Inflation hasn’t been much of an issue since Jimmy Carter was in office. But—like Mom Jeans and mullets—it’s totally back. This time, though, it feels different. We’re paying more than ever at the pump and in the grocery stores, so what’s to blame? Is it government spending? Supply chain shortages? The war in Ukraine? We’ve got questions, so we turned to UCF economist Sean Snaith for answers.
Want to learn more? Check out Snaith’s latest U.S. Economic Report from UCF’s Institute for Economic Forecasting.
- Sean Snaith, Ph.D. – Director, Institute for Economic Forecasting
Paul Jarley: Inflation hasn’t really been an issue since the Carter years. That Saturday Night Live skit was Dan Aykroyd impersonating Jimmy Carter. Inflation is definitely not the friend of people who are on fixed incomes. Today’s inflation, though, feels a little different. Some people think it’s not a surprise. We printed a bunch of money during the pandemic, and we’re suffering the consequences to that. Spending was high, particularly government spending.
Some people blame it on supply chain shortages. Some people blame it on the war in Ukraine. Some people believe it’s a government conspiracy. To sort through all of those things, when Sean gets here, we will have a conversation with him that will help us shed some light on where inflation really is today and where we think it’s going in the future.
Well, here he is. I’m assuming you’re in big demand these days.
Sean Snaith: Yeah. I’ve spoken on at least two occasions about inflation over the past year and a half.
Paul Jarley: So you raising your prices, given all this demand?
Sean Snaith: No, competition’s too fierce.
Paul Jarley: Really? Yeah.
Sean Snaith: Yeah. Economists are a dime a dozen.
Paul Jarley: Well, that’s probably true, but you’re the prettiest one I have, buddy.
Sean Snaith: Aw. You’re like my magic mirror. What fairy tale was that? Who’s the fairest economist in the land?
Paul Jarley: Oh, that’s not even close. I mean, it’s a low bar if you’ve met most economists, right?
Sean Snaith: I build a career on low expectations.
Paul Jarley: There’s no GQ for economics. I’ve never seen it.
Sean Snaith: No. We did do a GDP GQ…
Paul Jarley: There you go. Very nice.
Sean Snaith: But yeah, the model was not an attractive man.
Paul Jarley: I would imagine not. So how unattractive is it right now?
Sean Snaith: Well, we’re making the call when our release goes out that we are in or very close to a recession right now. And speaking to different groups and to the media over the past year, all of this can be traced back to the policy response to COVID-19 in 2020.
Paul Jarley: We’ll come to that in a couple minutes.
A few weeks ago I was driving home and when I drive home from the gym, I tend to put on sports talk radio. It’s my time to kind of catch up with. And the guy was railing against the inflation number in the sense that he didn’t believe it, that he thought the reported one was too low. And he was quoting the doubling in gas prices over a period. And yeah. So talk a little bit about how that inflation number is actually put together and what it really means.
Sean Snaith: Many of the variables in macroeconomics have measurement issues. Financial markets, interest rates…
Paul Jarley: Pretty simple stuff right?
Sean Snaith: To the second on the spot. When you start talking about GDP, employment, unemployment inflation, now you’re dealing with something that’s not as directly observable. And especially for something like the price level, we know what the price of individual commodities are. We know much wheat and soybean costs. We know much corn costs, how much a gallon of gas or gallon of milk costs, but the price level’s not observable. So we, the economics profession, the government, comes up with proxies to try to gauge that.
And the most common cited and observed proxy for inflation is the consumer price index. Hopefully people aren’t listening to while they’re driving, because we might have people nodding off and driving on the shoulder. But basically, when I’m teaching introductory students about it, I’d say, just think about you go to the grocery store and you put in a bunch of different items from the shelf and you go to the checkout and they ring it up and they tell you how much it is. Then the next month you do the same thing.
So basically that’s what the CPI is. It’s a basket of goods and services consumed by the so-called typical urban consumer. That basket gets repriced each month. And from that these inflation numbers are calculated. Now within that basket, certain items may be rising much faster than the average of the basket as a whole. And so if you’re looking at used car prices, which were up 40% year over year, if you’re looking at energy prices, which were up much higher than, and driving, really the overall CP numbers in many ways, or some food prices, it’s much higher than the eight and a half percent that gets reported as the headline number. So I think that’s where a lot of the skepticism comes in, that somehow the government’s trying to hide or obfuscate the real inflation rate out there.
Paul Jarley: Because the truth is, the inflation rate is different for different people based upon their purchasing patterns forward. Right? I mean, there isn’t really one inflation rate.
