(Almost) Everything you need to know about inflation Part 1

James Brown
USA TODAY

On today's episode of the 5 Things podcast:

Inflation. Whether you know much about it or not, it hits us all in the pocketbook. And it's at its highest rate since 1982. But what is driving this 40 year high?

Surging costs for food, gas and housing have caused consumer inflation to rise 7.9 percent over the past year. USA Today's James Brown and University of Texas at Austin Macroeconomist Julia Coronado discuss how inflation works, how money is printed, rising prices, the car market, income inequality, wages, and what the media gets wrong about inflation in part one of this two part series.

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To follow Julia Coronado on Twitter click here.

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Hit play on the player above to hear the podcast and follow along with the transcript below.This transcript was automatically generated, and then edited for clarity in its current form. There may be some differences between the audio and the text. 

James Brown:                  Hello, and welcome to 5 Things. I'm James Brown. It's Sunday, April 24th, 2022. On Sundays we do things a bit differently, focusing on one topic instead of five. This week, we're talking about dollars and cents. Inflation, inflation, inflation. It's one of those concepts that's hard to avoid. We're at a 40 year high and I'm definitely feeling it. Like many other renters, I just got noticed from my landlord that my rent is going up in a couple of months. Yay. I just filled up my gas tank the other day, and I'm paying nearly twice as much as last year. I went to Wegmans to buy eggs, a dozen of them cost about $1.50 last year. Today they cost close to $3. And that's not even a half of it. And if you're anything like me, you're wondering, what's going on? So, I ask for your questions on Instagram and Twitter. I also ask friends and colleagues what they want to know about inflation. Thankfully, macro economists, Julia Coronado has plenty of answers. She's a professor at the McCombs School of Business.

                                           That's a part of the University of Texas at Austin. For a quarter century, she studied inflation and the economy at large, and roles of the Federal Reserve in the private sector. And as an academic, believe it or not, Julia is pretty optimistic about the state of the economy, at least when it comes to things like the job market, incomes and consumer debt. In our talk she also zeroed in on some of her long term economic concerns and what she thinks the media is missing about all this. Keep in mind that there's so much to this topic that we couldn't keep it to just one episode. Part two is coming next Sunday. And now, my chat with macro economists, Julia Coronado. Julia Coronado, welcome to Five Things.

Julia Coronado:               Thank you very much. I'm happy to be here.

James Brown:                  I am so curious and a bit puzzled. I've heard of economists for a long time. I'm not exactly sure what you guys do. Can you explain roughly what is the field in macro and what you specialize in?

Julia Coronado:               So, macroeconomics is about the economy as a whole, so not a particular sector or a particular market, but the whole economy. So, we're talking about GDP growth, employment, unemployment, inflation, fiscal policy, monetary policy. We're interested in how the economy is doing, where we are in the business cycle. There's a lot of ways you can be a macro economist. You can be an academic macro economist. You can be a policy economist. So, I used to work at the Federal Reserve Board, and our job was to try to forecast and understand the economy and inform the decisions of policy makers. And then when I moved to the private sector, we were helping money managers mostly, help them make their decisions based on our analysis, and understanding, and forecast of the economy and where it's going.

James Brown:                  The Federal Reserve was actually one of the questions that I got a number of replies about. Obviously they control the flow of money, the creation of money. And one of the questions that I got was, how is money taken out of circulation?

Julia Coronado:               Right. How do they slow the money supply? And there are two ways that they are doing that right now. One is they're raising interest rates. So, money is injected into the economy through the lending process, actually, in the banking system. So, when the Fed lowers interest rates, you want to borrow more. You want to take out a mortgage or a car loan. And so the bank gives you that loan and that is how money is created in the economy. And it works in reverse the same way. The Fed is raising into rates. We've seen mortgage rates jump above 5% from below 3%. That's a big rise in interest rates. That means fewer people are going to want or qualify for mortgages, and that will slow down the process of mortgage lending, and that will slow the process of money creation.

