The following has been taken from an audio podcast with Dordt University professor of economics, Jan van Vliet, about inflation.
Since rising inflation is a growing concern for most Americans, I sat down with Dordt University professor of economics, Jan van Vliet to discuss inflation and what the average American can do to combat this issue.
Jan van Vliet:
I’m Jan van Vliet, and I’m professor of economics here at Dordt.
The consumer price index rose 7.5 percent over the last 12 months, which has been the highest increase since 1982. What is the main cause for this?
Jan van Vliet:
So, the main cause for this is basically an increase in various items in the typical consumer basket. The typical consumer basket is really a measure of what a typical urban consumer in the United States spends their money on, right? So, there’s eight measures. There are things like health, there’s things like energy, housing, food, and so forth. Right? So, the main culprits in the recent inflation are food, energy, and things like used cars, because we can’t get new cars because of the shortage problem. So that’s what’s happening right now.
So, is inflation mainly caused by the shortage of supply or is there another factor that’s causing the rise in inflation?
Jan van Vliet:
It depends on who you ask. There is this very common definition that inflation is really defined as too much money chasing too few goods. So, if you look at the too much money aspect, it’s certainly true.
Since COVID, we have had a lot of money given to us. Through both the federal reserve, which is a central bank of the United States. And, and the government, which has given us trillions of dollars, right? So, there’s a lot of money out there. There’s a shortage of goods because of the supply chain problems, with manufacturing, primarily, but also in other areas. And so we have too much money chasing too few goods. And there are other technical details as well, but I think that pretty much represents the state of the economy today.
Do you foresee the increase of inflation to continue throughout 2022? Or does it appear to be slowing down?
Jan van Vliet:
Well, it’s not slowing down yet. First, we need to understand that the inflation rate we saw in December  and January  are really the rate of price increases since December  and January  of last year, Right? And so it’s year over year the measure, but it’s still troublesome. And in order to see, to ask or to get a handle on whether the consumer price index is going to continue to rise at this rate, you have to look at some of the leading indicators as we call them.
One of them is the producer price index. So, the producer price index measures the price increase of goods and services that producers buy and use in order to make a final product, which we, the consumer then buy, right? So, it’s almost like a stage of manufacturer that we’re looking at.
So, the PPI went up by 9.5 percent, just recently. So, I can say, I think with a fair degree of confidence, that we’re going to see a consumer price index rising for the foreseeable future, but then we also have the federal reserve, which will be going to do something about that in March. They’ll try to reign that in, and they have various tools in their toolkit, in which they can slow inflation down. And they can, what we call, manage the economy.
On the actual federal reserve, do you think that increasing interest rates like they’ve proposed will have a positive effect on inflation or will it kind of help alleviate inflation?
Jan van Vliet:
It’ll have the positive effect on inflation and by positive, I mean, alleviating it somewhat. It depends exactly on what they do if they increase interest rates, which is the most likely scenario, that will slow down consumer spending because much of the economy is driven by borrowed money. Interest rates are the most important price in the economy because the investment is done mostly with borrowed money, also with some retained earnings. But mostly with borrowed money. Consumer spending on cars, on furniture and fixtures, on appliances is often done with borrowed money. So, as the cost of borrowing goes up the demand and the purchase of those products will go down and that’s what I think we’re trying to see. At least maybe the demand for new cars will go down.
I have a bit of a story here. I have a car which I need to take to Sioux falls for service. I’ve done that now for years since I’ve had it. I usually get a loaner up to one week, right? I dropped my car off there and come back with the loaner. I had my car serviced about, about two weeks ago there.
I asked for a loaner, and they said, “no, we don’t have any for you.”
I said, “Well, why not?”
And the service manager says, “Well, we normally have 39 loaners, but now we only have 12.”
And I said, “Why is that?”
He said, “Because we sold 27 of them because we don’t have any new cars and it’s all because of the computer chip problem.”
Right. The supply chain. So, the federal reserve is increasing interest rates. That will do something to combat inflation, but there are certain things we can do too, we don’t have to buy new cars. We can buy used cars except used cars have gone up by 29 percent, on the car I’m talking about, my own car.
I can get $12,000 more now than I paid for it in March of 2020 at the start of the of the coronavirus issue. Crazy.
That is, it’s very crazy how much these prices have gone up. So how will inflation affect future employee wages?
Jan van Vliet:
Wages have to go up. Wages are right now, lower than they were a year ago because of inflation, right? If you’re in an industry that is unionized, you can be sure that union and management will have to negotiate higher wages. Number one, to make up for the lost purchasing power of your present wages and number two, to protect you from any increase in future prices.
So, if you’re not in a unionized job, then hopefully, your employers will have mercy and they’ll see that if you’re a good worker and you deserve your wage, that you should get an increase that at least compensates you for the loss of your purchasing power.
Will current consumer prices lower to normal levels as we saw before 2021, or will this increase in price due to inflation to be more permanent?
Jan van Vliet:
I think it’ll be temporary. It’s the highest it’s been since the early eighties, right? So that’s 40 years. That’s when my career got going, in the late seventies and very early eighties, right? And then, consumer inflation was really high because of the energy crisis that we had at the time.
But I don’t see that happening. We’ve learned a lot of lessons through the last couple of decades. And so, I think we’re smarter. We can use our policy better, and I think consumers are a lot smarter too.
There are things they can do to combat. I mean, it’s limited, of course it’s limited, but you know, there’s things they can do. They can negotiate higher wages for one thing, right? To recoup the purchasing power that they lost with inflation. And they can purchase less, right? They can save more. Although you want to save it, be smart about saving because you don’t want it to be in a bank where you’re getting low returns or perhaps even negative returns. You can buy generic rather than brands, or you can buy on sale, or you can join a co-op and buy in bulk or simple things like not wasting food or not buying lunch, for example, right?
