WEBVTT - Why Adam Posen Thinks Inflation Will Surge Back to 4% 0:00:02.720 --> 0:00:19.440 Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to 0:00:19.520 --> 0:00:21.680 another episode of The Odd Laws podcast. 0:00:21.760 --> 0:00:24.000 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:24.360 --> 0:00:28.920 Tracy, you know, future economy, it's always uncertain, path of 0:00:28.960 --> 0:00:32.479 the path of inflation, path of employment, always big debates. 0:00:32.640 --> 0:00:34.839 I think what's really interesting right now compared to a 0:00:34.880 --> 0:00:37.440 few years ago maybe is, you know, at various times 0:00:37.520 --> 0:00:40.200 it's like inflation is going to come down, but there's 0:00:40.200 --> 0:00:43.000 a fight over how fast. Right And now you have 0:00:43.040 --> 0:00:46.800 a situation which there are people who argue both sides. 0:00:46.920 --> 0:00:48.440 Some peoples like, oh, no, we're on a you know, 0:00:48.479 --> 0:00:51.320 we're heading down the sort of camp, et cetera. And 0:00:51.440 --> 0:00:54.560 others are like, look, we're reaccelerating. It's going to get 0:00:54.600 --> 0:00:57.080 hot again. And we're recording this February eleventh. We just 0:00:57.080 --> 0:00:59.960 had a fairly strong jobs print, et cetera. And so 0:01:00.000 --> 0:01:02.440 some people are making the reacceleration argument. 0:01:02.720 --> 0:01:05.520 We are so back. So yeah, well that job's report, 0:01:05.560 --> 0:01:07.760 I mean it was a blowout numbers. Yeah, one hundred 0:01:07.800 --> 0:01:11.959 and thirty thousand jobs added in January versus expectations for 0:01:12.040 --> 0:01:14.960 sixty five thousand, and even if you drill down into it, like, 0:01:15.040 --> 0:01:16.720 it looks pretty good. 0:01:16.680 --> 0:01:18.280 Right, But you're absolutely right. 0:01:18.319 --> 0:01:21.760 So we used to argue about how far we would 0:01:21.800 --> 0:01:25.840 travel in one direction, you know, inflation. Is it going 0:01:25.880 --> 0:01:28.240 to be four percent, is it going to be five percent? Whatever, 0:01:28.760 --> 0:01:32.320 And now we're sort of arguing about which direction we're actually. 0:01:32.080 --> 0:01:33.880 Going to go totally. And I think, like, if you 0:01:33.959 --> 0:01:36.959 just look like, okay, one jobs report, can't you know, 0:01:36.959 --> 0:01:38.960 I take it with a grain of salt. There is 0:01:39.160 --> 0:01:40.959 there does seem to be a lot of evidence of 0:01:41.040 --> 0:01:43.600 some softening in the labor market by a lot of 0:01:43.640 --> 0:01:47.319 different measures, et cetera. Housing market continues to be fairly soft. 0:01:47.600 --> 0:01:50.720 On the other hand, look at various commodities, you know, 0:01:50.920 --> 0:01:53.639 look at copper, look at a bunch of other stuff, 0:01:53.720 --> 0:01:57.280 Look at trucking prices, freight picking back up, et cetera. 0:01:57.360 --> 0:01:59.440 I wrote about this in the AU Thoughts newsletter. 0:01:59.520 --> 0:02:02.240 Yeah, there's lots of things that are going in the 0:02:02.280 --> 0:02:04.720 other direction. And you say, look, this looks like reflation. 0:02:05.000 --> 0:02:07.240 Yeah, so we are going to be speaking with someone 0:02:07.240 --> 0:02:11.040 who had a non consensus call about a month ago. 0:02:11.080 --> 0:02:14.359 But again, I think it's becoming maybe more consensus by 0:02:14.400 --> 0:02:16.400 the day, by the hour, as we get these types 0:02:16.400 --> 0:02:17.480 of reports totally. 0:02:17.520 --> 0:02:19.960 Well, we really do have the perfect guest to sort 0:02:20.000 --> 0:02:22.400 of give us a different take, a sort of I 0:02:22.400 --> 0:02:24.560 would say it's still a little bit out of consensus call, 0:02:24.680 --> 0:02:28.720 but definitely not the direction that a lot of people 0:02:28.880 --> 0:02:31.520 want to see. Definitely not the direction if you think 0:02:31.560 --> 0:02:34.359 that the FED should cut rapidly this year. Maybe we'll 0:02:34.360 --> 0:02:36.840 talk some FED stuff. We're going to be speaking, of course, 0:02:36.840 --> 0:02:39.799 to Adam Posen, here's the president of the Peterson Institute, 0:02:39.840 --> 0:02:44.799 recently co author at apiece with Peter Orsag four percent inflation. 