♪♪ ♪♪ ♪♪ >>> WELCOME TO "DIALOGUE," A DISCUSSION SERIES PRODUCED BY WOSU PUBLIC MEDIA AND OSU'S JOHN GLENN COLLEGE OF PUBLIC AFFAIRS.

I'M TREVOR BROWN, DEAN OF THE GLENN COLLEGE.

AMERICA'S RATE OF INFLATION HAS HIT ITS HIGHEST LEVEL IN MORE THAN 30 YEARS.

HEATING COSTS, FOR ONE, ROSE SHARPLY OVER LAST YEAR.

EXPERTS BLAME SUPPLY CHAIN DISRUPTIONS, RISING WAGES, AND GOVERNMENT STIMULUS CHECKS FOR THE TREND.

THIS "DIALOGUE" DISCUSSION WILL TRY TO GET TO THE BOTTOM OF THIS RISING TREND, PREDICT WHAT LIES AHEAD, AND LOOK AT WHAT, IF ANYTHING, POLICY MAKERS CAN DO ABOUT IT.

JOINING US TODAY ARE NED HILL, PROFESSOR OF ECONOMIC DEVELOPMENT AT OHIO STATE'S GLENN COLLEGE, AND DR. ROBERT RICH, SENIOR ECONOMIC AND POLICY ADVISOR FOR THE FEDERAL RESERVE BANK OF CLEVELAND.

WELCOME TO THE BOTH OF YOU.

WELL, LET'S START BY A LITTLE BIT OF A DIFFERENT TWIST HERE IN "DIALOGUE."

NORMALLY WE JUMP RIGHT INTO CONVERSATION.

BUT THIS IS SUCH A COMPLEX AND INTERCONNECTED TOPIC.

WE THOUGHT WE'D START WITH A LITTLE "BACK TO SCHOOL" LESSON.

A LITTLE ECON 101.

MAYBE EVEN ECON 201.

I'M GONNA TURN IT OVER TO ROB, WHO'S GONNA GIVE US A LITTLE BIT OF A SORT OF TABLE-SETTING ABOUT WHAT IS INFLATION, WHAT ARE ITS COMPONENTS, AND HOW WE MEASURE IT.

SO ROB, I WANT TO START BY TURNING IT TO YOU AND ASKING YOU THAT BASIC QUESTION.

WHAT IS INFLATION?

>> WELL, TREVOR, FIRST OF ALL, THANK YOU FOR THE INVITATION TO SPEAK HERE TODAY.

I THINK THE -- AND THE OPPORTUNITY TO BE HERE.

I THINK THE BEST WAY TO THINK ABOUT WHAT INFLATION IS IS TO REALLY THINK ABOUT INFLATION BEING AN OVERALL INCREASE IN THE GENERAL PRICE LEVEL OF GOODS AND SERVICES IN AN ECONOMY.

NOW, WHAT -- I THINK IT'S IMPORTANT TO EMPHASIZE WHAT INFLATION IS NOT -- IS IT'S NOT REALLY THE INCREASE IN A SINGLE GOOD OR SERVICE.

AND I THINK A LOT OF PEOPLE, WHILE THEY MIGHT SEE GAS PRICES AND FOOD PRICES RISING, MIGHT SAY THAT THAT'S INFLATION.

BUT IT REALLY ISN'T.

WHEN WE THINK ABOUT INFLATION, WHAT WE'RE REALLY THINKING ABOUT IS SORT OF A MARKET BASKET OF GOODS AND SERVICES.

AND WE'RE THINKING ABOUT, IN GENERAL, THE PRICES OF THOSE ITEMS RISING AND CONTINUING TO RISE ON A SUSTAINED BASIS.

SO REALLY, IT'S AN ONGOING INCREASE IN THE OVERALL GENERAL PRICE LEVEL.

IT REALLY SHOULDN'T BE ASSOCIATED WITH A PARTICULAR ITEM.

>> SO I KNOW YOU'VE GOT SOME CHARTS AND FIGURES TO SHOW US.

I'M HAPPY TO TURN IT OVER TO YOU TO GIVE US A LITTLE WALKTHROUGH, A BIGGER KIND OF AN OVERVIEW OF THE CONTEXT WE'RE IN RIGHT NOW.

>> SURE.

I'D BE HAPPY TO DO THAT.

SO I'LL ASK TO HAVE MY PRESENTATION BROUGHT UP.

AND I WANT TO BEGIN BY, FIRST OF ALL, NOTING THAT THE USUAL DISCLAIMER APPLIES, WHICH IS THAT THE VIEWS EXPRESSED HEREIN ARE SOLELY MY OWN AND DO NOT NECESSARILY REFLECT THE OFFICIAL VIEWS OF THE FEDERAL RESERVE BANK OF CLEVELAND OR THE FEDERAL RESERVE SYSTEM.

ALL RIGHT, SO I THOUGHT THAT FOR THIS STARTING POINT, I THOUGHT PERHAPS THE BEST THING TO DO WOULD JUST BE GIVE A LITTLE CONTEXT AND BACKGROUND IN TERMS OF WHERE INFLATION IN THE U.S. HAS BEEN OVER THE LAST 60 YEARS.

AND SO WHAT I'VE PUT UP HERE FOR YOU IS ESSENTIALLY TWO DIFFERENT MEASURES OF HOUSEHOLD INFLATION, ESSENTIALLY WHAT THE COST TO A HOUSEHOLD OF PURCHASING A MARKET BASKET OF GOODS AND SERVICES HAPPENS TO BE.

AND I'VE USED TWO VERY WELL KNOWN MEASURES OF HOUSEHOLD INFLATION -- THE CONSUMER PRICE INDEX AND THE PERSONAL CONSUMPTION EXPENDITURES, OR PCE, PRICE INDEX, TO MEASURE THIS INFLATION.

AND I THINK WHAT IS IMPORTANT IT THAT, WHILE THERE IS SOME DIFFERENCES BETWEEN THESE TWO MEASURES, THEY'RE GENERALLY GONNA TELL THE SAME STORY.

SO JUST AS BACKGROUND TO THIS, I JUST WANT YOU TO SORT OF LOOK AT WHERE INFLATION HAS BEEN OVER THE LAST 60 YEARS.

IF YOU START SORT OF IN THE '60s, YOU CAN SEE THAT THERE WAS THIS BEGINNING OF THE RISE AND ACCELERATION, INFLATION TOWARDS THE LATE '60s.

AND THEN YOU CAN SEE THE HIGH INFLATION DECADE OF THE '70s.

YOU CAN SEE THE TWO NOTABLE PRICE, OR INFLATION, SPIKES THAT TOOK PLACE WITH SORT OF FOOD AND ENERGY PRICE SHOCKS AROUND '73 AS WELL AS AROUND '79.

THEN YOU CAN SEE THE VOLCKER DISINFLATION TAKING PLACE IN THE EARLY '80s.

AND THEN YOU CAN SEE, GENERALLY, INFLATION MOVING DOWN INTO SORT OF THE FOUR OR THE FIVE RANGE.

AND THEN WHAT I'D REALLY LIKE TO DRAW YOUR ATTENTION TO AS YOU CONTINUE TO LOOK THROUGH TIME HERE IS STARTING AROUND 1992, TO NOTICE THAT WHEN WE START LOOKING AT INFLATION HERE, THERE'S SORT OF TWO NOTICEABLE FEATURES THAT BECOME APPARENT.

THE FIRST IS THIS SORT OF THIS DOWNWARD SHIFT IN THE LEVEL OF INFLATION, AS WELL THE FACT THAT IT'S BECOME MUCH MORE STABLE AND LESS VOLATILE.

AND WE CONTINUE TO SEE THAT, AND I ACTUALLY HOPE AT THE END OF PRESENTATION TO PROVIDE SOME EXPLANATION FOR WHY THAT DEVELOPMENT TOOK PLACE.

AND THEN AS WE CONTINUE TO SEE INFLATION, WE SORT OF SEE IT, AGAIN, STAY RELATIVELY STABLE.

WE SEE, OF COURSE, SOME DECLINES AND DEFLATION THAT TOOK PLACE AFTER THE GLOBAL FINANCIAL CRISIS.

AND THEN AS WE MOVE INTO SORT OF, YOU KNOW, PAST THE GLOBAL FINANCIAL CRISIS, IF ANYTHING, WE'RE SEEING INFLATION BELOW THE FED'S 2% OBJECTIVE FOR INFLATION.

AND THEN, AT THE VERY END, WHICH IS SORT OF WHERE THE CENTRAL DISCUSSION IS GOING TO BE TODAY, WE SEE THIS NOTABLE RISE THAT HAS TAKEN PLACE IN INFLATION.

AND WE KNOW THAT THE PANDEMIC HAS SORT OF BEEN THE CENTRAL FORCE BEHIND THIS.

AND AT THE VERY BEGINNING OF THE PANDEMIC, THERE WAS ACTUALLY A SLOWDOWN IN INFLATION.

AND NOW DURING THE COURSE OF ABOUT THE LAST YEAR, THERE'S BEEN THIS NOTABLE INCREASE THAT'S TAKEN PLACE.

SO IF YOU GO TO THE NEXT SLIDE, PLEASE.

I THINK ONE OF THE MOST IMPORTANT FACTORS TO HELP UNDERSTAND WHAT'S GOING ON WITH INFLATION IS TO UNDERSTAND THAT THERE'S JUST BEEN A SIGNIFICANT SHIFT IN THE COMPOSITION OF CONSUMER SPENDING THAT'S TAKEN PLACE DURING THE PANDEMIC.

SO WHAT I'VE PUT UP HERE FOR YOU IS TO BASICALLY SHOW THAT YOU CAN BASICALLY DECOMPOSE CONSUMER SPENDING INTO SPENDING ON GOODS AND SERVICES.

AND BY GOODS, I MEAN THINGS LIKE CARS, LIKE NEW CARS, USED CARS.

ALSO APPAREL, FURNITURE, ELECTRONICS.

AND THEN THERE'S ALSO SPENDING ON SERVICES, LIKE SHELTER, MEDICAL CARE.

OTHER EXAMPLES WOULD BE HOTEL -- YOU KNOW, HOTELS OR AIRFARES.

AND WHAT YOU CAN SEE HERE IS THAT THIS SPENDING HAS BEEN ADJUSTED FOR INFLATION.

YOU CAN SEE THAT WHEN THE PANDEMIC HIT, WE SAW BOTH SERVICES AND GOODS SPENDING DECLINE.

BUT THEN VERY QUICKLY AFTERWARDS, WE SAW GOODS SPENDING ACTUALLY REBOUND.

AND IN FACT, BY JUNE OF 2020, IT ACTUALLY WAS EXCEEDING ITS PRE-PANDEMIC LEVELS.

ON THE OTHER HAND, SERVICES SPENDING, WHILE IT'S BEGINNING HAS SORT OF RISEN FROM THE DEPTHS FROM WHERE IT WAS FROM THE PANDEMIC, HASN'T EVEN GONE BACK TO WHERE IT WAS PREVIOUSLY.

