How To Understand the Inflation We’re Seeing Right Now

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal. Unfortunately, my colleague, Tracy Alloway, she is off today, so it's just me. But regardless, I'm very excited about today's conversation nonetheless. So a couple of the big themes this year that we've been talking about, and they're pretty intimately linked. We've been talking a lot about supply chain and supply chain disruptions, and we started talking about those. I think at the end of last year, very early this year, I mean, we've really been talking about them since the beginning of the pandemic, but they haven't gone away. And I think arguably, in some cases, they continue to compound and get worse, and there is not a day go by where there is not some new type of shortage that emerges. And I think the latest thing I saw this week is that fertilizer prices are going up, and there's droughts in Brazil, and that's causing coffee prices to go up, and there's no wind these days in the UK, so that's causing energy prices to go up. So in addition to the pandemic, all kinds of things are going on.

We know that by and large, there is this sort of characterization of the elevated inflation that we've seen so far as being transitory. A lot of people are not satisfied with what that word actually means or how that's defined.

We know that under the Fed's new framework, there is a greater willingness to tolerate some inflation overshoot in an aim to get back to maximum employment or a full employment. But then there is also a debate about how the current supply chain driven inflation plays into that. So there are so many sort of like macro and micro themes, which we've been discussing a lot on Odd Lots, that intersect. And so I'm very excited about sort of exploring all of that. We really have like two perfect guests to discuss it. They're actually colleagues and we're gonna have a nice macro chat that hopefully helps us understand what's actually happening right now and what we should be looking ahead to next.

My guests for this week are Julia Coronado. She's the founder and president of Macro Policy Perspectives, as well as Laura Rosner-Warburton, who is a founding partner and a senior economist, also at Macro Policy Perspectives.

Very excited for this conversation. I expect I will be learning quite a bit. So Julia and Laura, thank you so much for joining us.

Julia Coronado (2:43)

Oh, it's our pleasure.

Laura Rosner-Warburton (2:44)

Thanks, yeah, great to be here.

Joe Weisenthal (2:47)

So why don't we kick it off? Let's just dive into the inflation question and either of you can take this.

Lots of debate about, you know, we have this elevated inflation. It doesn't, you know, it may be rolling over a little bit, but not particularly fast. And like I said, every single day, there's some, there's like the shortage of the day, something I hadn't even thought about in this week, like I said, I think it's like fertilizer prices, which of course is not going to help the food situation at all. How would, what do you characterize where we're at or how you're thinking about inflation right now?

Julia Coronado (3:24)

Well, we had a huge shock and we're sort of parsing through what we're learning about the nature of these inflationary impulses. I mean, a lot of what we're seeing is one of the biggest, is a reflection of one of the biggest shifts in relative demand that we've ever seen. So one of the big shocks in the COVID crisis was not just COVID itself and the shutdown of the global economy, but it completely changed what consumers spent their money on.

So by virtue of being locked away at home and everything being shut down, a huge chunk of your budget got freed up. The money that you spend on personal care and entertainment and travel was suddenly unlocked and you were sitting there at home and so you started ordering things.

So we saw this gigantic shift from services spending to goods spending in the middle of a huge recession. And of course, we've never seen anything like that. So on the other side of the equation, producers were preparing for the worst.

They followed their recession playbooks. So they shut down production, they cleared out inventories, they canceled orders. So the combination of those two things led to the just gigantic surge in goods prices. You know, it was not the typical recession. Typical recessions, goods spending gets hit really hard and services spending is more resilient. And we saw exactly the opposite.

And so producers were caught off guard and had to scramble to restart operations and restart supply chains. And then of course, consumers were delivered several trillions of dollars into their bank accounts almost instantaneously by April, disposable income was above pre-COVID levels, even though wage and salary income was a trillion dollars below, so consumers had money to spend and they could only spend it on goods. And so that has just led to just tremendous bottlenecks in supply chains. And that's probably the primary factor. And if that were the only factor, then the whole transitory narrative would probably be unfolding as expected. And I think the best example of this is lumber, something that you've covered in your podcasts. It's not subject to all of the global supply chains and container issues and COVID disruptions to the same degree as other goods. So it's already returned. They've ramped up production, lumber's getting delivered, prices have fallen, case solved, but there's these other frictions. COVID itself, it's just this rolling series of port shutdowns, factory shutdowns, and it keeps coming. Delta is the latest wave and that's affected semis particularly hard. And then increasing frequency of climate events, the Texas freeze, flooding, fires keep happening. And that's probably something that's gonna be with us more often. And then there were some things, I mean, Laura's pointed out, there are some things that were going on even before COVID with supply chains that are kind of being revealed by this crisis, Laura.