On this episode, Dan Richards talks with Mark Blyth about his new book, co-written with Nicoló Fraccaroli, called “Inflation: A Guide for Users and Losers.” 

Mark and Dan discuss the competing theories for what causes inflation, the merits of each, and how they explain (or fail to explain) the inflation we saw post-pandemic. They also explore why inflation harms some parts of society more than others, and how to make sure that, the next time inflation rears its head, we fight it in a way that’s more effective and more fair.  

Learn more about and purchase “Inflation: A Guide for Users and Losers”

[MUSIC PLAYING] DAN RICHARDS: From the Watson Institute for International and Public Affairs at Brown University, this is Trending Globally. I'm Dan Richards. There's one economic phenomenon that we have all become pretty familiar with in the last few years. You've probably heard all about it on the news, and you've probably experienced it firsthand in your household budget.

NEWS REPORT 1: Inflation. Inflation jumped to a 13-year high, squeezing American pocketbooks.

NEWS REPORT 2: Biden is calling inflation the number one problem facing families today.

NEWS REPORT 3: And you would tell the American people that inflation is going to continue to decline?

JOE BIDEN: No, I'm telling the American people that we're going to get control of inflation.

NEWS REPORT 5: Now to those new inflation numbers out this morning that--

PRESIDENT DONALD TRUMP: And the inflation is eating everybody alive. And it's been doing that for three years.

NEWS REPORT 6: This report shows us that high inflation will persist for a longer amount of time and keep the Federal Reserve on that path of aggressive interest rate hikes to combat this high inflation.

DAN RICHARDS: Now, inflation in the US has lowered significantly since its peak in Twenty Twenty-Two. But according to our guest on this episode, if we don't develop a better understanding of inflation, of how it works and of how to fight it, we'll be doomed to see persistent high inflation again and likely sooner than we think.

Mark Blyth is a political economist at the Watson Institute and author of a new book co-written with Nicolo Fraccaroli called Inflation, A Guide for Users and Losers. I talked with Mark about the competing theories that exist for what causes inflation, the merits of each of these theories, and how they all explain or fail to explain the inflation that we saw post-pandemic. We also discussed the uneven burden of inflation on society, and how to make sure that the next time inflation rears its head, we fight it in a way that is both effective and fair.

Let's start with an idea that Mark and Nico put out in the very beginning of their book. Even though inflation can look egalitarian, the price of eggs goes up for everyone after all, it isn't. The clue is in their title. When it comes to inflation, there are winners and losers. Who are the winners and who are the losers, you ask, well, it depends, but broadly speaking, as Mark and Nico see it, the losers are often the people in society who are already struggling to get by. Here's how Mark put it to me.

MARK BLYTH: That we measure inflation as a measure of consumption. Now, if you shop at Aldi, as I want to do because I'm Scottish and I'm cheap, right, and also because they're great value, if you're there, the chances are you're not in the top 20% of the income distribution. Fair?

DAN RICHARDS: I think that's fair.

MARK BLYTH: Now, if inflation goes up by 10%, the people shopping at Aldi are definitely going to feel it.

DAN RICHARDS: Right.

MARK BLYTH: Right. If You're in the top 20% you're probably shopping at Whole Foods.

DAN RICHARDS: But won't Whole Foods get more expensive.

MARK BLYTH: You won't notice it as much because a lesser proportion of your income is spent on consumption goods. Right. And then when you get to the very top of the income distribution, it's even more fun. Because let's say, for example, own your own house outright. Well, what happens in an inflation? Well, houses become an inflation hedge, because people invest in them because the nominal value keeps going up in line with inflation.

DAN RICHARDS: Right.

MARK BLYTH: You might have stocks and shares and bonds and all that of stuff. Let's say that you've got shares in oil companies and there's a giant shock to oil prices. You're going to do quite well at that. So what net convinced me was the story to be written about the winners and losers of inflation, and how this notion that we all suffer from inflation isn't actually that kosher.

DAN RICHARDS: We will get back to the winners and losers of inflation later on, but let's go back to the basics. And maybe let's start with a definition. What exactly is inflation? Here's Mark.