AND THERE'S AN EXPLANATION FOR THIS, WHICH IS THAT THIS ROTATION OF SPENDING AWAY FROM SERVICES TO GOODS IS SORT OF A NATURAL CONSEQUENCE OF THE LOCKDOWNS AND THE SOCIAL DISTANCING MEASURES THAT TOOK PLACE.

SO AGAIN, IT'S VERY CRITICAL HERE TO UNDERSTAND THAT, IN TERMS OF CONSUMER SPENDING, IT'S VERY IMPORTANT TO THINK ABOUT THIS ROTATION AWAY FROM SERVICES TOWARDS GOODS.

SO IF YOU GO TO THE NEXT SLIDE.

THIS IS REALLY NOW TRYING TO GET AT WHERE AND WHAT'S GOING ON WITH THE CURRENT RATE OF INFLATION.

AND I THINK THAT WHAT THIS CHART IS TRYING TO DO IS IT'S LOOKING AT CPI INFLATION, AND THEN IT'S DECOMPOSING IT INTO THESE TWO COMPONENTS THAT I TALKED ABOUT -- GOODS INFLATION AND SERVICES INFLATION.

AND WHAT I WILL SUGGEST TO YOU IS THAT THAT ELEVATED READING OF CPI INFLATION THAT WE'RE SEEING IS LARGELY A CONSEQUENCE OF GOODS INFLATION.

AND REALLY, WHAT'S GOING ON HERE IS ESSENTIALLY AN IMBALANCE BETWEEN DEMAND AND SUPPLY.

SO AS BACKGROUND, WHAT WE SHOULD REMEMBER IS DEMAND RIGHT NOW IS VERY STRONG.

DEMAND IN THE ECONOMY IS GROWING VERY, VERY STRONG, AND THAT'S A CONSEQUENCE OF THE VERY GENEROUS FISCAL SUPPORT THAT HAD BEEN PUT IN PLACE DURING THE PANDEMIC.

VERY ACCOMMODATIVE MONETARY POLICY.

SO WE HAVE VERY STRONG AGGREGATE DEMAND TAKING PLACE.

AND AGAIN, THIS ROTATION WITHIN AGGREGATE DEMAND TOWARDS GOODS AND AWAY FROM SERVICES.

BUT WE ALSO KNOW THAT THERE'S ANOTHER IMPORTANT CONSIDERATION, WHICH IS WE KNOW THAT ON THE SUPPLY SIDE THAT THERE HAVE BEEN CONSTRAINTS THAT HAVE TAKEN PLACE AS A CONSEQUENCE OF GLOBAL SUPPLY CHAIN DISRUPTIONS AS WELL AS BOTTLENECKS.

BUT MOST IMPORTANTLY, THOSE DISRUPTIONS ARE TAKING PLACE IN THE GOODS SECTOR.

SO WHAT WE NOW HAVE IS VERY STRONG AGGREGATE DEMAND.

WE HAVE A ROTATION FROM SERVICES INTO GOODS.

AND THEN WE HAVE SUPPLY CONSTRAINTS TAKING PLACE IN THE GOODS SECTOR.

AND SO WHAT YOU SEE THEN IS THIS VERY NOTICEABLE AND MARKED ACCELERATION THAT'S TAKING PLACE IN GOODS INFLATION, AND THE CURRENT HIGH INFLATION READINGS THAT WE SEE ARE PRINCIPALLY BEING DRIVEN BY GOODS INFLATION.

NOW, IT IS TRUE THAT SERVICES INFLATION HAS SORT OF FIRMED A LITTLE BIT, BUT IT'S NOT NEARLY THE KEY DRIVING FORCE IN TERMS OF WHAT WE'RE SEEING IN TERMS OF CURRENT INFLATION READINGS.

SO AGAIN, THE CRITICAL FACTOR HERE TO THINK ABOUT IS A LOT OF WHAT WE'RE SEEING IN TERMS OF THE HIGH INFLATION READINGS RIGHT NOW IS COMING FROM, ESSENTIALLY, THE GOODS SECTOR.

OKAY.

GO TO THE NEXT SLIDE, PLEASE.

SO WHERE DOES THAT LEAVE US?

AND SO, YOU KNOW, THESE HIGH INFLATION READINGS WERE INITIALLY BEING DRIVEN BY JUST A FEW COMPONENTS.

YOU PROBABLY HAVE HEARD ABOUT USED CARS AND NEW CARS BEING THE PRINCIPAL SOURCE FOR IT.

BUT WHAT WE'VE ACTUALLY SEEN HAPPEN WITH INFLATION IS WE'VE ACTUALLY SEEN NOW THAT THE PRICE PRESSURES ARE SORT OF MORE BROAD BASED THAN THEY WERE BEFORE.

ALSO, WE WERE ANTICIPATING THAT IN SOME SENSE THE HIGH INFLATION RATES WERE GOING TO DISSIPATE MORE QUICKLY THAN THEY HAVE.

AND THEY HAVEN'T.

SO WE HAVE SEEN A MORE BROAD BASED INCREASE IN TERMS OF INFLATION.

IT'S ALSO TENDED TO LAST MORE LONGER THAN WE EXPECTED.

AND SO ALL OF THIS HAS RAISED CONCERNS ABOUT, YOU KNOW, INFLATION GOING FORWARD.

THERE PROBABLY HAVE BEEN DISCUSSIONS YOU'VE HEARD ABOUT SORT OF A RETURN TO THE 1970s.

IS THERE A WAY TO PRICE SPIRAL?

AND SO WHAT I'D LIKE TO SORT OF FINISH OFF WITH IN TERMS OF THESE PARTICULAR SLIDES IS TO SHOW YOU THAT ONE OF THE KEY INDICATORS THAT WILL BE VERY IMPORTANT TO MONITOR ARE LONG-TERM INFLATION EXPECTATIONS.

AND WHAT I'VE PLOTTED HERE AGAIN IS TOTAL CPI.

I'VE ALSO PLOTTED CORE CPI INFLATION.

THAT'S CPI INFLATION THAT TAKES OUT FOOD AND ENERGY PRICES.

AND YOU CAN THINK OF CORE CPI INFLATION HERE AS TRYING TO GET A PROXY FOR THE UNDERLYING RATE OF INFLATION.

AND THEN I'VE ALSO PUT IN TEN-YEAR CPI EXPECTATIONS FOR THE U.S. SURVEY OF PROFESSIONAL FORECASTERS.

AND WHAT I REALLY WANT TO NOTE IS THAT LONG-TERM INFLATION EXPECTATIONS ARE REALLY IMPORTANT FOR HAVING AN INFLUENCE ON INFLATION.

THERE VERY IMPORTANT FOR SORT OF WAGE AND PRICE SETTING DECISIONS.

THEY'RE ALSO VERY IMPORTANT FOR SORT OF SAVINGS AND INVESTMENT DECISIONS IN THE ECONOMY.

WHERE INVESTMENT HERE IS AND FINANCIAL INVESTMENT.

IT REALLY IS MORE THINKING ABOUT CAPITAL EXPENDITURE.

AND SO MY CLOSING POINT ABOUT THE ROLE OF INFLATION EXPECTATIONS IS WHEN YOU LOOK AT THIS CHART, I WANT YOU TO BASICALLY THINK OF THERE BEING AN IMAGINARY LINE AROUND 1992.

AND I WANT YOU TO LOOK AT THE BEHAVIOR OF LONG-TERM INFLATION EXPECTATIONS PRIOR TO 1992 AND AFTER 1992.

AND WHAT YOU CAN SEE HERE IS THAT PRIOR TO 1992, YOU CAN SORT OF SEE LONG-TERM INFLATION EXPECTATIONS STEADILY RISING AND THEN FALLING.

AND ASSOCIATED WITH THAT, WHAT YOU ESSENTIALLY SEE ARE HEADLINE INFLATION READINGS BEING PASSED INTO CORE INFLATION.

SO CORE IS FOLLOWING HEADLINE AS INFLATION EXPECTATIONS ARE SORT OF RISING.

AND THEN, AS INFLATION EXPECTATIONS ARE COMING DOWN, THEN AGAIN YOU SEE HEADLINE BEING PASSED INTO CORE AND YOU SEE A DECLINE IN CORE TAKING PLACE.

AFTER 1992, HOWEVER, WHAT YOU SEE IS THIS REMARKABLE STABILITY OF LONG- TERM INFLATION EXPECTATIONS.

AND WHAT I WANT TO DRAW YOUR ATTENTION TO NOW IS THAT WHEN YOU SEE THE BLUE LINE SORT OF MOVING UP AND DOWN A LOT, YOU DON'T SEE THAT RED LINE MOVING WITH IT.

AND ESSENTIALLY WHAT THAT MEANS IS THAT HEADLINE INFLATION IS NOT BEING PASSED INTO CORE.

AND SO WHAT THIS IS REALLY TRYING TO GET AT IS THE KEY ROLE THAT LONG- TERM INFLATION EXPECTATIONS HAVE IN TERMS OF INFLUENCING THE BEHAVIOR OF INFLATION AND HOW CERTAIN RELATIVE PRICE CHANGES OR SHOCKS THAT HIT THE ECONOMY, WHETHER THEY'RE GOING TO BE PASSED INTO SORT OF UNDERLYING INFLATION.

AND SO ONE OF THE KEY THINGS THAT WE'LL BE MONITORING GOING FORWARD IS WHETHER IN FACT LONG-TERM INFLATION EXPECTATIONS WILL REMAIN WHAT THEY CALL "WELL ANCHORED."

THAT IS, RELATIVELY STABLE.

OKAY?

LET ME THEN JUST FINISH UP WITH A LITTLE BIT OF SELF-PROMOTION BEFORE I TURN IT OVER TO NED.

AT THE CLEVELAND FED, WE HAVE AN INITIATIVE THAT WE STARTED IN DECEMBER OF 2018.

IT'S CALLED THE CENTER FOR INFLATION RESEARCH.

I WOULD VERY MUCH LIKE TO ENCOURAGE ALL THE VIEWERS HERE TO GO TO THE CENTER FOR INFLATION RESEARCH.

WE HAVE A WEBSITE.

AND IN PARTICULAR, WE HAVE A SECTION IN THERE CALLED "INFLATION 101" WHICH DISCUSSES MANY OF THE THINGS THAT I WAS TALKING ABOUT HERE TODAY AND WILL HOPEFULLY PROVIDE ADDITIONAL INFORMATION TO YOU IN TERMS OF THE CURRENT BEHAVIOR OF INFLATION.

SO I THINK WITH THAT I'LL STOP.

THANK YOU FOR YOUR ATTENTION.

AND I HOPE THAT THIS PRESENTATION AT LEAST HELPED CLARIFY SOME OF THE ISSUES THAT ARE GOING ON IN TERMS OF THE CURRENT INFLATION ENVIRONMENT.

THANK YOU AGAIN.

>> THANKS, ROB.

AND FOR THOSE OF YOU THAT WEREN'T ABLE TO SEE THE SLIDES, WE WILL MAKE THOSE AVAILABLE TO YOU ONLINE AFTERWARDS.

A LOT OF GREAT INFORMATION IN THERE.

AND ROB, THANK YOU FOR THAT TOUR THROUGH THEM.

