0:09:53.040 --> 0:09:57.840 spreading beyond categories that we can easily tell the story about. 0:09:58.040 --> 0:10:00.760 Or when you look at it, is it still seemed 0:10:00.760 --> 0:10:03.520 like yep, you know, check all the boxes. This is 0:10:03.640 --> 0:10:09.440 fairly fairly clearly connected to the pandemic. I think that 0:10:09.559 --> 0:10:12.880 it's still fairly clearly connected to the pandemic, although it 0:10:13.040 --> 0:10:16.560 is a little bit broader than just vehicles. So you know, 0:10:16.600 --> 0:10:20.280 where are we seeing it. We're seeing it within recreation goods, 0:10:20.679 --> 0:10:24.840 you know, televisions, We're seeing it in gaming consoles, We're 0:10:24.880 --> 0:10:28.800 seeing it a little bit in computers, and we're seeing 0:10:28.840 --> 0:10:31.480 it in furniture. And I think, what of what are 0:10:31.520 --> 0:10:35.880 those categories have it common? Either they're being affected by 0:10:35.920 --> 0:10:41.880 the chip shortage, or they're being affected by shipping congestion 0:10:42.200 --> 0:10:48.319 and higher input prices. So I still think it's fairly specific. 0:10:48.360 --> 0:10:51.439 We haven't seen it broaden out, and we certainly haven't 0:10:51.520 --> 0:10:57.720 seen it in services yet. I would add that two things. One, 0:10:58.000 --> 0:11:02.000 even within goods, there are some interesting examples where these 0:11:02.040 --> 0:11:07.160 costs aren't being passed along to the same extent, like apparel. So, 0:11:07.760 --> 0:11:10.280 you know, one of the interesting questions that were kind 0:11:10.280 --> 0:11:13.160 of passing through the data and sifting through the data 0:11:13.200 --> 0:11:17.400 to figure out is what is the consumers reaction to 0:11:17.440 --> 0:11:20.760 these prices. What we knew before the pandemic is that 0:11:20.800 --> 0:11:26.839 consumers had been for decades incredibly resistant to absorbing price increases. 0:11:26.920 --> 0:11:29.360 If you tried to pass through price increases, they would 0:11:29.400 --> 0:11:32.439 shift their spending. And what we saw in the pandemic, 0:11:32.520 --> 0:11:35.200 was there was this period when they were had, you know, 0:11:35.400 --> 0:11:39.280 trillions slashing around that they were less price sensitive. And 0:11:39.320 --> 0:11:43.400 now the question going forward is, okay, that fiscal impulse 0:11:43.559 --> 0:11:45.920 is fading, some of a lot of that money has 0:11:45.960 --> 0:11:50.040 gotten spent or saved or invested. How price sensitive will 0:11:50.040 --> 0:11:53.920 consumers be. We are not seeing still any passed through 0:11:53.960 --> 0:11:57.360 in terms of the apparel UH and definitely all of 0:11:57.400 --> 0:12:00.199 it's imported and subject to these bottlenecks. So that's one 0:12:00.240 --> 0:12:04.840 interesting example. And then another pandemic related dynamic that we 0:12:04.920 --> 0:12:08.840 are still seeing is that there is still services disinflation 0:12:08.880 --> 0:12:12.320 that's very sensitive to the pandemic. Airfairs just went down again, 0:12:13.120 --> 0:12:17.439 Hotel prices just went down again. There is excess capacity 0:12:17.480 --> 0:12:20.839 in those sectors. And probably as long as this if 0:12:20.840 --> 0:12:24.920 we're looking at kind of a semi permanent pandemic dynamic, 0:12:25.120 --> 0:12:28.800 you know, for the foreseeable future, where people remain reluctant, 0:12:28.800 --> 0:12:33.640 our variants keep rising UH and falling, is that you know, 0:12:33.679 --> 0:12:36.280 these sectors will be oversupplied. People are not going to 0:12:36.320 --> 0:12:38.520 go back to the same level of business travel or 0:12:38.600 --> 0:12:42.120 personal travel that they were comfortable with before, and so 0:12:42.200 --> 0:12:46.800 those prices can go up and down with much greater frequency, 0:12:46.840 --> 0:12:49.840 even as the goods prices exhibit sort of the mirror 0:12:49.880 --> 0:12:52.840 image of that. And then I guess that the bigger 0:12:52.880 --> 0:12:56.840 open question is is rents right now in terms of 0:12:56.920 --> 0:13:02.320 what's what's something that could be more persistent and sticky 0:13:03.120 --> 0:13:05.160 is you know, what are we seeing in the rental 0:13:05.240 --> 0:13:08.560 market and and how will