The Inflation Boogeyman


Inflation is on everyone's mind right now, but is it nothing more than a boogeyman for companies to demonize higher wages?


Why are we not talking about bloated margins? CEO, board, and executive pay? How about immigration and our broken supply chain? How will it impact the cost of doing business? What's going to happen with energy prices? Interestingly, history can tell us a lot about what the future holds.


That's why the boys have brought back Columbia professor Suresh Naidu to make sense of the current state of inflation.


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INTRO (1s):

Hide your kids! Lock the doors! You're listening to HR’s most dangerous podcast. Chad Sowash and Joel Cheeseman are here to punch the recruiting industry, right where it hurts! Complete with breaking news, brash opinion and loads of snark, buckle up boys and girls, it's time for the Chad and Cheese podcast.


Joel (21s):

Oh yeah. What's up everybody. It's your favorite guilty pleasure, the Chad and Cheese podcast. I'm your cohost Joel Cheeseman joined as always by Chad Sowash and today we are just super excited to welcome back Suresh Naido Columbia professor of Economics and International and Public Affairs. Suresh welcome.


Suresh (46s):

Thanks for having me.


Joel (47s):

It's been a while. What you been up to, man?


Suresh (49s):

You know, I'm teaching we're back in person, so it's coming back. So it's good. It's good. It's really true that when you teach students and you're like in the room, the energy and everything is just way better. And I think it's convincing me that the university will not be replaced by like online classes anytime soon.


Joel (1m 5s):

Oh, don't get Chad started. Don't get him started.


Chad (1m 9s):

Yes. Okay. So with that being said, with everything that we're seeing since the pandemic, I'm sure you've been busy crunching numbers, citing things from history. What's kept you the most busy when it comes to this point in time and then looking back into history?


Suresh (1m 26s):

Well, one thing I've been really interested in is actually trying to find a business, ideally like a restaurant or retail chain, that's actually willing to take advantage of this period of both price and wage inflation to actually run an experiment where they're willing to, like, I dunno, like randomized wages across say a bunch of different like cafes or restaurants or something. And look at like the retention and recruitment of facts of that. Like who comes, who leaves, who, how quickly, how much better does service get? And the idea is that like, you know, so if anyone's listening out there that happens to like run a chain of businesses and wants, and is thinking yeah, this is, you know, the fact that like, you're probably going to have to raise wages in the next year.


Suresh (2m 13s):

Why not use it to figure out the ROI on wages? Like, would I actually make more money if I paid wage paid higher wages, right? This is kind of like the best time to figure that out because you're going to have to raise wages anyway. So why not like learn in the process? And so, you know, if anyone is listening out there, that's like interested in running this experiment, just send me an email.


Chad (2m 34s):

We might be able to reach out to a couple of people because we do know, and they we've had restaurants on the show before, at least on the hiring side. But before we get too deep into this, let's talk about, cause we're gonna talk about inflation today and obviously how wages impact that. But also some of the other areas that might actually have correlation to it. First and foremost, just the basic question. What is inflation?


Suresh (2m 57s):

Yeah. So inflation is basically adding up across all of the, like there's a set of products. They're like, it's a basket of goods. It's like your rent, your energy, your car. Yeah. You know, food. And what you basically do is you look at how much of a sort of average person's budget does each of these things take up and then you look at how much the price of each of those things went up over the last, you know, you'll see different numbers, you'll see month on month inflation, you'll see year on year inflation, generally. It's like, you know, the scary numbers have been the year on year inflation. So like inflation, you know, in March compared to the March of last year, it's like, oh, it's like 7-8%. You know what that is, is basically telling you that the average prices across all of these products have gone up by, you know, when you average over all of them have gone up by about 7% since a year ago.