NED, I WANT TO BRING YOU INTO THE CONVERSATION.

AND WE'LL UNPACK MANY OF THE THINGS THAT ROB SHARED THERE IN A MINUTE.

BUT WE READ A LOT ABOUT INFLATION RIGHT NOW, AND IT'S PRESENTED IN THE MEDIA AS A VERY SCARY THING.

IS INFLATION INHERENTLY BAD OR GOOD?

AND I GUESS ONE WAY TO THINK ABOUT THAT IS, WHAT IS THE IMPACT THAT BOTH INDIVIDUALS AND FIRMS ARE FEELING WITH RISING PRICES?

>> WELL, THAT'S A NICE, SHORT QUESTION.

THANKS FOR TEEING UP, TREVOR.

[ LAUGHTER ] THAT'S WONDERFUL.

FIRST I WANT TO SAY, ROB, THANK YOU VERY MUCH.

THAT WAS JUST A TERRIFIC SUMMERY OF WHAT'S TAKEN PLACE.

AND I THINK HE REALLY GOT THE COMPLEXITY ACROSS IN A VERY STRAIGHTFORWARD WAY.

SO BOTH THANK YOU AND CONGRATULATIONS.

TREVOR, THE QUESTION, "IS INFLATION SCARY?"

WELL, THERE ARE TWO PARTS TO WHAT ROB TALKED ABOUT.

ONE IS THE ROLE OF PRICING MECHANISMS TO ALLOCATE SCARCITY.

AND WITH WHAT'S HAPPENING IN THE GOODS SECTORS, AND WE CAN SEE THIS, IS THAT YOU'LL SEE THAT CONSUMERS -- BECAUSE OF THE WAY THE STIMULUS TOOK PLACE, HIGH INCOME CONSUMERS HAVE LOTS OF SPENDING -- DISPOSABLE INCOME FOR SPENDING.

AND SO YOU ENDED UP WITH SHORTAGES IN THINGS LIKE LUMBER, AND STEEL GOT LESS IN DEMAND.

WE ALSO HAD A SERIES OF SUPPLY-SIDE CONSTRAINTS, WHICH IS A NICE WAY OF SAYING SCREW-UPS, THAT HAPPENED TO THINGS SUCH AS -- WE HAD BARK BEETLES BREAK OUT IN BRITISH COLUMBIA THAT CAUSED SHORTAGES IN LUMBER.

YOU HAD COVID SHUTTING DOWN CHIP PLANTS IN TAIWAN AND IN KOREA.

YOU HAD SUPPLY CHAIN SHUTDOWN BECAUSE OF VERY DRACONIAN COVID MANAGEMENT IN CHINA.

ALL THAT ENDED UP AFFECTING THE SUPPLY OF GOODS.

AND SO THE END RESULT WAS PRICES WENT UP TO ALLOCATE SCARCITY.

ABOUT ONE-THIRD OF CPI IS TIED UP IN HOUSING.

AND WE SEE THAT A LOT OF THE PRICE INCREASES THAT INCREASE THAT GENERAL BASKET THAT ROB TALKED ABOUT WAS WITH ENERGY.

SO I THINK THAT WHAT YOUR AUDIENCE, OR OUR AUDIENCE, IS GOING TO BE LOOKING FOR ARE SAYING, "WHO IS THE BOOGEYMAN?

WHO IS THE BAD GUY HERE?"

AND I THINK IT'S GOING TO BE VERY HARD TO FIND ONE.

WE SAW THAT THE PACKAGE OF STIMULUS, THE 2 TRANCHES TOGETHER WERE 900 BILLION IN THE FIRST FIRST TRANCHE OF STIMULUS, 1.9 TRILLION IN THE SECOND.

I SAW LARRY SUMMERS CALCULATED THAT'S 13% OF GDP, WHICH WAS MORE THAN THE GAP BETWEEN ACTUAL GDP DOWN HERE AND POTENTIAL UP HERE.

SO I THINK THAT WHAT THE FED IS GOING TO BE DEALING WITH -- AND AGAIN, I'M NOT SPEAKING FOR THEM, AND NEITHER IS ROB -- IS THEY ARE GOING TO START TRYING TO THROTTLE BACK SOME OF THAT DEMAND.

WHAT COMPANIES ARE DOING RIGHT NOW IS THEY'VE JUST BEEN BATTLING SHORTAGES.

IN OHIO, WE'RE IN AND OUT OF -- I ALSO WORK WITH THE OHIO MANUFACTURING INSTITUTE.

WE'RE IN AND OUT OF PLANTS FREQUENTLY.

WE TALK TO THEM FREQUENTLY.

AND THERE ARE TWO THINGS THAT YOU KEEP ON HEARING.

AND THIS IS WHERE IT'S GOING TO START BLEEDING INTO THE SERVICES SIDE.

WE'RE FINDING LABOR SHORTAGES.

AND THOSE LABOR SHORTAGES ARE BECAUSE ARE LOOKING FOR HIGHER -- PARTICULARLY LOWER SKILLED WORKERS ARE NOW -- HAVE AN OPPORTUNITY TO GET $18 TO 20 AN HOUR, AND THEY'RE LOOKING FOR IT, AND THEY'RE LOOKING FOR BETTER WORKING CONDITIONS.

OTHER PEOPLE AREN'T IN THE LABOR MARKET BECAUSE OF COVID.

THIS IS PARTICULARLY TRUE WITH WOMEN.

THEY'RE DOING HOME CARE.

THEY'RE HOMESCHOOLING.

THEY TEND TO BE THE PRIMARY CHILDCARE GIVER.

WE'VE SEEN THE COLLAPSE OF CHILDCARE.

SO YOU'VE GOT STRUCTURAL ISSUES AROUND THERE.

GOING FORWARD, I THINK THAT WHAT YOU'RE SEEING IS A LOT OF COMPANIES ARE JUST VERY UNCERTAIN AS TO WHAT THE FUTURE BRINGS WHEN IT COMES TO PRICES.

AND THEY ARE ALSO NOT CERTAIN THAT THE SHOCKS THAT THEY'VE RECEIVED THROUGH THEIR SUPPLY CHAINS ARE OVER AND DONE WITH.

SO TWO OTHER AREAS I JUST WANT TO TALK ABOUT BRIEFLY.

THEY FIRST IS BECAUSE OF THIS LARGE INCREASE IN GOODS PRODUCTIONS.

THAT ACTUALLY -- I'M SORRY, GOODS DEMAND.

THAT TRIGGERED A LARGE DEMAND FOR IMPORTS, AND THAT KIND OF SWAMPED THE PORTS.

COUPLED WITH A LOT OF TECHNICAL THINGS, WHICH IS INDUSTRY IS REALLY RATCHETED DOWN PREPARING FOR A BROAD-BASED DROP IN DEMANDS AND WERE SHOCKED BY HIGH INCOME SPENDING.

SO GOING FORWARD, I THINK WHAT YOU'RE GOING TO SEE IS COMPANIES ARE GOING TO BE VERY CAREFUL ABOUT WHAT THEY PRODUCE.

THE SECOND THING, WHICH IS KIND OF OFF TO THE SIDES OF MARKET A LITTLE BIT, IS OIL AND GAS PRICES AND THE COST OF HEATING FUEL.

WE DID SEE DOMESTIC PRODUCTION OF GAS AND OIL RATCHET DOWN IN EXPECTATION.

THERE'S GOING TO BE A BROAD-BASED RECESSION.

AND THEY GUESSED WRONG.

THEY GUESSED, AND THEY GUESSED WRONG.

BUT MORE IMPORTANTLY, WE DID SEE RUSSIA AND OPEC COLLABORATE TOGETHER TO MAKE CERTAIN THEY GOT HIGHER PRICES OUT OF ALL THIS.

I DANCED AROUND A LOT, TREVOR.

I HOPE THAT I ANSWERED EXACTLY WHAT YOU WANTED.

AND IF NOT, TRY AGAIN.

>> YOU'VE CERTAINLY BOTH ANSWERED LOTS OF QUESTIONS.

SO LET ME UNPACK A COUPLE OF THOSE.

AND I'LL TURN BACK TO YOU, ROB.

SO YOU NOTED THAT EXPECTATIONS AROUND INFLATION POST-'92 HAVE BEEN DECLINING.

AND YET, IN THE CONVERSATIONS THAT WE HEAR IN THE MEDIA AND AMONG POLICY MAKERS, THERE'S ALWAYS BEEN THIS FEAR OF THE RETURN OF INFLATION AS WE'VE INJECTED MORE STIMULUS INTO THE ECONOMY AT VARIOUS TIMES.

AND PERHAPS MOST NOTABLY IN 2008 AND 2009 AFTER THE FINANCIAL CRISIS, THERE WAS A STIMULUS THAT WENT INTO THE ECONOMY AT THAT POINT.

AND PEOPLE EXPECTED, OR SOME EXPECTED, INFLATION TO RETURN.

BUT IT DIDN'T.

AND NOW, THIS TIME, IT HAS.

WHAT'S -- HELP US UNDERSTAND WHY, IN THIS MOMENT, INFLATION AND OUR EXPECTATIONS ABOUT FUTURE INFLATION HAVE RETURNED.

>> THAT'S A GREAT QUESTION.

SO I THINK THE WAY THAT I WOULD THINK ABOUT IT IS THAT WE -- YOU KNOW, WHEN YOU START TO SEE RISING PRICES AND HIGHER INFLATION, I THINK THERE'S A COUPLE THINGS THAT ARE GOING ON.

THERE IS A GENERATION RIGHT NOW THAT HAS NEVER DEALT WITH HIGH INFLATION.

WHEREAS THERE'S A GENERATION FROM MY TIME THAT ACTUALLY, YOU KNOW, FOR WHICH THE '70s IS NOT THAT DISTANT.

I THINK THAT THE FACT THAT IT HAPPENED SO QUICKLY AND THE FACT THAT PRICES WERE RISING -- I MEAN, THIS IS A NEW PHENOMENON, I THINK, FOR A LARGE SEGMENT OF THE POPULATION.

AND AS A CONSEQUENCE OF THAT, THIS IS JUST NOT SOMETHING THEY'RE ACCUSTOMED TO.

AND I ALSO THINK, TOO, THAT THE HIGHER -- IT'S VERY LIKELY -- THERE ARE A LOT OF INDIVIDUALS THAT WILL REACT TO SORT OF, YOU KNOW, INCREASES IN PRICE AND GASOLINE AND WILL TEND TO SORT OF THINK ABOUT THOSE INFLUENCING THEIR PARTICULAR BEHAVIOR.

SO, YOU KNOW, THE HIGH INFLATION READINGS THAT WE'RE SEEING IS VERY CLEAR.

WHILE PEOPLE EXPECTED TO SEE HIGHER INFLATION COMING OUT OF THE GLOBAL FINANCIAL CRISIS, WE DIDN'T SEE IT.

SO EVEN IF THEY WERE EXPECTING IT AND YOU DON'T SEE IT, IT COULD TURN OUT THAT THAT'S NOT REALLY GOING TO HAVE MUCH OF AN IMPACT.