0:02:45.080 --> 0:02:48.639 What Adam, thanks for coming back and joining us here 0:02:48.639 --> 0:02:50.119 in studio four percent inflation? 0:02:50.280 --> 0:02:53.960 Really, thanks Tracy, Thanks Joe for having me back. Yeah. 0:02:54.080 --> 0:02:57.000 I mean I've got friends who say I should have 0:02:57.120 --> 0:03:02.120 just said three point five and the exactly, but I 0:03:02.120 --> 0:03:05.160 think it's realistic to think about four percent by the 0:03:05.280 --> 0:03:08.119 end of the year. On headline CPI and just going 0:03:08.120 --> 0:03:09.959 to the spirit of what both of you were saying, 0:03:10.280 --> 0:03:13.560 I think the direction of travel is up, not down, 0:03:14.000 --> 0:03:17.720 and pretty clearly that way. There's obviously, like you just said, 0:03:17.760 --> 0:03:20.600 today's job report, but I think there's a broader pattern. 0:03:20.919 --> 0:03:23.720 The issue isn't you know, like you say, one month, 0:03:24.560 --> 0:03:27.840 it's more about why the job's report looks the way 0:03:27.840 --> 0:03:32.040 it does. And if you look at prime age, like 0:03:32.360 --> 0:03:34.920 Tracy was saying about drilling down in the numbers, if 0:03:34.920 --> 0:03:38.000 you look at prime age labor force participation, which to 0:03:38.080 --> 0:03:41.240 me is one of the most important statistics you can 0:03:41.280 --> 0:03:45.760 look at, it's still pretty high. And there's this risk 0:03:46.080 --> 0:03:49.360 of women dropping out of the labor force to look 0:03:49.400 --> 0:03:54.480 after kids and elderly and sick people if they don't 0:03:54.520 --> 0:03:59.160 restore some of the Obamacare insurance subsidies. And there is 0:03:59.720 --> 0:04:05.400 a conundrum that if you're either they haven't deported yet 0:04:05.520 --> 0:04:08.760 or managed to drive out yet as many migrants as 0:04:08.800 --> 0:04:14.240 they think, or you're losing labor there too. So it's 0:04:14.280 --> 0:04:17.000 hard for me to see this as a very weak 0:04:17.120 --> 0:04:21.039 job market. The kinds of things people point to, like 0:04:21.200 --> 0:04:25.520 the slowing of wage growth or the vacancies over as 0:04:25.560 --> 0:04:31.279 compared to unemployment, I think, are not indicative of a 0:04:31.360 --> 0:04:35.720 demand side slowdown. They're indicative of what economists called mismatch, 0:04:35.880 --> 0:04:39.440 meaning less good functioning in the labor market. So just 0:04:39.600 --> 0:04:44.000 give you two quick examples. African American unemployment is up 0:04:44.000 --> 0:04:50.720 relative to average unemployment historically for both nasty and good reasons. 0:04:50.839 --> 0:04:54.680 That's been the case, but it'd come way down. So 0:04:54.720 --> 0:04:57.119 the question is is it going up because they're the 0:04:57.160 --> 0:04:59.839 canary in the coal mine, or is it because something 0:05:00.080 --> 0:05:04.400 specific hit African Americans. And unfortunately, I think it's something 0:05:04.480 --> 0:05:10.039 specific contributed to African American unemployment, which is DOSEE may 0:05:10.080 --> 0:05:14.119 not have cut overall government spending, but it massively reallocated 0:05:14.160 --> 0:05:17.840 where our government's spent. So Department of Education gone, a 0:05:17.920 --> 0:05:20.960 lot of environmental gone, a lot of health and human 0:05:21.000 --> 0:05:23.680 services gone. And these are things where you had a 0:05:23.720 --> 0:05:27.359 lot of government contractors that were African American owned or 0:05:27.440 --> 0:05:30.839 run or heavily populated. And so I think part of 0:05:30.839 --> 0:05:34.520 the reason African American unemployment is up, and that doesn't 0:05:34.560 --> 0:05:36.679 mean it's okay, it just means it's not a sign 0:05:36.720 --> 0:05:41.240 of demand shock or declining or soft market is because 0:05:41.279 --> 0:05:45.520 of this hit to this specific part of the workforce. Similarly, 