Sean Snaith: Well, one of the biggest sources of economic fallacies and misinterpretations is the notion that we forget. And I mean, we, in the biggest sense that when the rules of the game change, we’ll go back to sports talk radio here, the players play the game differently. So in the NFL, when they start penalizing for high hits to try to reduce the number of concussions, well now we start to see more lower body injuries. And so for the consumer, the rules of the game are your income, the prices that you face each day when you go shopping. And when those things change, your behavior changes. You don’t push that same cart up to the checkout that they use for calculating the CPI.
If the price of chicken wings goes up too high, I eat fewer chicken wings and maybe I substitute pork or beef. And so you that’s what’s happening now. People’s behavior will be altered by that. And so it is, depending on how you respond, how inflation impacts you in a real sense will in part depend on how you react.
Paul Jarley: But what is the inflation rate today?
Sean Snaith: I think the last reading was 8.7%, which was for May.
Paul Jarley: Do you have any reason to believe that’s over or understated?
Sean Snaith: No. I think it reflects what’s happening to energy prices. I think it reflects what’s happened to food prices. I think it reflects what’s happened to the price of shelter. These are the three big items that consumers… 65% of house of household spending for households that make $80,000 or less, 65% is on those three items. And so rent’s been rising. Food’s been rising, and the cost of transportation’s been rising. That doesn’t leave a lot of wiggle room for most people. And I think this is one of the key reasons we’re seeing consumer confidence at levels we haven’t seen since the early 1980s.
Paul Jarley: We opened the podcast with Dan Aykroyd’s famous inflation as your friend skit, impersonating Jimmy Carter. When was last time inflation was double digits? Was it the Carter year?
Sean Snaith: It may have leaked into the early Reagan years as well.
Because that’s when the early eighties, the Fed had to very dramatically raise interest rates. They raised short term interest rates to close to 20% in order to break the stranglehold that inflation had formed on the economy.
Paul Jarley: Okay. So let’s break down that inflation rate. So how much of this do you think is due to the war in Ukraine?
Sean Snaith: I think in Spanish it would be un poco. This was, to put the cart ahead of the horse earlier in the park podcast, but most of the economic problems that we’re currently facing, the labor market shortages, the supply chain problems, the high price of oil and gasoline, the overall high rate of inflation rates was already baked into the cake by, I keep wanting to go back to COVID-19 policies, but Putin’s invasion of Ukraine was the icing on this layer of cake of economic misery. Sure, it caused a spike in oil. Nobody knew. I mean, how’s this going to play itself out, right? We haven’t seen this kind of war in Europe for a long time. And so markets reacted, oil spiked up close to $150 a barrel. And then as the reality on the ground continues to unfold, it’s not the World War III as some were predicting and unfortunately some seemed to want.
And so, we’re kind of back down to where we would’ve been had Russia not invaded Ukraine. We were on this trajectory for a year and a half. Now we’re back around $110 a barrel. Politically, we love to point the figure, nothing like a good scapegoat. Somebody’s wearing a black hat. In this case, it’s Putin, who, I mean, it really has caused more problems for a country with a GDP just a few hundred billion more than the state of Florida. Well, 6,000 nuclear war heads. I’m not going to brush that aside.
But no, that was not helpful. There was disruption, there were problems, and then we added to it. These embargoes were meant to punish Russia somehow, caused further pain for the rest of the world in terms of commodity prices in terms of fertilizer. I mean, this is the hidden cost of high oil and natural gas prices is what it’s done to the cost of fertilizer, which has skyrocketed over a year and a half. And that means that the price of food isn’t going to be coming down very quickly, because there’s another crop of food inflation that, so to speak, is already in the ground.
Paul Jarley: What’s the source of all these labor shortages we’re having. Did everybody retire?
Sean Snaith: No. Again, the labor market is very complex and people’s behavior in terms of entering or leaving the labor market can depend on a variety of things. But some of it is aging. A piece of it is aging. The baby boomers continue to age and more of them are moving into retirement. So that’s…
Paul Jarley: Well, and at the beginning, right, of this, the pandemic and the aftermath, their portfolios were pretty good because the market was still really high. Right? Unlike other slow downs we’ve had.