WHEN YOU SUDDENLY START SEEING IT, THAT'S WHEN IT CAN REALLY INFLUENCE YOUR EXPECTATIONS.

SO I THINK THAT WHAT'S DIFFERENT RIGHT NOW IS THE FACT THAT THESE READINGS ARE IN FACT SHOWING UP AND THAT WHEN YOU START SEEING THEM, AND MORE IMPORTANTLY, WHEN THEY'VE BEEN SOMEWHAT LONGER THAN WE WERE EXPECTING THEM TO BE, I THINK ALL OF THAT THEN SORT OF CAUSES THESE CONCERNS.

AND THAT, AGAIN, RAISES THESE WORRIES ABOUT, "OH, MY GOSH, ARE WE GOING BACK TO THE '70s?

IS THERE A WAY TO PRICE SPIRAL?"

AND I WOULD, AT SOME POINT, BE MORE THAN HAPPY TO EXPLAIN WHY I DON'T THINK THAT HAPPENS TO BE THE CASE.

BUT I JUST WANTED TO SORT OF ANSWER YOUR INITIAL QUESTION.

BUT I DO UNDERSTAND, AND WE'RE WELL AWARE, THAT THERE ARE THESE CONCERNS THAT, YOU KNOW, IS THERE GOING TO BE SOME MECHANISM THAT IS GOING TO PROPAGATE AND SUSTAIN THESE HIGHER INFLATION MEETINGS?

WHICH, AGAIN, LEADS BACK TO THIS IDEA OF INFLATION EXPECTATIONS REMAINING WELL ANCHORED AND SORT OF ACTING TO MUTE THAT.

BUT WITH THAT, TREVOR, I'LL STOP AND LET YOU, YOU KNOW, ANSWER -- ASK ANOTHER QUESTION IF YOU'D LIKE TO.

>> GREAT.

AND I DEFINITELY DO.

AND TO THAT END, I WANT TO REMIND YOU, AS VIEWERS, THAT WE WELCOME YOUR QUESTIONS.

I KNOW THIS IS A COMPLEX, COMPLICATED TOPIC, BUT I KNOW MANY OF YOU ARE EXPERIENCING IT IN YOUR DAY-TO-DAY TO LIVES.

SO BY ALL MEANS, SHOOT US SOME QUESTIONS.

AND DIANA CAN LET ME KNOW WHEN THOSE ARRIVE.

I'LL PITCH THIS TO BOTH OF YOU.

YOU'VE -- ROB JUST STARTED TO MENTION THE POTENTIAL FEAR OR THE -- I SHOULDN'T SAY FEAR.

-- THE POSSIBILITY THAT THERE'S A WAGE PRICE SPIRAL.

EXPLAIN THAT TO US, THAT RELATIONSHIP BETWEEN RISING PRICES AND THE POTENTIAL FOR RISING WAGES.

>> WELL, SURE.

SO I THINK THE WAGE PRICE SPIRAL IS THE IDEA THAT, FOR EXAMPLE, THAT WORKERS, UPON SEEING HIGHER PRICES, ARE GOING TO DEMAND HIGHER WAGES.

THOSE HIGHER WAGES, THEN, FIRMS WILL RESPOND TO THAT BY ESSENTIALLY PASSING THOSE HIGHER WAGES INTO HIGHER PRICES, WHICH WILL THEN RESULT IN WORKERS THEN DEMANDING HIGHER WAGES AGAIN.

AND SO YOU END UP IN THIS CYCLE WERE YOU HAVE THIS ONGOING, SUSTAINED, SORT OF, ALMOST FEEDBACK TAKING PLACE BETWEEN WAGES AND PRICES.

AGAIN, THERE IS A FEAR OF THAT.

I DON'T THINK THAT THAT'S ACTUALLY GOING TO TAKE PLACE.

AND I THINK IT'S VERY IMPORTANT TO DISTINGUISH BETWEEN, YOU KNOW, WHAT WE'RE SEEING, WHICH IS, YOU KNOW -- ARE WE JUST GOING TO SEE AN ADJUSTMENT OF WAGES AND PRICES RIGHT NOW, AND THEN AFTER THAT, THE INCREASES ARE GOING TO BE SOMEWHAT MORE MUTED?

OR IS THERE GOING TO BE THIS ONGOING, SUSTAINED, LARGER INCREASE THAT WILL BE TAKING PLACE?

SO IT'S ALWAYS VERY DIFFICULT.

I'LL PERHAPS GIVE AN ANALOGY.

WE'RE KIND OF IN A FIRST INNING.

RIGHT?

AND SO YOU'RE IN THE FIRST INNING OF SOMETHING, AND WHETHER -- WHERE THINGS ARE GOING TO END UP IN THE FORTH OR THE FIFTH INNING IS SOMEWHAT - - YOU KNOW, YOU HAVE TO FORECAST THAT A LITTLE BIT.

BUT IN TERMS OF ACTUALLY HAVING A WAGE PRICE SPIRAL ALONG THE LINES I TALKED ABOUT, YOU NEED TO HAVE SOME SORT OF MECHANISM THAT IS GOING TO PROPAGATE THAT.

AND THAT'S WHERE, AGAIN, INFLATION EXPECTATIONS BECOMING UNANCHORED AND MOVING UP -- THAT'S REALLY GOING TO BE THE KEY THAT SORT OF WOULD BE RESPONSIBLE FOR THAT TYPE OF ACTION TO TAKE PLACE.

AGAIN, THE FACT THAT WE'RE SEEING WAGES RISING RIGHT NOW IS VERY MUCH TO WHAT NED'S POINT WAS.

I MEAN, WAGES ARE A PRICE.

THEY'RE A PRICE OF LABOR.

IF YOU HAVE SCARCITY -- AND, IN FACT, WE KNOW THAT LABOR FORCE PARTICIPATION DECLINED DURING THE PANDEMIC AND REALLY HASN'T COME BACK.

WAGES RISING IS EXACTLY HOW, IN A MARKET ECONOMY, YOU ALLOCATE LABOR EFFICIENTLY BETWEEN WORKERS AND FIRMS.

SO WAGES RISING BY THEMSELVES, IN SOME SENSE, IS VERY MUCH WHAT YOU WOULD EXPECT TO TAKE PLACE WHEN YOU HAVE AN IMBALANCE BETWEEN LABOR DEMAND AND LABOR SUPPLY.

SO THAT'S THE FIRST POINT, I THINK, THAT I JUST WANTED TO MAKE.

AND THE SECOND IS, YOU KNOW, THE WAGE PRICE SPIRAL -- I JUST DON'T THINK THAT WE'RE GOING TO SEE IT.

I JUST DON'T THINK THAT WE'VE BEEN IN A SUSTAINED ENOUGH ENVIRONMENT WERE EXPECTATIONS ARE MOVING TO SORT OF END UP GENERATING THAT SUSTAIN.

BUT WITH THAT, I'LL STOP.

I AM SURE THAT NED HAS MUCH MORE TO ADD TO THIS.

>> NED, ANYTHING YOU'D LIKE TO ADD?

>> YEAH, A COUPLE THINGS.

FIRST THING IS, THE INSTITUTIONAL ENVIRONMENT IS VERY DIFFERENT FROM THE '70s AND '80s TO TODAY.

IN THE '70s AND '80s, A MUCH LARGER FRACTION OF THE AMERICAN WORKFORCE WAS COVERED BY CONTRACTS, UNION CONTRACTS.

AND THOSE CONTRACTS HAVE, BUILT WITHIN THEM, COST OF LIVING ESCALATORS.

AND THAT RATCHETED AND MADE THIS ALMOST -- MADE THE WAGE PRICE SPIRAL VERY DIFFICULT TO BREAK AND REALLY LED TO THE DRACONIAN INCREASE -- OR HELPED STIMULATE OR CAUSE THAT HUGE INCREASE IN INTEREST RATES IN THE '80s TO BREAK THE BACK OF THE WAGE PRICE SPIRAL.

THAT INSTITUTIONAL MECHANISM DOESN'T EXIST RIGHT NOW.

THE SECOND POINT IS, I AM IN AGREEMENT WITH ROB.

IN MANY WAYS, THE INCREASE IN WAGES THAT WE ARE SEEING, THE DATA I'VE BEEN LOOKING AT, SHOWS IT'S MOSTLY IN THE LOWER END OF THE LABOR MARKET, SEMISKILLED WORKERS.

AND AMAZON MAY BE ACTUALLY CAUSING A LOT OF THIS BY INCREASING THE WAGES OF WAREHOUSE WORKERS.

AND IN MANY WAYS THAT'S A GOOD THING BECAUSE THE WAGES OF LOW SKILLED AMERICANS HAS BEEN CONSTANT OR ACTUALLY DECLINING FOR THE PAST 15 YEARS.

SO MARKET MECHANISMS ARE NEEDED.

BUT I THINK THAT A NUMBER OF LABOR ECONOMISTS ARE ALSO NOTICING SOME STRUCTURAL ISSUES WITH LABOR THAT IS GOING TO HAVE TO TAKE PLACE IN THE FUTURE.

THE SECOND REALLY BIG POINT IS THAT THE SUPPLY CHAIN PROBLEMS WHICH JUST -- "THEY WENT BLA-HOOEY," I THINK, IS THE TECHNICAL TERM.

THEY'RE GOING TO TAKE -- OH, MY GUESS IS UP TO TWO YEARS TO WORK OUT.

THE INTEL PLANT ANNOUNCEMENT IN OHIO IS AN EXAMPLE OF A PARTIAL RESPONSE TO THIS.

IT ISN'T JUST DEFENSE POLICY.

IT'S JUST INCREASED DEMAND FOR SENSORS AND INTEGRATED CIRCUITS.

THE CHALLENGE THAT IS TOUGHER FOR POLICY TO HANDLE IS THE INCREASE IN PRICES WHEN IT COMES TO FOOD.

BECAUSE A LOT OF THAT IS A REACTION TO A DROUGHT THAT WE HAD THIS SUMMER.

SO IT'S GOING TO TAKE SOME TIME TO WORK THIS OUT.

AND I THINK THAT THE FED IS GOING TO BE USING THEIR MONETARY POLICY, ONE, TO KIND OF THROTTLE BACK SOME OF THIS DEMAND AND START TO SIGNAL THAT -- THEY HAVE SIGNALED -- BUT ACTUALLY START INCREASING INTEREST RATES A LITTLE BIT.

WHICH, FOR THOSE PEOPLE THAT LIVE ON FIXED INCOMES, THAT WOULD BE WELCOME.

THEY HAVEN'T SEEN A RAISE IN A WHILE.

>> SO WE'LL GET TO -- YOU STARTED TO INTRODUCE SOME OF THE POLICY MECHANISMS, AND WE'LL GET INTO THAT CONVERSATION IN JUST MINUTE.

BUT DIANA, ANY QUESTIONS FROM THE AUDIENCE?

>> WELL, JUST GOING OFF BY WHAT HE JUST SAID, THERE'S A QUESTION FOR DR. RICH.

"ARE YOU EXPECTING A CONTINUATION OF THE LONG-TERM TREND OF LOW TO NEGATIVE REAL INTEREST RATES?"