0:05:45.560 --> 0:05:49.320 and I know you have had episodes talking about this issue, 0:05:49.440 --> 0:05:53.080 we see the phenomenon of young people having less hiring, 0:05:53.720 --> 0:05:57.760 particularly college educated people, young people not getting hired as much. 0:05:58.160 --> 0:06:00.839 And I think there's two things going on there. One 0:06:00.960 --> 0:06:05.000 is I mean it's real. Again, like with African American employment, 0:06:05.040 --> 0:06:06.800 I'm not saying it's not real. I'm just saying it's 0:06:06.839 --> 0:06:09.839 not telling you about the demand situation. So it is 0:06:09.880 --> 0:06:16.200 incredibly right well said, very tech speak. So you know, 0:06:16.279 --> 0:06:20.240 I think part of it is that we've the the 0:06:20.360 --> 0:06:24.040 rise in you, younger people unemployment college as younger people 0:06:24.120 --> 0:06:27.880 unemployment has been a very steady rise for a few years. 0:06:27.920 --> 0:06:30.520 It's actually a very it's not like suddenly, oh it 0:06:30.640 --> 0:06:34.039 got soft. It's been coming up slowly since roughly twenty 0:06:34.080 --> 0:06:37.440 twenty three. And to me, that has to do with 0:06:37.520 --> 0:06:41.520 the hiring and rematching coming out of COVID. That people 0:06:41.680 --> 0:06:44.320 moved a lot, companies moved a lot of people into 0:06:44.400 --> 0:06:47.600 new jobs, and they hired extra people in some sense, 0:06:47.640 --> 0:06:51.919 and so there's this overhang and that's particularly affecting young people. 0:06:52.040 --> 0:06:55.320 I mean, AI's in there. I'm just that's not so anyway. 0:06:55.560 --> 0:06:57.960 I'm not trying to cherry pick data, but I'm just 0:06:58.160 --> 0:07:00.800 trying to say that if you match that with the 0:07:00.800 --> 0:07:04.760 more well known data, the layoffs are relatively low, the 0:07:04.920 --> 0:07:08.000 wage growth is slowing but it's not going to zero, 0:07:08.600 --> 0:07:12.760 That participation rate is high, that the monthly job numbers 0:07:12.800 --> 0:07:15.760 are fluctuating. But on the new baseline that we all 0:07:15.960 --> 0:07:19.960 rightly should be looking at solid. I don't see it 0:07:20.000 --> 0:07:21.560 as a week week labor market. 0:07:37.360 --> 0:07:39.760 So you just talked about the labor side, but your 0:07:39.840 --> 0:07:43.000 forecast for four percent inflation by the end of this 0:07:43.120 --> 0:07:47.280 year is comprised of many different things. So walk us 0:07:47.320 --> 0:07:50.800 through what exactly you're looking at to get that call. 0:07:51.120 --> 0:07:54.080 Thanks Tracy for the opportunity, which odd lots gives to 0:07:54.240 --> 0:07:58.000 give more than two points. But I think the message 0:07:58.040 --> 0:08:00.200 is there are I want to start with. Those are 0:08:00.280 --> 0:08:03.120 so many points if you kind of step back right 0:08:03.160 --> 0:08:05.440 and you say, all right, if I'm making a forecast 0:08:05.520 --> 0:08:08.640 for inflation over the next year or two, there's how 0:08:08.680 --> 0:08:11.520 softer typed the labor market is. There's how hot the 0:08:11.560 --> 0:08:15.400 economy is running, and those two obviously overlap. There's are 0:08:15.440 --> 0:08:19.480 we getting supply shocks like tariffs or anti migration policy. 0:08:19.840 --> 0:08:23.080 There's what's fiscal policy is doing, and then there's what's 0:08:23.160 --> 0:08:27.320 monetary policy doing, and very importantly, how credible is it? 0:08:27.360 --> 0:08:30.160 How is it being transmitted? So you go down that 0:08:30.240 --> 0:08:32.480 list and there's, to me, there's just an awful lot 0:08:32.520 --> 0:08:37.959 of inflationary stories. So tariff's, anti migration policy, there was 0:08:38.000 --> 0:08:41.080 a debate, or at least a bunch of people asserting, Oh, 0:08:41.280 --> 0:08:46.079 it didn't really matter, Look, inflation's not up that much. Well, 0:08:46.240 --> 0:08:48.760 my view, and I argued this in a Bloomberg Business 0:08:48.760 --> 0:08:52.839 Week piece a few weeks ago, is that we never 0:08:52.840 --> 0:08:57.000 