Suresh (3m 49s):

It's important to recognize, I think, when thinking about that number, that it's A, it's an average over a bunch of goods. So, you know, a big chunk of that is purely, and I think you guys have probably heard this, other people that probably have also used cars and cars and some of it is also, you know, just even in the fact that used car prices have gone up. Like, I think it's the case that when, when we compute the CPI, like we don't account for the resale value of the car. So, you know, one of the things when you're buying a car, you're also gonna have the opportunity to resell it. But if you only count the price of the car, would that accounting for the fact that like, you're going to be able to resell out for more on the future, you're kind of getting this gross price of like a used car.


Suresh (4m 34s):

You're not kind of getting the net price cause you're be able to sell it for more later on. And so that's like, you know, even when looking at the used car prices, it's you know, there's like some, some decisions that get made in how, what number gets used that, you know, if that decision went a different way and you would get a different number. So there's not like some sort of law of physics around, like, what is inflation that sort of tells you what exactly how it is. It's calculated in slightly different ways in different countries, but it's kind of capturing this general idea that there's, you know, an overall increase in prices and that freaks people out because you know, both concretely, when they, when they think about going and buying a quart of milk and finding, seeing that the price has gone up, that freaks you out and you think about buying toilet paper or getting your essential goods when the price of those things starts increasing.


Suresh (5m 23s):

I think it just like has a psychological effect on people that's scary and understandably so. And particularly when you don't necessarily see your wages sort of like increasing at anything close to the same clip. And then you're like, oh, am I going to be able to afford all the things I thought I was going to be able to afford? And so, and you know, I think people are in fact changing what they buy at the grocery store because of the changing prices of meat and milk and things like that.


Chad (5m 45s):

Have we seen high rates of inflation in the past? If so, when did it happen and how did we deal with it?


Suresh (5m 54s):

Yeah, so we did in the seventies most memorably, although it's been kind of a concern, I think almost always in, in, when you look at opinion data, for example, going back to World War II was then another period of like kind of crazy price inflation because there's like shortages of everything. And, and so the price of basic goods is a lot higher. And people are during World War II are very upset about inflation. And that's one of the things that goes into a union demands at the time included kind of putting in cost of living adjustments into union contracts, for example, so that wages would keep pace with inflation. Similarly in the 1970s, there was another rash of inflation precipitated by the oil shock and the oil shock.


Suresh (6m 39s):

Plus, you know, people will definitely say that there was some, the fact that the federal reserve sort of like kept interest rates low, even in the face of this oil shock, probably amplified inflation. That's kind of the standard narrative. Although I'll say the evidence for this standard narrative is not what you, what you think is what everyone thinks is what everyone says, but if you sort of like dig deep into it, it's not, it's like, is that really what happened? How did


Chad (7m 5s):

It's sounds like propaganda?


Suresh (7m 7s):

I mean, the problem is there's like lots of things that are happening at the same time. It's like Nixon goes off the gold standard. There's an oil shock. There's like middle east crisis. There's then, you know, the wage and price controls as a response to the inflation. So it's just like, lots of things are happening and so it's just not clear, which is responsible for the inflation of the 1970s. So I think, I think we're going to see a lot of research on the 1970s in the next few years, just as like an attempt to understand that historical period of high inflation in light of like today's period of high inflation.


Joel (7m 35s):

So speaking of the 1970s, there was an article in the Wall Street Journal last week, talking about the fear of a wage price spiral. I could try to explain that, but you could probably do it a lot better. What would you say is a wage price spiral for our listeners?


Suresh (7m 51s):

Yeah. So here's the basic idea of a wage price spiral, right? So you see prices going up. And so then workers start asking for higher wages and then employers then take those higher wages and then pass them along as higher prices, forcing worker and then workers ask for higher wages. And then if it's a higher prices and then that leads to higher wages. So that's the spiral is that, you know, one of , this like ratcheting up of expectations kind of takes off for you. It's like everyone thinks that prices are going to be higher. So they're asked for higher wages now, and then that results in prices being higher next year and the process


Joel (8m 25s):

And around and around we go. So the Wall Street Journal speculated that there are a few things that are different from the 1970s. History, a rhyme sometimes, but this time it may be different. They cite an activist fed, which was not in place in the seventies. Less unionization today, and also imports, which I assume would be the supply chain issues. So each one of those separately, how do you see those playing out in current day inflation fears?