>> SO IF THE QUESTION IS REALLY, "WHAT IS THE ANTICIPATED RESPONSE OF THE FED TO THE CURRENT ENVIRONMENT," I WOULD SAY THAT I THINK WE HAVE SIGNALED THAT WE ARE, IN FACT, GOING TO BE, AS NED HAD SUGGESTED -- THAT WE ARE GOING TO BE REDUCING THE AMOUNT OF MONETARY ACCOMMODATION IN THE ECONOMY.

AND I THINK THAT CHAIR POWELL, AS WELL AS MEMBERS OF FOMC, HAVE INDICATED THAT, IN FACT, WE'RE GOING TO BE ANTICIPATING INCREASES IN THE FEDERAL FUNDS RATE DURING THE COURSE OF THIS YEAR.

THERE'S ALSO AN ISSUE ASSOCIATED WITH THE BALANCE SHEET.

QUANTITATIVE TIGHTENING WILL ALSO BE APPLIED.

SO IN TERMS OF WHAT THE FED'S POLICY IS GOING TO BE -- AND MAYBE I CAN TALK A LITTLE BIT ABOUT MAYBE THE PROJECTION OF WHERE WE THINK INFLATION IS GOING TO GO AND WHAT THE CURRENT OUTLOOK HAPPENS TO BE.

I THINK THAT WE'RE ANTICIPATING THAT INFLATION IS GOING TO MODERATE DURING THE LATTER PART OF THIS YEAR INTO NEXT YEAR.

AND THERE ARE THREE MECHANISMS THAT ARE GOING TO BE RESPONSIBLE FOR SEEING THE HIGH INFLATION READINGS SORT OF MOVING DOWN.

THE FIRST IS THAT, IN FACT, THE FED IS GOING TO BE REMOVING MONETARY ACCOMMODATION.

I DON'T THINK I'M SAYING ANYTHING THAT HASN'T ALREADY BEEN SIGNALED IN SOME SENSE.

THE SECOND IS THAT FISCAL POLICY IS GOING TO BE LESS SUPPORTED THAN IT HAS BEEN IN THE PAST.

AND WE DO ANTICIPATE SOME IMPROVEMENT IN SUPPLY CHAIN ISSUES.

NOW, I'M NOT SUGGESTING THEY'RE GOING TO COMPLETELY DISSIPATE.

BUT WE'RE ANTICIPATING SOME IMPROVEMENT.

SO AS YOU SORT OF -- SLOWING THE PACE OF ACCURATE DEMAND, AND THEN SEEING SOME IMPROVEMENT ON THE SUPPLY SIDE, YOU WILL THEN SEE A MODERATION TAKING PLACE IN INFLATION.

HAVING SAID THAT, I DO WANT TO EMPHASIZE AGAIN A POINT THAT NED MENTIONED.

THE UNCERTAINTY ASSOCIATED WITH THIS PROJECTION FOR INFLATION IS QUITE HEIGHTENED THESE DAYS.

I MEAN, THERE'S JUST A GREAT DEAL OF UNCERTAINTY.

THE PATH OF COVID, WHETHER IT TAKES THE FORM OF -- YOU KNOW, WHETHER IT'S TAKING THE DELTA, OMICRON, HOW THAT'S GOING TO BE IMPACTING SUPPLY CHAINS REMAINS VERY, VERY UNCERTAIN.

THE POLICY THAT CHINA HAS WITH THE ZERO TOLERANCE ON COVID TYPE OF POLICY -- I MEAN, THAT'S ANOTHER IMPORTANT CONSIDERATION.

SO THERE'S A GREAT DEAL OF UNCERTAINTY ASSOCIATED WITH WHAT I JUST SUGGESTED IN THE TERMS OF WHERE THE PATH FOR INFLATION IS GOING TO BE.

BUT IN TERMS OF WHAT THE FED ITSELF IS PLANNING TO DO -- AGAIN, WE ARE GOING TO BE -- WE ARE PLANNING ON REMOVING THE AMOUNT OF ACCOMMODATION THAT WE HAVE.

AND IF, FOR WHATEVER REASON, IT APPEARS THAT INFLATION IS REMAINING HIGHER AND IS MORE PERSISTENT PERHAPS THAN WE ANTICIPATED, I THINK IT'S BEEN INDICATED THAT APPROPRIATE POLICY ACTIONS WILL THEN TAKE PLACE.

>> DIANA, IF I CAN JUMP IN A LITTLE BIT.

OH, I JUST DID JUMP IN.

SO TWO RESPONSES TO REINFORCE ROB.

FIRST THING IS, IF INTEREST RATES GO UP, AND I EXPECT THEY WILL GO UP, THEY'RE STILL GOING TO BE VERY LOW BY HISTORIC STANDARDS.

AND REAL INTEREST RATES AT 3 TO 4% ARE SORT OF WHAT'S BEEN EXPECTED OVER THE LONG TERM.

WE'VE BEEN VERY LOW TO NEGATIVE, AND I THINK IN REAL INFLATION, ADJUSTED TERMS, GETTING UP TO 4% IS PRETTY FAR OUT THERE.

THE SECOND THING IS THE POINT THAT ROB JUST BROUGHT UP.

WHEN I WAS, OVER THE PAST YEAR, GIVING MY QUALITATIVE ECONOMIC FORECAST, WHICH I DO FOR THE OHIO HOMEBUILDERS, HOUSING FINANCE, AND A COUPLE OTHER GROUPS, I WOULD START THE DISCUSSION WITH PUBLIC HEALTH POLICY.

THE HEALTH OF THE ECONOMY REALLY IS COMPLETELY TIED UP TO WHAT'S HAPPENING WITH THE PANDEMIC.

AND IDEOLOGICAL PUSHBACK AGAINST PUBLIC HEALTH MEASURES HAS CAUSED THE SECOND DROP OF THIS THING.

SO EITHER WE REACH HERD IMMUNITY OR WE, AS A NATION AND AS A COMMUNITY, REALIZE OUR ECONOMIC HEALTH REALLY IS FOUNDED ON OUR PUBLIC HEALTH.

WE ARE GOING TO HAVE THIS INCREASED -- WE'RE GOING TO HAVE THIS VOLATILITY AND UNCERTAINTY.

SO HAVING PUBLIC POLICY MAKERS RUN AND CAMPAIGN AGAINST PUBLIC HEALTH MEASURES HAS A LOT TO DO WITH WHAT HAPPENED TO THIS ECONOMY WHEN THE DELTA VERSION OF COVID STARTED TO WANE IN THE MIDDLE OF SUMMER.

AND THEN WHEN DELTA CAME ON AND WE GOT HIT WITH ANOTHER SET OF SUPPLY CHAIN SHORTAGES, THIS IS THE FAILURE AS A COMMUNITY TO ACCEPT BEING THY BROTHERS KEEPER.

>> SO LET'S TALK ABOUT SOME OF THOSE POLICY RESPONSES.

AND YOU'VE BROADENED THE APERTURE TO INCLUDE PUBLIC HEALTH MEASURES IN THERE.

BUT TYPICALLY, WHEN WE THINK OF ADDRESSING INFLATION, THERE'S MONETARY AND FISCAL POLICY.

>> MM-HMM.

>> AND ROB, TO YOU, ACTUALLY, THE FEDS PRINCIPAL MECHANISM IS QUANTITATIVE EASING AND THE INTEREST RATES.

ARE THERE OTHER TOOLS THAT WE SHOULD BE THINKING ABOUT IN THE POLICY COMMUNITY THAT COULD POTENTIALLY FINE TUNE OUR RESPONSES TO INFLATION?

>> YEAH.

SO LET ME -- TO CLARIFY.

SO OUR PRINCIPAL TOOL FOR -- WE HAVE A DUAL MANDATE.

OUR DUAL MANDATE IS PRICE STABILITY AND MAXIMUM EMPLOYMENT.

>> RIGHT.

>> AND THE PRINCIPAL TOOL OF MONETARY POLICY IS ESSENTIALLY THE FED FUNDS RATE.

THAT'S OUR KEY POLICY TOOL.

AND THE BALANCE SHEET IS SORT OF A SECONDARY TOOL THAT WE USE.

BUT TO YOUR POINT -- AND THIS ACTUALLY ALLOWS ME TO GO BACK TO THE '70s, JUST IN TERMINOLOGY, AS OPPOSED TO ACTUAL PHYSICALLY TURNING BACK TO THE '70s.

I THINK ONE OF THE OTHER THINGS THAT'S VERY IMPORTANT TO UNDERSTAND IS HOW MUCH THE FED NOW HAS CHANGED THE WAY THAT IT COMMUNICATES.

I THINK THAT'S A REALLY IMPORTANT ISSUE COMPARED TO SORT OF HOW IT WAS IN THE '70s.

IN TERMS OF FINE TUNING, I THINK WE'RE MUCH MORE OPEN NOW ABOUT HOW WE TRY TO COMMUNICATE TO FINANCIAL MARKETS AND HOW WE TRY TO COMMUNICATE TO THE PUBLIC WHAT OUR INTENTIONS HAPPEN TO BE, WHAT THE DATA INDICATORS ARE THAT WE'RE LOOKING AT.

SPEAKING OF THE 1970s, THERE WAS THIS BOOK, "SECRETS OF THE TEMPLE," THAT SORT OF TALKED ABOUT HOW THE FED WAS SORT OF, YOU KNOW, CLOAKED IN THIS - - THIS VERY SORT OF QUIET, SECRET SORT OF APPROACH.

THEY DIDN'T WANT TO LET PEOPLE KNOW WHAT THEY WERE DOING.

IT WAS VERY OPAQUE.

THAT HAS CHANGED REMARKABLY.

I MEAN, THE FED HAS UNDERTAKEN A SIGNIFICANT CHANGE IN COMMUNICATION POLICY.

AND I SHOULD ALSO ADD IN EDUCATION POLICY, IN TERMS OF OUTREACH, IN TERMS OF TRYING TO GET THE CONSUMERS ALSO TO HAVE A BETTER APPRECIATION AND UNDERSTANDING OF WHAT WE'RE TRYING TO DO.

SO YES, WE HAVE POLICY TOOLS.

I MEAN, THE FED FUNDS RATE IS OUR PRINCIPAL POLICY TOOL.

WE HAVE NOW ALSO USED THE BALANCE SHEET TO SOME EXTENT.

BUT I THINK THAT ONE OF THE KEY TOOLS THAT WE NOW HAVE AND THAT WE'RE USING IS EFFECTIVE COMMUNICATION, LETTING THEM KNOW, YOU KNOW, PUTTING OUT THE SUMMARY ECONOMIC PROJECTIONS, GIVING THEM IDEAS OF WHERE WE'RE PLANNING TO GO.

ALL OF THIS IS THERE TO TRY TO ENHANCE THE EFFICACY OF MONETARY POLICY.

BECAUSE THE MORE THAT, YOU KNOW, THE PUBLIC AND THE FINANCIAL MARKETS UNDERSTAND WHAT WE'RE THINKING, I THINK THE BETTER THAT WE'RE GOING TO BE ABLE TO ACHIEVE WHAT THOSE PARTICULAR ENDS HAPPEN TO BE.

