Speaker 1: Hello, and welcome to another episode All of the Odd
Speaker 1: Lots podcast. I'm Joe Wisenthal. Unfortunately, my my colleague Tracy Alloway,
Speaker 1: she is off today, so it's just me. But regardless,
Speaker 1: I'm very excited about today's conversation. Nonetheless, so a couple
Speaker 1: of the big themes this year that we've been talking about,
Speaker 1: and they're pretty intimately linked. We've been talking a lot
Speaker 1: about supply chain and supply chain disruptions, and we started
Speaker 1: talking about those, I think at the end of last year,
Speaker 1: very early this year. I mean, we've really been talking
Speaker 1: about them since the beginning of the pandemic, but they
Speaker 1: haven't gone away, and I think arguably in some cases
Speaker 1: they continue to compound and get worse, and there is
Speaker 1: not a day go by where there's not some type
Speaker 1: of shortage that emerges. And I think the latest thing
Speaker 1: I saw this week is that fertilizer prices are going up,
Speaker 1: and there's droughts and Brazil and that's causing cause your
Speaker 1: prices to go up. And there's no wind these days
Speaker 1: in the UK, so that's causing energy prices to go up.
Speaker 1: So in addition to the pandemic, all kinds of things
Speaker 1: are going on. We know that by and large, there
Speaker 1: is this sort of characterization of the elevated inflation that
Speaker 1: we've seen so far is being transitory. A lot of
Speaker 1: people are not satisfied with what that word actually means
Speaker 1: or how that's defined. We know that under the Fed's
Speaker 1: new framework there is a greater willingness to tolerate some
Speaker 1: inflation overshoot in an aim to get back to maximum
Speaker 1: employment or a full employment. But then there is also
Speaker 1: a debate about how how the current supply chain driven
Speaker 1: inflation plays into that. So there are so many sort
Speaker 1: of like macro and micro themes which we've been discussing
Speaker 1: a lot of odd lots intersected. So I'm very excited
Speaker 1: about sort of exploring all of that. We really have
Speaker 1: like two perfect guests to discuss it. They're actually colleagues,
Speaker 1: and we're going to have a nice macro chat that
Speaker 1: hopefully helps us understand what's actually happening right now and
Speaker 1: what we should be looking ahead to next. My guests
Speaker 1: for this week are Julia Coronado, she's the founder and
Speaker 1: president of Macro Policy Perspectives, as well as Laura rosn
Speaker 1: Or Warburton, who is a founding partner and the senior
Speaker 1: economist also macro policy perspective. Very excited, uh for this conversation.
Speaker 1: I expect I will be learning quit a bit. So
Speaker 1: Julia and Laura, thank you so much for joining us.
Speaker 1: Oh it's our pleasure. Thanks. Yeah, great to be here.
Speaker 1: So why don't we kick it off. Let's just dive
Speaker 1: into the inflation question and either of you can take this.
Speaker 1: Lots of debate about what you know, we have this
Speaker 1: elevated inflation, It doesn't you know, maybe rolling over a
Speaker 1: little bit, but not particularly fast. And like I said,
Speaker 1: every single day there's some it's like the shortage of
Speaker 1: the day, something I hadn't even thought about this week.
Speaker 1: Like I said, I think it's like fertilizer prices, which
Speaker 1: of course is not going to help the food situation
Speaker 1: at all. How would what do you characterize where we're
Speaker 1: at or how you're thinking about inflation right now? Well,
Speaker 1: we've had a huge shock and we're sort of parsing
Speaker 1: through what we're learning about the nature of these inflationary impulses.
Speaker 1: I mean, a lot of what we're seeing is one
Speaker 1: of the biggest is a reflection of one of the
Speaker 1: biggest shifts in relative demand that we've ever seen. So
Speaker 1: one of the big shocks in the COVID crisis was not, uh,
Speaker 1: just COVID itself and the shutdown of the global economy,
Speaker 1: but it completely changed what consumers spent their money on.
Speaker 1: So by virtue of being locked away at home and
Speaker 1: everything being shut down, a huge chunk of your budget
Speaker 1: got freed up. The the money that you spend on
Speaker 1: personal care and entertainment and travel was suddenly unlocked and
Speaker 1: you were sitting there at home, and so you started
Speaker 1: ordering things. Uh. So we saw this gigantic shift from
Speaker 1: services spending too good spending in the middle of a
Speaker 1: huge recession, and of course we've never seen anything like that.
Speaker 1: So on the other side of the equation, producers were
Speaker 1: preparing for the worst. Uh. They followed their recession playbook playbooks,
Speaker 1: So they shut down production, they cleared out inventories, they
Speaker 1: canceled orders. So the combination of those two things led
Speaker 1: to the just gigantic surge in goods prices. You know,
Speaker 1: it was not the typical recession. Typical recessions, goods spending
Speaker 1: gets hit really hard and services spending is more resilient,
Speaker 1: And we saw exactly the opposite. Uh, and so producers
Speaker 1: were caught off guard and had to scramble to restart
Speaker 1: operations and restart supply chains. And then of course consumers
Speaker 1: were delivered several trillions of dollars into their bank accounts
Speaker 1: almost instantaneously. By April, disposable income was above uh pre
Speaker 1: COVID levels, even though age and salary income was a
Speaker 1: trillion dollars below. So consumers had money to spend and
Speaker 1: they could only spend it on goods, and so that
Speaker 1: that has just led to just tremendous bottlenecks and supply chains,
Speaker 1: and that's probably the primary factor. And if that were
Speaker 1: the only factor, then the whole transitory narrative would probably
Speaker 1: be unfolding as expected. And I think the best example
Speaker 1: of this is lumber, something that you've covered in your podcasts.
Speaker 1: You know, it's not subject to all of the global
Speaker 1: supply chains and container issue as in you know, COVID
Speaker 1: disruptions to the same degree as other goods. So it's
Speaker 1: already returned. You know, they've ramped up production, they've lumbers
Speaker 1: getting delivered, prices have fallen, you know, case solved, but
Speaker 1: there's these other frictions. COVID itself keeps it's just this
Speaker 1: rolling series of port shutdowns, factory shutdowns, and it keeps coming.