should have expected the impact of these policies to be 0:08:57.080 --> 0:08:59.920 so fast. And in fact, if you go back, I'm 0:09:00.120 --> 0:09:02.520 not that we forecast it perfectly by any means, but 0:09:02.520 --> 0:09:05.679 if you go back to the stuff my colleagues McKinnon 0:09:05.760 --> 0:09:08.640 and Nolan and others at Peterson's who published a year 0:09:08.640 --> 0:09:10.760 and a half ago on what would be the likely 0:09:10.800 --> 0:09:15.080 effect of the tariffs or the migration policies, they were 0:09:15.080 --> 0:09:18.200 building in a one year lag from when the policies 0:09:18.240 --> 0:09:23.320 took effect, and so you know, roughly next quarter is 0:09:23.360 --> 0:09:25.880 when we should start to really see the policy hit. 0:09:26.600 --> 0:09:30.240 And we're seeing anecdotally in the beige books from the FED, 0:09:30.440 --> 0:09:33.600 in statements by the Amazon CEO, and my co author 0:09:33.640 --> 0:09:36.480 and part of this, Peter Orzag who runs Loizard, has 0:09:36.679 --> 0:09:39.160 many contacts in the business community who are talking about this. 0:09:39.720 --> 0:09:42.679 It takes time to make up your mind what you're 0:09:42.720 --> 0:09:44.800 going to do, even if you're a big company, let 0:09:44.840 --> 0:09:47.000 alone if you're a small company. It's very hard. So 0:09:47.080 --> 0:09:49.880 like do I get a new supplier. Do I move 0:09:49.920 --> 0:09:52.360 production to China? Out of China? Do I move it 0:09:52.400 --> 0:09:55.040 into Mexico? Do I move it into the US? Can 0:09:55.120 --> 0:09:58.040 I find a substitute? Do I raise prices now? Do 0:09:58.120 --> 0:10:00.640 I wait till my competitors raise prices? Can I get 0:10:00.679 --> 0:10:02.800 an exemption from the terrace? If I go meet with 0:10:02.880 --> 0:10:05.960 Howard Luttnik? You know, all this stuff takes time to 0:10:06.000 --> 0:10:10.760 work through. And the same thing is true for that's 0:10:10.760 --> 0:10:13.720 even before you factor in like inventories of imported goods. 0:10:13.720 --> 0:10:16.320 And they're waiting to see whether Trump actually sticks with 0:10:16.400 --> 0:10:19.440 the tariffs or not before they make a decision. And 0:10:19.520 --> 0:10:22.400 I would argue that the SAME's true for migrant families 0:10:22.480 --> 0:10:25.920 or migrant workers, undocumented migrant workers that they have hard 0:10:25.960 --> 0:10:30.280 to leave aside the human aspect, which is amazingly horrible, 0:10:30.720 --> 0:10:34.400 but eat just on the economics. They have to make 0:10:34.480 --> 0:10:37.079 up their minds. Is ice really coming for me? Are 0:10:37.080 --> 0:10:39.640 they coming to my town? Is my employer going to 0:10:39.720 --> 0:10:42.600 protect me? How long do I have before they get 0:10:42.600 --> 0:10:46.160 here to accumulate dollar pay before I have to leave? 0:10:46.520 --> 0:10:49.040 Can I hide and keep working if I go? Do 0:10:49.080 --> 0:10:51.240 I go legally? Do I take my kids with me? 0:10:51.360 --> 0:10:52.880 Do I not take my kid, do I try to 0:10:52.880 --> 0:10:57.000 come back again. These are irreversible decisions. It takes time, 0:10:57.200 --> 0:11:01.360 and you want to see uncertainty change or at least 0:11:01.679 --> 0:11:04.920 get settled before you make the decision. So to me, 0:11:05.880 --> 0:11:10.000 I think these inflationary pressures from the anti migration policy 0:11:10.040 --> 0:11:13.680 of tariffs are already here, but that they're going to 0:11:13.760 --> 0:11:18.360 accelerate and be more visible then to be much quicker. 