Sean Snaith: Right. So if you’re the west coast of Florida, Naples and Sarasota and places that tend to attract more affluent retirees, they thrive when financial markets are booming like that. But it goes beyond that and we’re at a university here and I speak to students and ask them, “Were you working before the pandemic?” “Yeah.” “Are you working now?” This was 2021, the situation’s changing. “No.” I said, “Why not?” I know the answer. “I don’t have to.” “What do you mean you don’t have to?” “Well, I got two $1,400 checks when I got laid off from Buffalo Wild Wings, I got unemployment plus an extra $600 a month. I’ve got three roommates. I’ve got enough money to pay the rent. My Xbox subscription is up to date. I’ve got the money for my prescription for my glaucoma. Why am I rushing back to scrub pots in the kitchen of Buffalo Wild Wings? And the answer is, I’m not.”
So that’s part of it, because if you look at the shortages, you didn’t hear Advent Health or Orlando Health saying, since the pandemic, none of the orthopedic surgeons came back to work. No, it was servers, bartenders, people working in retail, gasoline stations. That is the piece of the labor market where the shortages were just really across the board. Now there were labor market shortages, again roll back the clock pre-pandemic, February 2020. But they were specific, not enough nurses, not enough accountants, not enough tradespeople, but it wasn’t, “Hey, I can’t get somebody to make a latte at Dunkin’ Donuts.” That wasn’t the issue. But that became the issue.
Paul Jarley: What about the airlines? What’s going on there? Just because it’s been in the news so much.
Sean Snaith: Labor shortages as well. Pilots, unlike politicians, there’s a mandatory retirement age of 65. And so again, you’ve got the baby boomers, they hit this age, they have to retire. And so there’s, with the explosion of demand that came out of the pandemic that was fueled by $6 trillion of government spending that was underwritten by 0% interest rate, the Fed pump liquidity into the banking system. But all those purchases, and we did this to fight the 2008, 2009 financial crisis. The Fed’s balance sheet went from 800 billion to over 4 trillion. But because of what we did in terms of the pandemic, the Fed had to go back and redo what they did in 2008, cut interest rates to zero. And then the balance sheet grew further to almost 9 trillion.
Now, not all of those purchases end up in circulation in the economy, because banks for a variety of reasons, from dog franks to stress tests to worries about being overextended are not loaning out all that money. They’re sitting on it. They’re holding it as reserve. So that really never makes it into the economy. However, those $1,400 checks, they did get spent. And the other spending that the government did outside of those checks went into the economy and those dollars started to circulate.
Paul Jarley: That gets us to velocity. So is velocity back to pre-pandemic levels/ velocity is the rate of turnover in currency, in the economy.
Sean Snaith: I would say that it’s increased. The Fed’s not reporting some of these monetary measures that they did historically. Monetary policy is very different post-financial crisis than it was pre.
Paul Jarley: Talk about that.
Sean Snaith: Well pre-financial crisis, being a central banker was a fairly straightforward occupation. If you wanted to stimulate economic activity, you would push reserves into the banking system. The banks at that time did not hold excess reserves because you don’t make money.
Paul Jarley: They loaned out the money.
Sean Snaith: They loaned out the money and that money…
Paul Jarley: Circulated through.
Sean Snaith: Right. And so interest rates came down, economic activity went up. If the economy was overheating, you pulled those reserves out. So it’s not as straightforward now. It’s more complex. They have a different set of tools. I haven’t taught money in banking in some time, but I imagine I couldn’t use my old notes to teach that class these days. So it’s a little more complex and it’s a whole different… The structure of the economy and the connections in how monetary policy makes its way to economic activity were all reset and changed and altered in ways that I think the Fed’s still learning.
Paul Jarley: That segues nicely. So the Fed has done a traditional response that moved to raise interest rates. How effective do you think that’s going to be in today’s economy? Because that’s usually a durable goods kind of, right?
Sean Snaith: Right. It affects things that are sensitive to interest rates…
Paul Jarley: Houses, cars…
Sean Snaith: Houses, cars, business investments. Building, buying equipment, building. It doesn’t affect purchases of food, typically. But the Fed is late to the party or late to ending the party, right? There’s the old saying, I can’t remember which former chair of the Federal Reserve said it, but that the Federal Reserve’s job is to take away the punch bowl once the party gets going. You don’t want people to overindulge. But not only did they not take away the punch bowl in time…
Paul Jarley: They filled it a couple times.
Sean Snaith: They went to, yeah. They went to ABC and bought a case of Everclear or alcohol and dumped it in. And well, guess what? People have landscapes on their heads and inflation’s 8.7%.
But the good news for the fed and my view on this has changed in the past three months, I thought the Fed was going to have to act very dramatically. They were trying to do baby steps the way they were doing pre-pandemic.
Paul Jarley: Well, it is an election year as well.