SO I WOULD CERTAINLY POINT TO ENHANCED FEDERAL, YOU KNOW, FED POLICY AND COMMUNICATION AS BEING CRITICAL FOR SORT OF GETTING TO -- GETTING US TO BE ABLE TO ACHIEVE OUR GOALS OF THE DUAL MANDATE.

>> RIGHT.

NED, YOU BEGAN TO IDENTIFY SOME OTHER TOOLS THAT ARE AVAILABLE TO POLICY MAKERS.

OBVIOUSLY THE RESPONSE TO THE PANDEMIC IS ONE SINCE IT INFLUENCES HOW CONSUMERS AND OTHERS BEHAVE IN THE MARKETPLACE.

BUT YOU ALSO MENTIONED HERE IN OHIO WE ARE THE BENEFICIARIES OF AN INVESTMENT TO -- TO HAPPEN BY INTEL AND A MAJOR CHIP MANUFACTURING PLANT.

>> MM-HMM.

>> AND THAT RAISES A LARGER QUESTION ABOUT, I THINK, ONE OF THE HYPOTHESES OR THESES THAT'S OUT THERE, PARTICULARLY IN THE BIDEN ADMINISTRATION, AS YOU WERE POINTING OUT, IS THERE'S A SUPPLY PROBLEM HERE FOR CRITICALLY -- FOR GOODS.

AND THIS HAS SPARKED AN INTEREST IN RESHORING OR REBUILDING THE MANUFACTURING BASE OF THE UNITED STATES.

WERE THAT TO OCCUR, WERE WE TO SEE MAJOR REINVESTMENT AND MANUFACTURING OF VARIOUS TYPES AND FORMS, DO YOU EXPECT THAT THAT WOULD HAVE AN IMPACT ON INFLATION?

AND IF SO, HOW?

>> WELL, THE IMPACT -- YOU ALMOST HAVE TO GO PRODUCT BY PRODUCT WHEN YOU'RE TALKING ABOUT MICROECONOMIC APPROACHES TO LONG-TERM PRICE AND STABILITY.

HOW'S THAT FOR AN ECONOMIC SENTENCE?

[ LAUGHTER ] SO WHEN YOU'RE DEALING WITH SOMETHING LIKE COMPUTER CHIPS, IC, INTEGRATED CIRCUITS AND SENSORS, WHAT'S HAPPENED IS THAT THEY HAVE NOW GOT BAKED AND COOKED -- BAKED INTO A LOT MORE GOODS AND PRODUCTS.

AND THAT HAPPENED FAIRLY QUICKLY.

AT THE SAME TIME, THE PRICE OF INTEGRATED CIRCUITS DROPPED LIKE A ROCK.

AND SO AMERICAN HEADQUARTERED SEMICONDUCTOR MANUFACTURERS, THEY ACTUALLY GOT OUT OF THE FOUNDRY BUSINESS BECAUSE THEY WEREN'T MAKING A RATE OF RETURN.

SO THE PRICE, ACTUALLY, OF CHIPS HAD TO START TO GO UP TO ENCOURAGE BUILDING NEW PLANT AND EQUIPMENT.

AND SOME OF THAT IS BEING DONE BECAUSE OF PROMISED SUBSIDIES BY THE FEDS.

I THINK A LOT OF IT IS BEING DONE BECAUSE -- I MEAN, LOOK AT OHIO PRODUCTS.

IT'S NOT JUST THE AUTOMOBILES THAT ARE CHIP INTENSIVE.

YOU CAN GO UP TO FINLEY AND GO INTO ONE OF THE WHIRLPOOL PLANTS, AND YOU'RE GOING TO SEE WASHING MACHINES AND DRYERS ENDING UP WITH -- LOADED WITH THE SAME LEVELS OF INTELLIGENCE.

SO THAT'S GOING TO HAPPEN.

THE BIDEN ADMINISTRATION HAS BEEN TALKING ABOUT THE IMPACT OF MONOPOLY, AND CONCENTRATION IS RISING PRICES.

THERE'S NOTHING TO INDICATE THAT THERE IS A SUDDEN INCREASE IN CONCENTRATION FOR THIS TO BREAK OUT.

THIS HAS BEEN GOING OVER FOR A LONG TIME.

BUT I AM CONCERNED ABOUT THE LEVEL OF CONCENTRATION IN THE LUMBER INDUSTRY.

IT'S ESSENTIALLY DOWN TO FIVE COMPANIES.

SO IT'S A COMBINATION OF SUPPLY CONSTRAINTS AS WELL AS INDUSTRY ORGANIZATION.

SO THE ANSWER TO THAT IS, ONSHORING WILL HELP.

SECOND ANSWER TO ONSHORING IS THAT IT MAY ACTUALLY INCREASE OUR LABOR PROBLEM BECAUSE WE DON'T HAVE THE SKILLS YET.

AND WITH OHIO STATE, WE JUST LAUNCHED A NEW BACHELOR OF SCIENCE DEGREE IN ENGINEERING TECHNOLOGY IN OUR REGIONAL CAMPUSES IN RESPONSE TO THIS.

SO I THINK THAT WHAT WE'RE REALLY TALKING ABOUT IS, WHEN WE'RE TALKING ABOUT THOSE INVESTMENTS, IS LONG-TERM ECONOMIC DEVELOPMENT, MUCH LESS THAN TALKING ABOUT SHORTER TERM MACROECONOMIC BUBBLES.

>> THANKS, NED.

WE HAVE ANOTHER QUESTION FROM THE AUDIENCE.

DIANA?

>> THIS IS A PRETTY BROAD QUESTION, BUT I THINK IT'S A REALLY GREAT QUESTION.

IT SAYS, "WITH THE CONTINUED DEFICIT SPENDING AND INCREASING NATIONAL DEBT, WHAT IS THE RISK OF THE DOLLAR LOSING ITS RESERVE CURRENCY STATUS, AND HOW SERIOUSLY WOULD THAT IMPACT INFLATION?"

>> ROB, LET'S TURN TO YOU AND THEN TURN TO NED.

THERE'S AN EASY ONE FOR YOU.

>> EITHER ONE.

>> SO I -- YOU KNOW, I'M NOT GOING TO COMMENT, YOU KNOW, ON OTHER THAN THE FACT THAT OBVIOUSLY THE DOLLAR DOES PLAY A ROLE IN TERMS OF HAVING AN IMPACT ON INFLATION.

WE KNOW THAT, FOR EXAMPLE, THAT WHEN THE DOLLAR DEPRECIATES THAT THAT IS TYPICALLY GOING TO CAUSE IMPORT INFLATION TO GO UP.

AND SO A DEPRECIATING DOLLAR WILL SORT OF TEND TO SORT OF PUSH UP INFLATION.

ISSUES ABOUT RESERVE CURRENCY AND ITS STATUS, I THINK I'M GOING TO JUST SORT OF VERY GENTLY SORT OF NOT MAKE ANY SORT OF FORECAST OR PREDICTION ABOUT THAT.

BUT CERTAINLY THERE IS AN IMPACT OF INTERNATIONAL FACTORS.

AND THE DOLLAR IS CERTAINLY SOMETHING THAT AT TIMES HAS HAD A SIGNIFICANT IMPACT ON INFLATION.

I MAY -- I THINK WE GO BACK TO -- I BELIEVE IT WAS AROUND 2014, 2015 WHERE WE SORT OF SAW A SIGNIFICANT, I BELIEVE, APPRECIATION OF THE DOLLAR AND WE SAW A MARKED DECLINE TAKE PLACE IN INFLATION.

SO YES, THERE IS CERTAINLY A CHANNEL THROUGH WHICH THE DOLLAR CAN IMPACT INFLATION IN TERMS OF HOW THE DOLLAR AND FINANCIAL MARKETS IS GOING TO BE VIEWED AND ITS RESERVE CURRENCY STATUS AND ALL THAT.

I WOULD VERY GENTLY SORT OF PASS THAT OVER TO NED IN CASE HE WOULD LIKE TO SORT OF OFFER HIS THOUGHTS ON THAT.

[ LAUGHTER ] >> FOLLOWING BASEBALL ANALOGY, NED, THE BALL HAS BEEN TOSSED TO YOU, AND IT'S A SOFTBALL AT THAT.

>> NO, I THINK IT WAS A SPINNER, TO TELL YOU THE TRUTH.

SO THIS IS A HARD AND IMPORTANT QUESTION.

WHAT YOU FREQUENTLY HEAR IS, "OH, WE HAVE THIS DEFICIT, AND WE HAVE TO CUT BACK ON SPENDING."

WELL, LET'S START TALKING ABOUT WHY WE HAVE A DEFICIT.

THE FIRST THING TO REALIZE IS THAT WE HAD A SERIES OF TAX CUTS DURING THE TRUMP ADMINISTRATION THAT CAUSED A STRUCTURAL RISE IN THE DEFICIT.

AND THE DEFICIT IS, "ARE YOU SPENDING MORE MONEY THAN YOU'RE BRINGING ON IN?"

AND SO TAX POLICY IS PART AND PARCEL OF WHERE YOU ARE IN TERMS OF DEFICIT.

SECOND THING I WANT TO BRING UP IS, THE DIFFERENCE BETWEEN THE 2008, 2009 RECESSION, THE GREAT RECESSION AND THIS ONE, WAS THE DIFFERENCE BETWEEN ACTUAL GDP AND POTENTIAL GDP WAS HIGHER THAN IT WAS DURING THE COVID HIT.

AND THERE WAS SO MUCH CONCERN ABOUT DEFICIT SPENDING AND INFLATION IN 2009 THAT THE THIRD TRANCHE OF A STIMULUS DIDN'T MAKE IT THROUGH CONGRESS.

AND I WOULD ARGUE THAT INCREASED OR SLOWED DOWN THE RECOVERY BY ALMOST A YEAR TO YEAR AND A HALF.

SO THAT WAS A CASE WHERE WE SHOT OURSELVES IN THE FOOT AND CAUSED MORE ECONOMIC HARM BY PAYING ATTENTION TO ESSENTIALLY FACT-FREE ECONOMIC POLICY.

WHEN WE LOOK AT THIS CURRENT STIMULUS PACKAGE -- NOW THAT I KIND OF BEAT ON REPUBLICANS, I'LL NOW GET MY DEMOCRATIC FRIENDS MAD AT ME.

WE HAD THREE ROUNDS OF STIMULUS PROPOSED.

THE SECOND ROUND ARGUABLY MAY HAVE BEEN A LITTLE TO HIGH.

THE OTHER THING ABOUT THE FIRST TWO ROUNDS IS THAT THANKS TO CONGRESS AND THE ADMINISTRATION, THAT STIMULUS WAS REALLY CLEVERLY TARGETED.

WE DID THINGS IN SUPPORTING INDUSTRIES AND INDIVIDUALS THAT WE'VE NEVER DONE BEFORE.

AND WE'RE GOING TO KEEP ON DOING THAT.

BUT THEN YOU HAD THE THIRD ROUND, WHICH IS A BUILD BACK BETTER ROUND, THAT YOU FAMOUSLY -- JOE MANCHIN KIND OF STOPPED.