Suresh (8m 53s):

One of the big ones is unions because, you know, things that unions asked for and the contracts was in fact, these costs of living adjustments in the union contract, which would tell you mechanically the formula written into the contract would say that if inflation goes up, wages have to have to go up. And so that literally bakes into the cake, this wage price spiral with the collective bargaining agreement. So that's a very direct wage price spiral. That's very hard to get in a world without unions. I think like, because you know, workers in a decentralized way are like, yes, they would like higher wages. They would, you know, they're trying to keep pace with inflation, but it's not like locked into a contract the way it is with a union.


Suresh (9m 36s):

So I think the mechanism for getting you wage price spirals is just really attenuated with when you don't have a labor market, you know, where like the biggest sector is the most important sectors of the economy covered by collective bargaining agreements. The imports are interesting, although, you know, I would say that it's under appreciated how important oil is as like an input into everything else in the economy. And it's generally the case that I think that oil shocks do propagate into like when the price of oil is higher, that in particular pipes into everything. And I think that's also one thing that sort of happened in this particular round of inflation is that, you know, the recovery from the early shutdown of 2020, and, you know, I think China's kind of continued economic growth and just, you know, the world demand for energy got pretty high.


Suresh (10m 26s):

And, I think it does drive up the price of oil and that's as one of the contributing factors to like, I think the inflation in food and stuff probably comes from energy shocks like that. And then there's of course the supply chain issues, which you mentioned, and that's the, you know, so the, I guess the point is that like, we were less globalized in the seventies and that's true, but the point is today is that we're also somewhat less globalized because a lot of the structure, because we built these super fragile international supply chains that got kind of scrambled during the pandemic and unraveling them and rebuilding them is kind of what we're going through now.


Suresh (11m 9s):

So we're in some ways like less globalized again than we were even two years ago because of the pandemic and because of like the scrambling of the supply chains and that's kind of, you know, puts us again back in. So I would say it's like that thing of anything is more similar to the seventies because of the not because, you know, the policy, each trade is, the tariffs are lower, but now, but the supply chains are broken.


Joel (11m 35s):

You just break the dam on this supply chain gridlock, does this thing kind of solve itself? Or do we still have issues?


Suresh (11m 43s):

I mean, I promise you that inflation will come down in a year. On durables, I am absolutely sure of that, and that's the vast bulk of it, by the way, is the durable good inflation?


Chad (11m 54s):

Oh yeah.


Suresh (11m 56s):

Like what, how much it comes open question, but I'm reasonably confident it will come down as the supply chain issues, unravel themselves.


Joel (12m 4s):

If you're in the prediction making business. I got one for you. Are we headed for a recession? Why or why not?


Suresh (12m 11s):

So right now I actually think it's the Fed's move on this stuff. So it's like, you know, the fed has this dual mandate of fighting both inflation and unemployment. And to the extent that it sort of sees this, this rash of inflation as sufficiently scary, that it's willing to sort of trigger a recession to fight it, then we get a recession. But I think without the fed actively doing it, I think, you know, as we were probably still on track to at least have, you know, pretty high employment for awhile, but again, probably, and with some inflation, but probably not a huge amount, I guess, I guess that's sort of like my stance on it is like, boy, I really hope the federal reserve doesn't trigger a recession in order to curb inflation.


Suresh (13m 3s):

But that's, I think they're like right now, the player in the short run for this.


Chad (13m 7s):

So a couple of points first and foremost, we'll talk about price hikes and B because margins have been bloating for decades. I point to Kroger, the CEO saw a pay bump from 12 million to over 20 million because of the pandemic. Chipolte, Mexican Grill, Brian, CEO, Brian Niccol made 38 million in 2020, which is nearly 3000 times more than the median store-level employee. Then Chipolte raised prices across the menu about 4% in June of 2021 and blamed increases on worker wages.


sfx (13m 47s):

Oh hell no.