Here’s one, this is a bit off the wall. You can borrow money. Let me tell you again, back to my experience with the late seventies and early eighties, I graduated in the late seventies, I had student loans, I also bought a house in the late seventies. My wife went back-to-back to school in the late seventies, also had a car. And so, from all the things I had, I had a lot of debt in the late seventies. But with the high inflation that we had for those years, the purchasing power of the money I paid back to the bank was much lower than it was when I borrowed it.
So, I paid the bank back in the reduced value dollars, so to speak, right. So, people who are in debt are winners from unexpected inflation, right? If inflation is expected, of course, the interest rate that you’re going to pay on your debt, they’ll have that incorporated in the, right in the interest rate. Inflation will be in the interest rate that you are assigned, but if it’s unexpected, which it was with the Persian Gulf and energy crisis in the late seventies and early eighties, You, people who are in debt, are a winner from inflation, right?
But I wouldn’t use that as an operating policy necessarily. But depends on your own level of comfort with debt, and with inflation and with uncertainty, and uncertainty is a huge thing that’s happening right now in the stock market. We’re not sure what’s happening. We’re not sure what the federal reserve is actually going to do next March. And by how much it’s going to do things like raise interest rates or take money out of the economy.
And there’s a political situation in the Ukraine now with Russia. So, all those things negatively impact the stock market, right? Bonds are seen as a safe Haven for money because your income is kind of guaranteed. But the stock market could know that those sort of equities could be risky, Right? And so, that’s why we see the market uncertainty about how long inflation will be with us, or what exactly the federal reserve will do. And just, you know, other technical things that can happen.
On the stock market, the S&P 500 has dipped about -7.8 percent year to date, and NASDAQ has seen a correction about -12.98 percent. Are the falling stock market prices a result of inflation?
Jan van Vliet:
Yeah. Political, as I mentioned, the Russia issue, uncertainty with respect to the fed, loss of confidence in the economy because of inflation. And, the fact that inflation reduces earnings expectations, right?
You go into the stock market to make money, and unexpected inflation hits. Well, earnings expectations are then thrown into turmoil. So, then you want to get into something more secure and so you go into bonds or something that guarantees somewhat of a steady return, higher interest rates mean higher borrowing costs. You’re going to have to borrow more money if you want to get into the stock market on borrowed money. So, there’s uncertainty there. Input costs, labor materials, which go into the manufacture of goods in the stock market go up to cause inflation. They’re just reducing the likely return on your investment.
So, yeah, it’s absolutely due to uncertainty politics and the inflation we have today.
And with the increase in uncertainty, is that an indication of a possible market recession that may occur?
Jan van Vliet:
I don’t think so. A recession is technically defined as two quarters, two quarters of back-to-back negative growth. I know it sounds like a mouthful. It’s easier to say six months of declining economic output. But we economists have our own language. I don’t think so, I mean, I think the federal reserve will act quickly. See what the federal reserve is doing is typically an activity or remove that typically is done when the economy is flying high and inflationary pressures are high, then they want to slow the economy down.
That’s what they’re going to do now in March, but to what degree we don’t know, but I think it’s unlikely that they will do it, put the brakes on the economy so hard that it will actually throw us into a recession when we’re just coming out of the slowdown that was imposed by the pandemic that we’re at the tail end of, I hope.
So I don’t think so. I don’t think so. That’s kind of what I mean, when I said earlier, we’ve learned a lot, the federal reserve has learned much about how to do policy properly. And so has the federal government with its fiscal policy, right? So, I doubt that it’ll cause a recession.
Any final tips for the average consumer and what they can do to combat inflation or where they should be storing their money?
Jan van Vliet:
Other than what I said earlier, not a whole lot, but we live here in the student population and just a couple of words of comfort.
First, if you live here and you are in a dorm and you have paid your tuition, And I’ve done surveys just with the classes I have and asked,
“Are you guys, you know, are you bothered or are you impacted by inflation?”
Most say no, right? Because they live here, and I would call it in a hermetically sealed or a protected world in a sense. If you live in the dorm, and so forth, no. But, if you don’t live here, you will be most certainly impacted by food prices. Students have said that. And if you drive, you will be impacted by higher energy prices.
Especially if you drive a truck, if you have a used vehicle and you want to sell it, you can get 29.3 percent more for it than you paid for it. And so those, those things, but I don’t think overall that the student is impacted very much if you work. And many do [work], if you work outside of the school, your wage, the real value or the after-inflation value of your wage will be reduced.
But, especially here in Sioux Center, I see a lot of signs for high wages. McDonald’s is paying over $16 an hour to flip burgers. But students are busy with other things, right? So, I don’t know how many of us are now working outside of school, but I think, students are not hurt as much by it.
There’s also one other thing. The consumer price index that is published is the price of a typical basket of goods and services that is bought by the typical urban consumer in the United States. I don’t think it can be argued that number one, we are that urban here in Sioux center, and number two, the basket, the typical basket of goods and services bought by the average urban consumer in the U.S. is different from the basket of goods and services that are bought by students.
And so, they will not be impacted as much by inflation, right? If you don’t drive. You won’t be impacted by higher energy costs. So, if you live in the dorm, you won’t drive, or if energy costs are high, you have a choice of not having to drive. People who are out there needing to drive to school. They will be impacted, right? And so forth.
So, I don’t think the average student here is going to be hurt that much. Tuition next year, I don’t know. I mean, maybe that’ll incorporate some of the current inflation. I’m not exactly sure how that works here at Dordt so I can’t say for sure, but I think you’ll do okay.