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Brian Lehrer: It's the Brian Lehrer Show on WNYC. Good morning again, everyone. Have you been experiencing more sticker shock lately, maybe your grocery bill has gone up or the cost of a rental car wasn't worth the trip upstate? Even if you don't drive, you've likely heard about soaring gasoline prices as a grim indicator of high inflation, but what exactly is inflation? What's causing it to rise? Will these increases last?

Over the last year, this is the stat that has everybody talking. Over the last year, the United States has experienced an annual inflation rate of 6.2%. Prices on average in general of the things they measure, which isn't everything, but of the things they measure, 6% increase over the last year, October to October, according to the Bureau of Labor Statistics. They measure what's called the Consumer Price Index or CPI, which looks at the average change in prices that people pay for goods and services.

We've talked on the show in the past about things left out of the CPI, when we used to say there was low inflation, it didn't take your cost of housing into account, it didn't take the cost of a college education into account. There's probably always more inflation on the big-ticket items than we have tended to officially talk about in the media. Now, the day-to-day stuff is going up and people are freaking out.

For reference, inflation rates in the past few years on these things have hovered around 2%, which is closer to where the Federal Reserve wants to see it, although there's no official target. We haven't seen a yearly jump like this, like I said, in the last three decades, but you know what else we haven't seen in 30 years? A global pandemic, where people stayed home and started spending more on goods and services. Remember when you couldn't go out to eat so you bought an air fryer. Money that would have been spent on things like big trips was saved by people who were in the right kinds of jobs and potentially supplemented by the federal stimulus payments to boot, which came because other people lost their jobs.

Labor markets are still seeing a shortage, therefore, as more people quit and resign. We talked about the great resignation on yesterday's show, and particularly in the service industry. Most economists can agree that the pandemic threw the global economy out of whack, but there's something of a debate over what this means for inflation going forward. Will high rates be transitory and short-lived like Federal Reserve Chair Jerome Powell suggests? Will spending trends, supply chains, and labor markets rebalance when the pandemic is more effectively managed? Does this indicate a long-term trend with forecasters sounding alarms and policymakers enacting broad changes to avoid a recession?

Here's a clip before we bring in our guest who has her own point of view on this. This is former Treasury Secretary Larry Summers talking about his op-ed in The Washington Post that says this has a more disturbing long-term look.

Larry Summers: You talk to businesses, they all say that they're facing rising prices, and they're also all confident that they're going to be able to pass the rising prices on. I think it's showing all the signs of a situation like the 1960s or the 1970s.

Brian Lehrer: Joining us now to comment on that and all of this is Wendy Edelberg, who is senior fellow of economic studies at the Brookings Institution, and director of something called The Hamilton Project, which I think has less to do with a hip hop musical and more to do with the first treasury secretary of the United States. Hi Wendy, welcome to WNYC.

Wendy Edelberg: Hi, thanks very much for having me.

Brian Lehrer: He was the first treasury secretary, was he? Did I get that right?

Wendy Edelberg: I believe you got that right, and I also want to say I am the proud owner of a brand new air fryer and I love it.

Brian Lehrer: There you go. Does that prove that inflation is permanent or temporary?

Wendy Edelberg: One of the underappreciated aspects of inflation recently has been how closely the trends have followed the unusual consumer spending patterns during the pandemic. For example, inflation for goods outside of food and energy, so that's automobiles, appliances, exercise equipment, air fryers, is at its highest level in 30 years. This is a category where since 2000, we have typically seen average price declines. High inflation is all the more remarkable, and at the same time, real spending on goods has been between 15% and 20% higher over the last six months than it was pre-pandemic.

Supply just couldn't keep pace with these increases in demand even under normal times, and then layer on top of that, supply constraints caused from the COVID 19 pandemic, and the recipe has been for very high inflation. Of course, the question is, what does all this mean for the next year or so? As the pandemic recedes, and everything hinges on the pandemic continuing to recede, demand for goods is going to come down, supply constraints will get better because demand will slacken, and producers will iron things out.

