Whither Inflation? - Round Table I

So this is our last seminar of the semester, so we have a panel discussion with three amazing presenters. I'll have it soon, so I just want you to say that the research seminar at the IPP will be held every other Wednesday, although next. In the short term, it may be on Tuesdays, but that's okay, so we are trying to discuss or trying to make that bridge between research and policy and we are challenging or analyzing the challenges that we face right now from a green transition like climate change . the role of the scenario, obviously, the issue of

inflation

, which has been a problem in the last year, I should say, yes, I think so, and in the implications that that has for all of society, including, of course, the poorest homes we have.

We're also going to unpack that a little bit, so yeah, thank you very much for coming so our first speaker would be Yeva Nurses Nursian, uh, thank you very much for being here, yeah, your Associate Professor of Economics at Franklin and Marshall College in a research . academic at the Living Economics Institute at Bard College. She has a doctorate in economics and mathematics from the University of Missouri, Kansas City. Thank you, she is a macroeconomist working in modern monetary theory as well as Keynesian and institutionalist traditions. Her research interests include um interests include. Banking and financial instability, fiscal and monetary theory and policy and she has also published several articles on the topics of shadow banking, fiscal policy, government deficits and debt, and the Green New Deal.

However, he is currently co-editing Monet's Companion Elgar of Modern Theory with Rondo Ray, so we're looking forward to hearing this, so we have Isabella Weber, our next speaker, who is a political economist working on China's global trade in the history of economic thought, is an assistant professor of Economics at the University of Massachusetts. She hates the word amarest and research leader for China at the Political Economy Research Institute Isabella has a PhD in economics from the new school and also from Cambridge and was a visiting researcher at TC at China's only University. I guess it's her first book about how China escaped the shock. therapy, market reform debates John Robinson price winner 2021 and also received the best book award from many 2021 lists around the world and more recently Isabella has been involved in the public debate on

inflation

advising the German government about the gasoline price reduction that they are adopting recently and we finally have here with us the tours and Bell in person, so he is the only one in Rio today that is less exotic, it's like, yeah, that's really exciting and Torsten is the executive director of the resolution.

Foundation I'm a think tank here in the UK combining analytical prescriptions of regrowth policies to improve the living standards of those in Britain on low to middle incomes and it's a fantastic foundation, you should check out everything they do. He has a background in economics, economic policy, and his research focuses on economic change, inequality, labor market taxes and benefits, and wealth before leading the foundation's resolution. Torson was the Labor Party's chief police officer. He didn't know that I have lost many elections. Someone wants advice. I understand that he also worked for the treasury as a member of the currency of economic advisors doing the financial crisis in as a fantastic civil servant his national bank also did Torsten is administrator of the Action Group against Child Poverty in a member of the Academy of Sciences Social, so I'm sorry to take so long to introduce them, but I think I want to show how special that night was and how we probably have one of the best academics and intellectuals here to talk about inflation today.

Yes, if I give you the floor, thank you. Well, I want to talk about the current inflation that we face today and my focus is primarily on the United States, but I think what I say about the United States applies. For many economists, especially developed economies including the UK, what I want to look at is whether the current inflation we are seeing is a demand or supply problem and ultimately what are the types of solutions we should reach for? . Well uh, and I'm going to go against the general consensus and say that monetary policy is really not the right tool, so that's basically my conclusion and I would say that not only is it not the right tool for this current inflationary episode in general.

I'm going to argue that monetary policy is not the right tool for the period of inflation, so at least in the United States a narrative has been built that the current inflation that we are seeing is a problem of too much demand and where is it? this lawsuit comes from this because the government added too much stimulus to the economy during greed we gave stimulus checks to people that was too much obviously all the attention is focused on the stimulus checks that went to households that didn't We heard a lot about all the money that went to businesses, although a lot of government spending went to businesses, but that's been the narrative that it's a problem of too much demand and we have to control demand to solve our supply problem. inflation, um, but even when So when you look at the economy, I think a different picture emerges: it's a picture of an economy where demand has recovered to pre-pandemic levels and has recovered quite quickly compared to our previous situations, but it is not a situation of too much. demand even by conventional standards, I would say um, because you know that a conventional economist and a later case can look at the same economy and they can see different levels of slack, right? um you know someone like me who does mmt would look at the economy uh where? the unemployment rate is, let's say, 3.5 and I would say that we can still reduce it even more and not necessarily have inflationary pressures.