Speaker 1: You know, Delta is the latest wave and that's affected
Speaker 1: semis particularly hard. And then increasing frequency of climate events
Speaker 1: the Texas freeze, flooding, fires keep happening, and that's probably
Speaker 1: something that's going to be with us more often. And
Speaker 1: then there were some things, I mean, Laura's pointed out,
Speaker 1: there are some things that were going on even before
Speaker 1: COVID with supply chains that are kind of being revealed
Speaker 1: by this crisis. Laura. But Juliet, before we even get there,
Speaker 1: I just really want to emphasize the first point you made,
Speaker 1: which is this epic shift into me end. You know
Speaker 1: what the global pandemic and all of these social distancing
Speaker 1: policies did was they increased the demand for space, so
Speaker 1: people moved out of urban areas where they needed cars,
Speaker 1: So they needed cars, housing, furniture. These are all very
Speaker 1: cyclical items and they typically fall sharply in recessions UM
Speaker 1: and so I think businesses when they saw a recession
Speaker 1: on the horizon, they were planning for the worst, like
Speaker 1: Julia said, and they actually cut their supply. They tried
Speaker 1: to get rid of inventories. So we started at the
Speaker 1: beginning of this epic shift in demand with way too
Speaker 1: little supply because demand just raged for all of these items.
Speaker 1: And I could say, from from an inflation forecasting perspective,
Speaker 1: you know, one one thing I feel like forecasters got
Speaker 1: wrong is maybe they looked at some of the more
Speaker 1: cyclical prices and inflation, you know, components of inflation at
Speaker 1: the beginning of the pandemic, and they said, Okay, I
Speaker 1: think it's reasonable to expect some you know, vehicle deflation,
Speaker 1: given that that's what we have seen every single cycle.
Speaker 1: And so to get not just a lack of deflation
Speaker 1: in the vehicle sector, but enormous inflation was a huge surprise.
Speaker 1: And I think that was again twofold one was again
Speaker 1: this shift in preferences, preferences that changed the composition of
Speaker 1: demand and to the fiscal stimulus that made it possible
Speaker 1: for consumers to spend more and made them more price
Speaker 1: uh insensitive than they typically are. And and so the
Speaker 1: vehicle sector has been a huge surprise this this time around.
Speaker 1: So you mentioned vehicles, and Julie, you mentioned lumber. Lumber
Speaker 1: has already started to correct vehicles. I don't know, I mean,
Speaker 1: there was some rolling over of the used vehicle prices,
Speaker 1: but not very much. And I actually saw a stat
Speaker 1: that maybe they're already going back up again. We know
Speaker 1: that overall vehicle demand has been impaired by the semiconductor shortage,
Speaker 1: and that doesn't seem to be easing anytime soon. In fact,
Speaker 1: I think every you know, again, it's another one of
Speaker 1: these things where every day there's like another headline about
Speaker 1: some major automobile. Oh, I'm saying that they're not going
Speaker 1: to be able to expand production. We could chalk up
Speaker 1: we could look at vehicles and say, okay, we could
Speaker 1: tell a pretty codid story about what's going on in vehicles?
Speaker 1: Is it spreading? Does this type of inflation that we
Speaker 1: could chalk up to the factors that you've described, which
Speaker 1: is the change in consumption patterns owing to the pandemic,
Speaker 1: plus uh, the increased demand and so forth, is it
Speaker 1: spreading beyond categories that we can easily tell the story about.
Speaker 1: Or when you look at it, is it still seemed
Speaker 1: like yep, you know, check all the boxes. This is
Speaker 1: fairly fairly clearly connected to the pandemic. I think that
Speaker 1: it's still fairly clearly connected to the pandemic, although it
Speaker 1: is a little bit broader than just vehicles. So you know,
Speaker 1: where are we seeing it. We're seeing it within recreation goods,
Speaker 1: you know, televisions, We're seeing it in gaming consoles, We're
Speaker 1: seeing it a little bit in computers, and we're seeing
Speaker 1: it in furniture. And I think, what of what are
Speaker 1: those categories have it common? Either they're being affected by
Speaker 1: the chip shortage, or they're being affected by shipping congestion
Speaker 1: and higher input prices. So I still think it's fairly specific.
Speaker 1: We haven't seen it broaden out, and we certainly haven't
Speaker 1: seen it in services yet. I would add that two things. One,
Speaker 1: even within goods, there are some interesting examples where these
Speaker 1: costs aren't being passed along to the same extent, like apparel. So,
Speaker 1: you know, one of the interesting questions that were kind
Speaker 1: of passing through the data and sifting through the data
Speaker 1: to figure out is what is the consumers reaction to
Speaker 1: these prices. What we knew before the pandemic is that
Speaker 1: consumers had been for decades incredibly resistant to absorbing price increases.
Speaker 1: If you tried to pass through price increases, they would
Speaker 1: shift their spending. And what we saw in the pandemic,
Speaker 1: was there was this period when they were had, you know,
Speaker 1: trillions slashing around that they were less price sensitive. And
Speaker 1: now the question going forward is, okay, that fiscal impulse
Speaker 1: is fading, some of a lot of that money has
Speaker 1: gotten spent or saved or invested. How price sensitive will
Speaker 1: consumers be. We are not seeing still any passed through
Speaker 1: in terms of the apparel UH and definitely all of
Speaker 1: it's imported and subject to these bottlenecks. So that's one
Speaker 1: interesting example. And then another pandemic related dynamic that we
Speaker 1: are still seeing is that there is still services disinflation
Speaker 1: that's very sensitive to the pandemic. Airfairs just went down again,
Speaker 1: Hotel prices just went down again. There is excess capacity
Speaker 1: in those sectors. And probably as long as this if
Speaker 1: we're looking at kind of a semi permanent pandemic dynamic,
Speaker 1: you know, for the foreseeable future, where people remain reluctant,
Speaker 1: our variants keep rising UH and falling, is that you know,
Speaker 1: these sectors will be oversupplied. People are not going to
Speaker 1: go back to the same level of business travel or
Speaker 1: personal travel that they were comfortable with before, and so
Speaker 1: those prices can go up and down with much greater frequency,
Speaker 1: even as the goods prices exhibit sort of the mirror
Speaker 1: image of that. And then I guess that the bigger
Speaker 1: open question is is rents right now in terms of
Speaker 1: what's what's something that could be more persistent and sticky
Speaker 1: is you know, what are we seeing in the rental
Speaker 1: market and and how will that pass through? You know,
Speaker 1: how will some of these market measures that we see
Speaker 1: pass into cp I, how persistent will that be? And
Speaker 1: then how will the FED react to that? You know,
Speaker 1: there are so many following questions that I have just
Speaker 1: from this so far, but you mentioned um both talked
Speaker 1: about the consumer response. And one of the stories that
Speaker 1: economists like to tell is that from the sort of
Speaker 1: vulgar era, I guess for about forty years that the
Speaker 1: FED had won the credibility by showing its commitment to
Speaker 1: fight inflation, and that that restrained inflation expectations themselves, and
Speaker 1: that by restraining expectations that had a feedback effect of
Speaker 1: restraining inflation until you get this sort of like nice
Speaker 1: positive feedback loop. And therefore central bankers are extremely reluctant
Speaker 1: to erin the other way. They're like, look, we spent
Speaker 1: decades and decades convincing consumers that inflation will be mild.