The real action will be in the service sector, not the goods sector, travel, entertainment, healthcare. Whether the good sector passes, the inflation baton to the services sector is really uncertain, but it's all about labor supply there. It's all about the labor supply recovery and whether people are willing to take the jobs out there.

Brian Lehrer: Sometimes inflation is a matter of economic justice. There was a big protest in New York City yesterday of people who work in nursing homes, who say, finally, because of all the nursing home deaths in the pandemic, people are paying attention to the pay and benefits and working conditions, really bad, that we have to put up with in this industry, and a lot of the other low paid professions too, a lot of people in the service industry sectors that have to do with entertainment and tourism where it was so unsafe to work, a lot of people who worked in restaurants have quit because they don't want to go back into that environment now.

It's making people look anew at the pay that will actually convince people that it's worth taking whatever risks and whatever headaches to go back into those jobs. Sometimes inflation, or to some degree, inflation as a matter of economic justice right now. I'm curious how much you think that's the case.

Wendy Edelberg: Well, you're absolutely right that we have seen a lot of wage pressure, and we've particularly seen wage pressure for lower-wage workers. We can think of that as, in many ways, right-sizing of where wages should be for those in the bottom of the wage distribution, and in fact, those wages have grown fast enough that those and maybe even as much as the bottom half of the wage distribution have seen real increases in their wages since before the pandemic, which is to say, their wages have gone up notably more than inflation.

Brian Lehrer: Then there's another aspect of inflation that, if inflation in the name of the lowest-paid workers getting paid decently is a good thing, then there's inflation that could be the result of price gouging. I wonder how much you see that because sometimes I think about these things that are going up in price, these ordinary goods that are going up in price, and I'm thinking, well, why does supply and demand, even though we always say the law of supply and demand determines price, why if the air fryer costs $15 to make in the past and it costs $15 to make now, but there are more people asking for air fryers than there are air fryers on the shelves, why does that make the price go up?

Wendy Edelberg: First of all, it takes some labor to make that good. Because of the pandemic, globally, manufacturers have had a difficult time getting the labor they need. Also, we need to get the air fryer from wherever it's made to someone's home or to the store where it's purchased, and that's much of what-- we were talking about the supply chain being messed up. A lot of what we're talking about there is transporting goods all the way across the globe. That has been up. There are all sorts of problems in shipping right now and then containers and at the ports, and some of that is specifically related to the pandemic. A lot of that is just because we are right now trying to move 20% more goods across the globe than we used to.

Brian Lehrer: Is there price gouging in this inflationary trend in your opinion?

Wendy Edelberg: I don't see a lot of evidence of it. It's certainly a very good thing to ask the questions, and I am very glad that policymakers are thinking hard about this because it's always a risk. The problems that are causing increases in prices for goods are pretty readily apparent. It's also readily apparent that producers are doing everything they can to get their goods to market. I don't see a lot of evidence of it on the face of it, but I'm happy for folks to be talking about it.

Brian Lehrer: Listeners, help us report this story. Where are you seeing inflation in your life? 212-433-WNYC, 212-433-9692. I think the top-line thing that's in all the news reports is the price of gasoline. Right now, we could get into that, but let's take that as the thing that everybody knows and tell us where else you're seeing inflation right now in your life. 212-433-WNYC, 212-433-9692, or tweet @BrianLehrer.

In addition to any questions you might want to ask on the nature of the inflation or a policy response to it for Wendy Edelberg from the Brookings Institution, 212-433-WNYC, 212-433-9692. How has Joe Biden's administration responded, and what do you see as the range of policy options to take on this inflation either if they land on it being transitory or if they land on it being more long-term?

Wendy Edelberg: There are limited actions that the Biden administration can take on its own. I think they are working hard to alleviate the supply constraints that are specifically related to shipping and what's happening at the ports and containers and the trucking industry. There's stuff they can do there, and I think that they are making good strides on that dimension.