It's just the kind of politics we do, but even if we follow conventional standards, right? uh the economy is overheating and that's the reason we have inflation so one way to look at this would be to compare potential GDP versus actual GDP and this is all in nominal terms initially when the pandemic started the congressional budget office, which presents these estimates of potential GDP because that's what their estimates are, they're not observable, so they revise their estimates downward because of the expectation that we were going to have this great recession and in recessions our potential as an economist is eroded because we basically don't use the potential and So it gets eroded that way, but then they quickly revise them up and they keep revising them upward because of the kind of recovery that we had, which was stronger, which I would attribute to the strong fiscal policy response, and if you look at these figures only in the second quarter of 2022 is when our real GDP got close to potential GDP and that was not so correct and obviously inflation had started long before that , so if the argument is that we have reached our Economist Potential, right, we are spending more than the economy can accommodate, then you should have started to see inflationary pressure from mid-2022, but obviously inflation started long before that, so even with this measure we had not reached our economic potential until sometime in 2022.

Now, the fact that we have reached the potential of the economy does not necessarily mean that we have to see inflation and this graph shows it very okay, so I have the potential GDP, which is the blue line, and then the actual GDP, which is the red line. and on the scale on the right I'm measuring inflation in the inflation rate, which is the Consumer Price Index, basically the change in the Consumer Price Index year over year and we can see that we had this long period right that led to the global financial crisis where we had our uh, you know, we had reached our potential GDP and even exceeded it to some extent for quite some time and our inflation was around three percent, we weren't seeing this runaway, you know, seven eight nine percent.

The inflation that we're seeing today and it accelerated here because we had commodity speculation, so basically when the housing market collapsed, a lot of the money that was in the housing market moved into the commodities market and inflated commodity futures. raw materials, that's why we saw that increase in inflation and then there was a very rapid slowdown and then inflation remained very moderate after the global financial crisis, so, you know, the fact that we are approaching potential GDP is not It necessarily means that we have to see price pressures and this is the story that we are hearing from traditional economists, people like Larry Summers Jason Furman basically says that we stimulate the economy too much we reach the overheated potential level and that is why we are seeing inflationary pressures Even before Kovid, right, we were very close to our potential, we had gotten there and the result was not the runaway inflation that you know, we are seeing today.

Another thing I would say here is that you can also see this blue line. how was its trend, you know, it changed downwards because we did not take appropriate and adequate policy measures after the global financial crisis and during the Great Recession, instead we engaged in austerity here and obviously it was worse in the United Kingdom and in you. The eurozone and that has depressed the potential of our economy, so in some ways the lesson I'm seeing from these two recessions is not that we shouldn't overdo fiscal policy because we're going to have inflation, it's more if we don't. enough then you are reducing the potential of your economy and preparing it for inflationary pressures in the future and I will be happy to answer questions about this if I have when you know if I'm being too much um you know technical here now the other The story we're hearing is that the labor market is too tight and that is evident in the low unemployment rate but of course the unemployment rate is not the whole story.

What I have here is the labor force participation rate, basically this tells us what percentage of the population that is eligible to be in the labor force is working or is unemployed and looking for a job, so we look at how much population, Let's say, 16 years old or older, who are not in prisons, you know, they are not institutions of any kind. labor force participation and what we have been seeing since the 1970s in the US is this gradual decline in the labor force participation rate and obviously this drop since the global financial crisis is quite significant and what What we see is that we never recovered.

The economy never recovered, so the people who left the workforce did so basically for the better. You know, a lot of them were left out and then we had this really big drop in greed month and we've recovered, but we're. not even at pre-pandemic levels, so we're not even back to those levels. I'm not even talking about these pre-global financial crisis levels, so there is still more room to convince more workers to enter the job market. right and to do that we need to make sure that the recovery continues, that the labor market stays strong, right, um, which is obviously not the policy, the choice that we're making, that's not the policy or what we're making right now. , the other graph I wanted to show you what also tells the story that we're not having a problem with too much demand: this graph from the Atlanta Federal Reserve's business expectations survey, so instead of surveying people and economists from Wall Street to try to gauge what the inflation expectations are is actually surveying non-financial companies, large and small, and asking them a bunch of questions like, for example, how do their sales compare to the norm?

And when you look at that, you see that companies are not reporting sales that are above the norm, right? And then one of the questions that they ask is what will be the influence of sales in the future on prices and we can see that that has not been above the norm after the pandemic and in fact, you know that the value it's actually going down right now, so even if you could argue that we had a problem with too much demand before after the pandemic, everything went well, so you can't say that. We're going to continue, we're going to continue to see too much demand to the extent that the fiscal stimulus contributed to the demand that has developed in the United States, at least at this time, what is driving the current inflation?