MARK BLYTH: So I define inflation from my childhood because I have this vivid memory of Mrs. Thatcher being on TV and a reporter basically asking the same question. And she said that inflation is not when certain things get expensive. That happens all the time. And inflation is a general rise in the level of all prices. And I think that that's a good definition of what it is. But that begs another question, what causes it?

DAN RICHARDS: According to Mark, today, experts and policymakers tend to subscribe to one of four main explanations for what causes inflation. To help illustrate these different explanations, or inflation stories, as Mark calls them, let's look at how they have all been used to explain the inflation we have seen in the last few years since the pandemic. To start, story number one,

MARK BLYTH: Too much money, too few goods.

DAN RICHARDS: Proponents of this inflation story in the years after the pandemic

MARK BLYTH: Came out and said, this is the Biden stimulus checks. What happened was we have this drop in the supply side of the economy. The pandemic, you can't get stuff, which means it stuff's going to be more expensive. And then we weaponize this by giving everybody checks, and that means that prices are going to go up. And the first cause there is money. Done.

DAN RICHARDS: Right, everyone got checks and we got inflation.

MARK BLYTH: That's it. Right.

DAN RICHARDS: While this is a very popular inflation story, Mark says it doesn't really explain the fact that inflation occurred not just in the United States post-pandemic, but around the world.

MARK BLYTH: 30 countries were hit with inflation. Only one of them had Biden's stimulus checks.

DAN RICHARDS: Those checks may have contributed to inflation, but clearly, they were not the only factor.

MARK BLYTH: So it's not incorrect, but not unproblematic, right?

DAN RICHARDS: Which brings us to inflation story number two.

MARK BLYTH: What's the second one. Well, it's actually associated with Paul Krugman. This is the team transitory narrative, right? This is a supply shock. This is COVID. This is Ukraine.

DAN RICHARDS: As in the war in Ukraine created a fuel supply shock and COVID in general disrupted supply chains, creating shocks on all types of goods. Remember the toilet paper panic of Twenty Twenty? In this story, too much money wasn't as responsible for inflation as was too few goods. So those are two of the biggest stories.

MARK BLYTH: And then there was a third one, and that's a subsidiary of the first one, the money shock one, which is to do with the labor market.

DAN RICHARDS: Starting around Twenty Twenty-One, the US enters a period of relatively low unemployment. As a result,

MARK BLYTH: People will start to try and get more wages.

DAN RICHARDS: Workers would have a better chance of success in those negotiations because there are fewer people who are unemployed and ready to take their place, which is good for them, but,

MARK BLYTH: If they get more wages, then firms will respond by raising prices.

DAN RICHARDS: Companies raise prices to offset the increased wages they now have to pay to their employees. But then those employees, seeing these higher prices when they go out grocery shopping or buying gas, demand a new wage increase. But then those companies in turn will raise their prices. You see where this is going.

MARK BLYTH: And you get this wage price spiral. So people got very worried about that for a while.

DAN RICHARDS: Mark thinks this story doesn't make quite as much sense for describing the inflation we saw recently as it might have in earlier episodes of inflation in the United States.

DAN RICHARDS: All right, the fourth and final inflation story that Mark and Nico identify.

MARK BLYTH: And then the last one basically said, well, it may not start the inflation, but let's be honest, when corporations see a chance to push up and make more profits, don't you think they're going to take it?

DAN RICHARDS: You might have heard a nickname for this story during the pandemic. Greedflation.

MARK BLYTH: So this is associated with a woman called Isabella Weber who's at UMass, and it was this idea of sellers' inflation.

DAN RICHARDS: In this story, the concentration of corporate power that we've seen in our recent history has altered how supply and demand work in ways that exacerbate inflation. In a more traditional view of, a quote, "competitive free market",

MARK BLYTH: If I raise prices, somebody else will come in and take my market share. But when you have highly concentrated markets, think, for example, eggs, why are American eggs so expensive? Because there's really just two buyers in the whole market that set prices for the whole industry. So it turns out the European Central Bank, for example, took this one a lot more seriously. And according to their estimates, 40% of the inflation that they got in Twenty Twenty-Two was from sellers' Inflation. Basically price hikes by corporations.

DAN RICHARDS: Too much money, too little supply, too many workers, and greedy corporations.

MARK BLYTH: So that was the four stories. And we were interested in who was making each one up and who was saying it, because what you're identifying is, who caused it and therefore who has to pay for it?