                                           The other way that the are doing it is through their balance sheet. So, they can actually go out and buy treasury bonds. And the objective there when they were doing that during the pandemic was to, again, lower longer term interest rates, help the financial markets, broadly speaking, not collapse, because there was this big volatile moment when we were going into the pandemic. And now they're going to shrink their balance sheet. That is, they're going to let the securities that they're holding mature. That means other investors have to buy those securities, and that also helps to raise interest rates and slow money creation.

James Brown:                  What I'm grasping here is you're sort of swimming through a giant pool of data daily.

Julia Coronado:               That is a great description. I do swim through a giant pool of data daily, which I do love. So, you know you're going to be an economist when you love data. You have to love data to be a macro economist. Love thinking about how it's measured, how it's put together, what it's telling us. Be willing to be surprised. The data often do things you don't expect it to do. And one of the joys of being a macro economist is that the economy often surprises us sometimes in good ways, sometimes in not so good ways, but we're always learning about how the economy is functioning. And the economy is always evolving, and that makes it a really dynamic way of life.

James Brown:                  For those of you who might not know, Julia is very active on Twitter. And I was looking through her tweets, couple of them, recent ones that jumped out at me, and I'd like you to explain what you are getting at. And I think it'll help frame our conversation, I think.

Julia Coronado:               Okay.

James Brown:                  The demands side is starting to matter. New and used car prices are cooling despite constrained supply as customers become more price sensitive with fiscal support fading, real incomes hit by inflation, consumption possibilities broadening, airfares jumped. Obviously there's a lot of pieces there, right? Can you decode that for me?

Julia Coronado:               So, we all know right now that inflation is high, right? Prices are rising on a lot of things. Gasoline is one thing that we see, tangibly also food prices. But what we've seen over the last year to year and a half is rising inflation. And this comes after several decades where inflation was very low. It just really wasn't an issue for people. So, what's going on here? It's the big question. Why did we suddenly get this burst of inflation? Why are we all of a sudden talking about the 1970s? And a lot of things happened in the pandemic that sort of contribute to what we've seen? So, one was, we didn't mess around. When the pandemic happened, both fiscal policy makers in Washington, Congress and the administration, and monetary policy makers at the Fed, they just put a bunch of money into the economy, right?

                                           This was nobody's fault. We were shutting down the economy. The impact of that have been disastrous. So, we put a lot of money out into the economy in a lot of ways. The Fed lowered interest rates, it stabilized financial markets. The federal government gave people stimulus checks, expanded unemployment insurance, provided rental assistance. There was just a lot of ways that we put money into the economy. And at the same time, consumers were locked down. They couldn't spend money on a lot of things that they like to spend money on, like travel, like entertainment, like going out to eat. And so what we saw was an extremely narrow set of goods that people could spend money on, mostly goods. Mostly things that you could order online. And so we saw a burst of spending in goods, and consumers were willing to pay more for those goods than they have been in 25 years.

                                           So, for 25 years we've seen consumers be really price sensitive that businesses that are selling consumer products just didn't have pricing power. And then all of a sudden they did. So, why and will that last, is kind of the question. And so what I was showing with that chart that I put up was, there are early indications that consumers are becoming a little bit more price sensitive. We've seen used car prices jump 50%. That is amazing. That is wild. That is something we've never seen before. But now we're seeing some downward pressure on car prices. Maybe consumers just, at these higher air prices, they're just less willing to spend the money, and they also now have more things that they can spend their money on.

                                           They can travel, they can get their haircut, they can do other things with their money. So, maybe that makes them a little bit more sensitive to ever higher prices on cars or other kinds of consumer goods. So, that's kind of the question. If consumers become returned to their more price sensitive ways, that in itself will act to cool off inflation. And of course, businesses are going to try to pass through price increases if they can, but if consumers say, "You know what, if you're going to raise the price, I'm not going to buy at that higher price." Then there's going to be more of a negotiation and we might see inflation cool off.