The other thing that I think policymakers more generally could do is use their power to help improve labor market matching is the term that we use, getting people who were looking for work matched up with employers who are looking for workers. I just heard an anecdote yesterday that a significant HR recruiter only had just recently realized that their algorithms were kicking out anybody who had applied for a job who hadn't held a job in the last six months because that's, in normal times, the sign of somebody who is not really a very good candidate.

Policymakers and all of the technocrats behind the scenes can help to educate these employers. It might be that the reason that you're not seeing enough people get through your screens is that your algorithms are all wrong, and policymakers can be helping the private sector to figure out those problems.

Brian Lehrer: That's to say that people aren't hiring for job openings that there are, I thought we were having the opposite problem, which is that employers can't find enough people willing to work.

Wendy Edelberg: Well, but you can imagine a firm saying, "We are putting up job openings and we don't have nearly enough candidates for it," but they might be without realizing it, screening out a vast majority of qualified candidates because they've done stupid things like said, "We're not going to look at anybody who hasn't worked in the last six months," which is not a very clever thing to do if you're trying to hire at what is hopefully the latter part of a pandemic.

By switching that algorithm and saying, "Actually we're willing, we're very happy to interview people who maybe haven't worked in the last six months, maybe even haven't worked in the last year, because we're not going to count that as a black mark against them," they may find a doubling, a tripling, a quadrupling of the number of candidates that they can look at.

Brian Lehrer: I want to take a few of our callers who have examples of inflation in their lives. Then I'm going to ask you to give us a little history lesson if you can. The last time that inflation was so big in the news and when it really was long-term was probably during the administration of President Gerald Ford, and people who were old enough will remember him seeming hapless around that. Of course, he inherited the presidency when Nixon resigned in 1974, and then he got defeated when he was running for a full term by Jimmy Carter in 1976.

Maybe one of the most notable things about the short Ford administration was the buttons that got distributed that said WIN, W-I-N, which were initials for whip inflation now. I'm going to ask you to recall the 1970s and what made that time similar or different to today, but first, let's hear about some inflation in people's lives. Eddie in Bloomfield, New Jersey, you're on WNYC. Hi, Eddie.

Eddie: Hi. I do heating and air conditioning. Prices are going up and things are in short supply, but this is the Reaganomics. I'm so glad you brought up Gerald Ford and Carter followed by Reagan. This is what everybody wanted, supply-side economics. There is no supply, everything goes up. Free market capitalism, which is what I've heard forever from the Bryan Cutlers of this world. Now, we got it, why is everybody crying? This is what they wanted. Oh, sorry, but you know what I'm talking about.

Brian Lehrer: Don't confuse me with them. [laughs]

Eddie: I said Brian there. I said Bryan Cutler. I'm sorry.

Brian Lehrer: You just used my first name. I'm just making a joke. Okay. You're making a political statement, but you're a contractor, you said, can you give me some concrete examples?

Eddie: Oh, because you can't get parts, you can't get them if people are shooting at eight, there's no boilers around, there's no boiler sections, so everything goes up. The workers, a million people died from COVID, and then you got all the old guys that retired. There's nobody out here to do the work. It's like, "Yes, here we are. This is what we are." I see it that way.

Brian Lehrer: Eddie, thank you very much. I appreciate your call. Marianna in Livingston Manor, you are on WNYC. Hi, Marianna.

Marianna: Hi. How are you?

Brian Lehrer: Good.

Marianna: I'm a floral designer, and it's actually affecting a lot of areas of my business because I started my business during the pandemic, that's when I started it. Now with gas prices going up and I do deliveries and the fluctuation of flower prices and then I have to pass on those costs to my customers and it sometimes doesn't make my business work.

Brian Lehrer: Profitable, yes. Explain it a little more if you understand it, why would flowers cost more?

Marianna: Well, because the whole import, all the workers in different countries, the flowers are imported from different parts of the world. During flower season, I buy locally to support local flower farmers here, but the season is not that long. They kept their prices because it's the same worker, which made it great for me, but then once the season is over, and for example, right now, we're going into Thanksgiving and I'm getting a lot of orders, the flower prices are not reliable. I often tell my customers, "This is the price range and I'll confirm when I know exactly how much exactly."