that pass through? You know, 0:13:08.559 --> 0:13:11.200 how will some of these market measures that we see 0:13:11.720 --> 0:13:16.680 pass into cp I, how persistent will that be? And 0:13:16.720 --> 0:13:34.960 then how will the FED react to that? You know, 0:13:35.000 --> 0:13:37.760 there are so many following questions that I have just 0:13:37.880 --> 0:13:41.040 from this so far, but you mentioned um both talked 0:13:41.080 --> 0:13:45.520 about the consumer response. And one of the stories that 0:13:45.679 --> 0:13:49.719 economists like to tell is that from the sort of 0:13:49.840 --> 0:13:54.160 vulgar era, I guess for about forty years that the 0:13:54.240 --> 0:13:58.920 FED had won the credibility by showing its commitment to 0:13:59.679 --> 0:14:06.520 fight inflation, and that that restrained inflation expectations themselves, and 0:14:06.600 --> 0:14:10.360 that by restraining expectations that had a feedback effect of 0:14:10.800 --> 0:14:13.640 restraining inflation until you get this sort of like nice 0:14:13.679 --> 0:14:19.600 positive feedback loop. And therefore central bankers are extremely reluctant 0:14:19.640 --> 0:14:21.880 to erin the other way. They're like, look, we spent 0:14:21.960 --> 0:14:26.560 decades and decades convincing consumers that inflation will be mild. 0:14:26.600 --> 0:14:29.000 That's caused inflation to be mild. We've got to be 0:14:29.040 --> 0:14:32.200 really careful. And there's still even with the tolerance of 0:14:32.240 --> 0:14:36.400 the overshooting the new framework, you could tell that central 0:14:36.400 --> 0:14:40.600 bankers are still extremely reluctant to give up what they 0:14:40.680 --> 0:14:46.120 perceive as their hard won gains of restraining inflation expectations. 0:14:46.480 --> 0:14:50.400 And I'm curious what both of you make about this 0:14:50.600 --> 0:14:55.840 idea of inflation expectations. Is this a powerful force, is 0:14:55.880 --> 0:14:59.280 this a real thing that affects inflation, or is this 0:14:59.640 --> 0:15:03.440 a way for central bankers to pat themselves on the 0:15:03.480 --> 0:15:07.560 back and talk about and sort of trumpet their further accomplishments. 0:15:08.400 --> 0:15:11.360 That's a great question. And what we're we're we are 0:15:11.520 --> 0:15:15.280 in the midst of is one of the coolest experiments 0:15:15.280 --> 0:15:19.000 you could ever design to test this um. You know, 0:15:19.320 --> 0:15:22.920 central bankers, as you say, put themselves very much at 0:15:22.960 --> 0:15:27.160 the center of taking credit for this low inflation regime 0:15:27.200 --> 0:15:32.680 and stable inflation expectations dynamic that we've seen in recent decades. 0:15:32.920 --> 0:15:36.600 But of course we didn't even start to measure inflation 0:15:36.680 --> 0:15:41.800 expectations until that post volca era, So we don't have long, 0:15:41.960 --> 0:15:46.920 long time series of consistent measures of inflation expectations. We've 0:15:46.920 --> 0:15:50.120 only measured them in the era of low and stable 0:15:50.200 --> 0:15:53.640 inflation and inflation expectations, so we've never tested what it 0:15:53.760 --> 0:15:58.840 looks like when inflation expectations drift higher and how that 0:15:58.960 --> 0:16:04.760 actually affect X pricing decisions and dynamics and behavior. So 0:16:05.240 --> 0:16:07.560 I would say it's fair to say we're a little 0:16:07.560 --> 0:16:11.000 bit more skeptical of that, you know, I mean, certainly, 0:16:11.120 --> 0:16:14.840 central bank credibility has been an incredibly important global force, 0:16:14.880 --> 0:16:18.120 but it's not the only force, And there's a few 0:16:18.200 --> 0:16:23.600 other secular forces, uh that we attribute the era of 0:16:23.680 --> 0:16:28.120 lower inflation too, And so that's we're looking to both 0:16:28.600 --> 0:16:32.120 inflation expectations as well as these other secular forces. I 0:16:32.120 --> 0:16:34.840 don't know, or you want to outline the things that 0:16:34.880 --> 0:16:38.760 we tend to focus on in addition to expectations, sure, So, 0:16:39.040 --> 0:16:43.040 I mean, one thing we're focused on is demographics. So 0:16:43.240 --> 0:16:47.800 as the population ages um, they tend to consume more 0:16:47.880 --> 0:16:51.920 healthcare in particular, and