James Brown:                  When I solicited questions on Instagram for you, a lot of the questions fits in with your answer there or a part of your answer. You that it was sudden. Essentially, at least, they're the feeling the inflation was sudden. One of the questions I received was, has the inflation really been sudden? Hasn't it already been happening for a long time?

Julia Coronado:               No, it has not. So, actually one thing that we've seen, particularly again with consumer goods. So, people feel the effects of food and energy inflation, and those can be very volatile. They can go up and they can go down. But when we look at consumer goods, the trend has been, since China joined the global trade system, and we've seen a lot of outsourcing of production globally, we've seen consumer goods get actually cheaper and cheaper. Think of TVs. The actual price of TVs has gone down and you get a much better TV now than you used to get. So, technology is advancing very rapidly and we're making things cheaper and cheaper. So, what we've seen over the last 25 years is consumer goods from TVs, to clothing, to consumer electronics, prices actually fall over time. And so that's been a pretty strong trend over the last 25 years, and that sort of turned around and shot upward. So, a lot of those TV prices rose for the first time in many years.

James Brown:                  So, the shoot up starts with the pent up demand with COVID, and  we're seeing a crescendo, hopefully?

Julia Coronado:               Yes.

James Brown:                  And that was another popular question was, do you see a crescendo and how do you go about figuring out or making that kind of prediction?

Julia Coronado:               Right. Yeah. Well, that's the secret sauce of being a macro economist, right? There is no easy answer to that question. We have to look into our crystal ball as much as we can. So, we're putting together a lot of different kinds of information to try to figure out, where are we in this process? We also look at consumer demand and that was what we were just talking about. Are consumers still wanting more TVs or is that demand cooling off now that we are opening up more and doing more, getting out and about, are we buying fewer TVs? And the answer is yes. Yes, we're buying fewer TVs. We are seeing some shifting back of consumer spending to services, and we're seeing the improvement in the supply chain has been very slow. We've got real bottlenecks in global shipping.

                                           There's been some improvement, but we've got a long way to go till we see goods flowing the way that we're used to. Where you can go into a store and get the product you want when you want it. That hasn't been the case in the last year. You have to wait, you might not get what you want because of the bottlenecks in global shipping. So, we look at a lot of indicators of where we are. Are we seeing good start to flow more smoothly? And the answer is, not quite yet. There's still a lot of bottlenecks to work through till we get there.

James Brown:                  And I've noticed that in myself. I've been looking to get a new couch. I went to a store and I'm seeing, oh, I have to wait till June to actually receive this?

Julia Coronado:               Yes. Yes. So, that's the supply chain bottlenecks. I have my own example of, I ordered sheets in November of 2020 and got them in September of 2021. So, that's been a common experience for consumers, and that is unusual, right? We got used to ever shorter shipping times. Overnight shipping, two day shipping, three day shipping even on large items like furniture, for example. You could go on websites and buy your furniture and have it delivered relatively quickly. And now, yes, we have to wait because there's just these bottlenecks that we have to work through. We didn't have enough capacity to move the things people wanted. We didn't have enough shipping containers. We didn't have enough ships. We didn't have enough port space or warehouse space to put these goods as we move them from point to point through the supply chain.

                                           Things got really constrained. And again, add to that the port shutdowns from waves of COVID. We've had wave after wave. The Delta variant last summer, late summer, early fall, incredibly disruptive to the global supply chain. We saw factories in Malaysia and Vietnam shutting down, ports shutting down, and that just added to an already very constrained situation. So, if you think about a traffic jam is a good analogy. When somebody has an accident and the whole roadway backs up, and then even after the accident clears, it takes a while for the cars to start flowing at a normal rate. So, that's kind of where we are. We're starting to clear the accident. Although the latest news from China is that they are having waves of COVID and shutting down major cities. So, we may have another accident in our roadway right now that's going to keep those bottlenecks pretty tight for a while.