I think there are many factors that are contributing to this and I would say they are mainly on the supply side, so this is the breakdown of the CPI, the consumer price index, by a major component and I think Isabella is going to talk about one of these components. inIn particular, you don't need to be able to read the legend to tell me which bar is green, right? It is obvious that it is Transportation. It is obvious that a lot of it is oil. Some are the prices of cars, which are related to the. shortages of semiconductors and so on, clearly this is a story of particular bottlenecks and the other line, which is the other bar that is quite no

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, is this yellow one here and they are rents, but they are not real rents, the real rents are like this green, sorry.

The gray bars which, as you know, are still somewhat significant, but they are not as important as the yellow ones, and the yellow is what we call imputed rents for housing, so these are not real prices, they are imputed prices and what is done is that. um, you know, the question is if you own your own home like I do, for example, how much would I pay to rent the type of home that I currently have? So this is for owner-occupied homes, people who own their own homes. The question is if they rented that type of home, how much would they pay for it?

Obviously, this is not a good reflection of how much I am actually paying because my mortgage has been fixed since I bought the right house. 10 years ago, so this isn't a real price people pay, it's just the price we would pay if we rented houses. You know the types of houses we've bought and live in, so in a sense, I can see that this unobservable price is a pretty important part of the price index and has been driving the current inflation and high inflation readings. inflation as well, but I think for me the main story here is that this is an oil problem and If you look at the oil markets, is it a question of too much demand?

Is it a matter of too little supply? I think it's a little bit of both, so again it seems to me that demand has recovered and supply has not. we've been able to recover at least in the US, we're just now getting to pre-pandemic oil supply levels and obviously we can see that OPEC is a big part of this story, right, it was a big part of history in the US in the 1970s when we had the inflationary episode and it's still a big part of history today, so we didn't do well in the 1970s, the policy of, for example, moving away from oil and it seems like where we have where we haven't learned those lessons that we're still not doing the right thing here, so to me the story is a parallel story of supply, right, it's a story of a pandemic that started as a supply.

Let's say the crisis turned into demand and we have the policy tools to affect demand and as an MMT economist I would say that we can finance demand in unlimited quantities, so money is not a problem, the problem is real resources So do we have enough real resources? resources and that's where the supply comes in, so the first round of greed, greed for the relief that we did in the US, the fiscal stimulus or the Cisco relief. I have to say that it wasn't really a stimulus, it helped people pay their bills, it paid off their debts, it also increased savings, so it was somehow divided into three equal parts, one third went to consumption, one third to savings and a third to paying off debt, basically, um and then finally the latest round of Resort spending to pre-greed levels, but at the same time, we've continued to see supply-side pressures, problems in the supply chain that companies have been facing in the same survey that I talked about in the Atlanta Fed survey when when companies are asked about price, you know, supply-side disruptions like most. of them were still reporting supply-side disruptions in mid-2022 and I think those things are still ongoing.

There is also the question of setting the right prices. Prices don't happen by chance, they are set by corporations and in the US corporations tell their shareholders. They are very clear that they are using the inflation hedge to increase prices. They are actually saying that this is a good time for our pricing decisions. Basically we can take advantage of the situation because there is inflation and no one is going to point fingers at us. or look at this company they are raising their prices right, so they are using this as an opportunity to raise their prices.

There is also the issue of, of course, the war, the war in Ukraine and the sanctions, etc., and that is going to be greater. part of the story in Europe, I would say um, and that's why I think we're seeing higher inflationary pressures in a place like Germany, even compared to the United States, so it's not a story of wages driving this, no. It is a story. of the wage price spiral, wages are just catching up right now and from the beginning I was basically of the opinion that this inflationary episode was transitory and I still have that opinion that it is transitory, although I think it is taking longer. than I initially thought it was going to take and that's because in the US workers don't really have the power to force companies to fully compensate them for the inflation they're facing, in fact, real wages, actually, you know? catch up properly, so they have decreased in real terms, the salary is okay, so I'm going to speed up because I think I'm already at that 15 minute mark, so the question is what do we do about it, what can we do?

What do central banks do about this inflation or inflation in general in the US, the FED quickly kept it up as long as they could, but then they came under heavy pressure from economists in particular, saying that the FED has to do something about it if he doesn't. If we don't, the inflation cat will be out of the bag and there's no way we're going to put it back in, you know, the Federal Reserve was considered too soft on inflation, Larry Summers, who was not part of the administration that was trying some kind of outside influence policy urging the FED to keep increasing the raids or, great, you know, the argument was that it should have started earlier and I should have approached them with faster things like that, right? um and the FED was finally forced and now they are on a path of interest rate increases which I think is not going to end very well the FED of course the economists are definitely to blame for this and I will come back to that at one point, but the FED is also guilty because They have taken credit for low inflation in the US, so they have been happy to take credit, which I think has been largely unjustified, so I guess the story is that Paul Volcker, the chairman of the FED, supposedly broke his back. of inflation in the 1980s, the reality was that it raised interest rates above 20 and caused a deep recession and financial crisis not only in the US but also abroad, something that we are again seeing that is happening right now or potentially going to happen.