the healthcare market is not a 0:16:51.960 --> 0:16:56.480 competitive market. The government has a very large footprint and 0:16:56.600 --> 0:17:02.280 they actually set prices for medicare and Medicaid services, which 0:17:02.320 --> 0:17:06.959 is about forty of the market. So because the government's 0:17:07.000 --> 0:17:11.399 liabilities are tied to healthcare prices going forward, they have 0:17:11.440 --> 0:17:15.560 a very strong incentive to keep healthcare inflation low. And 0:17:15.840 --> 0:17:19.880 an example of this playing out right now are proposals 0:17:19.960 --> 0:17:25.000 to lower drug prices um so, so we've actually noticed 0:17:25.359 --> 0:17:31.080 a low and stable trend in healthcare inflation despite tightness 0:17:31.080 --> 0:17:34.520 in the labor market that might call for upward pressure. 0:17:34.560 --> 0:17:38.200 We think that this is a large component that will 0:17:38.240 --> 0:17:42.479 continue to see downward pressure. Another secular trend has just 0:17:42.520 --> 0:17:49.359 been globalization and international trade, which has kept goods inflation low. 0:17:49.480 --> 0:17:53.159 Of course that is coming into question now just given 0:17:53.200 --> 0:17:56.959 all of the disruptions, but it certainly has been something 0:17:57.000 --> 0:18:01.879 that has limited goods inflation in the pass I think, sorry, 0:18:01.880 --> 0:18:04.120 go ahead, Well no, I mean, I'm glad. I'm glad 0:18:04.160 --> 0:18:06.920 you brought this up because we did a recent episode 0:18:06.960 --> 0:18:11.919 with Dan Wong, who is a China China analyst, and 0:18:12.000 --> 0:18:14.280 he brought this up. You know, he's like, China has 0:18:14.880 --> 0:18:18.640 closed its borders, and he's like it maybe several years 0:18:18.680 --> 0:18:21.720 before they fully opened up their borders, and I'm curious 0:18:21.880 --> 0:18:24.760 from your perspective. That got a lot of questions and 0:18:24.800 --> 0:18:27.199 of all the things he said on that episode that 0:18:27.280 --> 0:18:30.320 may have caused people's attention the most. What would it 0:18:30.440 --> 0:18:35.760 mean for inflation if our relationships or our trade relationship 0:18:35.920 --> 0:18:40.160 with China were to never normalize whatever that word means. 0:18:40.280 --> 0:18:43.119 If we were to never say, go back to twenty 0:18:43.320 --> 0:18:48.520 nineteen trading patterns with China because of both the disruptions 0:18:48.600 --> 0:18:52.919 but also policy choices, or maybe the Biden relationship with 0:18:53.000 --> 0:18:55.680 chij and Ping, what would it What could that actually 0:18:55.720 --> 0:18:59.960 mean on an ongoing basis for inflation. So I think 0:19:00.040 --> 0:19:02.879 that's a great question because we're not going back to that. 0:19:03.000 --> 0:19:06.840 I mean, we know that was a trend before COVID 0:19:07.359 --> 0:19:10.080 that you know, the trade war was centered around China. 0:19:10.240 --> 0:19:15.320 China has its own express intentions to delink its technology 0:19:15.400 --> 0:19:19.480 supply chain from the US and is making rapid progress 0:19:19.560 --> 0:19:22.160 on that front. That was one of the contributing factors 0:19:22.200 --> 0:19:26.359 to the semiconductor shortage. So we know that we're going 0:19:26.440 --> 0:19:32.720 to We're in the midst of a structural reallocation of 0:19:32.760 --> 0:19:36.200 global supply chains in which the U S and China 0:19:36.280 --> 0:19:39.560 are seeking to realign their own supply chains to be 0:19:39.680 --> 0:19:45.119 more not just domestically dependent, but amongst allies. So you 0:19:45.160 --> 0:19:48.600 see a lot of investment, for example, in semiconductor capacity 0:19:49.119 --> 0:19:51.840 domestically in the US and the UK and amongst allies, 0:19:51.880 --> 0:19:53.960 and the same thing with raw materials. There's a lot 0:19:54.000 --> 0:20:00.560 more policy focus on designing more ally friendly resil aliency 0:20:00.720 --> 0:20:04.120 in supply chains. So that is gonna add to costs 0:20:04.119 --> 0:20:07.000 in the next couple of years. You know, we've already 0:20:07.040 --> 0:20:11.159 seen that doing so. And then the question is, you know, 0:20:11.200 --> 0:20:15.280 when we talk about inflation, it is more of an 0:20:15.320 --> 0:20:18.160 