Confluence of factors causing inflation that will last a while longer
High prices are squeezing families across the nation and Oklahoma lawmakers get ready to return for a special session to address inflation, University of Oklahoma economist Dr. Robert Dauffenbach explains the economic forces causing the surge.
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Dick Pryor: This is Capitol insider - taking you inside politics, policy and government in Oklahoma. I'm Dick Pryor with Quorum Call publisher Shawn Ashley. And our guest is Dr. Robert Dauffenbach, Senior Associate Dean for Economic Development and Impact at the University of Oklahoma Price College of Business. Good to have you back with us, Bob.
Dr. Robert Dauffenbach: Glad to be here.
Shawn Ashley: Bob, people feel the effects of inflation with rising prices, but how do economists define inflation?
Dr. Robert Dauffenbach: Well, inflation is a continuing rise in the price level throughout the economy, not just a particular sector. Now, you can have a bad wheat crop, for example, that's going to affect the price of bread, but it's not really going to reverberate through the economy. But when prices in general rise and becomes embedded, becomes the expectation in grain behavior patterns, that's when you get that problem of inflation that is going to plague you through time.
Dick Pryor: Are there different types of inflation?
Dr. Robert Dauffenbach: There are basically two types of inflation. Demand pull inflation and cost push inflation. Demand pull inflation is too much money chasing too few goods. This was the view of Milton Friedman, a very famous economist, Nobel Prize winning economist, who believed that inflation is always and everywhere a monetary phenomenon. And if you expand the money supply at the rate of growth of the real economy, then there's really no need for inflation in the long run. Cost push inflation, also known as stagflation, is accelerating inflation and falling utilization of your resources. So, falling employment, unemployment, rising, for example, and as a consequence, we're looking at falling output and rising prices and that we call stagflation. These sources of inflation can feed on one another. And in fact, you end up cost push inflation leading to pressure on politicians to increase aggregate demand, which also increases prices, which leads to further cost push inflation and you get yourself off into a spiral.
Shawn Ashley: Well, that leads us to the next question. What has caused this accelerating inflationary period?
Dr. Robert Dauffenbach: Well, one of the, one of the problems, of course you get, is when cost push inflation also becomes a political football to raise aggregate demand, lower taxes, increase spending, and thereby yield a higher level of employment level. So, you get that interaction and that is what gives you the problem overall. So, we've had a lot of hits to our economy. COVID has been a dramatic hit to our economy, and the government had to do something to keep the economy from falling into the abyss. Now, whether they've done too much is, of course, an argument that can be made. But now we have supply chain problems. We have China lockdowns, we have wars. We've got a lot of things hitting us at once and it's not clear that we're going to have an easy path out of this.
Dick Pryor: Bob, what have federal policymakers done that is working and how long will those solutions last?
Dr. Robert Dauffenbach: Right now, we have a Fed very much concerned about inflation and they are on record verbally to restricting money supply growth, to raising interest rates, to choking off demand to kind of cool the economy. And with, let's face it, we are at full employment. So, they've got some room there, but they haven't yet started to really raise interest rates any, any kind of dramatic level. And of course, they also have this $9 trillion in quantitative easing that they've built over the years that they've got to take down. And there's not really any indication of what the impact of that will be on the economy.
Shawn Ashley: Are there any other tools that they might have to reduce inflation?
Dr. Robert Dauffenbach: Well, one important tool is to not lose sight of your productive capacity. In this country, I fear is politically losing sight of the need to maintain and expand infrastructure. And we see the political football being kicked around in Congress and in the Senate, and it's important to maintain your productive capacity. And we're losing that, I think, to a large degree, by inattention.
Dick Pryor: Oklahoma legislators will return to the Capitol in about a week for a special session to discuss repeal of the grocery tax, the sales tax, and the state's response to inflation. Based on your research and experience, what can state lawmakers do to help Oklahomans with high prices during this inflationary period?
Dr. Robert Dauffenbach: Well, I'm not sure that, that I would recommend any, any particular action there. Certainly, there are regressive aspects of taxing groceries that some states have taken care of by rebates through their income tax system. And that's what I prefer. Let's remember that food to some houses is treated as a luxury good. Whole Foods, for example, is a sort of pricey, high quality food and for that to be exempt from taxation, I'm not sure that's a good idea. I think if we look at and this is not going to happen, but where we’re really falling down in the state is not taxing services. And that is, that is something that I think deserves further consideration, but I don't have any hope of it being examined.
Shawn Ashley: Where do you see inflation and the economy heading over the next several months?
Dr. Robert Dauffenbach: I think the best-case scenario we can hope for, and I think that's what markets are expecting, is that we'll start seeing more like, let us say point-3, point-4% increases from month to month inflation. Now when you get down to a point-3, you're talking about our annual rate at 3.6%. So that that would be a great achievement. And there is a lot of expectation of…that we've already hit the high-water mark on inflation, and that's the best case that we can, we can hope for, because there's, there's still a lot to do in terms of fighting inflation on that front. Now, the path to a soft landing is very narrow, but there is a shot at it. And that's our best-case scenario for what the future looks like.
Dick Pryor: What's your best advice to people who are concerned right now about the prices they're seeing?
Dr. Robert Dauffenbach: Well, I think that one response we have to make as households, and I see this in my own household in terms of my behavior patterns, is to recognize that maybe we don't need to spend as much eating out. Maybe we need to economize in that, in that kind of sense. In other words, not being all that supportive of the increases in prices that we're seeing, I'm afraid is, so there are some households or this is going to hit them very naturally because gas prices, $5 hamburger for a lean one pound hamburger to take home to cook, it's… Budgets are getting hit and so there's a natural reduction in sort of discretionary spending that will come about anyway. But let’s recognize that demand curves slope downward and to the right in higher prices, we consume less. And I think there's a lot of underlying readjustment that the national economy has to do to get us back on track.
Dick Pryor: Bob, thanks as always.
Dr. Robert Dauffenbach: Glad to be with you.
Dick Pryor: And we understand you're retiring from the University of Oklahoma at the end of this month.
Dr. Robert Dauffenbach: Yes, I'm retiring, but I hope not disappearing.
Dick Pryor: Thank you very much. And look forward to visiting with you next time.
Dr. Robert Dauffenbach: Thank you.
Dick Pryor: That's Dr. Robert Dauffenbach, Senior Associate Dean for Economic Development and Impact at the University of Oklahoma Price College of Business. If you have questions, e-mail them to firstname.lastname@example.org or contact us on Twitter @kgounews and @QuorumCallShawn. Until next time, with Shawn Ashley, I'm Dick Pryor.