Why Everyone's Experience Of Inflation Is So Different

Tracy Alloway (0:10)

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

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, we're recording this episode on July 13th, and we have just 30 minutes ago gotten the latest US inflation data. It's come in a lot higher or hotter than expected. I think headline CPI came in at like 5.4% and core inflation was 4.5%. It was expected to be something like 4% for June.

And we're sort of watching the reactions come in in real time from the sell side analysts and on social media. And it's amazing how you're getting these sort of two distinct camps. So on the one hand, everyone's looking at the same data, but everyone seems to be reaching vastly different conclusions. So on the one hand, you have people who say this is still transitory.

A lot of the strength is in certain segments that have seen these supply bottlenecks that we've been talking about. And on the other hand, you have people who are saying, well, this is starting to look very worrying and maybe something more permanent.

Joe Weisenthal (1:20)

Right. There's no question that the intensity of the CPI gains that we've seen really over the last three months have been higher, hotter than economists had expected. It seems to be lasting a little bit longer. So on the one hand, you say, okay, that's worrisome. On the other hand, when you dig into the guts of the report, it still looks like there's an argument for transitory. So a huge component of this is still used cars, which haven't slowed down. Not long ago, we were never talking about used cars as an important inflation category. Now it's something like a third of the gain or 40% of the gain was used cars.

Other categories specifically related to reopening are pushing things higher.

So I kind of think it's like an impasse, like no side will be totally satisfied because the people who are convinced that this is all transitory could point to the subindexes or the sub numbers, whereas the people who are saying this is a start of a real problem point to the headlines that are hotter than expected several months in a row now.

Tracy Alloway (2:20)

Yeah, it's kind of like CPI is the ultimate exercise in confirmation bias. Like there's something for everyone, whether you're looking at the headline numbers or the sub components. But I mean, I say that, and one of the things I've been thinking about a lot lately is this idea that, you know the saying that inflation is always and everywhere a monetary phenomenon, which I don't necessarily disagree with, but I feel like it's also a human phenomenon. And you're seeing that in this discrepancy between these two camps of people looking at the inflation numbers, and you're also starting to see it in terms of inflation expectations themselves. So for instance, if you look at the breakdown of survey respondents by age, you can see that older people are a lot more worried about inflation at the moment than younger people, which is kind of interesting.

Joe Weisenthal (3:13)

Yeah, I mean, I think instead of, they say it's always a monetary phenomenon, but look, I don't think there's an obvious monetary link to be drawn between saying anything that the Fed has done recently and the fact that used car prices continue to have this bottleneck in part due to a chip shortage as a result from our over-reliance on TSMC and the virus and so forth.

So, but what I do think and what I think you're getting at too is that there is a tremendous political valence to all inflation. And if you are young and you're able to be flexible in your consumption and lifestyle patterns, maybe inflation doesn't affect you so much.

If you're older, if you're on a fixed income, it could be a greater problem. If you're a urban professional who likes to eat Chipotle burrito bowls and take an Uber to work, you're probably not thrilled with the cost of an Uber these days and you want the Fed to hike. So a lot of it is sort of like personal.

It's formed by one consumption pattern. There's a political nature. And I think these headline CPI numbers that we get, no one feels them like, no one, everyone's like, that's not my experience. The things are up 10%. Everyone is sort of a subjective experience of what kind of inflation is happening in the economy.

Tracy Alloway (4:28)

Yeah, exactly. Subjective is the key word. So I'm glad to say that we are going to be getting into the subjectivity of inflation on this episode. And we have the perfect person to discuss it. We have someone who basically wrote a seminal paper on inflation experiences back in 2013 And she's been updating her thesis with new research. And we're gonna get into that.