How To Understand the Inflation We’re Seeing Right Now

Episode Summary

Executive Summary: Joe Weisenthal speaks with Julia Coronado and Laura Rosner Warburton about whether 2021’s inflation surge is temporary or more structural. They argue the biggest driver is a pandemic-era demand shift toward goods amid supply constraints, with spillovers from chips, shipping, climate shocks, and labor-market frictions. They also discuss de-globalization, consumer price sensitivity, distributional effects, and how the Fed’s new framework changes its response.

Main Topics: Pandemic-driven demand shift and goods inflation (Priority: 5/5): The guests argue inflation largely reflects an extraordinary shift from services to goods during COVID, paired with producers cutting output and inventory too aggressively, creating bottlenecks and price spikes in items like cars, furniture, and electronics. Supply chain disruptions and sector-specific shortages (Priority: 5/5): They emphasize that ongoing frictions—port shutdowns, semiconductor shortages, shipping congestion, weather/climate events, and intermittent COVID waves—continue to disrupt production and keep goods prices elevated. Inflation expectations and secular disinflationary forces (Priority: 4/5): The discussion questions how powerful inflation expectations really are, while stressing other long-run forces like demographics, globalization, healthcare pricing, and technology as key determinants of low inflation over time. De-globalization, China, and higher long-run costs (Priority: 4/5): They note that supply-chain realignment away from China and toward allies or domestic capacity may raise costs and create one-time price-level shifts, but they remain skeptical that this automatically produces persistent inflation. Distributional effects of inflation and fiscal policy (Priority: 4/5): The guests argue this cycle differs from the usual 'inflation hurts the poor' story because fiscal support was highly progressive, low-wage workers saw strong wage gains, and distress was reduced through the recession. Fed reaction function and the new framework (Priority: 5/5): They say the Powell Fed has clearly become more dovish and tolerant of temporary overshoots, with a stronger willingness to prioritize employment and wait longer before tightening. Productivity, capex, and structural change after COVID (Priority: 3/5): They expect firms to invest more in automation, technology, and more resilient supply chains, boosting productivity and potentially easing some inflation pressure over time.

Key Arguments: The inflation surge is mainly a result of an unprecedented shift in demand from services to goods during lockdowns, not a broad-based wage-price spiral. Supply-chain breakdowns and repeated shocks like semiconductors, shipping bottlenecks, and weather events are keeping goods inflation elevated longer than expected. Inflation has not meaningfully broadened into services overall; some services like airfares and hotels still show disinflation because of excess capacity. Inflation expectations matter, but economists should not overstate them because they were measured only during the era of low inflation, limiting historical evidence. Demographics, globalization, and technology have been powerful disinflationary forces, especially in healthcare and goods pricing. A shift away from China and toward more resilient supply chains likely raises costs, but that may be a one-time level shift rather than a self-reinforcing inflation regime. Consumers became less price sensitive during the stimulus-heavy phase of the pandemic, allowing more pass-through of higher prices; that may fade as fiscal support wanes. The Fed’s new framework is already visible in its willingness to tolerate more inflation overshoot and focus on employment, unlike the earlier tightening bias. Lower-income workers have benefited from stronger wage growth and reduced distress, though asset owners benefited disproportionately from supported asset prices. The current cycle may accelerate productivity improvements, capital spending, automation, and digital adoption, which could offset some cost pressures later.

Data Points: Pandemic-era disposable income: Above pre-COVID levels by April - Used to illustrate how fiscal support gave consumers money to spend even as wage and salary income lagged. Wage and salary income gap: About $1 trillion below - By April, wage and salary income remained far below while disposable income had already recovered. Fed inflation target: 2% - Referenced as the target the Fed hopes to overshoot moderately at the peak of the cycle. Prime-age employment-to-population ratio: Return to 2019 levels or possibly 1990s levels - Suggested as a benchmark for Fed-defined labor market victory. Core PCE impact from healthcare: About 25 basis points - Laura said the January 2021 healthcare inflation spike would not repeat and would lower core PCE inflation by roughly this amount in January 2022. Healthcare market share under government pricing: About 40% of the market - Explained as Medicare and Medicaid’s large footprint in healthcare pricing. College class size trend: Shrinking incoming college classes - Used to explain downward pressure on higher-education inflation. Used car/repossession trend: Loan delinquencies and repos fell during recession - Illustrated the unusual reduction in distress caused by fiscal support. Semiconductor shortage timing: Ongoing through 2021 - Cited as a major constraint on vehicle production and other goods.

Pivotal Quotes: "What the global pandemic and all of these social distancing policies did was they increased the demand for space." — Laura Rosner Warburton: Explaining the structural shift in spending toward cars, housing, furniture, and other goods. "I think it's fair to say we're a little bit more skeptical of that." — Julia Coronado: Responding to the idea that inflation expectations alone drove the low-inflation regime. "I think thinking of going back to normal is not, it's almost never a useful concept. We never go back. We're always going forward." — Julia Coronado: On why the pandemic is likely to leave lasting changes in business models, technology adoption, and productivity.

Implications: Listeners should expect inflation to stay uneven: goods and rents may remain pressured while some services stay soft. The Fed is likely to stay patient, but supply-chain restructuring and higher capex could reshape prices, productivity, and policy for years.