Chad (13m 48s):

So we're seeing CEO wages up from what used to be about 30%, correct me if I'm wrong by about 30% in the eighties today it's over 350% and a guy like Brian Niccol is just blowing it out. So are we really seeing this as more propaganda smoke and mirrors and gas lighting as opposed to around quote unquote "capitalism" as opposed to trying to drive more equity and raise wages?


Suresh (14m 19s):

I think it's complicated. I mean, so, it is true that like for the first time, since like the late nineties, the wages of low wage workers are growing faster than anyone else.


Chad (14m 29s):

That's because they were so low for so long.


Suresh (14m 31s):

Because there were so low for so long, but here we are. But it's also true that corporate profits are also very high and inflation is high. And so it's kind of, you know, this strange pattern of economic growth where it's like, we are seeing an increase at the bottom and we're seeing an increase at the very, very top. And then we're kind of seeing this decrease or stagnation and then in the middle. And I think that's, what's really politically problematic for the Biden administration, right? It's like that's, the median voter is kind of like looking at their wages, not seeing that those go up and keeping pace with inflation, but for low wage workers, like if you're in the bottom 40% of the wage distribution, you're probably doing better than you have been in a very, very long time.


Suresh (15m 21s):

But if you're someone on a fixed income, then you're not. That's and then the fact is that, that I will say that from what I've seen, most of the price increases are not in the sectors that are experiencing the wage increases. So if you look overall at services, including like restaurant and retail there, those are the places where wages are going up. It doesn't look like those are the places that are accounting for the big chunk of the, like their prices are going up, but that's not, what's driving like a 7% CPI increase.


Chad (15m 52s):

Gotcha. Gotcha. So here, quick question, does inflation and prosperity actually go together because when more people have more money, they go out and they spend more. And that's what we've seen, obviously during the pandemic where a government sent out checks to be able to sustain and help people, you know, pay their bills and get food and all those other things, but does press prosperity, drive demand and then demand drive for goods. And we'll get into supply chain here in a second. That's my next part. But does that does prosperity really drive inflation? So is it is inflation really bad ?


Suresh (16m 27s):

So, no. I think like, you know, a healthy level of inflation, like anywhere between, you know, two and 6% you can imagine is like pretty consistent with prosperity. I mean, inflation rates over the post-war period were generally much higher than they have been since 1980. So it's like, I don't have the number off the top of my head, but you know, it was much higher than 2%. And, you know, people are worried about inflation, but we have fast enough growth that it's like, okay, well people's incomes are growing or growing really fast. So I think, there is a real thing in which like, if we were willing to tolerate more inflation, we could probably have more prosperity.


Chad (17m 3s):

Tolerate inflation when everybody it's like a boogeyman, at this point.


Suresh (17m 6s):

It is a boogeyman. And, you know, there's an interesting way in which like inflation is it's, you know, it King's called that like animal spirits on both sides of the flip side is, you know, here's what a conservative would say is that, well, what inflation does is it actually also reduces the real return on investment potentially. And so, you know, high enough inflation is basically going to be a disincentive for people to save, for businesses to invest, and that will actually be like a drag on the economy. So that's like the anti Keynesian view, for example, on why inflation is a bad thing or there's ways around that. Right. Because you can imagine the return, even if you're a business, right?


Suresh (17m 47s):

You can always just charge the inflation rate and so you're not necessarily exposed to inflation. So then, and then you're just like in a world, like, why do you actually, why is inflation a bad thing? It's not something that we're sort of taught in economics or that we teach very clearly. It's like exactly why inflation is a bad thing. We're going to say something like the prices are all messed up and that's bad, but it's not exactly like a completely compelling case.