0:11:18.400 --> 0:11:22.719 With the other points. Fiscal policy, I think the Republican 0:11:22.760 --> 0:11:25.800 majorities in the Congress and the President are going to 0:11:25.840 --> 0:11:29.080 want to pass a big blowout checks to people ahead 0:11:29.120 --> 0:11:32.360 of the midterm election. I think they are going to 0:11:32.400 --> 0:11:35.960 pass some restoration of the lower middle class subsidies for 0:11:36.000 --> 0:11:39.319 Obamacare insurance because it's really hurting people and it's really 0:11:39.320 --> 0:11:44.560 making people angry. You put those two together, that's well 0:11:44.600 --> 0:11:47.960 towards two percent of GDP in additional deficit. So say 0:11:48.000 --> 0:11:50.320 you risk weight it. Say you put a fifty percent 0:11:50.440 --> 0:11:54.679 chance on the checks being handed out, and you put 0:11:54.800 --> 0:11:57.200 i'd say an eighty to ninety percent chance on some 0:11:57.360 --> 0:12:00.679 amount of Obamacare subsidies coming back. You put in that 0:12:00.720 --> 0:12:03.960 weighted average, that still get you an additional percent plus 0:12:04.920 --> 0:12:08.319 of GDP on the deficit that people weren't figuring. Then 0:12:08.320 --> 0:12:12.320 you got a week er dollar. Then you've got the FED. 0:12:13.160 --> 0:12:15.679 And this is something we've talked about a few times 0:12:15.679 --> 0:12:18.520 when you've been kind enough to have me on the 0:12:18.720 --> 0:12:23.280 interest rate. For all Trump talking constantly about it and 0:12:23.320 --> 0:12:29.200 pressuring the FED doesn't summarize sufficiently the state of monetary 0:12:29.240 --> 0:12:33.280 conditions in the economy. So you've got all this private credit, 0:12:33.360 --> 0:12:36.720 You've got all the AI investment being funded either out 0:12:36.720 --> 0:12:40.280 of retained earnings or out of issued bonds, not based 0:12:40.280 --> 0:12:44.760 on credit, not based on normal bank borrowing or big stuff. 0:12:45.120 --> 0:12:47.920 And as Joe says, you have a soft housing market, 0:12:47.960 --> 0:12:51.360 but mortgage rates and real terms have been coming down, 0:12:52.200 --> 0:12:55.600 and it's not like mortgage money is unavailable, so it's 0:12:55.679 --> 0:12:59.920 not a tight credit environment. And so then finally, regret, 0:13:00.679 --> 0:13:02.960 we have to take into account all the attacks on 0:13:03.000 --> 0:13:06.079 the FED and the changes at the FED. And I'm 0:13:06.120 --> 0:13:08.719 not too into personalities. I don't think it matters that 0:13:08.840 --> 0:13:13.040 much which individual, but the structural forces on the FED 0:13:13.120 --> 0:13:17.760 for change, and you have to believe that makes the credibility, 0:13:18.040 --> 0:13:21.000 the likelihood that they're going to react in the right 0:13:21.040 --> 0:13:26.800 direction to this inflation soon enough lower, So Boom boom 0:13:26.800 --> 0:13:28.560 boom boom boom boom. 0:13:28.600 --> 0:13:32.040 So there was a great summary or overview of your view, 0:13:32.080 --> 0:13:35.680 and there's plenty of follow ups to ask about that. Well, 0:13:35.760 --> 0:13:38.040 let's just talk about the tariffs. So I certainly take 0:13:38.080 --> 0:13:41.800 your point that it would take any company a while 0:13:41.840 --> 0:13:46.560 before they decide their pricing strategy. Incidentally, not you know, 0:13:46.600 --> 0:13:48.839 some companies you know about almost a year after the 0:13:48.880 --> 0:13:52.599 tariffs are going in the other direction, for example, so 0:13:52.640 --> 0:13:55.720 they cut prices. So clearly like some companies are decided 0:13:55.880 --> 0:14:00.280 they cut but just don't tariffs, you know, even theoretically, like, yes, 0:14:00.320 --> 0:14:02.319 I can understand the argument there is a good reason 0:14:02.360 --> 0:14:05.160 to raise prices. On the other hand, tariffs are attacks, 0:14:05.200 --> 0:14:09.360 and generally we think of taxes as disinflationary. They take 0:14:09.400 --> 0:14:13.080 money out of the economy. Here's I guess the question 0:14:13.240 --> 0:14:15.760 is every company would love to be able to pass 0:14:15.800 --> 0:14:19.000 on higher costs. Does there need to be something on 0:14:19.080 --> 0:14:21.800 the demand side for them to be able to because 0:14:21.840 --> 0:14:24.080 another possibility is they just have to eat it in 0:14:24.240 --> 0:14:27.480 margins because the consumer is not willing or you know, 0:14:27.560 --> 0:14:30.800 as the pepsi consumer. Evidently they don't want to continue 0:14:30.840 --> 0:14:34.080 to pay high prices and goods like are tariffs per 0:14:34.080 --> 0:14:37.400 se inflationary or they only inflationary if there's sort of 0:14:37.440 --> 0:14:40.240 a demand boost something for like the checks or the 0:14:40.240 --> 0:14:42.800 Obamacare subsidies coming back, et cetera. 