Brian Lehrer: How about that? Marianna, I don't know if you heard our announcement earlier, but starting anytime now, you can sign up for what we're calling Shop Listener on The Brian Lehrer Show. Since you're a listener and you have a business selling things that people might want to buy around the holidays, we would be happy to list your flower shop and you can go to wnyc.org/shoplistenersignup if you want to be listed. I'm just letting you know. [chuckles]

Marianna: Oh, that's amazing. Thank you so much. I'll pass it on to the small businesses in my town.

Brian Lehrer: Good. Please do in Livingston Manor, that would be great, Marianna. Again, that's wnyc.org/shoplistenersignup, other listeners who are selling things. Let's hear at least one more for now. Let me see who we've got here. How about Bob in Brooklyn? Bob, you are on WNYC. Hello.

Bob: Hello, Brian. Is that me?

Brian Lehrer: Hi there. That is you, Bob.

Bob: Thank you so much. I'm talking about the price of home heating oil. I have oil heater in my home in Brooklyn, and the price has gone up 35% for now and it's expected to go higher. The costs, I don't know, it's probably primarily OPEC. Some people say there's price gouging, the President says there's price gouging, conservatives say it's shut down of the pipelines, I don't know.

My main concern is this, there's a state program called HEAP, Home Energy Assistance Program, to help low-income homeowners like myself with the cost of heating, whether it's natural gas or oil, anything. The problem is that funding comes from Congress, but there has been not one increase in the benefit, not one penny. If your price of heating oil goes up 35, 40, maybe even 40%, maybe higher or natural gas, the benefit is not increased for low-income persons. I don't know. Where are the Democrats? Why don't they help us?

Brian Lehrer: Bob, thank you very much. You heard that creed occur, Wendy, and my guest is from the Brookings Institution, Wendy Edelberg, who's director of what's called The Hamilton Project there and senior fellow of economic studies. Yes, oil prices go up. It doesn't just affect the price of gasoline. It's also home heating oil, and you hear the emotion in Bob's voice about what he's facing this winter.

Wendy Edelberg: There's absolutely a role here for policy to increase what are food stamps or what's now called SNAP benefits and make them more generous so that people can afford food even as it's become more expensive and to make more generous these programs like what the caller was mentioning LIHEAP to help people better afford heating costs over the winter. There's absolutely a role for policy there. Let's put this in the broader context.

I think any comparison to what we're seeing now to the 1970s, it's somewhat disingenuous. Right now, the numbers you mentioned at the top of the show, with CPI inflation right now having risen over the last 12 months at about 6%, that is a shockingly high number. In the 1970s, it was over 14%. It's really the comparison is not quite apt.

The other thing that makes this situation so unique in comparison to what we saw in the 1970s is that the temporary factors that are boosting inflation are remarkably identifiable. We know that there has been a surge in demand for goods. We are gorging ourselves on goods, and in a way, that is just completely unsustainable and very much related to the pandemic, and indeed, yes, related to the fiscal support that the government provided during the pandemic to make sure that people could sustain themselves during this time and to make sure that the recovery would be strong. This is most definitely temporary. These are identifiable factors where we know that they're not going to be sustained over the next several years, and that just makes the policy response quite different.

Brian Lehrer: Well, what did happen in the 1970s, because I get what you just described about what's going on now. Maybe with respect to the oil prices, if there's an innocent explanation for it, it would be that when the pandemic hit, everybody stopped traveling more or less, and so the oil-producing nations and companies said, "Well, we have to slow down production, because people aren't flying, people aren't driving long distances, et cetera." They shut down production or reduced production. Now people are getting back to normal, and so there's a shortage. First of all, does that sound accurate to you and does that sound as innocent as that description just made it sound, or are they may be holding back production now that they've reduced it, because they say, "Oh, we can make just as much money producing less stuff."