Chad (18m 16s):

Well, having a 99 cent hamburger for the last decade, let's say, right. Prices not going up. Maybe in that chain. Are Americans just spoiled? We want things 24/7, and we want them cheap. Since prices are rising, the boogeyman comes out. I mean, shouldn't, we expect a normal rate of inflation and we should also be able to expect a normal rate of wage increase.


Suresh (18m 44s):

So I have 2 answers to that. One is, there's like the perception of inflation, which is just that, like, even though the actual amount that you're spending on milk, let's say has only gone up a little bit. Like you, you notice it and you're just kind of get freaked out by it.


Chad (18m 58s):

Yeah.


Suresh (18m 58s):

And, that's like a real, or like the media keeps telling you that inflation is a bad thing. And so, you know, you guys are probably seeing this about how, like, if you look at polling results by political parties, like the Republicans think that inflation is way higher than it is then do Democrats, for example.


Chad (19m 14s):

And depending on where you are in the country, I would assume too.


Suresh (19m 17s):

It's true. It's but even, I think within the same place, just like partisan beliefs about inflation are really, are really strong things. So I think that's a real thing it's like in place part of inflation is in the mind and, in the like collective mind, but then the other part of it is that like, well, no, there's a real thing about, like, I can't buy the things that used to be able to but, and my wages, aren't keeping pace with inflation and that's like a real, that's not just in the mind, that's literally I can not get all the things I need and that's the kind of inflation we don't like. So that's, I think what's hitting, like if you will, the middle and upper parts of the wage distribution is like, oh, my wages, aren't going up but the prices of everything's going up that means I can't buy all the things I plan to buy.


Suresh (20m 3s):

I can't, I can't do all the things I want to do. And that's really materially costly.


Joel (20m 10s):

I liked you talked about perception. And I think that sometimes perception is more important than reality. So the, the University of Michigan consumer sentiment index came out, I think Friday of last week, it dropped to 61.7, which to put it in context is the lowest level, it's been since 2011. 26% expect financial prospects to worsen, that's the highest since 1980. How do you solve that historically? Is it just the messaging from our leadership? Is it just better news that we watch every day? Like, how do we get out of that funk?


Suresh (20m 46s):

Like better news. I think if we get like, you know, six months of like very strong jobs reports and like inflation, doesn't sort of like, doesn't get above, like, let's say 6% then I think, you know, people's expectations will go up. I think if people are annoyed, upset that it does seem that like the recovery from COVID has maybe stalled a bit and that we're facing these price increases, but, you know, on the whole, I think it's funny. And I'd be curious what you guys think about this. It's like by the numbers, except for the inflation problem, like the recovery from COVID has been as good as it can. Well, not as good as it could be, but it has been okay.


Suresh (21m 29s):

Like we're almost back to an unemployment rate of where we were before and we're facing labor shortages because people have dropped out of the labor force, mystery about exactly what they're, what so many primates people are doing out of the labor force. Like, how are they paying the bills?


Joel (21m 45s):

They're driving Uber's in Arizona? That's what they're doing.


Suresh (21m 46s):

I would not be surprised about that.


Chad (21m 47s):

No they are.


Suresh (21m 48s):

I think there's a way in which like the gig economy wound up, like absorbing a lot of people, a lot of like workers during COVID. So I know, like in the construction sector, for example, in New York, a lot of the immigrant construction workers became delivery people on e-bikes and that's just and so they're not counted as unemployed, but then they're not counted as well, but, you know, they should be counted as independent self-employed, but they're probably just getting missed by the statistics, to be honest.


Chad (22m 15s):

Yeah. Yeah. So back to supply chain real quick, I want to hit this up. It seems like we are having big issues with supply chains, because we have a lot of workers who would immigrate to this country to be able to fill all many of those gaps in the supply chain, either driving trucks or are working on docks or what have you. And they stayed home with their family during the pandemic. So this has been, again, one of the points that I think we miss is that we don't have as large of a workforce as we normally do, because they stayed home. Now, do you believe that is one of the major impacts and if it is, how long do you think it will last?