you know, are we going to reallocate those and there's 0:20:18.200 --> 0:20:22.399 this one time re resetting in price levels, or is 0:20:22.440 --> 0:20:26.240 it going to become an ongoing force of repeated price 0:20:26.320 --> 0:20:30.560 increases year after year after year, reflecting ever more expensive 0:20:30.680 --> 0:20:34.520 supply chains. You know, we do see some deglobalization between 0:20:34.520 --> 0:20:38.520 the US and China, but globalization as a force is 0:20:38.600 --> 0:20:44.080 more about competitive forces that you know, US companies face 0:20:44.160 --> 0:20:48.960 global competition for the consumer, the consumer's wallet, and it 0:20:49.080 --> 0:20:54.120 interacts with technology. Technology is another secular force that we 0:20:54.680 --> 0:20:59.440 focus a lot on. Technology is something that allows companies 0:20:59.480 --> 0:21:07.720 to become constantly implementing cost saving changes in business production 0:21:08.280 --> 0:21:11.680 uh and business models. And that's on the one side 0:21:11.680 --> 0:21:17.680 of technology, So constant source of improvements uh and cost savings. 0:21:17.720 --> 0:21:23.359 And then the other is that technology brings brutal price transparency. 0:21:23.400 --> 0:21:26.080 It allows consumers, that allows you know, even at the 0:21:26.119 --> 0:21:33.520 wholesale level suppliers to visibility into costs and pricing. That 0:21:33.680 --> 0:21:38.760 forces this competition in pricing even in you know, markets 0:21:38.760 --> 0:21:43.800 that are somewhat concentrated. So yes, I would say we see, 0:21:44.320 --> 0:21:48.920 um that there is this reallocation of global supply chains 0:21:48.960 --> 0:21:52.239 that will add to costs that has already done so, 0:21:52.440 --> 0:21:57.199 is already doing so. But whether it becomes an inflationary dynamic, 0:21:57.280 --> 0:22:01.560 I think we're still skeptical. We still see the forces 0:22:01.680 --> 0:22:06.080 of the global marketplace and the influence of technology as 0:22:06.200 --> 0:22:12.240 disinflationary forces on an ongoing basis. Just to radiorate which 0:22:12.240 --> 0:22:15.320 really is just said, I think I think we should 0:22:15.320 --> 0:22:18.679 really be careful to distinguish between a level shift in 0:22:18.840 --> 0:22:23.679 costs and kind of ongoing increases in costs that leads 0:22:23.720 --> 0:22:29.359 to kind of a self fulfilling dynamic of inflation. And 0:22:29.520 --> 0:22:33.680 I agree, I think decoupling from China, where it's cheap 0:22:33.920 --> 0:22:38.960 to produce and labor is cheap, would over time increase 0:22:39.240 --> 0:22:44.000 the cost of doing business for for a lot of manufacturers. 0:22:44.480 --> 0:22:48.040 I think also during the pandemic. You know, all of 0:22:48.080 --> 0:22:52.680 these supply chain issues that have arisen probably are causing 0:22:52.720 --> 0:22:58.399 companies to question you know, their their current supply chain operations. 0:22:58.800 --> 0:23:01.240 You know, it is maybe that maybe they need to 0:23:01.280 --> 0:23:03.520 be more simple, you know, maybe they need to be 0:23:03.560 --> 0:23:08.840 more diversified. Uh, and maybe that means higher costs as well, 0:23:09.400 --> 0:23:11.960 maybe they need to hold more inventory than they thought. 0:23:12.280 --> 0:23:16.600 So all of this suggests maybe higher a level shift 0:23:16.680 --> 0:23:20.200 up in cost. The question is how much of that 0:23:20.400 --> 0:23:24.000 is just absorbed in profits by the company and how 0:23:24.080 --> 0:23:27.639 much is actually gets passed on to consumers. And I 0:23:27.640 --> 0:23:33.440 think that's where the fiscal stimulus comes back as as 0:23:33.800 --> 0:23:39.479 a key factor. We saw companies during this unprecedented fiscal 0:23:39.520 --> 0:23:44.120 stimulus passing on a lot of cost cost increases to consumers. 