Speaker 1: That's caused inflation to be mild. We've got to be
Speaker 1: really careful. And there's still even with the tolerance of
Speaker 1: the overshooting the new framework, you could tell that central
Speaker 1: bankers are still extremely reluctant to give up what they
Speaker 1: perceive as their hard won gains of restraining inflation expectations.
Speaker 1: And I'm curious what both of you make about this
Speaker 1: idea of inflation expectations. Is this a powerful force, is
Speaker 1: this a real thing that affects inflation, or is this
Speaker 1: a way for central bankers to pat themselves on the
Speaker 1: back and talk about and sort of trumpet their further accomplishments.
Speaker 1: That's a great question. And what we're we're we are
Speaker 1: in the midst of is one of the coolest experiments
Speaker 1: you could ever design to test this um. You know,
Speaker 1: central bankers, as you say, put themselves very much at
Speaker 1: the center of taking credit for this low inflation regime
Speaker 1: and stable inflation expectations dynamic that we've seen in recent decades.
Speaker 1: But of course we didn't even start to measure inflation
Speaker 1: expectations until that post volca era, So we don't have long,
Speaker 1: long time series of consistent measures of inflation expectations. We've
Speaker 1: only measured them in the era of low and stable
Speaker 1: inflation and inflation expectations, so we've never tested what it
Speaker 1: looks like when inflation expectations drift higher and how that
Speaker 1: actually affect X pricing decisions and dynamics and behavior. So
Speaker 1: I would say it's fair to say we're a little
Speaker 1: bit more skeptical of that, you know, I mean, certainly,
Speaker 1: central bank credibility has been an incredibly important global force,
Speaker 1: but it's not the only force, And there's a few
Speaker 1: other secular forces, uh that we attribute the era of
Speaker 1: lower inflation too, And so that's we're looking to both
Speaker 1: inflation expectations as well as these other secular forces. I
Speaker 1: don't know, or you want to outline the things that
Speaker 1: we tend to focus on in addition to expectations, sure, So,
Speaker 1: I mean, one thing we're focused on is demographics. So
Speaker 1: as the population ages um, they tend to consume more
Speaker 1: healthcare in particular, and the healthcare market is not a
Speaker 1: competitive market. The government has a very large footprint and
Speaker 1: they actually set prices for medicare and Medicaid services, which
Speaker 1: is about forty of the market. So because the government's
Speaker 1: liabilities are tied to healthcare prices going forward, they have
Speaker 1: a very strong incentive to keep healthcare inflation low. And
Speaker 1: an example of this playing out right now are proposals
Speaker 1: to lower drug prices um so, so we've actually noticed
Speaker 1: a low and stable trend in healthcare inflation despite tightness
Speaker 1: in the labor market that might call for upward pressure.
Speaker 1: We think that this is a large component that will
Speaker 1: continue to see downward pressure. Another secular trend has just
Speaker 1: been globalization and international trade, which has kept goods inflation low.
Speaker 1: Of course that is coming into question now just given
Speaker 1: all of the disruptions, but it certainly has been something
Speaker 1: that has limited goods inflation in the pass I think, sorry,
Speaker 1: go ahead, Well no, I mean, I'm glad. I'm glad
Speaker 1: you brought this up because we did a recent episode
Speaker 1: with Dan Wong, who is a China China analyst, and
Speaker 1: he brought this up. You know, he's like, China has
Speaker 1: closed its borders, and he's like it maybe several years
Speaker 1: before they fully opened up their borders, and I'm curious
Speaker 1: from your perspective. That got a lot of questions and
Speaker 1: of all the things he said on that episode that
Speaker 1: may have caused people's attention the most. What would it
Speaker 1: mean for inflation if our relationships or our trade relationship
Speaker 1: with China were to never normalize whatever that word means.
Speaker 1: If we were to never say, go back to twenty
Speaker 1: nineteen trading patterns with China because of both the disruptions
Speaker 1: but also policy choices, or maybe the Biden relationship with
Speaker 1: chij and Ping, what would it What could that actually
Speaker 1: mean on an ongoing basis for inflation. So I think
Speaker 1: that's a great question because we're not going back to that.
Speaker 1: I mean, we know that was a trend before COVID
Speaker 1: that you know, the trade war was centered around China.
Speaker 1: China has its own express intentions to delink its technology
Speaker 1: supply chain from the US and is making rapid progress
Speaker 1: on that front. That was one of the contributing factors
Speaker 1: to the semiconductor shortage. So we know that we're going
Speaker 1: to We're in the midst of a structural reallocation of
Speaker 1: global supply chains in which the U S and China
Speaker 1: are seeking to realign their own supply chains to be
Speaker 1: more not just domestically dependent, but amongst allies. So you
Speaker 1: see a lot of investment, for example, in semiconductor capacity
Speaker 1: domestically in the US and the UK and amongst allies,
Speaker 1: and the same thing with raw materials. There's a lot
Speaker 1: more policy focus on designing more ally friendly resil aliency
Speaker 1: in supply chains. So that is gonna add to costs
Speaker 1: in the next couple of years. You know, we've already
Speaker 1: seen that doing so. And then the question is, you know,
Speaker 1: when we talk about inflation, it is more of an
Speaker 1: you know, are we going to reallocate those and there's
Speaker 1: this one time re resetting in price levels, or is
Speaker 1: it going to become an ongoing force of repeated price
Speaker 1: increases year after year after year, reflecting ever more expensive
Speaker 1: supply chains. You know, we do see some deglobalization between
Speaker 1: the US and China, but globalization as a force is
Speaker 1: more about competitive forces that you know, US companies face
Speaker 1: global competition for the consumer, the consumer's wallet, and it
Speaker 1: interacts with technology. Technology is another secular force that we
Speaker 1: focus a lot on. Technology is something that allows companies
Speaker 1: to become constantly implementing cost saving changes in business production
Speaker 1: uh and business models. And that's on the one side
Speaker 1: of technology, So constant source of improvements uh and cost savings.