They also broke the unions, that's what happened during Reagan, they broke the unions, they broke the air traffic controllers' strike and something that we are seeing right now in the American player, as well as in the railroad workers' strike, is happening. breaking again. The reality, I think, is that first the unions lost their power, but we also had this on a related issue: globalized supply chains, outsourcing of cheap labor overseas, we also had this just-in-time production driven in largely by Wall Street, where companies were trying to squeeze every last bit of profits trying to keep their costs down, labor costs and otherwise, we've also had a fiscal policy that has been too strict during the last few recoveries. , so we have had stagnant demand and austerity, we had austerity in the We are in the middle of a recession basically after the global financial crisis and that is why we have had jobless recoveries where wage pressures have not materialized, the labor market has been too weak and that's really what has kept prices low and whether the Federal Reserve has had any role.

In all of this, the Fed's role has been to preemptively raise interest rates to avoid tight labor markets and to prevent wage growth, and they say, if you look at the Fed minutes, they basically say that's what they watch. Look at the labor market, once it gets too tight they will swoop in and start raising interest rates. Now, as I said, you know that economists and economics have a role to play here, obviously, and economics has been a terrible guide for monetary policy and for the Fed the FED has abandoned quantitative theory the monetarist idea that we have that controlling the money supply to fight inflation is deba

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to what extent they really embrace that idea.

Some economic historians have argued that it was actually a kind of hedge to raise interest rates to 20 and say well, we're not doing that, we're just we are controlling the money supply and interest rates are where they are and the current approach is this new monetary consensus approach that inflation expectations cause inflation, it's not clear how and that Policy works by controlling expectations, right, policy monetary, you know, our primary approach to controlling inflation is basically to control market inflation expectations and so economist Jeremy Rudd wrote this very good article a few years ago in which he basically said that the FED has no a working theory on inflation, even Fed officials have basically said that my cuatha Randall Ray and Dimitri Papa dimitrio wrote an article in 1994 saying that the FED is flying blind and they recently wrote an update to that saying that the FED is still is flying blind they really have no way of knowing they don't have a proper theory of inflation so this graph shows long term and short term inflation expectations and this is actual inflation so instead of the expectations drive inflation, it's more that expectations eventually converge to reality, they inflate well, inflation expectations change when actual inflation rates change, so this right couldn't have caused that and that's basically the theory of facts that inflation expectations cause inflation and that's just uh no uh, you know what we?

What we're seeing in reality is the Fed actively trying to control inflation, like raising rates, and that's the orange line here, it's the federal funds rate or the overnight rate and this is actual inflation, which You know, it's like the active Fed is fighting inflation, what is it? are struggling, so I'll conclude by saying that the reality of using monetary policy to fight inflation is what MMT economists have been saying for quite some time and after Kansas, it's all too obvious that the FED is using unemployment as a tool to fight inflation and the only good thing that can come out of this episode is that they are actually openly admitting that right here is Jerome Powell saying that there will probably be some weakening of labor market conditions, but that we will continue like this until I am sure that the job is done and it is interesting that he uses the word we will continue like this, which is like the title of Paul Volcker's book, that it continues like this, something like that, that it continued like this, despite all the pressure from the workers. other parts of the government and so on continued like this and controlled inflation, you know, Powell says the labor market is very, very, very strong, very strong, right, and I would say that's not what we're seeing in the data. um and uh here's the president, sorry, oops, president of the Boston Fed saying: I anticipate that achieving price stability will require slower employment growth and a somewhat higher unemployment rate.

In fact, the Federal Reserve projected that the unemployment rate would rise from 4.4 to 5. Next year, right, that's the price to pay for having inflation supposedly under control. Well then, I'll jump to my conclusion for the sake of time. I think it's time we reconsider inflation and also reconsider how to fight it, current inflation is not really demand-driven and to the extent that monetary policy can do anything about inflation, it's not about expectations, it's really just about reducing aggregate demand, right? It can solve our supply problems so the only thing it can do is try to adjust demand and that's what we're doing and all of this is happening while a fiscal adjustment is going on we have our president basically saying our deficit is going down, that's great, but the deficit is going down, it means that the physical policy is improving. tighter, so fiscal policy is getting tighter and we are writing monetary policy and I think that's a recipe for a recession, soWe have to rethink how we fight inflation and we have to, you know, give a bigger role to fiscal policy. uh, because fiscal policy can actually address the bottlenecks, it can address the housing and homelessness problem, it can make the oil problem cause a bottleneck, for example by investing in alternative energy, We can try to help households that are struggling in the current inflationary environment.