AND I WOULD ARGUE THAT THAT WAS MUCH MORE SOCIAL POLICY THAN COUNTERCYCLICAL POLICY.

SO WHEN WE LOOK AT WHAT'S HAPPENED WHEN IT COMES TO DEFICIT AND DEFICIT SPENDING, WE HAVE TO MAKE THREE DIFFERENT -- LOOK AT THE BUDGET THREE WAYS.

THERE'S COUNTERCYCLICAL SPENDING.

THERE IS ECONOMIC DEVELOPMENT INVESTMENT.

AND THEN THERE'S SOCIAL POLICY.

AND BUILD BACK BETTER HAD -- IT WENT TO ADDRESS THE ECONOMIC -- PARTS OF THE ECONOMIC DEVELOPMENT SPENDING, WHICH IS CURRENT SPENDING THAT WE'VE GROSSLY UNDERINVESTED IN.

AND PART OF THAT INFRASTRUCTURE WAS NOT JUST ROADS AND BRIDGES.

IT'S BROADBAND.

AND I DO ARGUE THAT CHILDCARE WOULD BE IN THERE AS WELL BECAUSE OF THE IMPACT ON LABOR MARKETS.

REMEMBER, THIS IS MY POLITICS, NOBODY ELSE'S.

NOT EVEN MY WIFE'S.

AND AT THE SAME TIME THEN, WHEN YOU'RE THINKING ABOUT REDISTRIBUTING INCOME OR EXPANDING INVESTMENTS IN THE ECONOMY, TAXES SHOULD GO UP TO PAY FOR THAT.

SO IT IS THE DESIRE OF BOTH PARTIES TO GET A FREE LUNCH AND BELIEVE THAT THE DISCIPLINE OF MACROECONOMICS NO LONGER EXIST.

THAT IS SOMETHING THAT THIS CURRENT WAVE OF INFLATION IS BASICALLY A WONDERFUL DOPE SLAP FOR.

>> SO ROB, I WANT TO ASK YOU A FED RELATED QUESTION IN LIGHT OF WHAT NED HAS JUST SHARED WITH US.

AND DON'T WORRY.

I'M NOT ASKING YOU TO COMMENT ON WHAT THE FED WILL DO OR ANYTHING LIKE THAT.

BUT RATHER, AS THE FED IS SETTING POLICY AROUND INTEREST RATES, HOW MUCH IS IT TAKING INTO ACCOUNT WHAT WE'VE JUST HEARD FROM NED ON THE FISCAL STIMULUS SIDE, WHETHER IT BE TAX CUTS THAT ONE ADMINISTRATION PROPOSES OR, IN THE MOST RECENT CASE, ADDITIONAL SPENDING?

HOW DOES THE FED THINK ABOUT THAT FUTURE POSSIBILITY OF EITHER CHANGES TO TAX POLICY OR SPENDING POLICY?

>> SO THOSE -- I THINK THE BEST WAY TO THINK ABOUT HOW THOSE SHOW UP IS THAT THEY SHOW UP IN TERMS OF WHAT OUR PARTICULAR FORECAST FOR THESE VARIABLES ARE GOING TO BE, AND THEN, BASED THAT PARTICULAR FORECAST, HOW ONE WANTS TO THINK ABOUT SORT OF, YOU KNOW, ADJUSTING POLICY IN ORDER TO, AGAIN, ACHIEVE THE GOALS OF OUR DUAL MANDATE.

SO WE -- YOU KNOW, WE HAVE MODELS, AND WE THINK ABOUT DIFFERENT SCENARIOS, AND WE COME UP WITH IDEAS IN TERMS OF GENERATING FORECASTS FOR HOW THESE -- THESE PARTICULAR POLICIES ARE GOING TO BE IMPACTING THE ECONOMY.

AND THEN, BASED UPON THOSE FORECASTS, WE THEN WILL THEN THINK ABOUT WHAT THE APPROPRIATE SETTING FOR POLICY HAPPENS TO BE.

SO I WOULD SAY THE BEST WAY TO THINK ABOUT HOW WE DO THAT IS WE INCORPORATE THEM INTO OUR FORECAST.

I MEAN, WE'RE ALWAYS -- WE HAVE TO MAKE, NOT ONLY ASSUMPTIONS ABOUT FISCAL POLICY -- THERE'S LOTS OF OTHER ASSUMPTIONS THAT WE HAVE TO MAKE THAT GO INTO THESE PARTICULAR MODELS.

UM, THEN AGAIN, THEY THEN SORT OF GO INTO OUR FORECAST, AND THEN WE HAVE TO SORT OF THINK ABOUT, YOU KNOW, SORT OF, WHAT THE FORECASTS ARE FOR, SAY, GDP OR THE UNEMPLOYMENT RATE VERSUS INFLATION, AND THEN MAKE THE APPROPRIATE DECISION OF HOW WE WANT TO TRADE OFF THOSE PARTICULAR CHOICES IN -- IN ORDER TO, AGAIN, ACHIEVE OUR DUAL MANDATE.

SO, AGAIN, I THINK THE BEST WAY TO THINK ABOUT HOW THEY ENTER IS IN -- INTO OUR, SORT OF, FORECAST IN TERMS OF OUR PARTICULAR OUTLOOK THAT WE HAVE.

>> OKAY, I'M GONNA COME BACK TO A QUESTION ABOUT FORECASTS IN JUST A MINUTE.

BUT WE HAVE ANOTHER QUESTION FROM THE AUDIENCE.

DIANE?

>> IT'S JUST A LITTLE BIT OF DIFFERENT TOPIC OF WHAT WE HAD BEEN TALKING ABOUT, BUT IT'S AN IMPORTANT ONE.

AND THIS HAS TO DO WITH THE HEALTHCARE ENVIRONMENT.

AND SO THIS IS JUST HOW THEY PHRASED IT.

"IF YOU'RE WILLING TO COMMENT ON THE MONOPOLISTIC ENVIRONMENT OF THE HEALTHCARE ENVIRONMENT IN HOSPITAL SYSTEMS THAT CONTROL PRICE, INHIBIT COMPETITION, THUS SHOWING A RATE OF INFLATION OUTPACING CPI."

SO -- >> WELL, DIANE, I -- I'M GONNA -- I'LL -- I'LL START OFF ON THAT ONE AND SAY THAT RATE OF PRICE INCREASES IN THE HEALTH CARE SECTOR IS NOT INFLATION.

IT'S AN INCREASE IN PRICES IN THE HEALTH CARE SECTOR.

UM, THERE ARE REGULATORY ISSUES ABOUT, UM, HOW PUBLIC HEALTH INSURANCE BUYS PHARMACEUTICALS.

AND, UH, THAT INCREASES THOSE COSTS.

WE HAVE ISSUES ABOUT THE TECHNOLOGICAL INTENSIVITY OF AMERICAN MEDICINE THAT INCREASES THOSE COSTS.

WE HAVE UNDERPLAYED, AGAIN, PUBLIC HEALTH.

I'M A PRACTICING FAT GUY, SO I'M ONE OF THOSE FOLKS THAT DOES -- THAT -- THAT HAS MADE A SERIES OF LIFESTYLE CHOICES WHICH INCREASE THOSE COSTS.

AND WE'RE LIVING LONGER.

SO, UM, I DON'T SEE -- AND ALSO, WE'VE GOT A HEALTH INSURANCE SYSTEM THAT IS ABOUT 30% OF HEALTH CARE COSTS.

SO I THINK THAT WHEN WE'RE TALKING ABOUT THE IMPACT OF THE HEALTH CARE INDUSTRY, WE -- IT MAKES A LOT OF SENSE WHERE WE DIG DOWN AND SAY WHERE THE SOURCES OF THOSE COST INCREASE -- INCREASES, AND HOW MUCH OF THAT IS ACCOMMODATED BY INDUSTRY-FRIENDLY PUBLIC POLICY AND HOW MUCH OF THAT IS BEING ACCOMMODATED BY LIFESTYLE CHOICES THAT AMERICANS AREN'T WILLING TO MAKE.

>> RICH -- RICH, ANY ADDITIONAL THOUGHTS?

>> NO, I THINK THAT -- THAT'S FINE, THANK YOU.

>> GREAT.

UM, SO LETS BROADEN IT.

AND -- AND I KNOW MANY OF OUR VIEWERS WANT TO KNOW, "WHEN IS THIS GONNA END?"

UM, PRICES CONTINUE TO GO UP.

UH, AND, UH, IT DOESN'T APPEAR THAT THEY'LL END TOMORROW.

SO HOW -- HOW CAN WE -- BEFORE YOU -- YOU MENTIONED, ROB, THE INDIVIDUAL -- OR, SORRY, THE FORECASTS THAT THE FED MAKES.

HOW CAN WE, AS INDIVIDUAL CONSUMERS, BE MAKING FORECASTS ABOUT WHAT TO EXPECT FOR THE FUTURE?

>> SO I -- I THINK -- THAT'S A GREAT QUESTION.

SO LET ME -- LET ME JUST TAKE A STEP BACK AGAIN, AND LET'S WORK THROUGH - - I THINK THE FIRST THING IS JUST TO SIMPLY UNDERSTAND WHAT -- WHAT HAS -- WHY IS THE CURRENT ENVIRONMENT LOOKING THE WAY IT -- IT PARTICULARLY -- IT IS RIGHT NOW?

ALL RIGHT?

AND SO I -- I THINK THAT, AGAIN, WHAT WE'VE SEEN IS THROUGH THE -- THE COVID SHOCK AND THE PANDEMIC, WHAT WE'VE SEEN IS THIS -- THIS SHOCK THAT IS IN MANY DIMENSIONS UNIQUE AND UNPRECEDENTED.

RIGHT?

IT'S NOT JUST THE MAGNITUDE.

IT'S -- IT'S THE NATURE OF IT BEING BOTH, KIND OF, A DEMAND SHOCK AND A SUPPLY SHOCK.

IT'S ALSO BEEN A SHOCK THAT HAS HIT A PARTICULAR SECTOR HARDER THAN ANOTHER SECTOR.

ON TOP OF THAT, WE'VE SEEN, IN SOME SENSE, A RATHER REMARKABLE RESPONSE ON THE PART OF BOTH MONETARY AND FISCAL POLICY IN ORDER TO RESPOND INITIALLY TO THE PARTICULAR SHOCK ITSELF.

SO HOPEFULLY, BETWEEN WHAT NED AND I HAVE SAID TODAY, HOPEFULLY THE MESSAGE RIGHT NOW IS, "YES, WE ARE IN A -- WE ARE SEEING ELEVATED INFLATION READINGS."

HOPEFULLY IT'S UNDERSTOOD THAT A LOT OF IT IS COMING FROM THE GOODS SECTOR AND IS A CONSEQUENCE OF VERY, VERY ROBUST DEMAND.

AND AGAIN, YOU KNOW, SUPPLY CONSTRAINTS IN THAT PARTICULAR SECTOR, IN WHICH GOODS INFLATION IS SORT OF GENERATED A MUCH HIGHER, YOU KNOW, INCREASE IN TERMS OF OVERALL, YOU KNOW, INFLATION.