Speaker 1: And then the other is that technology brings brutal price transparency.
Speaker 1: It allows consumers, that allows you know, even at the
Speaker 1: wholesale level suppliers to visibility into costs and pricing. That
Speaker 1: forces this competition in pricing even in you know, markets
Speaker 1: that are somewhat concentrated. So yes, I would say we see,
Speaker 1: um that there is this reallocation of global supply chains
Speaker 1: that will add to costs that has already done so,
Speaker 1: is already doing so. But whether it becomes an inflationary dynamic,
Speaker 1: I think we're still skeptical. We still see the forces
Speaker 1: of the global marketplace and the influence of technology as
Speaker 1: disinflationary forces on an ongoing basis. Just to radiorate which
Speaker 1: really is just said, I think I think we should
Speaker 1: really be careful to distinguish between a level shift in
Speaker 1: costs and kind of ongoing increases in costs that leads
Speaker 1: to kind of a self fulfilling dynamic of inflation. And
Speaker 1: I agree, I think decoupling from China, where it's cheap
Speaker 1: to produce and labor is cheap, would over time increase
Speaker 1: the cost of doing business for for a lot of manufacturers.
Speaker 1: I think also during the pandemic. You know, all of
Speaker 1: these supply chain issues that have arisen probably are causing
Speaker 1: companies to question you know, their their current supply chain operations.
Speaker 1: You know, it is maybe that maybe they need to
Speaker 1: be more simple, you know, maybe they need to be
Speaker 1: more diversified. Uh, and maybe that means higher costs as well,
Speaker 1: maybe they need to hold more inventory than they thought.
Speaker 1: So all of this suggests maybe higher a level shift
Speaker 1: up in cost. The question is how much of that
Speaker 1: is just absorbed in profits by the company and how
Speaker 1: much is actually gets passed on to consumers. And I
Speaker 1: think that's where the fiscal stimulus comes back as as
Speaker 1: a key factor. We saw companies during this unprecedented fiscal
Speaker 1: stimulus passing on a lot of cost cost increases to consumers.
Speaker 1: Will that continue as fiscal stimulus starts to fade and
Speaker 1: consumers become more price sensitive and and and in this
Speaker 1: regard that, there's some interesting global comparisons. You know, you
Speaker 1: can see greater passed through of say vehicle inflation, for example,
Speaker 1: in the US then in Europe where there wasn't as
Speaker 1: generous a fiscal support. And that kind of speaks to
Speaker 1: um that unique moment where we had extremely like unprecedented
Speaker 1: strong support to consumer demand in the United States and
Speaker 1: again next year this year already that's that's largely behind us. Again,
Speaker 1: what is the behavioral response of consumers to hire prices,
Speaker 1: particularly for goods that that are easy to postpone or
Speaker 1: you know, shift around to other producers. The vehicle market
Speaker 1: is an extremely competitive market, will they and and cars
Speaker 1: are a car purchases easy to postpone, what kind of
Speaker 1: behavioral response will we see In fact, you know, arguably
Speaker 1: in the new car market, it's it's still quite a
Speaker 1: moderate degree of passed through of the supply chain issues
Speaker 1: that they're facing because it is such a competitive market.
Speaker 1: You know, I want to get into inflation um and
Speaker 1: we've talked about this before. It gets people going, people
Speaker 1: who have very strong feelings about it. And I think
Speaker 1: part of the reason it gets people going is because
Speaker 1: there's a sort of It affects different people differently. And
Speaker 1: one cliche that people often say, which I'm a little
Speaker 1: skeptical about, is like, oh, inflation it it mostly hurts
Speaker 1: the poor. And I'm sure that in some cases that
Speaker 1: is the case. On the other hand, as you mentioned,
Speaker 1: one of the contributing factors perhaps to some of the
Speaker 1: inflation that we've seen in the US so far this year,
Speaker 1: the aggressive fiscal response, which was incredibly well targeted at
Speaker 1: people with a high marginal propensity to consume. Service workers
Speaker 1: who aren't typically particularly high paid, who had lost their
Speaker 1: jobs had seen income replacement like they've never seen before.
Speaker 1: And what we've seen, even as things have begun to
Speaker 1: return to normal a little bit, is that wages at
Speaker 1: the low end, which had been fairly stagnant for some time,
Speaker 1: clearly seemed to be growing at a more rapid pace
Speaker 1: than high end wages. Setting aside uh, the expansion of
Speaker 1: the unemployment insurance and so forth. So I'm curious about
Speaker 1: how you think overall the policy mix, but the policy
Speaker 1: mix in the sort of the data outcomes that we've seen,
Speaker 1: the distributional effects of them. How how are you thinking
Speaker 1: about the distributional effects of different uh, sort of levels
Speaker 1: of income, different levels of wealth from what we've seen
Speaker 1: so far. Yeah, So, So the grand experiment that we're
Speaker 1: running is what does it look like when you actually
Speaker 1: air on the side of going too much rather than
Speaker 1: too little and supporting and having a demand lead recovery.