DAN RICHARDS: Since each inflation story identifies a different cause of inflation, they all also point to different ways to fight inflation. If you think low unemployment is the main driver of inflation, you'll create very different policies than if you think inflation is caused by greedy corporations. Which means that not only does inflation produce economic winners and losers, the policies that then fight inflation also produce economic winners and losers. As Mark put it,

MARK BLYTH: So it's not just inflation's distributive effects you have to worry about. It's also the cure, the medicine.

DAN RICHARDS: So which story accurately explains the inflation we saw post-pandemic? Who are the winners and losers from our fight against inflation so far, and who should they be? Well, to answer these questions, Mark and Nico think it's essential that we actually look back at one of the most important and influential episodes of inflation in modern history, one that still shapes how many policymakers think about inflation today. And it's a history that they think many people have all wrong. We're talking about

DAN RICHARDS: The great inflation of the Nineteen Seventies,

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Which goes like this. In the Nineteen Sixties and 70s, governments, particularly in the United States and other places, Western Europe spent a lot of money, more than basically we could augment either through supply or through technology and productivity. We had highly unionized labor markets that led to a lot of strikes and unrest that caused prices to go up.

DAN RICHARDS: It was bad. Inflation hit rates as high as 14%. For context, after COVID rates peaked around 8%, oil and gas prices skyrocketed. There were fuel shortages and rationing at gas stations.

SUBJECT 6: I'm in a line two hours there and I can't get gas. This is baloney.

DAN RICHARDS: The relatively highly unionized workforce in the US demanded higher wages to respond to this.

MARK BLYTH: And we go into this wage price spiral where everyone's expectations become unhinged. And we needed decisive action to break this.

DAN RICHARDS: By many accounts, it was broken by one man,

MARK BLYTH: The then Federal Reserve chair, Paul Volcker.

DAN RICHARDS: Paul Volcker decided to raise the Federal Reserve's interest rates. You see, when a central bank like the Federal Reserve raises their interest rates, it affects the interest rates at banks and lending institutions throughout the economy, affecting everything from mortgage rates to the rates of car payments to construction loans. Volcker raised this rate to unprecedented levels.

MARK BLYTH: Pushes rates up to around 20%.

DAN RICHARDS: Again, for context, at the peak of our post-pandemic pandemic inflation, the Federal Reserve raised their interest rates to just over 5%. Volcker's increase of Federal Reserve interest rates did what many economists predicted it would do. It became harder and harder to borrow money, which hurt consumption and investment.

MARK BLYTH: You get this huge destruction of capital, jobs, unemployment, cetera, and inflation went down.

MARK BLYTH: So this goes back to an economist and central banker called Alan blinder, who still teaches at Princeton. And he's been doing a bunch of papers over the past 25 years that basically goes exactly to this question. And in his analysis, he says there are three main causes of the Great Inflation in the Nineteen Seventies, and none of them are money.

And his story, which we expand on, basically goes like this. We call it the London buses model of inflation. So the story with London buses is you wait for an hour for one, nothing comes, and then eight of them come at the one time. And you can think of the period from around Nineteen Sixty-Six to about Nineteen Eighty as essentially being the same.

DAN RICHARDS: By which Mark means that in that period, a bunch of different things that all could have caused a little inflation all hit the US economy at once. Things such as,

MARK BLYTH: Start with the Vietnam War. You got half a million people in the field and 2.5 million in support. Your labor markets in the Nineteen Sixties are incredibly tight. This has got to push up wages and there's only so much employers can do, augmenting productivity, cetera, to try and pay for those wages. Industrial unrest starts to happen. The standard story is right.

But there's other things. Women and minorities incorporated in the labor market at scale for the first time, they push up prices and rents and a whole bunch of other things. You have failed wheat harvests in the Soviet Union and in Canada that actually push on commodity prices. You've got the Nineteen Seventy-Four oil crisis, where the price of oil is quadrupled into a United States economy that's much, much more oil dependent. So there's a whole bunch of factors that if you basically see them as a bunch of supply shocks that all ram into each other, you end up with a very different story in the Nineteen Seventies.