0:14:43.000 --> 0:14:46.360 That's a really good added layer sophistication to this, Joe, 0:14:46.400 --> 0:14:49.640 And you're absolutely right. It varies from company to company, 0:14:49.640 --> 0:14:54.360 from industry to industry. The decisions. Part of the decision 0:14:54.360 --> 0:14:57.960 making process is what is the competitive landscape, and we 0:14:58.040 --> 0:15:00.480 do see. I'm proud to say PepsiCo was one of 0:15:00.520 --> 0:15:03.960 the many corporate supporters of the Peterson Institute, a big 0:15:04.000 --> 0:15:07.840 fan and no, no, I have to be honest, and 0:15:08.160 --> 0:15:10.440 I'm proud to be honest. All our donors are listed 0:15:10.480 --> 0:15:15.960 on our website. But anyway, PepsiCo is arguably facing a 0:15:16.000 --> 0:15:21.320 lot of fundamental trends in the food industry and having 0:15:21.320 --> 0:15:24.160 to do with goops, having to do with health perceptions 0:15:24.200 --> 0:15:27.520 and things that of course are going to overwhelm for them. 0:15:27.600 --> 0:15:31.280 And they actually are not that exposed to tariffs compared 0:15:31.280 --> 0:15:34.320 to some other companies because they're not importing sugar and 0:15:34.320 --> 0:15:38.920 they're not importing inputs the way say auto company is. 0:15:39.680 --> 0:15:42.880 But anyway, but just that just illustrates your point that 0:15:42.960 --> 0:15:45.240 it is going to vary from company to company, And 0:15:45.280 --> 0:15:48.240 my argument was just that as a general thing, for 0:15:48.440 --> 0:15:52.120 any given company, it's not a trivial decision. You don't 0:15:52.160 --> 0:15:55.480 just go. But your point, your further point, Joe, that 0:15:56.160 --> 0:15:59.720 it's sort of conditional on demand, is absolutely right. So 0:15:59.760 --> 0:16:03.040 there there's two aspects to that. One is just literally 0:16:03.080 --> 0:16:07.280 what you said that if it turns out their slack demand, 0:16:08.000 --> 0:16:11.040 you may not see the rise in pricing as much 0:16:11.200 --> 0:16:15.760 because you're just the company. Any given company additionally has 0:16:15.800 --> 0:16:18.320 to decide, you know, how much am I going to 0:16:18.400 --> 0:16:23.960 lose market share if I raise prices. But additionally, there 0:16:24.160 --> 0:16:30.680 is an interactive effect that when you are when this 0:16:30.720 --> 0:16:32.680 is why I made so much about the labor market 0:16:32.720 --> 0:16:36.240 initially with Tracy. It's it's a question of not so 0:16:36.360 --> 0:16:40.240 much the demand side as your input side. Right, are 0:16:40.280 --> 0:16:43.240 we in a tight labor market? Are we in a 0:16:43.320 --> 0:16:48.240 tight supplies market for commodities? Do these things matter? And 0:16:49.040 --> 0:16:54.560 our expectations about inflation in the economy more broadly moving 0:16:54.600 --> 0:16:58.160 towards the high side, and so again, just to come 0:16:58.200 --> 0:17:01.200 back your bottom line point is right, it's interactive, and 0:17:01.240 --> 0:17:03.560 that's why when you talk about inflation, you want to 0:17:03.600 --> 0:17:05.000 have all these components. 0:17:06.080 --> 0:17:08.919 I have to say I spent thirty five dollars on 0:17:09.080 --> 0:17:11.919 three bags of chips and two dips on the weekend 0:17:12.000 --> 0:17:15.560 for the Super Bowl. To be fair, I got them 0:17:15.600 --> 0:17:17.959 from a gas station, so there was a markup, but 0:17:18.280 --> 0:17:21.840 it was so worth it, so good. I don't eat 0:17:21.920 --> 0:17:23.720 chips that often, but when I do. 0:17:24.040 --> 0:17:27.240 Yeah, yeah, yeah, no, we had, we had, we had 0:17:27.400 --> 0:17:31.920 Freedom scoops and uh they're so good. Yeah, I think 0:17:32.119 --> 0:17:32.680 super Bowl. 0:17:33.240 --> 0:17:36.200 Now we're just talking about stack food, which is fine. Okay, 0:17:36.200 --> 0:17:38.320 what about tariff's tariff inflation? 