Speaker 1: I think if we Look, you know, the old cliche
Speaker 1: as you as you call it, um, was based on
Speaker 1: you know, supply chain inflation is not new. It's something
Speaker 1: that we've typically ascribed mostly to you know, food and energy. Right,
Speaker 1: food and energy are subject to repeated constant supply chain issues,
Speaker 1: supply side issues year after year, from geopolitics, from weather,
Speaker 1: and so that's one reason we exclude food and energy
Speaker 1: and look at core inflation. And that's also the reason
Speaker 1: people tend to think of inflation is harming lower income
Speaker 1: people because they spend more of their budgets on food
Speaker 1: and energy. But as you say, this cycle has been
Speaker 1: unique in a lot of ways, and um, we did
Speaker 1: see very progressive sort of support for lower income, lower
Speaker 1: wage workers who got higher than even replacement rates through
Speaker 1: unemployment insurance. These lump sum stimulus payments are of course
Speaker 1: a bigger share of income for lower income households, so
Speaker 1: very progressively structured fiscal support. Low wage workers were hit
Speaker 1: the hardest by job losses, but are seeing the biggest
Speaker 1: wage gains upon reemployment and recovery. So I think the
Speaker 1: distributional if we look at sort of the labor and
Speaker 1: price side of things, there's a lot of different things
Speaker 1: going on. A lot of the goods that are inflating,
Speaker 1: like cars, are luxury goods. Meanwhile, large wage games for
Speaker 1: lower wage workers are certainly kind of a welcome development
Speaker 1: after years of rising wage inequality. So I think it's
Speaker 1: hard to just say, oh, lower wage workers are getting
Speaker 1: hit the hardest by this high inflation because they are
Speaker 1: getting the biggest wage increases as well. So we're going
Speaker 1: to have to see how this settles out going forward.
Speaker 1: Of course, if we broadened out to wealth and equality,
Speaker 1: it's unambiguous because part of the aggressive response was supporting
Speaker 1: asset prices, and that benefits the wealthy disproportionately, and that's
Speaker 1: just an ongoing byproduct of the fed's toolkit, and that
Speaker 1: argues not for the FED to do nothing or to
Speaker 1: do less to support the economy. It argues for exploring
Speaker 1: a different toolkit for the FED, which we're all in
Speaker 1: favor of a more blue sky exploration of toolkit the
Speaker 1: FEDS toolkit. But I think distributionally, another thing that came
Speaker 1: out of this pandemic was, because of all of that
Speaker 1: cash support, a huge reduction in distress. Loan delinquencies for
Speaker 1: the first time ever fell during a recession, you know,
Speaker 1: one of the interesting dynamics in the used car market
Speaker 1: was one of the limitations in supply came from the
Speaker 1: fact that cars weren't getting repossessed because people normally you
Speaker 1: see a recession, uh, and you know a lot of
Speaker 1: people can't make their car payments and they lose their cars. Well,
Speaker 1: they could make their car payments and they kept their cars.
Speaker 1: In fact, repose were lower than normal, even in which
Speaker 1: was a great year. So that's a that's kind of
Speaker 1: a unsung hero of this fiscal package is that people
Speaker 1: didn't fall into distress. They didn't lose their homes, they
Speaker 1: didn't lose their cars as a result of the recession.
Speaker 1: And that's usually those sort of knock on effects that
Speaker 1: really hit lower income people the hardest, these sort of
Speaker 1: repeated shocks. You lose your job, and you lose your house,
Speaker 1: then you lose your car. That makes it harder to
Speaker 1: get a job, etcetera. And and really there was a
Speaker 1: short circuiting of of that domino effect that you know,
Speaker 1: as we look back over time and sort of evaluate
Speaker 1: the recession, that's gonna, I think be one of the
Speaker 1: unambiguous victories of this kind of approach to policy I
Speaker 1: want to go back to something. So we're recording this September,
Speaker 1: and this morning we got a strong housing number, and
Speaker 1: this idea of the supply side response, and you're talking
Speaker 1: about it a little bit with semiconductors, and uh, you know,
Speaker 1: we might see some greater investment, and I think there's
Speaker 1: some hope, you know, I think there's some hope that
Speaker 1: with tightness, with tightness in the labor market, with tightness
Speaker 1: in supply chains, that we may see a supply side
Speaker 1: expansion or a capital deepening of some sort, that companies
Speaker 1: will invest more, and that we will just have a
Speaker 1: more productive supply side sector than we would have had otherwise,
Speaker 1: because tightness and very US market will result in greater
Speaker 1: building of factories, higher more aggressive training of workers so
Speaker 1: that they are more productive, greater investment in automation and
Speaker 1: so forth. On the flip side, if this is all
Speaker 1: like a temporary so that's like the hope, but you know,
Speaker 1: people have been talking about this more on the flip side.
Speaker 1: If this is all just uh pandemic disruption, and Okay,
Speaker 1: the pandemic isn't over yet, but maybe it'll be over
Speaker 1: in three or six months, and then we've returned to
Speaker 1: something resembling normal, and then we get that fiscal policy tightening,
Speaker 1: which has already begun because some of these uh pandemic
Speaker 1: era programs have come are are winding down. Then maybe
Speaker 1: things won't be so tight in six months, and then
Speaker 1: maybe some of that investment will have proven to be unnecessary.
Speaker 1: What is your outlook for a sort of sustained change.
Speaker 1: I guess I would say a sustained change in the
Speaker 1: KPE trajectory. I think that thinking of going back to
Speaker 1: normal is not It's almost never a useful concept. We
Speaker 1: never go back, We're always going forward. The pandemic has
Speaker 1: disrupted a lot of things that are not going to
Speaker 1: return to their prior state. Consumer preferences on where they
Speaker 1: want to live, how they want to work, business preferences
Speaker 1: for you know, how they want to conduct their businesses,
Speaker 1: the importance of you know, face to face client contact
Speaker 1: versus virtual meetings, business travel, etcetera. Like, these things aren't
Speaker 1: going back, even even if the delta variant fades and
Speaker 1: vaccinations broaden and things feel a lot safer on a
Speaker 1: more sustained basis. Um we've seen businesses realize a lot
Speaker 1: of things about how they can do things more efficiently
Speaker 1: and consumers realize things about how they and work more efficiently.
