LULU GARCIA-NAVARRO, HTE:
Uncontrolled inflation has decimated economies around the world. No, the United States is not Venezuela or Lebanon, where powdered baby milk now costs a quarter of the average worker’s monthly salary, but there are things to worry about. The Consumer Price Index, a barometer of inflation, experienced its biggest jump in 13 years in June here in the United States. Jason Furman headed the Council of Economic Advisers at the Obama White House and now teaches economic policy at Harvard. And he’s joining us now. Hello.
JASON FURMAN: Hello.
GARCIA-NAVARRO: Are we entering an inflationary phase?
FURMAN: We definitely have a lot of inflation. In the last six months we have had 3.6% inflation. Normally, it would take two years for prices to rise that much. But, you know, as you noted in your introduction, it’s a long, long way, you know, from the types of disasters that you see in the world.
GARCIA-NAVARRO: Of course. But this is of course a concern. I mean, Neel Kashkari is in charge of the Minneapolis Fed, and we heard a conversation yesterday about this program that he had with my co-host, Scott Simon. He told Scott that some price spikes, like with cars, can last a few years because it takes that long to ramp up production of computer chips. Let’s listen.
(EXTRACT FROM ARCHIVED NPR BROADCAST)
NEEL KASHKARI: But I don’t see any evidence yet that we’re going to have sustained high inflation beyond this reopening period. Whether it’s six months or a year or 18 months, I’m not sure.
GARCIA-NAVARRO: So a few years for cars, maybe 18 months for other stuff, but it’s a lot of money in people’s pockets.
FURMAN: Yeah. I think I might be more worried about some of the inflation being persistent than Neel. Everyone agrees that we are not going to continue to see prices go up 3.6% every six months. It’s going to come down. But I don’t think it’s going to come down to the 2% inflation the Fed always wanted. I think there are years of pressure. Both demand, people buying more – and supply, the economy cannot produce as much as it used to. And the combination of these, I think, will last for a while.
GARCIA-NAVARRO: Does that worry you?
FURMAN: I’m worried about it, but not terrified about it. Just to understand, a lot of economists – and I count myself as one of them – think that stable inflation of 3% that was predictable and controlled at 3% would actually be better than stable, predictable inflation. 2% that we have experienced in the past. The reason is that it gives the Fed a bit more leeway to fight recessions and would make recessions less severe. So if we could design this result, that would be great. The problem is, it’s really hard to get from here to there. If the Fed overreacts, it could trigger a recession. If wages do not increase, workers could suffer. So I think there are a lot of dangers here. But there’s also, you know, a way to go, and that’s what I hope will happen.
GARCIA-NAVARRO: Before I get to the plans for the Biden administration, I just want to briefly ask you for some sort of news that you can use in the sense of what I should be doing, as an individual, in a period of time. inflation? What should I do to protect myself in some way?
FURMAN: You know, the greatest protection is if you can get a raise from your employer. Now, most people are not in a full position …
GARCIA-NAVARRO: If anyone is listening, I’m ready.
FURMAN: … Complete the position to get it. But, you know, wages used to go up with inflation. When inflation rose, there were indexation contracts and the like. Those are long gone. I think it’s going to be important, over the next couple of years – you know, we could easily have 5% inflation this year. If you get a 4% raise, you’ve just lost money over the year. You may also have lost money last year during the pandemic, when many people suffered a wage freeze. So I realize that this is not something that people control. But, you know, employers – they make more money because of the higher prices. They should also pay more this year.
GARCIA-NAVARRO: So the Biden administration and Congressional Democrats are asking for $ 1 trillion for infrastructure and $ 3.5 trillion for climate change, education, medicare and more. Do you think these numbers should be recalled? That’s what Republicans are saying – you know, based on what we saw the economy do in June?
FURMAN: I think the needs of this country in terms of children, in terms of paid vacation, in terms of infrastructure, in terms of climate change – they’re so great that those numbers shouldn’t be reduced. And I would separate the inflation debate. This year, we put $ 2 trillion into the economy in one year with almost no notice. It is a difficult thing for the economy to absorb. The legislation that Congress is talking about – it spans 10 years. Much of it has to be paid for. It would increase the size of the economy. And that would give the Fed as many years as needed to make up for it. So I wouldn’t worry at all about inflation in the context of the new proposals.
GARCIA-NAVARRO: I mean, one of the things we know about inflation is that it’s a kind of confidence and perception and even talking about inflation can lead to l ‘inflation. Is this something you are thinking about?
FURMAN: Absolutely. Inflation expectations are that magical thing that pops up in our economic models, and we’re not quite sure where they’re coming from. We don’t really know what expectations matter. But yes, inflation can be self-fulfilling. If you think there is going to be inflation, you are going to raise your wages, raise your prices, and there will be inflation.
GARCIA-NAVARRO: And do you think that’s something we’re risking here?
FURMAN: The Fed is really trying to control this. I think they will probably be able to. We will see.
GARCIA-NAVARRO: It’s Jason Furman, formerly of the Council of Economic Advisors, now at Harvard. Thank you so much.
FURMAN: Thanks for having me.
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