Wendy Edelberg: It is a remarkably accurate description of what's going on. Keep in mind that quite different from the way the energy sector worked in the 1970s, we now have a very substantial domestic energy production in this country. We're actually a net exporter of energy, which is quite different than the circumstances in the 1970s. From the spring to the summer of 2020, the number of oil rigs that we had going in the United States to get oil out of the ground was cut by two-thirds. I don't know if you'll remember, but during that time, the price of a barrel of oil briefly went negative because the oil producers had so much inventory, they didn't even have places to put it.

Brian Lehrer: What does that even mean? Does that mean we'll pay you to take our oil?

Wendy Edelberg: Indeed, that is exactly what it means.

Brian Lehrer: That happened?

Wendy Edelberg: That happened. That's how much demand fell off a cliff while supply was chugging along. It makes perfect sense that the US domestic energy producers, so I'm counting there both petroleum and natural gas, cut production as fast as they possibly could. A really good indicator of that is this rig count, the number of oil rigs out there fell by two-thirds in just a very short amount of time.

Brian Lehrer: Why can't they ramp it up again that quickly to meet demand at the oil prices?

Wendy Edelberg: The rig count is indeed coming up. It's coming up at a pretty steady pace. They've recovered about halfway. I think they're a little nervous that the current level of demand may not be so durable and that they don't know where demand ends six months from now, a year from now. The outlook is really uncertain. I think they've been waiting a little bit on the sidelines to see which moving target they should try to hit.

We are starting to see US production come back online. Just in the past couple of days, production forecasts have come up, the price of oil has come down. OPEC is certainly a really big player here, but we have enough domestic oil production in this country and natural gas production that our domestic industry can actually move the needle here on where prices are.

Brian Lehrer: What did happen in the 1970s, if you can give a very short version of that? There was the global politics having to do with the Middle East situation that resulted in what they called at the time the Arab Oil Embargo that pushed prices up in the United States. Did that singly touch off a years-long round of inflation on so many things, or what's the short version of what happened in the 1970s that we're now trying to figure out if this is that?

Wendy Edelberg: I won't get into all of it, but some high-level things that are actually useful to mention, because you can really see the contrast to how things work today, is that in the face of those increases in energy prices, and we were also a very-- we use a lot of energy to make all of our goods and services. We were a more energy-intensive economy back then. We were very sensitive to those increases in energy prices in the '70s much more so than now.

We saw the price of inputs go up a lot. At the same time, we also had the system for how wages were determined in the 1970s meant that there was a lot more year ahead negotiations that took place every year where everybody tried to guess where inflation was going to be a year ahead and set wages based on those inflation expectations. What that meant is if you thought that inflation was going to stay at 14%, then, well, for sure, you were going to demand a wage increase over the next year of 14%. That means that wages went up by 14%, which in turn meant that people had a lot of money in their pocket chasing the same number of goods that they would otherwise, and that meant that the prices of those goods went up by 14%. That's what we mean when we say a wage-price spiral.

Then what happened, and contracts for wages are just set in a remarkably different way right now. There's a useful contrast right there. Then the other thing is that it looks like the Central Bank kept saying, month after month as these readings were coming out, "We think that this is short term. We think that this is short-term. We're going to hold off. We're going to let the economy run," because they could see that unemployment was high. They were frustrated that these were price increases that didn't reflect a hot economy. They just reflected price shocks from abroad. They kept trying to keep the economy running hot and hoping that somehow everything would work itself out.

What happened is that what are called inflation expectations started to reflect high inflation forevermore. Long-term interest rates went up a lot, for example. If you wanted to get a 30-year fixed mortgage, you were going to pay an interest rate of something like 14% or 15%. The expectation of high inflation started to get baked into all the ways our economy and our financial system operated. Once that gets baked into the cake, it becomes very, very painful to try to get a reset on what everybody is expecting for inflation over the next 5, 10, 20 years.

Brian Lehrer: What I think we have a personal history call on exactly one of the points you brought up. I think this is going to be interesting. David in Woodbury, you're on WNYC. Hi, David.

David: How are you doing? Actually, I used to live in Brooklyn before, and my wife at the time, we bought a two-family brownstone in Cobble Hill. The mortgage was 16% on the house.

