What’s Actually Causing Prices to Spike

The story of heightening prices for so many things we buy and use has played out in a bunch of different ways. For worried investors and CEOs, it’s a personal finance story of runaway inflation—but Jordan Weissmann, Slate’s senior business and economics correspondent, thinks that’s way overstating the current situation. “It’s actually a very small handful of categories, mostly related to transportation, that are driving an outsize share of inflation,” he told me. Weissmann claims the debate over inflation right now is actually simpler than you might think: Any road to economic resurgence is bound to be bumpy, with temporary spikes and valleys, and these price hikes are likely a result of supply chains adjusting to newfound demand from now-vaccinated consumers. Plus, even market arbiters, from the regulators at the Federal Reserve to bond holders, aren’t acting too frantically about inflation. So why are so many businesspeople and economists so panicked? Is there any reason for more people to panic? And did the huge cash influx from the stimulus bills, meant to “overheat” the economy, play a part in the new financial saga? To answer all these questions, I spoke with Weissmann on Tuesday’s episode of What Next. Our conversation has been edited and condensed for clarity.

Jordan Weissmann: Inflation is a weird story right now. Used cars, new cars, rental cars, and airfare—those four categories basically drove half the inflation in May. The reasons for those things are all sort of quirky and they have to do with this bizarre point: We are in recovery from the pandemic, and strange supply chain issues have popped up.

I think there are a few different arguments going on that you need to separate from one another. The big one about inflation: Is this the beginning of a persistent problem? Meaning, is inflation going to take off and then continue to rise, or is this transitory? The Federal Reserve is going to come down on the transitory side of things—which is a fancy way of saying temporary. It’s just a blip. It’s something we’re dealing with because we’re in this weird period where the pandemic is winding down in the U.S. It’s sort of like the economy has woken up after a fitful night’s sleep and it’s still shaking off the grogginess. So that’s one argument.

Then there’s this other argument about what’s actually causing inflation right now. On the one side, it’s supply chain issues, the stuff I’ve talked about with cars and airline fares. But the other side is people saying it’s actually all this government spending, all the coronavirus aid, combined with the fact that wages are going up because it’s a very tight labor market. If you had to ask me, I would say it’s mostly transitory and that a lot of it is just the weirdness of the moment, all the weird supply chain issues, with some wage issues thrown in.

I don’t want to downplay the extent to which inflation can really suck for some people. There is a chance this year that prices are going to rise a little faster than wages overall. So people might end up a little poorer in real terms, even if it’s just a temporary burst of inflation. That sucks. The question is whether that possibility is so terrible that the Federal Reserve should essentially move more quickly in order to in order to prevent it from happening.

Mary Harris: By all accounts, it looks like the Fed does not plan to make any moves here, in part because of what we’re seeing in the bond market: Despite rising inflation, investors there seem untroubled.

There are a few different measures that actually show that traders and investors are getting less worried about inflation than they may have been last month. For one, Treasury yields have started to fall.

What does that mean?

Think of it as the return on a Treasury bond rate. Your yield is what you get back every month or every year from the government if you decide to loan it money. If investors expected inflation to rise a lot in the future, you would also expect Treasury yields to go up, for the simple reason that people want the return on their bond investment to keep up with rising prices so that they retain the value of their investment. If investors think we’re going to see 3 percent of 4 percent inflation in the next 10 years, you would see Treasury yields rise. Instead, Treasury yields, after kind of rising earlier in the year, have been falling. And other measures that are signaling the same thing. So, are used car and airline prices really going to continue surging for next 12 months or two years? Probably not, because right now they’re just in this period of adjustment.

This is the thing: Why is it that car prices are going up right now? Is it because of some generalized macroeconomic force that is causing all prices to rise, or is it something specific to the auto industry? It seems like it’s the latter, right?

How does the labor force factor into inflation concerns?

You definitely have seen wages starting to rise, which is because businesses have been having trouble hiring—it’s a very competitive labor market. You’ve heard the complaints about that, I’m sure. Some of that is probably going on. But there are also issues around whether families can find child care and whether everyone has been vaccinated and feels comfortable going back to work. But the bottom line is it’s a competitive labor market. Wages are going up and that’s probably pushing up prices a bit.

It doesn’t seem like there’s a good way to predict whether the inflation is going to be a problem. I look around and the metric that a lot of analysts are using to decide whether they should be worried about inflation is whether other people around them are worried. That seems problematic because that’s influenced by all sorts of factors that have nothing to do with real measures.

You’re actually poking at one of the funny things about monetary policy and inflation, which is that a lot of it is actually supposed to be a kind of confidence game. I mean, there are hard, concrete things that are supposed to influence inflation. But a lot of it really, when you look at the theory, is supposed to be what people expect to happen. Economists talk about this all-powerful force known as inflation expectations: Just what do you think is gonna happen in the future? The reason for that is, if people think prices are going to rise, if business owners think prices are going to rise, then they will raise their own prices. It’s sort of a self-fulfilling prophecy. That’s the theory. And one of the Fed’s main jobs is to keep inflation expectations in check.

Back in August, Fed Chair Jerome Powell announced that he intended to run the economy hot. That meant keeping interest rates low, even if inflation seemed a bit higher than he wanted. It was a whole new monetary framework.

The old framework of trying to predict when inflation was going to crop up ahead of time by looking at things like the unemployment rate didn’t seem to be working that well. So maybe it was time to move to a new model. They moved to this new framework in 2020, and in some ways we’re seeing the first real test of it.

It’s so interesting because it sounds like what you’re saying is the Fed is making this decision to be more progressive and a bunch of ways. A guy like Larry Summers probably never liked that from the beginning.

It is to some extent a test of how progressive the Fed has become, or how dovish the Fed has become compared with the past. As a result, you’re going to see this conflict play out. Some people are going to be very nervous and are going to, as a result, hyperventilate on CNBC a lot.