Speaker 1: You know, these are still early measures of GDP data,
Speaker 1: but it's been a productivity boom. We track earnings reports
Speaker 1: by companies across industries, and every industry is reporting intentions
Speaker 1: and active projects of exploring, you know, ways to do
Speaker 1: things better and cheaper and more efficiently. And investments in
Speaker 1: technology have been enormous. Cap X is again above pre
Speaker 1: pandemic levels, still with decent momentum. It's not falling back,
Speaker 1: you know, and so we expect continued pretty radical transformation,
Speaker 1: uh in business models and operations. And it's not again
Speaker 1: it's it's it's pulled forward. I think a dynamic that
Speaker 1: we've long expected, things like machine learning and artificial intelligence,
Speaker 1: where things that all industries had kind of been looking
Speaker 1: and explore, worrying and you know, thinking about implementing projects
Speaker 1: over the coming years, and it really concentrated that those
Speaker 1: efforts and brought them forward and forced you know, things
Speaker 1: like telehealth. You know, the behavioral resistance to change is
Speaker 1: often slows things down. It's an impediment to adopting new processes,
Speaker 1: and things like telehealth was always slow on implementation because
Speaker 1: you know, the more established doctors were resistant to it, etcetera. Well,
Speaker 1: in a pandemic, you had to get it up and
Speaker 1: running and guess what, it works. So it's cheaper, it's
Speaker 1: more efficient, and it's not going away. So that's just
Speaker 1: one example, but I think there's many examples across industries,
Speaker 1: and I think that's also contributes to one reason, Like
Speaker 1: we see so many frictions in the labor market. What
Speaker 1: consumers want to do, what businesses need from workers is
Speaker 1: shifting very quickly, and business models need to shift quickly,
Speaker 1: and so you hear the loudest complaints from the people
Speaker 1: that are having the hardest time re orienting their business models.
Speaker 1: But we again, if you read earnings reports, you hear
Speaker 1: a lot of non complainers. People are that are saying,
Speaker 1: we implemented this and it was amazing, and our profits
Speaker 1: are higher than expected because you know, we've been able
Speaker 1: to you know, do more with fewer workers or you know,
Speaker 1: transform these processes. So I guess we're pretty optimistic that
Speaker 1: the productivity performance this cycle is going to be better
Speaker 1: than last cycle, and you know that's also a good
Speaker 1: news for the inflation front. We do think that that
Speaker 1: this is sort of a transformational period these frictions. You
Speaker 1: you watch, you know, these companies dealing with these supply
Speaker 1: chain issues, they're re engineering what they need and how
Speaker 1: to do things more effectively, inefficiently, and you know they're
Speaker 1: they're going to be better at things when they come
Speaker 1: out on the other side of this. So we don't
Speaker 1: really know what's going to happen with some of these
Speaker 1: democratic stimulus or spending plans that are in the works.
Speaker 1: Some might not pass at all. Really, it's it's all
Speaker 1: very ambiguous. There is one provision in one of the
Speaker 1: bills that would give the government greater flexibility to negotiate
Speaker 1: on I think medicare negotiate on drug prices, and there's
Speaker 1: some question who knows whether it will actually make it
Speaker 1: in the bill. And then furthermore, beyond that, I think
Speaker 1: there was some language that it wouldn't kick in until power,
Speaker 1: So even if it were to make it in the bill,
Speaker 1: it would probably be kind of irrelevant to some of
Speaker 1: the inflation pressures that we're seeing right now. Nonetheless, I'm
Speaker 1: curious your take on that and how much you know
Speaker 1: something like that. It's pretty obvious that there are pretty
Speaker 1: contributors to the inflation metrics that have nothing to do
Speaker 1: with monetary policy or macro and might be as simple
Speaker 1: as well, what are the government rules that can govern
Speaker 1: the price of prescription drugs? How are you thinking about that?
Speaker 1: And how much difference could it make were the were
Speaker 1: the law to change such that the government could exercise
Speaker 1: some of its clause. I'm an option e buying power
Speaker 1: of prescription drugs for so many people uh to be
Speaker 1: able to more aggressively push prices down. I think it
Speaker 1: could have a material impact. I haven't. I don't have
Speaker 1: an estimate for you, but um, it's it's not something
Speaker 1: that we have factored into our baseline expectation for inflation.
Speaker 1: We had health care inflation actually pick up quite substantially
Speaker 1: in January, and that's something that is very unlikely to
Speaker 1: repeat in January two and that I've estimated will reduce
Speaker 1: core PC inflation by about twenty five basis points just
Speaker 1: that that that not repeating. I think more broadly, our
Speaker 1: view is that healthcare inflation will remain low relative to
Speaker 1: you know, the two early two thousands when it was
Speaker 1: a lot higher, and that will be just a source
Speaker 1: of structural downward pressure on prices. That should help alleviate
Speaker 1: maybe some of this supply chain inflation that we're going
Speaker 1: to see in Yeah, it's kind of interesting because I
Speaker 1: think for years there were a few categories they were
Speaker 1: seen as these like really consistent upward contributors to inflation,
Speaker 1: and obviously healthcare is one of them. Education, if I'm
Speaker 1: not mistaken, there's another area that for a long time
Speaker 1: was putting up a lot of upward pressure, but now
Speaker 1: that really seems to have called off. Yeah, yeah, Yeah,
Speaker 1: that's another one of the examples of the demographic headwind.
Speaker 1: You know, the class size of every incoming college classes shrinking,
Speaker 1: and the education sector is not a nimble sector that
Speaker 1: adjusts capacity at high frequency. So we're oversupplied with higher
Speaker 1: education capacity in the United States. And you know, for years,
Speaker 1: higher education institutions tried to fill those empty seats with
Speaker 1: UM foreign students, and that's become more difficult, although that's
Speaker 1: still you know, an important source of of UM students.
Speaker 1: But at the end of the day, we still do
Speaker 1: have more higher education capacity than uh, we have excess capacity,
Speaker 1: and so we've seen downward pressure on higher on education
Speaker 1: inflation from that. You know, what one thing that we're
Speaker 1: exploring right now is how would some of these other
Speaker 1: subsidies to education. So some of these other policy variables
Speaker 1: that are going to impact education feed into CPI inflation.
Speaker 1: So one thing that we've been posing questions to b
Speaker 1: LS about is how would for example, free community college
Speaker 1: or you know, the subsidies to higher education feed into
Speaker 1: cp I. It's a it's more of an open and
Speaker 1: unsettled question right now. What they do is they tend
Speaker 1: to drop zeros out of their their calculation. They would
Speaker 1: just sort of ignore these subsidies. These subsidies would would
Speaker 1: tend to actually potentially increase higher education inflation. Also, what
Speaker 1: about these subsidies to daycare that are being included in
Speaker 1: some of the bills that are you know, in the
Speaker 1: Reconciliation bill that that's being debated right now, how would
Speaker 1: that feed into daycare pricing in cp I. So there's
Speaker 1: some open questions about how the education pricing. It's it's
Speaker 1: a sector that is the subject of a lot of
Speaker 1: policy focus. Uh, and it could that source of inflation
Speaker 1: could evolve in different ways going forward. So I think
Speaker 1: demographically higher education we've seen the disinflation. There's no reason
Speaker 1: to expect that to reverse some of the other areas,
Speaker 1: though you know, we'll have to think through how that's
Speaker 1: going to be captured and factored into measures of inflation
Speaker 1: as they get more government support. So we're running a
Speaker 1: little bit of a risk here. Like I said, we're
Speaker 1: recording this UH twenty one, it's actually the day before
Speaker 1: a FED decision. But I don't think anyone you know, nothing,
Speaker 1: nothing that we've really talked about, or I think going
Speaker 1: to talk about it here is going to matter much.
