Omair Sharif Explains How Inflation Measures Really Work

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, do you remember, I think it was probably like last June or last July, like over a year ago now, I think we were talking to Vitor Constancio, and I think you asked like one of the most important questions like at the time and maybe still like that we've had on this podcast.

Tracy Alloway (0:36)

I struggle to remember things that happened a month ago, let alone 12 months ago. Everything is sort of blurring into this one long stretch, but.

Joe Weisenthal (0:46)

Yeah, that's fair.

Tracy Alloway (0:47)

What did I ask?

Joe Weisenthal (0:49)

Well, you asked him whether economists or anyone these days had a cogent theory of inflation.

Tracy Alloway (0:57)

Oh, yes.

Joe Weisenthal (0:57)

Do you remember? And at the time, like, you know, there wasn't much inflation going on. I think we were probably still in something resembling deflation or disinflation not long after the initial shock. But now, you know, fast forward to August 2021, and official inflation measurements are pretty elevated relative to recent history.

And I think that question, and I think his basic answer was no, although I don't want to quote him on that. That question of like whether economists understand inflation is probably never been, is extremely top of mind these days.

Tracy Alloway (1:29)

Totally. And I mean, I think I would agree with you on the no part, but of course, there's a really big irony right now, which is right when the Fed changed to the flexible average inflation targeting regime after more than a decade of undershooting the 2% inflation target, as soon as they did that, now we seem to have possibly transitory inflation, but like certainly more than they would have expected a year ago. And yeah, like I think it just illustrates that no one seems to have a very good handle on what exactly causes price increases or decreases.

Joe Weisenthal (2:09)

Right, so even prior to the new framework, there's always been this idea that, okay, we'll use, and this came up in our recent episode with Neel Kashkari of the Minneapolis Fed, that, okay, we'll use inflation as our gauge, as our speed limit to know when we say hit maximum employment or full employment, that's true under the old Fed, that's true under the current Fed. Now we have elevated inflation, but it's like, oh, this doesn't really count because it's transitory and it's related to shipping and we know that doesn't have anything to do with employment, but there's always probably gonna be a story to tell, which sort of calls to mind whether these are sort of like useful things. Of course, no one predicted this sort of like, or very few people accurately predicted the timing and the degree of elevation of the current inflation.

So I think we're still sort of like back to square one. We don't know how long this will last. I don't even think there's a wide agreement of like what really would be transitory, of what would be worrisome, of what would spur the Fed to act sooner than maybe markets affect. And so I think that question that you asked, Constancio several months ago remains really the sort of the key thing right now.

Tracy Alloway (3:16)

Yeah, I agree.

Joe Weisenthal (3:17)

All right, so today we're going to be talking about inflation and really what it is and how it's measured and whether it's even possible to forecast it accurately or how we should be thinking about it right now. And we have literally the perfect guest.

We're going to be speaking with Omair Sharif.

He's currently the founder and president of a new shop that he set up called, appropriately enough for this episode, Inflation Insights. But he has a long track record. He's prior to that, a buy-side strategist at the asset management firm Millennium. He's been an economist at various shops, including Sokgen, RBS and so forth. So we're going to talk about whether there is a cogent theory of inflation and how to think about it right now. So Omair, thank you so much for joining us.

Omair Sharif (4:04)

Thank you for having me.

Joe Weisenthal (4:05)

Well, what's your answer to Tracy's question? Do economists have a useful or cogent theory of inflation that works in practice?

Omair Sharif (4:17)

I think the short answer to that is no. All you have to do is sort of look at the fact that there's a massive academic literature that's basically just devoted to forecasting inflation and coming up with various types of models to figure out what the inflation process is.