0:23:44.480 --> 0:23:49.040 Will that continue as fiscal stimulus starts to fade and 0:23:49.119 --> 0:23:53.800 consumers become more price sensitive and and and in this 0:23:54.000 --> 0:23:58.280 regard that, there's some interesting global comparisons. You know, you 0:23:58.320 --> 0:24:03.520 can see greater passed through of say vehicle inflation, for example, 0:24:03.960 --> 0:24:07.800 in the US then in Europe where there wasn't as 0:24:07.920 --> 0:24:11.720 generous a fiscal support. And that kind of speaks to 0:24:12.640 --> 0:24:17.679 um that unique moment where we had extremely like unprecedented 0:24:17.760 --> 0:24:21.919 strong support to consumer demand in the United States and 0:24:21.960 --> 0:24:28.000 again next year this year already that's that's largely behind us. Again, 0:24:28.040 --> 0:24:31.640 what is the behavioral response of consumers to hire prices, 0:24:31.680 --> 0:24:35.960 particularly for goods that that are easy to postpone or 0:24:36.000 --> 0:24:38.760 you know, shift around to other producers. The vehicle market 0:24:38.840 --> 0:24:42.480 is an extremely competitive market, will they and and cars 0:24:42.520 --> 0:24:46.000 are a car purchases easy to postpone, what kind of 0:24:46.040 --> 0:24:49.680 behavioral response will we see In fact, you know, arguably 0:24:49.680 --> 0:24:52.919 in the new car market, it's it's still quite a 0:24:52.960 --> 0:24:57.400 moderate degree of passed through of the supply chain issues 0:24:57.480 --> 0:25:01.440 that they're facing because it is such a competitive market. 0:25:02.280 --> 0:25:05.880 You know, I want to get into inflation um and 0:25:06.160 --> 0:25:09.840 we've talked about this before. It gets people going, people 0:25:09.840 --> 0:25:12.600 who have very strong feelings about it. And I think 0:25:12.680 --> 0:25:15.920 part of the reason it gets people going is because 0:25:15.920 --> 0:25:18.840 there's a sort of It affects different people differently. And 0:25:18.920 --> 0:25:21.680 one cliche that people often say, which I'm a little 0:25:21.680 --> 0:25:25.440 skeptical about, is like, oh, inflation it it mostly hurts 0:25:25.440 --> 0:25:28.360 the poor. And I'm sure that in some cases that 0:25:28.520 --> 0:25:31.680 is the case. On the other hand, as you mentioned, 0:25:32.480 --> 0:25:35.200 one of the contributing factors perhaps to some of the 0:25:35.240 --> 0:25:37.800 inflation that we've seen in the US so far this year, 0:25:38.680 --> 0:25:43.560 the aggressive fiscal response, which was incredibly well targeted at 0:25:43.600 --> 0:25:47.560 people with a high marginal propensity to consume. Service workers 0:25:47.600 --> 0:25:50.520 who aren't typically particularly high paid, who had lost their 0:25:50.640 --> 0:25:54.399 jobs had seen income replacement like they've never seen before. 0:25:55.080 --> 0:25:59.040 And what we've seen, even as things have begun to 0:25:59.119 --> 0:26:02.840 return to normal a little bit, is that wages at 0:26:02.840 --> 0:26:06.879 the low end, which had been fairly stagnant for some time, 0:26:07.359 --> 0:26:10.800 clearly seemed to be growing at a more rapid pace 0:26:11.280 --> 0:26:16.320 than high end wages. Setting aside uh, the expansion of 0:26:16.359 --> 0:26:19.639 the unemployment insurance and so forth. So I'm curious about 0:26:19.680 --> 0:26:23.720 how you think overall the policy mix, but the policy 0:26:23.760 --> 0:26:27.639 mix in the sort of the data outcomes that we've seen, 0:26:28.080 --> 0:26:32.120 the distributional effects of them. How how are you thinking 0:26:32.160 --> 0:26:36.760 about the distributional effects of different uh, sort of levels 0:26:36.760 --> 0:26:39.760 of income, different levels of wealth from what we've seen 0:26:39.800 --> 0:26:43.520 so far. Yeah, So, So the grand experiment that we're 0:26:43.560 --> 0:26:47.359 running is what does it look like when you actually 0:26:48.119 --> 0:26:50.440 air on the side of going too much rather than 0:26:50.480 --> 0:26:54.760 too little and supporting and having a demand lead recovery. 0:26:55.119 --> 0:26:58.160 I think if we Look, you know, the old cliche 0:26:58.240 --> 0:27:00.919 as you as you call it, um, was based on 0:27:01.119 --> 0:27:04.639 you know, supply chain inflation is not new. It's something 0:27:04.720 --> 0:27:10.600 that we've typically ascribed mostly to you know, food and energy. Right, 0:27:10.800 --> 0:27:15.600 food and energy are subject to repeated constant supply chain issues, 0:27:15.680 --> 0:27:21.679 supply side issues year after year, from geopolitics, from weather, 0:27:22.400 --> 0:27:24.960 and so that's one reason we exclude food and energy 0:27:24.960 --> 0:27:27.920