Speaker 1: You know, whether some minor language they changed to the taper, well,
Speaker 1: by the time people are listening to this that big said,
Speaker 1: I want to talk about the FED a little bit
Speaker 1: because one of the subjects that we've dwelled a lot
Speaker 1: about on is sort of this new FED framework that
Speaker 1: was unveiled August at Jackson Hole, and basically, you know,
Speaker 1: tolerate some overshoot of inflation in order to do a
Speaker 1: better job of hitting its employment goals. And I think
Speaker 1: if you look at some of the uh the hikes
Speaker 1: that we saw in the post grade financial crisis, the
Speaker 1: FED clearly underestimated the degree to which unemployment could fall,
Speaker 1: and it was sort of perhaps premature and expecting inflation.
Speaker 1: So I think my first you know, the first thing
Speaker 1: I'm curious about is do you see so far a
Speaker 1: meaningful change since this new FED framework has emerged? Do
Speaker 1: you see evidence that the FED has behaved meaningfully different
Speaker 1: than they otherwise would have in the absence of uh,
Speaker 1: this new framework? Is the is the Is the current
Speaker 1: power FED different than the old power FED? Is it
Speaker 1: different than the yelling Fed? Is it Is there evidence
Speaker 1: of a significant change in thinking? Or is it is
Speaker 1: it pre marginal? Oh my goodness, I think there's huge
Speaker 1: evidence of the change already. I mean, part of the
Speaker 1: review that wasn't formalized as much as some of the
Speaker 1: other elements was the idea that you go big in
Speaker 1: a recession because the biggest risk is the lingering malaise.
Speaker 1: You don't mess around time is of the essence, you
Speaker 1: go big, you go early. That was one of the
Speaker 1: things that came out of the review for Powell in particular,
Speaker 1: and he did exactly that in the heat of the
Speaker 1: pandemic when it was becoming a financial crisis. He short
Speaker 1: circuited that very quickly. So that's evidence. And then I
Speaker 1: think you can see it in their tolerance of the
Speaker 1: supply chain inflation so far, there are Hawks on the
Speaker 1: committee that are less comfortable share Powell is more of
Speaker 1: a dove, and he's more comfortable. I mean, his Jackson
Speaker 1: whole speech was, you know, pretty devish on that front.
Speaker 1: And then even if you look at their projections, you
Speaker 1: know that they are projecting lift off. Whether they pull
Speaker 1: it forward to or leave it in three at the
Speaker 1: September meeting, it's still you know, given the inflation that
Speaker 1: we've seen in the old days, you would have seen
Speaker 1: way more panicking over this kind of inflation. Number one
Speaker 1: and number two. You know that the agreement is that
Speaker 1: you're going to let that unemployment rate fall to very
Speaker 1: right around the longer run rate, whatever you think that is,
Speaker 1: before liftoff. And so even in the Hawks projections, they
Speaker 1: might have a view that the labor market is going
Speaker 1: to be stronger, faster and therefore lift off will come sooner.
Speaker 1: But you know, even somebody like Jim Bullard is on
Speaker 1: board with this reaction function. So I definitely see strong
Speaker 1: support for the new reaction function being put into two action.
Speaker 1: I mean the fact that we're just talking about tapering now,
Speaker 1: which is way beyond anything they would have done before
Speaker 1: last cycle. They like each tapering, each QUEI program was
Speaker 1: so hard fought to get put into place, and they
Speaker 1: were always rushing to end it as soon as they
Speaker 1: possibly could. And and this is just a completely different mindset. Um.
Speaker 1: I don't know, Laura, do you want to add anything? Yeah, no,
Speaker 1: I agree. I think Um, earlier this year, you know,
Speaker 1: when you had the major fiscal stimulus bill passed and
Speaker 1: the FED stop plot was unchanged, right, was evidence of,
Speaker 1: you know, a shift towards some more devish reaction function.
Speaker 1: I'm a little bit less sure on the supply chain inflation.
Speaker 1: I feel like in the past, if you thought the
Speaker 1: inflation was going to be temporary, then you wouldn't respond
Speaker 1: to it. Only if it impacted inflation expectations would you,
Speaker 1: you know, really be concerned about it. So I don't
Speaker 1: know if we've seen, you know, so far, necessarily a
Speaker 1: shift in thinking about supply chain inflation from the FED.
Speaker 1: I think the one difference is that there was general
Speaker 1: consensus that most measures of inflation expectations were at the
Speaker 1: low end of the range consistent with their mandate, and
Speaker 1: they would like to see them move higher. So we've
Speaker 1: seen kind of a tolerance for reflation that maybe would
Speaker 1: not have been as welcome, you know, if inflation expectations
Speaker 1: were in a more normal, healthier range. So that's been
Speaker 1: a that's been a difference as well. So obviously, you know,
Speaker 1: part of the whole reason for this rethink there's ultimately
Speaker 1: about you know, and and and I think a lot
Speaker 1: of people give Poll credit for this of taking the
Speaker 1: employment side of the FED mandate extremely seriously, and that
Speaker 1: the recognition, even a pre crisis, unemployment can go very
Speaker 1: low without triggering inflation. I think unemployment got to I
Speaker 1: think we've got down to three point four percent in February.
Speaker 1: There was not meaningful inflation, and there was probably at
Speaker 1: the time no reason to think it couldn't it couldn't
Speaker 1: have gotten into the twos without triggering a significant rise
Speaker 1: in inflation. This time around, assuming we get back to
Speaker 1: those numbers, what what what's victory going to look like
Speaker 1: from the Fed's perspective in the end, because you're still
Speaker 1: I still see this issue where you still have this
Speaker 1: sort of like Phillips curve logic. We're in the end,
Speaker 1: they're still going to rely on inflation measures to tell
Speaker 1: them that they've reached the speed limit or the max
Speaker 1: capacity or something like that. But I'm curious what you think.
