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Two economists tell us what we know about rising inflation and the economy right now


Good morning. One big, scary word is dominating the news these days - inflation. It's at a 40-year high, up more than 8% from last year. And we're all paying more for gas, for rent, for groceries. And you might be wondering why and how bad could this get. The thing is, it's not entirely clear, and even the experts don't agree on those points. So we're asking a couple of economists to tell us what we do know so far. Tara Sinclair teaches at George Washington University, and Justin Wolfers teaches at the University of Michigan. Good morning, both of you.

JUSTIN WOLFERS: Hey, good day.

TARA SINCLAIR: Good morning.

KURTZLEBEN: So let's start with you, Justin. What do we know so far about how we got here to 8% inflation? What are some of the biggest factors behind that?

WOLFERS: So I think we learned that the coronavirus is not just a health threat, but also an economic threat. Things have probably never been shaken up as much in my lifetime as they have been over the past couple of years. So that's the first big factor. The second is, ever since Putin started amassing troops on the border with Ukraine, gas prices started going up. And you can draw a straight line from Putin to the price that you're seeing at the pump.

Then beyond that, the real question is, does inflation have a bit more of its own momentum? Is it that employers are finding it hard to find good workers that wages are rising? But many of the people who've been optimistic, including myself, recognize that some of the factors driving inflation are quite definitely temporary. And even though they haven't gone away yet, we know they will go away.

KURTZLEBEN: Well, I want to ask you about two things in particular that get mentioned as potential causes of inflation, and that is pandemic stimulus and corporate price gouging. Those make intuitive sense as causes. Do we have a sense of how much those things actually have been pushing prices up?

WOLFERS: Let's start with price gouging. This is the idea that these big corporations are out to get you and I, the consumer. And the truth is they are. The thing is, they were also trying to get as much out of my back pocket a year ago as they could. So what this tells us is corporate price gouging might explain why some prices are too high, but it doesn't explain why they're rising. And that's what inflation is. How much did the stimulus drive the current moment? One answer is we don't really know. Inflation has been high not just in the U.S, but also in other countries that didn't pass the same fiscal stimulus that Biden did. It may have played a role, but its role might also have been overstated by some.

KURTZLEBEN: Tara, I want to turn to you. Can you put the spike in consumer prices in perspective for us? How bad is it? And should we expect it to get worse?

SINCLAIR: It isn't necessarily the same experience as what people remember from the 1970s, but it's still much, much higher than people had gotten used to and had gotten used to planning on. So then if we think forward as the pandemic, you know, hopefully wanes, some of the issues will unwind and it - the inflation pressures will ease. But at the same time, it's really important to note that the Federal Reserve is stepping in and taking action now. We do expect to see their policies have an effect on inflation. But again, exactly the time frame of that, the Fed has admitted themselves they don't know the exact time frame.

KURTZLEBEN: Well, and for consumers who are trying to make sense of this, they might be wondering, are prices ever going to go back to what they used to be? So what should people expect in terms of prices?

SINCLAIR: This idea that prices should actually come down across the board, that's not the Fed's goal, right? They want to just bring inflation down, but not actually prices coming all the way down to where we got used to them before.

KURTZLEBEN: You know, there is growing criticism of Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell for not reacting sooner to curb inflation. I'm wondering how important - and also how possible is it to act quickly on inflation? Justin, let's start with you.

WOLFERS: I think the right thought experiment is to close your eyes and go back two years ago to the depths of the pandemic where you didn't know if your family was healthy. You knew that most workers were at home, and you didn't know whether your workplace was ever going to reopen. And ask yourself, in that situation, would you rather the government risked doing too much and as a result, got everyone back to work but caused a bit of inflation? Or do you wish that they did too little? And a bunch of people, millions of people, stayed out of work, and we had no inflationary risk. I would have chosen the former. That's, in fact, what the federal government chose. It's what the Federal Reserve chose. And I think it was a wise choice. After the global financial crisis in 2008, they made the opposite choice, and the recovery took years and years and years and years.

KURTZLEBEN: The Federal Reserve is trying to strike this careful balance - right? - of slowing down the economy, slowing things down from being overheated, but not too much. And the - just this week, we saw them raise interest rates by 0.75 of a percentage point. That's a lot to do all at once. Is that the best way to tame inflation? Or are there other solutions? What do you think, Tara?

SINCLAIR: When people are concerned about higher prices, what they're really concerned about is their purchasing power. Like, am I going to be able to get as much stuff as I want, as I envision getting with my paycheck and, you know, with my savings? When the Fed comes in and raises interest rates, that shrinks our spending power there. And that's the effect of the demand side of the economy. And it is important to bring inflation down and have stable, low inflation in the long run, but this is a painful way to get there.

KURTZLEBEN: President Biden said this week that he thinks a recession is, quote, "not inevitable." I really want to hear both of your thoughts on that. Is he right? What do you think, Justin?

WOLFERS: I can't promise any of your listeners there won't be a recession, but none of the warning signs are flashing bright red right now, and almost none of them are even flashing amber. Look, when people are worried about a recession, it's the very real fear that the Fed could overreact, do too much, and choke off the economy. But you know what else? They could make the opposite mistake. They could underreact, do too little. Inflation keeps chugging along, but so does the rest of the economy. And we all keep spending money, and we're all in jobs, and some of us start to get pay rises. So yeah, we should worry about the downside, but let's acknowledge there's an equal and opposite upside, too.

KURTZLEBEN: Tara, what do you think? Do you agree?

SINCLAIR: Yeah, well, one of the benefits of people being a little bit more concerned about a recession is that they may make the Fed's job actually a little bit easier in the sense that they may cut back on spending and put a little bit more in savings in the meantime in order to insulate themselves. And by doing that, that might actually cool demand and mean that the Fed might need to raise interest rates by less. But at the same time, you know, we definitely want businesses to feel like it is a safe and healthy economy in the future so that they continue to invest and expand and hire workers.

KURTZLEBEN: Wait, so do we have historical precedent for coming out of this high of inflation without sinking the economy into a recession? Is that possible?

WOLFERS: It is definitely possible. And many countries who've been afflicted by high inflation have followed these policies where they basically convince the broader public that they mean business - inflation's coming down. They win that argument. If everyone believes that inflation's coming down, it leads them to raise their prices by less, and that causes inflation to come down. This has happened. It doesn't always happen, but it does require the Fed to have a lot of credibility in the eyes of the public.

KURTZLEBEN: All right, I want to finish by zooming out here. Tara, what do you think is important for consumers to better understand about this current moment? What is a good takeaway for our listeners?

SINCLAIR: Well, I think the big takeaway is that we are in a - once again, an unprecedented time. And so I think it's both important to look back and see how much success that we've had in terms of recovering as quickly as we have, as well as to look forward and say, OK, that was a relatively short time period, and we've been in this inflationary environment for a relatively short time period. And so we can expect that as things stabilize, that maybe we can also picture a return to normal coming along the lines of a return to stable prices as well.

KURTZLEBEN: That's Tara Sinclair, professor of economics and international affairs at George Washington University, and Justin Wolfers, professor of public policy and economics at the University of Michigan. Thank you both so much for being with us.

WOLFERS: Thanks, Danielle.

SINCLAIR: Thank you. Transcript provided by NPR, Copyright NPR.

Danielle Kurtzleben is a political correspondent assigned to NPR's Washington Desk. She appears on NPR shows, writes for the web, and is a regular on The NPR Politics Podcast. She is covering the 2020 presidential election, with particular focuses on on economic policy and gender politics.