0:17:39.720 --> 0:17:41.480 That's yeah, that's true. 0:17:42.040 --> 0:17:45.679 Just from a math perspective, what you often hear is that, well, 0:17:45.720 --> 0:17:48.159 you know, you might have a price impact from tariffs, 0:17:48.200 --> 0:17:49.920 but it doesn't matter that much because it's a one 0:17:49.960 --> 0:17:53.280 off and then you know, the next year the base 0:17:53.320 --> 0:17:57.439 effect kind of goes away. But does it matter if 0:17:57.520 --> 0:17:59.640 we get four percent at the end of the year 0:17:59.880 --> 0:18:02.080 or would you expect this to be a sort of 0:18:02.320 --> 0:18:05.240 the start of a durable price increase cycle. 0:18:05.920 --> 0:18:10.400 Well, I think yes, it is a start of a durable, 0:18:10.440 --> 0:18:13.960 as you put, a price increased cycle. And again, it's 0:18:14.080 --> 0:18:17.119 partly to do with the general conditions, and it's partly 0:18:17.119 --> 0:18:19.280 to do with the nature of the tariffs and the shock. 0:18:20.040 --> 0:18:24.320 So I think in a world where the labor market 0:18:24.440 --> 0:18:28.600 is not high unemployment, lots of slack, whatever anybody says, 0:18:29.240 --> 0:18:31.560 in a world where they are going to be putting 0:18:32.040 --> 0:18:36.440 fiscal fuel on the fire, in a world where, whatever 0:18:36.480 --> 0:18:40.359 you think about the transition from J. Powell to nominated 0:18:40.480 --> 0:18:43.960 Kevin Moorsh and the attacks on the FED, you cannot 0:18:44.000 --> 0:18:48.560 believe that the Fed's credibility of commitment to low inflation 0:18:48.840 --> 0:18:51.479 is as strong as it was a few years ago. 0:18:52.200 --> 0:18:57.160 All of those things suggests that any given shock, any 0:18:57.200 --> 0:19:02.000 given price shock, will to me translate into higher and 0:19:02.080 --> 0:19:05.200 more persistent inflation than it would, say a few years 0:19:05.200 --> 0:19:10.080 ago in a different circumstance. The second point is, and 0:19:10.600 --> 0:19:12.480 there's this, I forget what it's now called, but there 0:19:12.560 --> 0:19:15.119 used to be the Million Prices project at Harford Business 0:19:15.160 --> 0:19:17.720 School that's been looking at the price pass through, and 0:19:17.760 --> 0:19:20.320 there've been others looking at it, and people at Peterson 0:19:20.400 --> 0:19:25.200 as well. The second thing is the migration shock, if 0:19:25.240 --> 0:19:28.439 it turns out they do drive out a million people, 0:19:28.720 --> 0:19:32.360 million workers, is going to have much bigger first round 0:19:32.400 --> 0:19:36.640 effects than the TARF shock. The TARRAF shock. I think 0:19:36.720 --> 0:19:41.080 reasonable listmates are they've already had one point year's worth 0:19:41.119 --> 0:19:45.760 of CPI effects roughly over the past year. I think 0:19:46.400 --> 0:19:49.480 if they really are pushing out the migrants, and we 0:19:49.480 --> 0:19:51.919 can go to why I keep putting it conditionally and 0:19:51.960 --> 0:19:54.360 saying I'm not sure they have yet, but if they 0:19:54.400 --> 0:19:59.119 really are, we're talking about something potentially four to six 0:19:59.160 --> 0:20:03.280 times as large. But then the final thing I want 0:20:03.320 --> 0:20:07.280 to emphasize, Tracy, is on the when you say about 0:20:07.320 --> 0:20:16.080 the durable size of inflation, it is a question of 0:20:16.200 --> 0:20:21.360 what people expect the monetary policy response to be. And 0:20:21.440 --> 0:20:24.920 so we have a very important lesson from the eighties, 0:20:24.960 --> 0:20:28.440 from forty years ago. Last time we had high inflation 0:20:28.520 --> 0:20:32.439 in the US, even under Paul Volker, they disinflated in 0:20:32.560 --> 0:20:36.280 nineteen eighty two after an oil shock, but they didn't 0:20:36.320 --> 0:20:38.480 take it all the way down. They stopped when it 0:20:38.520 --> 0:20:41.480 got to around four percent. And so then when the 0:20:41.520 --> 0:20:45.240 inflation came back in eighty five, it turned out to 0:20:45.280 --> 