James Brown:                  Back to Twitter before we get to a few more of the questions I gathered, I noticed a couple different tweets over the last few months where you've been critical in ways that the media has tried to explain our circumstance. So, I'll give you an open floor. How are we screwing up? What can we do to be better?

Julia Coronado:               So, the thing that has gotten less attention, the in the high inflation has gotten a lot of attention and understandably so. People are feeling the higher prices, but we're also in one of the strongest labor markets we've had in a generation. More than a generation. This is the strongest labor market we've had since the 1990s. And, in fact, one of the very encouraging things that's happening in the labor market, we've had a trend in the last 30 years of rising income inequality. That is, higher wage workers have been getting bigger raises and lower wage workers have been falling behind. And what we're seeing right now is the reverse. Higher wage workers are getting sort of average wage gains, but the lower wage workers are seeing enormous wage increases, and a greater ability to get full-time jobs with benefits. So, that kind of bargaining power for lower wage workers is an incredibly positive and encouraging development.

                                           There was a survey recently that was quite frustrating, because it showed that when consumers were asked about the job market, something like 40% of them thought that the economy was losing jobs. We've been in the strongest jobs recovery on record. We've seen the fastest decline from a disastrously high unemployment rate that we've ever seen. And so the labor market is really a worker's job market right now. People are moving around, they're commanding higher wages. They've got flexibility to negotiate over scheduling and benefits, and work life trade offs. And I think that's a really positive development. And I would like to see that get more attention alongside the coverage of high inflation, which also deserves attention. But we're kind of seeing some very challenging and some also really positive things. We're coming out of this pandemic.

                                           We're booming out of this pandemic. And that was kind of the design. That was the intent of going extremely aggressively on policy support was, we didn't want to make the mistake of the housing crash. After the housing crash of 2008 and '09, policy makers were too cautious and too conservative, and they wanted to do just enough, but not too much. And what we ended up with was a labor market that took 10 years to recover. And that's unacceptably slow. That was too much hardship for too many people, for too long. And we've maybe aired on the other side and we're getting a burst of inflation out of it. But the positive side of that is we're putting people back to work so fast, and people are jumping back into the labor market and they are getting good jobs, and that's a great development. It's great to see. Makes me happy.

James Brown:                  It sounds like the trade off, for lack of a better term, juicing the job market is in part this inflation that we're suffering through.

Julia Coronado:               Some of it is. We're running a hot economy and so we're seeing the Fed moving to raise into for rates to cool it down somewhat. But some of the inflation is this very unique situation of the supply chain bottlenecks tied to this whole pandemic situation. And some of that will unwind. If you think about the car market, for example, as semiconductors become more available. We just got a number this morning that showed auto production picking up to the highest level in more than a year. So, car makers are finding a way to solve their supply chain problems. Production is picking up, availability of cars is slowly improving, and prices are starting to level off or even potentially go down somewhat from the very high levels that they're at.

                                           So, some of the inflation is that kind of running the economy hot. And again, we're seeing less fiscal support and monetary policies tightening in response to that, to achieve that soft landing. And some of it will be, look, the supply side of the economy firms are incentivized to solve problems and get the goods to consumers. They want to sell products. So, they're working hard on addressing their supply chain issues. And I have faith that companies, their incentives are aligned and they're going to solve these problems, and they're going to get us the goods.

James Brown:                  If you like to show, write us a review on Apple Podcast or wherever you're listening, and do me a favor, share with a friend. Thanks to Julia Coronado for joining me. What do you think about her take on inflation? Let me know on social media @jamesbrowntv or email me at jabrown@usatoday.com. We're planning on bringing on more subject matter experts in the coming weeks. So, if you have an idea, let us know. Thanks to Alexis Gustin for her production assistance. Taylor Wilson will be back tomorrow morning with 5 Things you need to know for Monday. An for all of us at USA Today, thanks for listening. I'm James Brown, and as always be well.