DAN RICHARDS: If the story of the cause of the Nineteen Seventies inflation is incomplete, does that mean that the story of the solution is incomplete, too? That it wasn't just the monetary policy instituted by the Federal Reserve, the raising of interest rates that put an end to inflation? According to Mark, yes.

MARK BLYTH: Well, I don't want to say that monetary policy was useless at an effective. I think that'd be far too strong a claim. But if you take a supply side view of this quite seriously, then ultimately you have to think that there's got to be more to it than that, which is adjusting the supply side of the economy rather than just relying on interest rates to crush demand.

So what ended it in the 70s? By that account of the supply side, it was essentially each of these individual supply shocks, ranging from Vietnam to incorporating women and minorities at scale in the labor market as consumers. The oil shocks of '74, '72, field harvests, cetera, cetera. All of these had a kind of impulse and then decay. But they came along altogether all at once and that made it look like it was a systemic problem.

DAN RICHARDS: In other words, once the supply shocks of the Nineteen Sixties and 70s either went away or the economy was able to adjust itself around them, inflation started to go down on its own.

MARK BLYTH: So if anything, high interest rates were the coup de grace that ended it definitively.

MARK BLYTH: Allows you to see the Twenty Twenties inflation. And the Nineteen Seventies is much more of the same thing, because if it's basically it was all labor markets and overheating and overspending, that doesn't really explain what happened this time around. But if you see it as supply shocks, they're just supply shocks of a different type and a different duration, and then it becomes easier to actually understand them both together.

DAN RICHARDS: So looking now at the current inflation we've been experiencing, is that really how you think about the causes, not so much the stimulus checks and more like an energy shock from the war in Ukraine with supply chain issues from COVID and changing consumption patterns that got everyone to buy Peloton's and whatever, kind of that same London bus series of supply shocks?

MARK BLYTH: Right, exactly.

DAN RICHARDS: Which brings up a question. If post-pandemic inflation was largely driven by supply shocks, where any of the policies tried by governments around the world to fight inflation effective, or was it just a matter of waiting for the London bus traffic jam to ease up? Well, let's look at some examples.

MARK BLYTH: So what was tried around the world? Lots of different things.

DAN RICHARDS: Such as?

MARK BLYTH: Price controls.

DAN RICHARDS: Which as the name suggests, involves the government attempting to control the prices of goods and services. In the years after the pandemic, they were done in different countries, in different ways to varying levels of effectiveness.

MARK BLYTH: Hungary basically, Orban comes in and says all of the basics will be price controlled. And exactly as any economist would tell you, black market shortage, price spikes, supermarkets shutting down, total disaster. Another one that was interesting was Scotland. Scotland basically said, right, rents will be frozen for the pandemic and the people in them will have tenancy, secure tenancy.

But the way the law was written, if you were short-term rentals that didn't have a secure tenant, then you could raise the prices. So what did landlords in Scotland do? Every trick they could to get existing tenants out and then declare it a short-term rental. And prices in Edinburgh went up by around 30% in one year.

DAN RICHARDS: There were also more promising examples.

MARK BLYTH: Spain tried it, but Spain didn't try and control prices at the supermarket. What they did, they said, was basically, if you're in the bottom 40% of the income distribution, then how about you get free transport and then we'll lower electricity prices and control these things. And what that's doing is it's freeing up part of your budget so that you can then deal better with the inflationary part, right? That seemed to work really well.

DAN RICHARDS: So price controls. A mixed bag, and maybe the takeaway is that the devil really is in the details.

MARK BLYTH: What else was tried? Windfall taxes. So what's a windfall tax? Well, you're an oil company. The world's suddenly oil short. You make billions. Who does that go to? Your shareholders and the people in the c-suite. How about we just tax that and redistribute it to the people that are getting absolutely killed with higher oil prices?

DAN RICHARDS: Countries also worked to address the underlying supply issues themselves.

MARK BLYTH: You can focus on policies that are to do with, how do we ameliorate the consequences of running out of gas? It doesn't become a fiscal problem or a monetary problem. It becomes an actual just public policy problem. And interest rates might be part of that solution, but finding new sources of gas or investing in solar or whatever could do just as well.

DAN RICHARDS: Mark and Nico go through even more examples of non-monetary tools that were used to fight inflation. But the key takeaway is this.