Sean Snaith: Well, supposedly they’re not swayed by politics and goodness knows that President Trump did his best to try to change monetary policy. So that’s a good thing in this country, that it’s not. But they’re going to get a really big assist by this recession. They’re not going to have to raise interest rates as dramatically as they would have if the economy was still pumping the way it was a year ago. I think this recession will be fairly long, certainly by comparison to 2020, which was only two months. I think it’ll be a year, year plus. I don’t think it’s going to be terribly deep, but I think over the course of that time, you’re going to start to see a slow fading or erosion of inflation rates. And so they’re not going to have to repeat 1980 when they just crush the economy because that was the only way to kill inflation.
I think inflation will sort of fade over time without the Fed having to be as aggressive as they would in a different economic environment.
Paul Jarley: Where do you see this recession hitting the hardest?
Sean Snaith: Really, I don’t think it’s going to be… I don’t want to understate or diminish people that might suffer in a recession, but it’s not going to be this dramatic plunge that we saw, certainly not 2020, certainly not in 2008, 2009. I think the unemployment rate will creep up a little bit, but there’s a huge cushion in the labor market. There’s a lot of fat in the labor market that we can cut away before we get into muscle and bone. And that’s the 11.4 million job openings that remain unfilled.
So I’m an Acme anvil company and I’ve got a thousand positions open. Well, I can cut those and nobody is hurt.
Paul Jarley: That’s nobody’s paycheck.
Sean Snaith: Nobody’s paychecks, nobody’s lost a job. So that could be trimmed. And I think that consumers and… When you’re tightening your belt as a household, there’s some things you can cut and there’s some things that you can’t, so that those more discretionary or luxury kind of items I think are going to see the impact. And so, those associated industries. I’ve never predicted a recession. I always felt that that was sort of folly to do so. But I’m pretty sure we’re in one or very close to one right now. When it officially gets announced a year from now, we’ll see if I’m right or wrong, but this is the medicine that I think is going to help cure what ails us economically, from the labor market to the supply chain to inflation to high oil and gasoline prices. It’s not going to be quick, a shot of a adrenaline and your heart’s back. It’s going to, as I said, I think a year, but slowly, this economic fever dream we’ve been living in is going to is going to break.
Paul Jarley: Could anything go wrong here that would make this recession deeper in your mind?
Sean Snaith: If the Fed overreacts. They were slow to start tightening. Are they going to now err further to the side of tightening? I think that remains yet to be seen. I think if we had passed more spending bills. There was some discussion at one point of a $3 trillion in addition to everything else…
Paul Jarley: Infrastructure bill.
Sean Snaith: Infrastructure. Build Back Better. They call it infrastructure, but then they spend it on everything else. But that money would’ve just went in and would’ve further fueled inflation. So in introductory economics course is, introducing the concept of inflation to new students. Often use the terminology that inflation is too many dollars chasing too few goods.
And so this, putting more dollars in is not going to help. I think in California, they’re giving everybody a thousand dollars, excuse me, to help with inflation. I’m like, “Okay.” Let’s put out the fire by throwing gasoline on it. The fire truck rolls up and they’ve got an oil tanker behind them. You might want to leave because the fire’s not going out. And these other notions, going back to Dan Aykroyd and some of the comical nature policy, then these notions of price gouging and trying to put price restrictions on to, or… These failed economic tropes of the seventies, the fact that they’re somehow trying to be resurrected to me is just stunning.
But I don’t think we’ll see those. But you start doing stuff like that. You’re just going to compound problems. I mean, we’ve made our bed here and we got to lay in it here for a year. And I think as we get to the other side of this recession, we’re not going to rocket out of it. It’ll be a gradual rise, but that period is going to allow a lot of these problems to resolve.
Paul Jarley: So bottom line, two years from now, are we still talking about inflation? Still going to be a thing?
Sean Snaith: No. Now will it be back down to 2%? No, it won’t be, but it won’t be 8.8%.
Paul Jarley: You think it’s three, four, somewhere…
Sean Snaith: Three to four. Yeah. Yeah.
Paul Jarley: It’s my podcast. So I get to go last. We have certainly been through the most unusual two and a half years of my lifetime. Fear of a new virus caused us to voluntarily shut down the economy. We kept people from starving by government executing an intergenerational loan. This helped cushion the blow, but it also kept some folks from immediately jumping back into the economy when fear of the virus started to subside. And we looked to start everything back up.
If Sean is right, and I have no reason to doubt him, the weirdest time in my life is going to finally end by the most typical of economic responses as spending slows and a modest interest rate hike brings balance back to the economy. 2024 may very well be the year when we are able to close the book on the economic consequences of the 2020 pandemic.