Speaker 1: How the fed itself, we'll be able to tell itself. Okay,
Speaker 1: we've we've achieved victory. We've we've hit our goals, and
Speaker 1: we've got to maximum employment. Well, I mean, most participants
Speaker 1: on the f WEMC express satisfaction with the labor market.
Speaker 1: They were happy with that labor market. They they all
Speaker 1: kind of agree that that kind of looked like full employment.
Speaker 1: We didn't have a lot of inflation, we didn't have
Speaker 1: a lot of wage inflation, but we had a lot
Speaker 1: of narrowing disparities, a lot of very healthy dynamics, and
Speaker 1: so at a minimum, they'd like to see something that
Speaker 1: looks like that. They would like to see. You know,
Speaker 1: there's some debate about you know, aging boomers and weather
Speaker 1: those that left will come back. But let's look at,
Speaker 1: you know, the primate employment population ratio that should at
Speaker 1: least return to levels. Maybe it could go to levels
Speaker 1: depending on the productivity trends that we see UH and
Speaker 1: the policies that support labor supply, but definitely we can
Speaker 1: at least get back to levels of prime age employment
Speaker 1: to population. That seems to be a metric that most
Speaker 1: people on the committee agree to and broad based wage gains,
Speaker 1: wage gains that are not just the top but shared
Speaker 1: at the bottom, and narrowing disparities by race and ethnicity
Speaker 1: and gender. So I mean, I think they were seeing
Speaker 1: all of those things in uh, and it looked pretty great.
Speaker 1: Powell was very pleased with a labor market, often and
Speaker 1: repeatedly talked about it. Uh. He loved to see what
Speaker 1: he was seeing, and he would like to get back
Speaker 1: to that. That's one version of victory. Maybe you could
Speaker 1: go even maybe you could even improve upon that. We'll see,
Speaker 1: And I think wage growth is the other metric now
Speaker 1: that we've seen. I mean, I think one of the
Speaker 1: important takeaways of the COVID crisis is that we can
Speaker 1: see consumers accepting higher prices. We can see these inflationary dynamics.
Speaker 1: So I think wage growth becomes a very important metric
Speaker 1: in this environment. Do we see broad based wage gains?
Speaker 1: Are they ongoing? Uh? Do they support a higher run
Speaker 1: rate of inflation? Again, not just all these crazy, wild
Speaker 1: pandemic relative price shifts, but a process that's broad based
Speaker 1: and ongoing. Wage growth is kind of the essential ingredient
Speaker 1: to that. So I think there's going to be a
Speaker 1: lot of focus on after all of this noise settles down,
Speaker 1: what are the trends and wage growth across the spectrum?
Speaker 1: And you know, does that does that deliver you that
Speaker 1: higher run rate on inflation that you're seeking? And I
Speaker 1: would say that, you know, beyond, once we're past the
Speaker 1: supply chain issues, can we achieve a moderate overshoot of
Speaker 1: the feds two percent target at the peak of the cycle.
Speaker 1: We couldn't last time? Can we do that this time?
Speaker 1: And can that bring up measures of inflation expectations from
Speaker 1: the lower end of their normal range a little bit
Speaker 1: closer to the mid or even a little bit higher.
Speaker 1: Can that Can that anchor them there on a sustainable
Speaker 1: basis that maybe lifts interest rates neutral interest rates a
Speaker 1: little bit and brings us a little bit away from
Speaker 1: this risk of the zero lower bound. That would be
Speaker 1: that would be a clear victory for the Fed. Again,
Speaker 1: the challenge right now is we've moved so far above target. Uh,
Speaker 1: you know what, what is the inflation landscape gonna look
Speaker 1: like once these supply chain issues are resolved? Are we
Speaker 1: going to move back below? Will we continue to run
Speaker 1: significantly above? I think the Fed is really hoping for
Speaker 1: a moderate overshoot at the peak of the cycle, which
Speaker 1: it really didn't get in the last expansion. Well on that,
Speaker 1: on that hopeful note, I guess optimistic note and hopeful note,
Speaker 1: I think that's a good place to stop. Could talk
Speaker 1: about these topics with both of you for a long time.
Speaker 1: But Julia and Laura, thank you so much for coming
Speaker 1: on a lot. It was a pleasure. Thank you. Thanks,
Speaker 1: That was a lot of fun. Thank you so much.
Speaker 1: Julian and Laura, take care of thanks well here. Obviously
Speaker 1: I would do a long chat with Tracy, or a
Speaker 1: moderate chat with Tracy on what we just learned. But
Speaker 1: I found that conversation to be incredibly helpful, very interesting
Speaker 1: to think through the different moving parts of inflation and
Speaker 1: think about the degree to which you know. Obviously this
Speaker 1: to me, this is the big macro question, or one
Speaker 1: of maybe like three or four big macro questions. Easy
Speaker 1: enough to sit here in September one and point to
Speaker 1: elevated inflation is having something to do with supply chains
Speaker 1: and uh so forth. But if it, if it extends further,
Speaker 1: if it goes into rents, if we do not see
Speaker 1: anything resembling normalization, if we continue to see these rolling shutdowns,
Speaker 1: obviously things get quite a bit tricky, and of course
Speaker 1: Julia and Laura did a fantastic job breaking that all down.
Speaker 1: So on that note, this has been another episode of
Speaker 1: the Odd Lots podcast. I'm Joe Wisn't though. You can
Speaker 1: follow me on Twitter at the Stalwart, follow my normal
Speaker 1: co host Tracy Alloway or she's normally my co host
Speaker 1: on the show. She's also normal. She's at Tracy Alloway,
Speaker 1: and be sure to follow our guests on Twitter. Julia
Speaker 1: Coronado she is it at j c Underscore econ and
Speaker 1: Laura Rosner Warburton she is at it is Rosner. Follow
Speaker 1: our producer Laura rack Carlson. She's at Laura M. Carlson.
Speaker 1: Followed the Bloomberg head of podcast Francesco Levi at Francesca Today,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening.