This is a new experiment we’re trying at the Rhodes Center Podcast. 

From time to time, going forward, instead of focusing on one expert and their latest research, Mark will take a deeper dive into one issue (or one question) that’s been bothering him. 

Future episodes will examine the politics of immigration and the persistence of inequality. But the first episode in this new series will explore a topic especially near and dear to Mark: inflation. Specifically, the stories we tell about what causes inflation, how those stories affect our efforts to curb it, and who wins and loses depending on which stories our leaders believe. 

In the first half of this episode, Mark talks with economist Nicolò Fraccaroli about a book he and Mark wrote called “Inflation: A Guide for Users and Losers” (coming out in Spring 2025). 

In the second half, Mark talks with economist Claudia Sahm about the history of inflation, the role central banks play in it, and what’s lost when we try to take politics and politicians out of the inflation debate. 

(One thing to note: both of these conversations were recorded before the election, but the ideas explored in these conversations are just as relevant now as ever.)

Guests on this episode:

• Nicolò Fraccaroli is an economist at the World Bank
• Claudia Sahm is Chief Economist for New Century Advisors and former Section Chief at the Federal Reserve’s Board of Governors

Learn more about the Watson Institute’s other podcasts

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MARK BLYTH: From the Rhodes Center for International Finance and Economics at Brown University, this is The Rhodes Center Podcast. I'm the center's director and your host, Mark Blyth. Back in September, I mentioned on Twitter-- sorry, X. --that I wanted to try something a little different with the podcast. Instead of interviewing just one person in an episode, I wanted to go a bit deeper into things that puzzle me. And there are many things that puzzle me. Here are a few of them.

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We're all familiar with the claim that no one benefits from inflation, but it seems like increasingly that might not be true. So how should we think about inflation today? Or why is it that almost everyone on the center or left of the political spectrum seems totally unable to talk about immigration? Never mind address it as a policy problem. Or think about inequality. Academics like me have been banging on about it forever, and yet it never seems to be a topic around which politics gets organized despite it getting worse over time.

I could go on. There are many more examples, but you get the gist. I'll still have episodes with individual guests exploring their most recent work, but from time to time, we're going to have one of these puzzle episodes. This is our first one. And it's especially near and dear to my heart. If you listen to this show a lot, you probably heard me talk about a book I've been writing with an economist named Nicolo Fraccaroli. The book will be coming out with Norton in the spring. It's called Inflation-- A Guide for Users and Losers.

The book tries to make sense of why we so readily accept certain stories about what causes inflation, who is to blame and what to do about it, and sideline others. These questions have become all the more important since the US election in November, when inflation, both the experience of it and the stories about it, seemed to play a major role in helping Donald Trump win the presidency.

So to start this episode, I chatted with my co-author Nick about the different narratives of inflation that are out there, and who wins and who loses depending on which one gets into the ears of policymakers. After that, I talked to the legend, that is Claudia Sahm about inflation expectations and why we dump all this stuff on central banks.

Because when we do that, we get our elected representatives off the hook for all the stuff that should really be in their inboxes. We end up getting into some pretty surprising places. I hope you enjoy it and learn from it. One thing to note, both of these conversations were recorded before the election, but the core ideas of these conversations and our chronic misunderstanding of inflation generally are just as relevant now as they were earlier in the fall. All right. On with the show, as they say. To start, here's my conversation with my co-author, Nick Fraccaroli.

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Hi Nick, welcome to the podcast.

NICOLO FRACCAROLI: Hi, Mark. Great to be here.

MARK BLYTH: OK. So let's get started on the origin story of this book that we've written together. We both wrote books about austerity. We both said, this is probably going to be a bad idea. It worked out to be a really bad idea. In fact, Europe is still paying the cost of it, as is the United Kingdom. Why did you see a similarity between what was going on in austerity and what might go on when we started to fight inflation?

NICOLO FRACCAROLI: I think what caught our attention there was how ideas played a role in the economic debate. They played a role very differently. So in austerity, there was like a single idea. There was the fact that cutting public spending was good for economic growth, an idea that proved to be wrong.

And that was something that economists supported at the time and governments followed suit and applied it and realized that it wasn't really working in crisis times. With the inflation debate, it was a bit different because the inflation debate was coming after an increase in public spending after COVID, after the pandemic.

So the austerity idea was put aside because they realized that during a crisis, public spending was actually useful. But then when inflation started growing, this brought the idea of a new form of austerity that we call in the book monetary austerity. They weren't asking for reducing public spending and for governments to tighten their belts, but what they were asking is for central banks to increase interest rates.

And even some people even explicitly said it to engineer a crisis and raise unemployment so that the economy would compress and reduce the inflation that was surging at the time.

MARK BLYTH: So that didn't happen. And that didn't happen in part because there were lots of other stories being bandied around. And this is also something that got our interest. If inflation theory, if you will, or our way of dealing with it is this well-established body of doctrine, you'd think there'd be one story. But there wasn't one story. You mentioned one, which is we need to engineer a recession to get out of this. But there were other stories that were equally prominent. What were those other stories?

NICOLO FRACCAROLI: So let's really look at what happened chronologically. So when inflation hit in Twenty Twenty-One, some economists have already said that inflation was coming. They predicted inflation. They said it was going to happen. And they were praised for that because they were actually right.

But the problem was, what they were saying, it was coming from. So they say that inflation was coming because the US government, at least for the American debate, was spending too much money to recover from COVID. And while helping them was good, they said that the government should be more careful in how much money it gave because it created too much money. It put too much money into the economy and too much money was chasing too few goods.

So this was one of the story that was really prominent at the beginning of the debate. But not everyone agreed. Some people said that inflation was actually not coming from excessive government spending, but it was coming from COVID disruptions, and later on, by the invasion of Ukraine, by Russia, that was creating, of course, other disruption in the energy sector, which would percolate in the rest of the economy and bring prices up on a number of sectors.

MARK BLYTH: So just to keep track on this, the first school of thought is the too much money chasing too few goods. It's government spending that caused it.

NICOLO FRACCAROLI: Exactly.

MARK BLYTH: The second one is what got known as the supply shock school. Team transient.

NICOLO FRACCAROLI: Exactly.

MARK BLYTH: Basically, this is a big shock. Suddenly lots of shortages. Obviously, prices go up. This will eventually resolve itself and the prices will go back down. That was number 2.

NICOLO FRACCAROLI: Exactly. And that was just to clarify the main point of the second school. That the shock was temporary. And so inflation was going to fade away by itself. So the interest rate hike that the first school was calling for could have been a bit smaller and a bit more moderate without engineering the recession that the first school was calling for.

MARK BLYTH: All right. Good stuff. So what else was out there?

NICOLO FRACCAROLI: The other two views are called the labor market view and the price gouging view. So the labor market view is very connected to the first one because it also looks at aggregate demand. So it says that the economy is overheating. There is an expansion that is too large. And it can become problematic. And the main issue there is that wages could get out of control.

Why would wages get out of control? Because imagine that you see prices going up, but your wage remains the same. Then, of course, you're going to ask for a wage increase because you can't afford any more doing grocery or paying your rent. But if inflation keeps going up, you're going to keep asking for a higher wage. And the problem there is that this would create what is called a wage price spiral.

This is something that central banks took very seriously. A lot of them said, especially from the very beginning of the inflation crisis, that they were monitoring wages because they were afraid of a wage price spiral to come.

MARK BLYTH: Yeah. At the end of the day, wages didn't actually catch up with inflation.

NICOLO FRACCAROLI: No. Exactly. And they don't seem to accelerate. Real wage growth doesn't seem to be accelerating as much as to create the concern of a wage price spiral. There is a very interesting paper from the International Monetary Fund that looks at historical experiences of wage price spiral. And they notice that it's something that is quite rare as a phenomenon.

MARK BLYTH: Right. So theoretically, it happens a lot. But actually, it doesn't really happen a lot.

NICOLO FRACCAROLI: It doesn't happen a lot. Yeah. In theory, it makes a lot of sense. And it happened in the past. And it was a big problem in the inflation of the '70s and '80s. But it didn't seem to take place in the same way today. And there are reasons for that. One of the reasons that many people mentioned is that, for instance, the density of trade unions-- so people that are actually enrolled in a trade union, are represented by a trade union has declined a lot since the '70s. So of course they are less represented. So they have a lower power in claiming for a higher wage,

MARK BLYTH: Yeah. They can't push up their wages.

NICOLO FRACCAROLI: Right.

MARK BLYTH: All right. So what's the last school that we identified?

NICOLO FRACCAROLI: Well, the last school that we put in the book, but also probably the latest school that came in the debate was considered as a marginal heterodox school, which is claiming that firms also play a role in driving inflation up. Because they take advantage of prices going up. They say, OK. If all the prices are going up because of different reasons, as we say, one reason could be spending, one reason could be the supply-side shock, well, we can also increase them by a little to increase our margin. Our profit margins.

Some people call it greedflation because they connected it to the greed of firms, of corporations that are trying to increase prices to take advantage of the situation. Others, like Isabella Weber, call it sellers inflation. Initially, this view was quite discredited. But then as time went on, we could collect better data. We saw that in many sectors, especially the energy sectors, there were higher profit margins.

MARK BLYTH: And you saw that in some sectors, that were highly concentrated but not in others. So let's put all this together. We had these different stories. We had, you spent too much money, you're the government, it's a problem. You have the labor market expectations of wages and prices getting out of control. We had the simple, it's just big supply shocks.

And then we had, on the back of supply shocks come these corporations. And in certain markets, given certain market characteristics, we can expect them to engage in trying to push up their margins rather than just protect their profits. OK. So let's cut to the chase on this one, Nick. Having done all this, which ones do you think are the correct stories? What actually was the inflation of '21 and '24?

NICOLO FRACCAROLI: Well, I think inflation in the end was a combination of a lot of these elements. I think that the point here is really to understand what mattered the most. And what is clear from also recent analysis is that what mattered the most was the supply-side shock. So that's at least where inflation started.

So there were disruption caused during COVID. So firms that work across different countries had to find other providers, other suppliers. And of course, like the war in Ukraine created a spike in the prices of oil and gas that was particularly influential for Europe, but also other countries. But then the other story is highlight some other factors that definitely played a role, but they cannot be seen as a standalone explanation of why inflation went up.

We could argue that inflation in the US is a bit higher than in other countries because of government spending. What we didn't see is the labor market's dynamic. Some economists are still quite cautious about ruling out that story because they say that this is something that we may see in the future. Wages have not caught up yet, but they may be catching up in the near future. Some economists like Bernanke and Blanchard, in a recent paper, they are warning against that risk.

And the price gouging story is also true because for some sectors, we saw indeed profit margins going up. And we see how firms play a role, not only in making inflation more persistent, but also by increasing prices further in some of these sectors.

MARK BLYTH: So at the end, it's an all of the above, perhaps with a slight weighting to supply shocks and a bit of price gouging?

NICOLO FRACCAROLI: Yeah. And I think that is telling us something about how the debate evolved and how the debate should be read. Why did we have to give so much emphasis to one source of inflation against all the other? Well, what we explain in the book is that it doesn't impact everyone in the same way. It makes a difference whether you are raising interest rate for all against, for instance, imposing some windfall taxes that are just targeted to some sectors or some price controls that are targeted to some sectors. So I think that's one of the reason why the debate was so fragmented.

MARK BLYTH: So it wasn't just the castles in the air, let's find the best possible theoretical explanation. There were interests at play here, as you say. So for example, if the idea is you need to raise interest rates is the only way to deal with things and we need to have a period of high unemployment to cure it, then I'm guessing that the people who are saying things like that are not the people who are going to be made unemployed. There is a distributional skew in that one.

Similarly, if government spending is always involved with the problem, that's just an argument for everyone who always wants to cut government spending. Similarly, if you think that it's all just corporations' price gouging, then that gives the state a reason to go and interfere with the price making of corporations. So these things have real political economy and distributional spillovers. They're not just theories of inflation. They're also theories of who needs to pay given what caused it and who is to blame. Right?

NICOLO FRACCAROLI: Right. And we saw that inflation is also increasing the cost of living. And when it's increasing, especially as the recent inflation did, the cost of food and of energy, the people that spend more of their wage on these two categories, which are poorer people, are impacted the most by inflation.

And so when we think about the right policy response to that, it's really difficult to see how interest rate increases could help the poorer households. Because if you think about it, you're really struggling in distributing your wage to afford the food that you need or to afford the gasoline for your car, and then you see also the interest rate on your mortgage that might increase, so that really puts you in a very difficult situation.

And that's why some people in the debate were arguing for rate increases that were a bit more moderate than the rate increase that the first fiscal story was calling for. So, of course, the way the debate evolved was also determined a lot by the group of people that would have been impacted by inflation in a very different manner.

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MARK BLYTH: Nick, that's great. Thank you very much for writing the book with me, and for being on the podcast and helping us understand these different inflation stories.

NICOLO FRACCAROLI: Thank you.

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MARK BLYTH: I could talk with Nick for hours about these stories. Who pushes them, who wins and who loses because of them. If you want to hear more from us on that, just wait till the book comes out in the spring. But there's another piece I want to drill down into in this inflation puzzle. How much can top-down policies actually help reduce inflation? And how do different inflation stories point to different solutions at the highest level of government and policy?

To help answer these questions, I spoke to Claudia Sahm, Chief Economist for New Century Advisors and a former Section Chief at the Federal Reserve's Board of Governors. In other words, not only is she exactly the right person to talk to, she has often been in the room when inflation-related decisions were being made at the Fed.

If that isn't impressive enough, she also has a rule named after her, the Sahm rule, which is an indicator for predicting recessions. I'll spare you the details on that. But safe to say, you don't get a rule named after you for nothing. Here's our conversation.

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Hello, Claudia. Thanks for making the time to join us on the podcast.

CLAUDIA SAHM: I'm so happy to be here. Thank you.

MARK BLYTH: Excellent. So we're trying to get to the bottom, or if not the bottom, somewhere close to the bottom of what this whole inflation mystery is. Now, I'm going to start with some highfalutin stuff, and hope you can help us understand where it goes. Every year, the central banking community gets together in this wonderful ski resort called Jackson Hole. And they present lots of papers.

And this time around, the vast majority of those papers said that the reason the inflation went down was because the central banking community had correctly managed expectations. They didn't become de-anchored. And because of that, we were able to have a nice disinflation, where lots of people weren't made unemployed. Can you possibly explain what any of that is in terms that normal people would understand?

CLAUDIA SAHM: I'll try. So inflation expectations became very central to how central bankers think about their role in fighting inflation after the inflation of the Nineteen Seventies and bringing that under control. It was a period where you'd had years and years of high inflation. By many measures, you saw people expecting more inflation and even changing their behavior. A lot of times, bargaining not just people in unions, but also other workers bargaining for higher wages.

And so people just got-- both individuals and businesses got used to prices rising at a faster clip. And then that got baked in. And then we ended up with prices rising at a faster clip. But that was one piece that the central banks took from that great inflation and said, we need to make sure that we're serious about fighting inflation. And so that really can break the attitude. So there was an inflation mentality in the Nineteen Seventies.

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MARK BLYTH: What Claudia is getting at here with the idea of an inflation attitude is key to understanding how economists in general, and central bankers in particular, think about inflation. Think about it this way. While the root cause of inflation might be too much money or a supply shock, the inflation that results changes ordinary people's expectations of future prices. In other words, inflation is in the world, but it's also in our heads. And therefore, to tackle it, we need to get into our heads too. Hence all the discussion about expectations.

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CLAUDIA SAHM: We did see after the Nineteen Eighties and going forward, we saw inflation expectations come down as inflation came down. And roughly speaking, experts looked back and say that the Fed or the central banks, that was their doing right because they fought that inflation. And it just became very central. But measures of inflation expectations are all really pretty rough would be the right way to say it.

We never get to actually observe its surveys. You're asking people what do you expect prices to change in the next 5 to 10 years. I did work with the Michigan Survey, which is the one that does the big inflation expectations survey, one of a few that is used by the Fed. And I had done some research with the survey. And I had a chance to go and listen to the tapes of the survey, and my jaw hit the floor when I was listening to the inflation expectation questions.

MARK BLYTH: So why was that?

CLAUDIA SAHM: How fast people would answer them. It was clear some people have difficulty, what's a percent change. I mean, they are harder questions.

MARK BLYTH: Yeah. They are harder questions.

CLAUDIA SAHM: And what are we talking about? Prices and gen price? In judgment of people answering the questions, I get it. These are more complicated questions. They're busy. They won't go on their lives. But me knowing how important they were at the Fed, that disconnect of just knowing how hard it is to measure and how much the theories that economists use often treat them as very precise and knowable and very important.

Inflation expectations, very elegant in the theories. Makes a lot of sense. It gives a role to central banks to really make that commitment and have people believe it. In practice, I think it's very hard to measure it. And I personally think the expectations of inflation, a lot of that is based on what we've just experienced or have experienced more recently as opposed to the Fed convincing us they're going to get prices down.

In thinking about how-- when we ask people about their expectations and try to measure these in surveys, Richard Curtin, who had run the Michigan Survey for many years, he has a great book on the expectations. The measurement for those interested. But he had really stressed that people are gathering information from around them.

It's not that they're like me sitting breathlessly waiting for the latest Bureau of Labor Statistics print to come out and looking-- and even people-- it's in the headlines. But not everyone is reading those either. They're living in the employment report. They're living in the CPI. And you bring all those experiences. What they tell you about. When you bring it together and aggregate it, it gives us some picture broadly.

So I think the way that people are gathering information about the economy is different than the way economists are gathering information about the economy. And so I can see, especially with these expectations measures, there's more tension when you try to move between the two pieces.

But I do worry sometimes that economists fall in love with the models. And pushing so hard on inflation expectations, particularly in this particular cycle that had many very unusual features to it being related to the pandemic to then say, oh. We'll just point back. See, this cycle is just like all the others you can explain it with inflation expectations. You're like, whoa. Let's back up here.

MARK BLYTH: Well, if we do back up and go through the '21 to '23 period, there was a sequence of particular arguments. So the first one out of the stable was the ever ready, the government spent too much money. And the bit of evidence for this was the Biden stimulus checks. Then after that, it was the labor markets too tight in part because of COVID. And therefore, we're going to get these expectations out of hand.

Then after that one, there was sort of no, no. Really. This is just a big supply shock. And it too shall pass. And then there was and on top of all that, there's a whole bunch of greedy corporations and highly concentrated markets that are pushing on their margins. Is it fair to say that all of the above is true? But what we do is we just draw a line under it and say it's just easier to talk about expectations?

CLAUDIA SAHM: I would agree with all those factors. I'd add one more. And that was particularly important outside of the US would be the war in Ukraine.

MARK BLYTH: Yeah.

CLAUDIA SAHM: I try, when thinking about this cycle with inflation, I try to think to its causing factors, like the pandemic as one example. I mean, the war in Ukraine was the second one. But the pandemic, it was global in nature. This cycle has been global in nature. So yes. You can have policies, in particular, countries in the US went very big on fiscal in the response. And that last said, with the American Rescue Plan in Twenty Twenty-One, none of our peer countries had that.

MARK BLYTH: Right.

CLAUDIA SAHM: And it almost certainly contributed to inflation. It almost certainly contributed to the US having a stronger recovery as well. So there have been things that were very disruptive that affected inflation from the pandemic. And then I think about with the greedflation, which I don't particularly like the terminology, but the pandemic created an environment in which pricing power shifted.

And so capitalist firms, given the opportunity, they will make profits. But then it goes back to a question of what's the context of it? I think understanding what the cause is is important. In my opinion, a lot of what brought inflation down was not the Fed anchoring inflation expectations, though it is fascinating that the American people were team transitory the whole time. They stayed with them. But I mean, a lot of it was the passage of time. Like, working out the disruptions.

MARK BLYTH: Yeah. And the longer it goes, the more likely it stays. I've got a friend who runs a building company. And he says that now the work that he did pre-pandemic is probably 25% to 30% more expensive. And all the supply chain snarls have, in a sense, been solved. But no one's actually acting. In a sense, it's a great collective action problem. We're now here and I know it's horrible, but at the same time, I'm not going to be the one to try and break it. So we get stuck on that level.

Moving away from expectations, let's think about what you said there regarding the complexity of all of this. Is it because it's so complex and contains so many factors that central banks really tend to have just two tools? The first one is raising lower the price of money, crudely the interest rate, and the other one is buy and sell assets, which we did lots of in the prior decade. Could they do anything else, or is it really just that's the only thing they've got? So regardless of the precise causes of the inflation, we're going to respond with interest rates.

CLAUDIA SAHM: This was my great frustration in Twenty Twenty-Two, late Twenty Twenty-One, when it was clear, this inflation is here, it may be temporary, but it's a serious problem. I can remember watching a press conference early on where President Biden acknowledged inflation had gone higher, and essentially said, the Fed's got this. And had specifically talked about food and energy prices rising. He's like, the Fed's got this. And I'm like, no. The Fed can bring down any kind of inflation, right?

They are capable of destroying enough demand. And under the Volcker Fed, I mean, they essentially engineered a recession. So there is a path, and the Fed knows how to take down inflation. But they don't have very precise tools. So I'm not, oh, the Fed shouldn't have raised rates. I think the Fed had a role to play, and they did need to step in. But the mix of inflation and the idea of, oh. The Fed will handle it. And it's like, no. They can handle this, but it will be much more painful than it has to be.

One place where the Biden administration did step in, and I think this was-- I mean, it was politically difficult for them. But I do think this is an example of where outside of monetary policy, fighting inflation can be useful. So after Russia invaded Ukraine and the energy prices just went sky high, the administration did quite a bit more with the Strategic Petroleum Reserve to try to get more supply among other efforts. So to me, it's like that's a price that people care a lot about. And the Fed moving the federal funds rate around is not going to have--

MARK BLYTH: That's not going to do it.

CLAUDIA SAHM: Not really.

MARK BLYTH: Yeah. I mean, what is having a buffer stock and actually unleashing the buffer stock will really have that effect. Recently, I was back reading something I hadn't read in a very long time. You probably know it's a piece about the Golden Age by Margolin and Shaw back from the early '90s looking back on the whole sort of post '45 to '75 period.

And one of the things they pointed out in that we used to have a wheat buffer stock. That it was actually a global wheat buffer stock. And because of failed harvests in the '70s, that buffer stock was depleted. And when that was depleted, that's when basic commodity prices started to become much more volatile.

So there's a way in which we used to have other tools, but we've sacrificed them or let them atrophy over time. So I want to ask, do you think we should be a bit sympathetic to the central banks here? I seem to be ragging on them a bit because of the expectation stuff. But in a way, there's a story you could tell that goes like this, back in Two Thousand Eight, there was a big crisis. And politicians had-- during a prior 20 years of nice growth and so on and so forth, absolved themselves of any responsibility for the running of the economy and just said, the central have got it.

And then when it all went to hell in a hand basket, they turned to them and said, right, lads. You fix this. And as I suggested, they've only got two tools-- buy and sell, raise and lower. They spent a decade doing the buy and sell, and then they had to do the raise. Do you think that the Fed, in a sense, is being dealt a really, really bad hand in the game of economic poker, and they constantly have to play it?

CLAUDIA SAHM: They'll play the hand they're dealt. I'm actually pretty positive on what the Fed has done over this period, largely. I don't worry about the Fed. I worry about the outcomes for policy in the end. I think we're all getting dealt a bad deal. We're getting a bad deal here. It is my impression that over many, many years, there has been-- the gravity shifted among economists working in policy and academia and related that monetary policy was the way to solve the business cycle.

I think there's probably a lot of reasons. Probably some very economist are in control. It's very clean. It's not partisan, it's not as messy. We can have these nice models. They can be effective. It's not to say, but it gravitated towards the Fed's got this. And what happened then is you have a massive amount of research and thinking and models and ideas around monetary policy. And what should exist in a parallel space for fiscal policy really atrophied.

And then you start ending up with models and papers that justify that. They go, monetary policy is the better way to do this. And there's no way, given the tools, and I am firmly against giving the Fed more tools, like broadly speaking. Because I think there are times where I've seen even members of Congress, some of this came up with the environmental issues-- oh. The Fed could do this, that, or the other. And it's like, no. You all congressional legislation--

MARK BLYTH: Yeah. That's your job.

CLAUDIA SAHM: Go do it. If you need the Fed to help implement it, like you write in legislation, they'll go do it. But don't push on them to try to go around. They're often asked to do the impossible. They do the best they can. And then yeah. There's a real mismatch of tools. And what's unfortunate is some of those tools are sitting unused in other places. But when fiscal policy goes in and tries to work on inflation, it has downsides, too.

MARK BLYTH: Yeah.

CLAUDIA SAHM: So there is no perfect way to do it, but to me, something that's a more diversified policy approach would be a much better way to do it.

MARK BLYTH: So let's bring this conversation-- much as I'm enjoying it, to a bit of a close. Let's say that the expectation story, even if it's not clearly specified out there in the real world, is the one that central banks are going to stick to because it makes sense to them as a community. They can communicate it, and it seems to have worked, and we obviously know as you pointed out, that people do have price expectations. And they can, in a sense, become unhinged if they have experience of multiple years of 10% a year increase. Of course, that's going to have an effect.

It may not be calibrated the way the models think about credibility and all this sort of stuff, but you know that's out there in the world. So we had no inflation, basically, for a long time. And the prior decade to this recent past, we had lots of papers saying the Phillips curve is flat. And we were wondering where the inflation had gone and will it ever return. And then bang. It came back in a classic supply and demand shock mix.

It now seems to be on the wane. I'm not convinced that we've seen the last of this in the sense that the world might be changing in such a way that more of those types of supply shocks and volatility might arise rather than less. What's your pitch, if you had to give one, on whether we've seen the last of this and what the next episode of the inflation story looks like.

CLAUDIA SAHM: So I agree with you that a surge in inflation, like we've seen in the last 3 and 1/2, 4 years, we could see this again. I mean, I view this fundamentally as a supply shock. So pandemic, war in Europe. I had a friend who referred to early on the pandemic as our dress rehearsal for a very large climate change disaster. And we didn't do very well in the dress rehearsal.

So you can certainly think of other types of supply disruptions that could be global in nature that could cause this kind of inflation. And I think climate change is one where you might point to is the risks are rising of that. That's why I think it's so important that we try to pull the lessons out of this because-- and particularly the policy response, because the inflation expectations are important.

But if we overplay them, that doesn't set us up for this discussion about, well, if we have supply-driven inflation. Do we need tools that go beyond the Fed? Because you could argue, if it was largely demand inflation, then the Fed should have stepped in sooner and not been in as accommodative. They were very accommodative at the beginning of the pandemic. And we should do less fiscal.

And if you're in that demand cycle, I think that we can go with our standard playbook pretty well. But this was not our standard playbook. And if you really are thinking about the supply side of it, then the one thing that I think is tricky for some of the fiscal is-- you talk about monetary policy acting with a lag. A lot of what you would think of as supply side fortifying, dealing with the pressures, those can take a long time. One of our last real thorns in the side of the inflation right now is we're still dealing with some of the higher shelter. So housing.

MARK BLYTH: Rental. Yeah.

CLAUDIA SAHM: Rental inflation. Some of that is some wonky measurement stuff. But a lot of it comes to the US, went into this crisis with an under-supply of housing. And then there were various shocks that occurred right at the beginning of the pandemic that slammed into that. But it takes time to build housing.

MARK BLYTH: Yeah, absolutely.

CLAUDIA SAHM: And we can't have a buffer stock of homes. So you have to have-- if you're going to have a fiscal response, it's got to be either done ahead of time to reduce the risk, like moving to green energy. That's the Inflation Reduction Act. That could be against future inflation. So you move ahead of it to get more resilient--

MARK BLYTH: You can't have an oil shock if you're consuming less oil.

CLAUDIA SAHM: Yeah. But you have to set those plans ahead of time because the lags are much longer. But yeah. I hope it's a conversation. And I will say, you had mentioned at Jackson Hole, the inflation expectations came up and the research papers. And that all is very true. I will note that Fed Chair Jay Powell, when he gave his opening remarks, he had a portion of his speech that was talking about what's just happened with the inflation. And he talked a lot about the supply chains and the COVID and the-- So he was not all in on the we the Fed--

MARK BLYTH: No, absolutely.

CLAUDIA SAHM: --did this. So the lessons are there to be learned. It's just the policy. Like, how would we have done it better? Those are tough.

MARK BLYTH: Yeah. And as you say, when there are long leads and lags in both sides and you can't-- I love that example. You can't have a buffer stock of houses. It's not always clear what you do. But even if you know that there's a likelihood of these things cropping up in the future.

CLAUDIA SAHM: Mhm.

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MARK BLYTH: Well, anyway, Thank you very much for enlightening us. It's been great to talk to you.

CLAUDIA SAHM: Thank you.

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MARK BLYTH: So I think there are three things that I can take away from these conversations that make inflation a little less puzzling to me. First from Nick, inflation is a game of passing the blame around in order to avoid paying the costs. Let me give you one example of this from a new research paper. University of Massachusetts researchers recently estimated that US firms generated $301 billion in fossil fuel profits in Twenty Twenty-Two.

Analyzing the distribution of these profits revealed that 51% of those profits went to, wait for it, the wealthiest 1% of the population. Mainly through direct shareholdings and private company ownership. In contrast, the bottom 50% only receive 1% of the windfall. As the researchers put it, the incremental fossil fuel profits in Twenty Twenty-Two were enough to increase the disposable income of the wealthiest Americans by 6% and compensate all their purchasing power loss from inflation that year. In other words, we really don't all suffer inflation the same way.

Second from Claudia, while the Fed isn't in complete control of inflation, they're not bystanders watching passively as inflation came and went. They could have been more aggressive and possibly destructive in their taming of inflation. That they did not do this shows that they were well aware of the limits of their power and their knowledge.

Third, I'm going to take away that inflation, just like interest rates, is not going to revert to very low levels. The immaculate disinflation longed for by the Fed is not quite arrived yet. And with climate change, geopolitical fragmentation, tariffs on the horizon at very high levels and concerns about fiscal sustainability all becoming forces in their own right, inflation is probably going to stay higher for longer.

But this doesn't necessarily mean continued pain and suffering for working people around the world. We could develop better tools to address inflation and the fallout it creates for working people. But first, we need to make sure we understand who's telling these different stories about inflation and why they're doing so.

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This episode was produced by Dan Richards and Zach Hirsch, with production assistance from Sabrina Clumeck. If you like this episode, leave us a rating and a review on Apple, Spotify, or wherever you listen. And be sure to subscribe to the show while you're at it. We'll be back soon with another episode of The Rhodes Center Podcast. Thanks for listening.

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