Suresh (22m 58s):

So you're talking particularly because like, we don't have the same level of immigration that we did?


Chad (23m 4s):

Yeah.


Suresh (23m 4s):

That is probably definitely contributing to some of the shortages in agriculture I would imagine in particular. But you know, another side of this is that I think we had like over a million retirements, during COVID.


Chad (23m 16s):

Yes.


Suresh (23m 17s):

And so just people were just like, I'm checking out early. Like people that might've planned to work a bit longer, like I'm done and like retired.


Chad (23m 26s):

Screw this.


Suresh (23m 26s):

And so it's interesting actually like, you know, this is a grim stat, but like the social security trustees, you think okay all of the mortality from COVID should have made the social security look more money in the social security trust fund, because it's so many elderly people died, but it turns out because enough people like retired that's roughly even.


Chad (23m 49s):

Set off the balance.


Suresh (23m 50s):

Yeah.


Chad (23m 50s):

I get ya. Okay.


Suresh (23m 51s):

And so then I, so I think that's another component of the labor force shortage is just a lot of people were like, I'm done and retired. And, and so you can think about immigration was one of these margins. Retirement is another one, another one is the schools and the disaster of like, not having reliable childcare has kind of induced a lot of like women in particular to withdraw from the labor market.


Chad (24m 9s):

Yeah.


Suresh (24m 10s):

So I think it's, and you know, I think there's a lot of people that are just like scared of getting sick still for whatever reason and are like averse to coming back to the labor market for that reason.


Chad (24m 24s):

Right.


Joel (24m 24s):

We're in an election year as I'm sure you know.


Suresh (24m 29s):

Yep.


Joel (24m 29s):

And it should be interesting to say the least, I'm wondering what your take is on the election. Any predictions there? I saw something today said really, no, one's happy with Biden. No, one's really happy with Trump re Trump, if you will, for 2024. How do you see 2022? And particularly from a historical perspective, when we see times of great inflation, what happens politically?


Suresh (24m 52s):

So it's bad news for the party that's kind of blamed for the inflation, I think generally, but it's also, you know, in the historical thing, it's like the party of the president gets wiped out in the midterms is kind of like a reasonably stable, I think pattern. And so there's probably like given the margins of the Democrat majority in the house, that's like it will be shocking if they kept it. You know, I think all similarly in the Senate. So those are like, my that's kind of like my midterm projections is a combination of the inflation and just kind of this homeostatic reaction to the presidential party, you know, there's probably going to be, he's probably going to be governing a lot more with executive orders after next year.


Chad (25m 37s):

I would agree.


Suresh (25m 38s):

Which is really too bad, because like, you could, you could imagine a different world in which like a Joe Manchin and Sinema like were got with the program and you were expanding, you know, you were using government to expand the supply of everything enough to like make a dent in this inflation and really kind of deliver like lots of great paying jobs and stuff. But, but it doesn't look like that's going to happen. And that's why.


Chad (26m 6s):

I think it's important, you know, that we as Americans continue to have these discussions around it, not just being one points, you know, this is there several layers that actually impact inflation, impact, wages, pricing, all of that, because it seems like we were getting a bunch of smoke and mirrors. Which is one of the reasons why we have guys like you on. That's Suresh Naidu, economist, professor extraordinary now over at the Columbia University, man, we appreciate you once again, taking the time if somebody wants to connect with you?


Suresh (26m 44s):

Yeah. Yeah. You can find me on Twitter at SnaiduNL. The NL stands for Newfoundland. And, or does that mean just to be emailed SN2430@columbia.edu.


Joel (26m 56s):

Thanks, Suresh.


Chad (26m 57s):

Excellent, man. Thanks you so much.


Suresh (27m 2s):

Thank you guys.


Joel (27m 3s):

I feel so much smarter Chad.


Chad and Joel (27m 5s):

We out.


OUTRO (27m 2s):

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OUTRO (27m 49s):

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