0:20:50.200 be more persistent and higher, and Volker and the FED 0:20:50.320 --> 0:20:53.160 had to do more to race rates. Most people would argue, 0:20:53.160 --> 0:20:55.560 I mean, clearly they did race rates more, but most 0:20:55.600 --> 0:20:58.200 of us would argue part of the reason for that 0:20:58.359 --> 0:21:02.359 was because it was the second round of inflation and 0:21:02.400 --> 0:21:05.479 they hadn't fully stamped it out the first time. And 0:21:05.560 --> 0:21:08.520 I think you can make the case again this is speculative, 0:21:08.560 --> 0:21:11.399 but I think there's a historical parallel here. If we 0:21:11.520 --> 0:21:15.480 get this kind of inflation shock now coming, it's five 0:21:15.560 --> 0:21:18.240 years or four years instead of three years, but four 0:21:18.320 --> 0:21:22.800 years after the last inflation, having again the inflation not 0:21:22.880 --> 0:21:25.080 come all the way down to two percent target. In 0:21:25.119 --> 0:21:28.159 this case, I think the upside risk is higher. 0:21:28.320 --> 0:21:32.199 So this is interesting. You know when we were Rejection 0:21:32.280 --> 0:21:35.320 Hall of the last time we saw you, or that 0:21:35.440 --> 0:21:38.720 we did an episode with I mean Nachamara and talking 0:21:38.760 --> 0:21:43.040 about this idea of like the value of central credibility 0:21:43.040 --> 0:21:45.080 and there's like kind of a fixed stock of it, 0:21:45.200 --> 0:21:48.879 or the stock of credibility can deplete over time and 0:21:48.920 --> 0:21:51.960 it might take allow to refill the reservoir, so to speak. 0:21:52.000 --> 0:21:54.280 So what you're saying is sort of dovetails with that 0:21:54.680 --> 0:21:56.879 we just said that if you don't sort of in 0:21:56.960 --> 0:22:00.320 fairly short order smash it back to two percent, that 0:22:00.320 --> 0:22:03.119 there is this sort of like persistent cost that you 0:22:03.200 --> 0:22:04.960 might pay the next time there's a shock. 0:22:05.800 --> 0:22:09.720 That's that's generally what we see in the data and 0:22:09.760 --> 0:22:12.119 Professor Ackamar may have a different take on this, but 0:22:12.640 --> 0:22:16.480 but to my understanding of the research, including by a 0:22:16.480 --> 0:22:19.240 colleague of mine at Peterson, Joseph Kaniel, on some of 0:22:19.280 --> 0:22:23.440 these issues is if you fail to stomp it down, 0:22:23.960 --> 0:22:29.119 the anchoring as the phrases of inflation expectations is lower. 0:22:29.600 --> 0:22:32.919 And so a lot of people focus on the U 0:22:32.960 --> 0:22:37.080 Michigan Survey of inflation expectations or the New York Fed 0:22:37.160 --> 0:22:41.800 survey we had god I can her name, I apologize 0:22:41.960 --> 0:22:46.120 from you Michigan who runs that survey speak at Peterson's 0:22:46.160 --> 0:22:49.400 to last Friday. There's a video if you want to hear, 0:22:49.560 --> 0:22:53.560 and she can point to the fact that the long 0:22:53.720 --> 0:22:59.840 term inflation expectations haven't moved that much. My view is 0:23:00.720 --> 0:23:07.040 that only tells you so much because it's people have 0:23:08.520 --> 0:23:11.920 rational inattention. They don't spend their lives thinking about inflation 0:23:12.040 --> 0:23:14.640 unless they have to spend their lives thinking about inflation. 0:23:15.400 --> 0:23:19.880 And so the question is more when inflation comes out, 0:23:19.880 --> 0:23:22.800 do they react? And so besides the work of my 0:23:22.880 --> 0:23:27.120 colleague Joseph Gannon, there's a professor at Berkeley urigorod Nikschenko 0:23:27.720 --> 0:23:30.600 and his co authors who did a really interesting paper 0:23:30.720 --> 0:23:32.960 last summer, I think ahead of Jackson Hall at a 0:23:33.000 --> 0:23:39.320 different FED conference, showing that there was this persistently higher 0:23:39.680 --> 0:23:42.280 upside risk on inflation expectations. 0:23:43.000 --> 0:23:45.639 Since we're on monetary policy. You touched on this earlier, 0:23:45.680 --> 0:23:48.800 but one of the very interesting things in your argument is, 0:23:49.560 --> 0:23:53.679