MARK BLYTH: What you need is a kind of Swiss army penknife approach. That absolutely, the big blade is monetary policy, but maybe you don't always need to go for the big blade. Maybe there's other things you can do.

DAN RICHARDS: Those other tools might not only help us fight inflation more effectively, they also might help us to fight inflation more fairly. Because let's look at who the winners and losers are when we only use the big blade in the Swiss army knife. The classic inflation fighting tool, the raising of interest rates.

MARK BLYTH: So who already pays more for their credit, the poor or the rich?

DAN RICHARDS: The poorer.

MARK BLYTH: Right. Who has less access to credit?

DAN RICHARDS: The poor.

MARK BLYTH: Right. If you are at the bottom end of the income distribution and you have credit, it's probably payday loans or some kind of extremely expensive form of credit card. So you're already paying much more than someone who has much more cash at the other end of the income distribution, and therefore, that interest rate increase is going to be felt much more keenly by you than someone at the top.

DAN RICHARDS: In other words, according to Mark and Nico both the disease of inflation and the most popular medicine, raising interest rates, disproportionately affect people who might already be struggling the most. But Mark and Nico argue that by better understanding the causes of inflation, the tools we have at our disposal to fight inflation, and the distributional effects of all of this, we can find better and fairer ways to fight inflation the next time we see it.

And this is especially important because while the worst of the post-pandemic inflation seems to be behind us, Mark and Nico believe that we are entering a world where inflation will be coming at us harder and faster than it used to. This is, for a number of reasons, perhaps the most significant of which is,

MARK BLYTH: Climate change, which is basically a one way generator for prices to go up. Now, I know that the current government here doesn't believe in it and wants to ban research on it and funding on it, which is a bit denying the tide comes in, but the tide does come in. And what does this mean? Well, the Potsdam Institute for Climate Research has done the first really good numbers on this. And they estimate that already that food inflation is already increasing in some parts of the world at 3% a year.

Why? Because of drought. Because of downpours and the concentrated downpours effect on topsoil. Because the dry seasons in many places are expanding rather than contracting despite the extra rainfall. The complexity of biodiversity and food webs is basically breaking down because of heat shock. So all of these things are going to lead to climate stresses, which lead to increasing prices.

Now, that's not to say that there aren't ways to adapt to this. This isn't such a green tech, whether it's everything from seawalls to generating panels to cutting edge stuff in geothermal or whatever it happens to be. But that energy transformation at the heart of adapting to this is also going to be very expensive.

To me, it just seems like we're going to go into an inflationary period, not because of overheating labor markets, not because governments are going to excessively spend, they're actually quite constrained, in part, because of the debt burdens that they have, but because of supply shocks. And again, coming a lot from things like climate.

DAN RICHARDS: So if we are in for more inflation in the near future, what do you hope for readers of your and Nico's book, who maybe read this and think to themselves, wow, I think I've been one of inflation's losers? What would you like them to take away from this or have with them going into this kind of new world?

MARK BLYTH: Well, the first one is you're in good company because most of us are inflation losers. But it doesn't have to be that way. Our last chapter is called Our Inflation Wars, Class Wars. And essentially they are in the sense that what happens is people at the top who have stocks in oil companies benefit when there's an inflationary crisis stemming from an energy shock, whereas the people driving the cars at the bottom trying to get to work are the ones who pay for it. So that's there. But it doesn't have to be.

There are ways, with the Swiss army pen knife, of ameliorating those costs. We don't do a lot of it in this country. But I think that again, if we enter into a world in which intermittent but real supply shocks become part of what we're dealing with, we'll adapt to it, but we'll adapt to it with more tools than just interest rates.

DAN RICHARDS: Mark, thank you so much for coming back on Trending Globally.

MARK BLYTH: It's always fun to Trending Globally. This episode was produced by me, Dan Richards, with production assistance from Eric Emma. Our theme music is by Henry Bloomfield. Additional music by Blue Dot Sessions. If you liked this episode, leave us a rating and review on Apple, Spotify, or wherever you listen to podcasts. And if you haven't subscribed to Trend Globally, please do that too.

If you have any questions or comments or ideas for guests or episode topics, send us an email at trendingglobally@brown.edu. Again, that's all one word, trendingglobally@brown.edu. We'll be back in two weeks with another episode of Trending Globally Thanks.

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