Brian Lehrer: 1981, you said, right?

David: December 13th, 1981, we moved into the house.

Brian Lehrer: What time was it? I'm just kidding. You remember the exact date. You paid 16--

David: We moved in on Friday the 13th.

Brian Lehrer: [laughs] That's why you remember the date. It was a 16% mortgage?

David: Percent, yes.

Brian Lehrer: Interest rate mortgage. David, thank you very much.

Wendy Edelberg: Do you know what the 30-year fixed rate on a mortgage is right now? It's less than 3%.

David: I have a 2% mortgage.

Wendy Edelberg: Right now, it's less than 3%. That's for 30 years.

Brian Lehrer: David said he has a 2% mortgage. What was that 16% about? Because the Federal Reserve sets interest rates, why did they set interest rates that high?

Wendy Edelberg: The Federal Reserve, certainly back then, almost had no influence over what a 30-year mortgage interest rate would be. The Federal Reserve, the way it operated for a long time, what they set was the short-term interest rate. Long-term interest rates were affected a little bit because you might care what the whole path of short-term interest rates was projected to be over the next 30 years, but the 30-year mortgage rate or the 10-year treasury rate for that matter, those are far more influenced by just market expectations. The reason the mortgage interest rate was that high in the early 1980s is because the banks issuing those loans expected inflation to be quite high over the next 30 years and they wanted to get compensated for it in nominal terms.

Brian Lehrer: If the Fed does as a matter of policy, and this can be my last question as we run at a time, if the Fed does increase interest rates as a way of tamping down inflation, why aren't they doing that now?

Wendy Edelberg: They're trying to figure out how much of the inflation we're seeing right now is going to work its way out of the economy without them having to slow things down by tightening monetary policy. A lot of these forces that I just talked about, even if the Fed did nothing, would go away on their own. They don't want to tighten too much when it turns out if they had just sat by quietly, these things would go away. That said, it will be appropriate for them to start, I'm going to use some jargon here, to start removing accommodation over the next year or two that it is time for our economy to start having to stand on its own two feet.

Brian Lehrer: Without as much government investing in bonds and things like that, right?

Wendy Edelberg: That's right.

Brian Lehrer: Wendy, you know what, I'm going to throw in one additional question because I can't resist because listeners, my guests, Wendy Edelberg from the Brookings Institution used to be the chief economist at the Congressional Budget Office. We are sitting on pins and needles right now in this country waiting for a big ruling from the Congressional Budget Office. As I'm sure you know, they're waiting for the Congressional Budget Office to say whether the big Build Back Better human infrastructure program from President Biden with the childcare and the eldercare and everything will increase the deficit over 10 years or won't increase the deficit. If they come back with a zero CBO score as the Progressives are predicting, then it might be much easier to get this through Congress. Do you have any perspective on this as a former chief economist with the Congressional Budget Office? Are they going to get that zero deficit score?

Wendy Edelberg: The laser focus on what exactly the score is going to be and whether they're going to say that it cumulatively decreases the deficit over 10 years by 100 billion and zero increases it by 100 billion, 200 billion. The laser focus on what that exact number is is such misplaced attention. The Build Back Better Act will do all sorts of positive things to people's lives, improve wellbeing, make our economy more resilient. Those should be the guiding principles. We know or we can be pretty darn sure that CBO is going to come back with a score saying that there's no notable effect on the deficit over the next 10 years. That is far and away the most significant piece of information. I am frustrated that policymakers are actually overly focused on whether or not it increases the deficit by 100 billion, 200 billion, 300 billion. These are very small potatoes compared to the big picture of what this legislation will do.

Brian Lehrer: Keeping the news in perspective. Wendy Edelberg, director of what's called The Hamilton Project and senior economic fellow is that it, at the Brookings Institution.

Wendy Edelberg: That'll get people to find me. That's good enough.

Brian Lehrer: That's close enough. Sorry about that. Thanks for this great conversation. I really appreciate it.

Wendy Edelberg: Yes. Thanks for having me.

 

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