Published on: 04/11/2023
In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss where inflation comes from and what the Fed and consumers can do to help bring it down.
Welcome to another edition of Chart Talk. I’m Tony Ogorek. I’m here with Jeff Viksjo. And today, we’re going to talk about, Jeff, the drivers of inflation. And you know it’s interesting, this sense of inflation is sort of a nebulous concept. A lot of people find it difficult to understand where in the heck inflation comes from. So, we’ve got a chart here, which I think, talks about a couple of the primary drivers. So, let’s talk about what we see here Jeff.
Yea, so really this chart breaks down the drivers of inflation, like you said Tony, whether it’s coming from demand, or whether it’s supply driven. And Tony, you can see the dark blue is demand. It fell off a cliff during COVID. We were all stuck home, not buying anything, so it wasn’t contributing anything to inflation. But look at, we came out of the pandemic, that dark blue really shoots up. It almost doubles. And that’s telling you a lot of inflation has been driven by us just buying a lot of stuff. The supply issues, the constraints that caused inflation, they certainly contributed as well, that’s the light blue. But you can see they’ve come down as of late, while the demand side hasn’t. It stayed constant.
Yea, you know Jeff, you hear a lot of people complaining about the Federal Reserve left interest rates too low, for too long. And there may be something to that. However, when you look at this chart, you notice that we were driving, our behavior was driving inflation to a fair amount. Because you’ll just see how dramatically demand went up relative to 2016, ‘17, ‘18, and then took time for supply to catch up.
Now, there are two ways that this is being dealt with. Let’s take a look at our next chart. And this is a chart of the Federal Funds Rate with the general rise in short-term interest rates. Which is how the Central Bank is trying to fight inflation. And what do you see here, relative to prior inflationary flare ups?
Yes, so they’ve taken rates up very, very quickly. Faster than they have in the past. They’ve taken them higher than they have since the Great Financial Crisis. And what this chart, basically, shows you is very time they bring up rates, something does breaks. And you know, this time obviously, we’re having the issues with the banks. So, what they are trying to do is to cause everything else to be more expensive. To buy homes, to carry credit card debt. The effect of that, hopefully, is that we start buying less and that demand side of inflation starts to come down.
Right, so they’re doing that, but also everybody else can do something with it. And we’ve got our final chart here, which is really interesting. It looks at things over the past year. And over here, these are people who are shopping for goods. And we see something really interesting, it’s like a 40-40, 20%, change in behavior. So, let’s just chat on this chart.
Yea, consumers can play a role in bringing inflation down too, and that’s if they stop buying things. If they react to the higher price and say “There’s no way I’m paying that. I’m just not going to buy it”. And this survey basically asks, have you changed your behaviors? And that yellow line is saying, “No I haven’t changed at all. No matter what the price is, I buy it”. Look at how that has come down. So, fewer and fewer people are acting that way. More people are responding to the higher prices saying, “No thank you”.
Yea, they’re saying “I do it a lot”, or “I’m doing it a fair amount”. But bottom line is, consumers’ behavior is changing relative to the price bumps. And ultimately, the Central Bank, plus consumer behavior, is going to modify inflation going forward. There’s no question about it.
So, thank you Jeff. And thank you for joining us for this inflation talk on Chart Talk.
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Paul Dayer April 13 2023