SO THEN THE CRITICAL QUESTION IS, "WHAT COMES NEXT?"

I THINK THAT'S WHAT THE QUESTION HAPPENS TO BE.

THAT'S A GREAT QUESTION.

I CAN'T TELL YOU EXACTLY WHAT COMES NEXT.

BUT WHAT I CAN TELL YOU, THOUGH, IS THAT THERE ARE WAYS AS A CONSUMER -- YOU CAN SORT OF KEEP UP WITH WHAT -- WHAT -- WHAT MAY PLAY OUT.

AS I SAID, I THINK THE FORECAST GENERALLY -- AND THIS COMES FROM THE SURVEY OF ECONOMIC PROJECTIONS -- IS, WE ARE ANTICIPATING THAT THE HIGH INFLATION MAINS WILL BEGIN TO MODERATE IN THE SECOND HALF OF THIS YEAR AND INTO NEXT YEAR.

AND AGAIN, THAT'S A CONSEQUENCE OF, SORT OF, FISCAL POLICY AND MONETARY POLICY DIALING BACK A LITTLE BIT ON DEMAND.

AND WE'RE SEEING SOME IMPROVEMENT TAKING PLACE, UM, IN TERMS OF THE SUPPLY SIDE.

SO THAT SHOULD HELP INFLATION SORT OF MODERATE.

IN TERMS OF THE OTHER THINGS TO LOOK FOR, UM, AGAIN, THE -- THE MODERATION WILL VERY MUCH BE DEPENDENT UPON THINGS LIKE INFLATION EXPECTATIONS REMAINING WELL ANCHORED.

AND ALSO, WHAT WE CAN ALSO EXPECT, ALTHOUGH I DIDN'T BRING THEM UP, THERE ARE A NUMBER OF INFLATION MEASURES AND INDICATORS.

WE HAVE SOME OF THEM AT THE CLEVELAND FED.

SOME ARE IN DALLAS, TOO, THAT ESSENTIALLY TRY TO STRIP OUT WHAT ARE CALLED, SORT OF, THESE LARGE RELATIVE PRICE CHANGES OR OUTLIERS.

IN OTHER WORDS, HOW BROAD-BASED IS THE INCREASE TAKING PLACE?

SO AT THE CLEVELAND FED, FOR EXAMPLE, WE HAVE SOMETHING CALLED THE MEDIAN CPI AND THE TRIMMED-MEAN CPI.

WE ALSO HAVE THE MEDIAN PCE.

THESE ARE MEASURES THAT ARE ESSENTIALLY TELLING US, YOU KNOW, HOW BROAD- BASED ARE THESE INFLATION INCREASES TAKING PLACE.

WE HOPE TO START SEEING THOSE MEASURES, WHICH HAVE BEEN RISING RECENTLY.

WE WOULD HOPE TO SEE THEM ALSO GOING DOWN AND MODERATING TO, AGAIN, BE REFLECTIVE OF THE IDEA THAT THE UNDERLYING RATE OF INFLATION IS DECLINING.

SO, YOU KNOW, AS -- AS -- AS A CONSUMER, OR AS A MEMBER OF THE PUBLIC, I THINK PART OF THIS IS JUST SIMPLY RECOGNIZING THE CURRENT SITUATION, LOOKING AT THOSE PARTICULAR FACTORS, AND THEN, AGAIN, THINKING ABOUT THINGS LIKE, ARE WE GOING TO -- YOU KNOW, ARE WE GOING TO SEE ANOTHER OUTBREAK OF COVID TAKING PLACE?

ARE WE GOING TO SEE SOME OF THE SUPPLY DISRUPTIONS, SORT OF, IN SOME SENSE, COMING BACK ON BOARD?

I MEAN, IT'S A COMPLICATED QUESTION.

BUT I -- AGAIN, I THINK UNDERSTANDING WHAT -- WHAT HAS LED US TO THE CURRENT SITUATION HOPEFULLY WILL BE HELPFUL IN TERMS OF, AS AN INDIVIDUAL THEN, THINKING ABOUT WHERE THINGS WILL BE GOING FORWARD.

>> I -- I HAVE A FOLLOW-UP.

BUT -- BUT NED, WANTED TO SEE IF YOU HAD ANYTHING THAT YOU WANTED TO ADD TO ROB'S COMMENTARY.

>> UM, UH, TWO -- I THINK TWO SMALL POINTS.

THE FIRST IS -- AND THIS IS HARD FOR THE PUBLIC TO DO, IS WE NEED PATIENCE.

ONE OF THE THINGS ABOUT THE ECONOMY IS IT REALLY DOESN'T TURN ON A DIME.

IT'S MUCH MORE LIKE AN OIL TANKER TRYING TO TURN.

AND SO POLICIES THAT ARE IN PLACE NOW WILL HAVE IMPACTS GOING OUT FROM 6 MONTHS TO 18 MONTHS.

AND SOME OF THIS INCREASED, UH, DEMAND, OR STIMULUS, IS ALSO GONNA BE WORKING ITS WAY THROUGH THE ECONOMY FOR THE NEXT YEAR.

AND THE FED POLICIES, THEY CAN'T OVERREACT IN EITHER DIRECTION.

BECAUSE THE ECONOMY ITSELF, UH, PARTICULARLY THE LABOR SUPPLY, IS -- IS - - IS WEAK AND WILL TAKE SOME TIME TO DEAL WITH.

SO WHATEVER WE WANT TO DO, WE DON'T WANT TO SEE OVERLY ATHLETIC ACTION HERE.

SECOND THING IS, AS YOU GO AND LOOK AT THE SOURCES OF WHERE THESE PRICING INCREASES HAVE COME FROM, YOU CAN SEE SOME EASING, SOME -- FOOD, FOOD SUPPLY -- THAT WAS NOT COVID.

IT WAS COVID IN THE MEAT PROCESSING PLANTS, BUT IT WAS ALSO DROUGHT.

SO A LOT OF THAT IS REALLY GOING TO DEPEND ON WHAT HAPPENS THIS SUMMER IN TERMS OF ENVIRONMENT.

BUILDING MATERIALS -- I WAS SURPRISED TO SEE LUMBER PRICES GO THROUGH THE ROOF AGAIN OVER THE LAST COUPLE MONTHS.

AND AGAIN, THAT -- THAT REALLY WAS ENVIRONMENTAL CONDITIONS, PARTICULARLY OUT IN THE PACIFIC THAT CAUSED THAT TO HAPPEN.

BUT THAT'S STARTING TO LOOSEN UP AND WE'RE SEEING MORE CAPACITY COME UP, PARTICULARLY IN STEELMAKING AND IN LUMBER PRODUCTION.

A LOT OF THE INCREASE IN PRICES COME FROM THE ENERGY SECTOR.

THE UNITED STATES PLAYS A VERY LARGE ROLE IN THAT.

AND I READ JIM HALLORAN'S NEWSLETTER WHEN IT COMES TO ENERGY PRETTY CLOSELY.

AND THE PEOPLE THAT JIM IS FOLLOWING INDICATE THAT SUPPLY IS STARTING TO COME BACK ON IN THE ENERGY SECTOR, AND THAT'S -- THAT'S VERY MUCH A GOOD THING.

SO I -- I THINK WHAT'S GOING TO HAPPEN IS THAT SOME OF THESE, UM, UNDERLYING PRESSURES ARE GOING TO BE WITH US THROUGH THE SUMMER.

GM SAYS THE CHIP SHORTAGE IS GONNA START -- AT LEAST IN THEIR SUPPLY CHAIN, IS GONNA START BEING RELIEVED SOMEWHERE IN THE LATE SUMMER, LATE SUMMER, EARLY FALL.

AND THEN, IF -- IF COVID DOESN'T COME BACK, AND WE DON'T HAVE, UH, DROUGHTS, MEAT PRICES MAY ACTUALLY START TO COME DOWN.

THIS IS THE FIRST RECESSION I'VE SEEN WHERE THE VEGETARIANS WON.

>> TREVOR -- TREVOR, IF I MAY, COULD I JUST FOLLOW UP WITH ONE OTHER POINT?

I -- I THINK NED TOUCHED ON THIS.

WHICH IS, I THINK ANOTHER CRITICAL AREA FOR MONITORING, BESIDES INFLATION EXPECTATIONS, I THINK IS TO SORT OF MONITOR WHAT LABOR FORCE PARTICIPATION IS GOING TO BE DOING.

>> ABSOLUTELY.

>> THERE'S BEEN A REALLY DRAMATIC -- THERE WAS A DRAMATIC DECLINE IN LABOR FORCE PARTICIPATION DURING THE PANDEMIC.

THERE WERE A VARIETY OF, YOU KNOW, VARIOUS HYPOTHESES PUT OUT.

I MEAN, SOME OF IT HAD TO DO WITH THE FACT THAT THERE WERE, SORT OF, CHILDCARE-GIVING RESPONSIBILITIES THAT TOOK PLACE.

BUT AS WE'VE TALKED ABOUT TODAY, I THINK THE PANDEMIC -- AND I'M NOT A LABOR ECONOMIST -- I THINK THE PANDEMIC IN SOME SENSE CAN BE VIEWED AS ALMOST A WATERSHED EVENT RIGHT NOW WHERE, I THINK, WORKERS ARE REALLY RETHINKING JUST EXACTLY WHAT THEY'RE LOOKING FOR IN JOBS AND JOB OPPORTUNITIES.

AND THEN, ON TOP OF THAT, THERE WERE SOME ARGUMENTS THAT PERHAPS THE VERY GENEROUS UNEMPLOYMENT INSURANCE BENEFITS WERE SORT OF PRECLUDING PEOPLE FROM COMING BACK ON.

LABOR FORCE PARTICIPATION -- SEEING AN INCREASE IN LABOR SUPPLY TAKING PLACE IN THE ECONOMY WILL HAVE A VERY IMPORTANT IMPACT.

NOT ONLY IN TERMS OF, SORT OF, ALLEVIATING SOME OF THE WAGE INCREASES AND THE WAGE GROWTH THAT WE'RE SEEING ALSO, BUT IN TERMS OF FACILITATING PRODUCTION THAT WILL -- THAT WILL SORT OF TAKE PLACE ALSO.

SO AMONG THE VERY -- >> I'M GONNA -- I'M GONNA -- >> I THINK WE'VE GIVEN OUR AUDIENCE A LOT OF THINGS TO LOOK AT.

BUT I -- I JUST WANTED TO ADD LABOR FORCE PARTICIPATION IS SOMETHING -- >> NO, YOU'VE -- YOU'VE ENDED ON A GREAT POINT BECAUSE WE WILL HAVE A LATER DIALOGUE ON THE IMPACTS OF COVID-19 ON THE -- THE LABOR FORCE AND POTENTIALLY THE GREAT RESIGNATION.

SO THAT'S ALL THE TIME WE HAVE.

WE'D LIKE TO THINK NED HILL AND ROB RICH FOR SHARING THEIR EXPERTISE AND INSIGHTFUL ANSWERS TO OUR QUESTIONS.

UNTIL NEXT TIME, I'M TREVOR BROWN.

TAKE CARE.

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