Again, the FED can't do it, it has to be done through fiscal policy and obviously fiscal policy is also done democratically, which is not the way monetary policy is done. Okay, I'll stop here and do it. I'm happy to take questions at the end thank you very much, yes, but it was fantastic, thank you, it was great. I really recommend you check out Ever's articles on our website. I think what's very interesting is that not only do you have its purpose, it doesn't just show us. how complex it is to understand the factors behind inflation, but also to paint the theoretical methodological starting point of it.

You go to different places and you may miss some of these factors, which is also very important, so please review that document. Okay then, Isabella. You are the next cool one, thank you so much for setting this up. I think you have the newspaper and mine actually communicate perfectly with each other, so I can pick up where it left off, which is exciting, so the title of my presentation is inflation in times of overlapping emergencies systemically significant prices from an input perspective -product, some of you may have noticed that I was heavily criticized when I suggested about exactly a year ago that perhaps we should start thinking about specific issues. methods to address the price increases that are occurring in specific sectors and that this could involve us having to return to the tool of specific price controls that we have been abandoned in the dustbin of history for some time. but that might be relevant again now, a year later, because I want the same people who criticized me at the time to have been recommending price controls in the context of the war in Europe and I realize I'm about to do that . conclude work on a German government commission where we have been designing gas price caps and I can talk about the specifics of this policy because it is a very similar type of complex agreement, but I think the notion that we might need to do something about the specific prices is now much more acceptable than a year ago and I think the reason for this is that in parts that at least In the European context it is now very clear that there is a very serious emergency, there is a war in Europe as had not happened in a long time and this has huge economic implications, particularly for energy markets, in ways that require new rates. of economic policy so far what I am arguing in this article is that yes, the situation in Europe is very dramatic, the pandemic was very dramatic, but this idea that we are about to return to a state of normal tranquility seems very charming and tempting. and I hope that the war ends soon, that the pandemic stops lurking and that, finally, it happens that we have a true victory, that it really is a global victory, that we have under control the climate change that we do not have.

If there are more extreme weather events, we will not have more climate change shocks, etc. My sense is that there are likely to be more shocks in the pipeline because we live in a world of overlapping emergencies, so the type of shocks that will occur. supply that we've been watching for the last two years or so is likely to happen again in one form or another, we don't really know how they're going to happen, we don't really know where they're going to hit, but it seems pretty likely that there will be more shocks from come, which is why I am advocating for a form of economical disaster preparedness.

No one wants a disaster to happen, but it is better to be prepared than for a disaster to happen unprepared. So, as I think Kim already made it very clear and yet, give us a presentation, we've been thinking about monetary policy a little bit like this currency-based horse, they're coming and going in a very regular kind of fashion is pretty one-dimensional. , if you think about it, it's basically a dimension that matters to you. There are different dimensions that different people emphasize. Some emphasize the amount of money more. Some emphasize more. um the the the the the potential GDP relative to actual GDP, others might be emphasizing the expectations question more, but generally it's kind of a one-dimensional question where you have a one-dimensional tool which is raising interest rates. , which is supposedly enough to achieve monetary stability, um, uh, for the With this mindset you come to understand that changes in relative prices have nothing to do with inflation.

Milton Friedman, as of course a figurehead of monetarism, put it very explicitly and explicitly in the context of the inflation of the 1970s when he said: oil and food that all governments have officially pointed out in relation to inflation, right? Are they then the obvious immediate cause of the price explosion? It is not at all essential to distinguish changes in relative prices from changes in absolute prices; the special conditions that drove up oil and food prices required purchases to spend more on them and leave less to spend on other items that did not force other prices to fall or rise less rapidly than otherwise why the average level Should oil prices be significantly affected by the changes? in the prices of some things relative to others, then these changes in relative prices have, at best, a transitory impact on the microeconomy and that transition period is so short that it doesn't really matter because people um spend less on other items if they spend more on some items, which means that overall the price level will remain constant now, this is, of course, exactly the opposite of the idea that specific price shocks could be important for the economy. inflation.

I'm going to skip this. because you've already covered this brilliantly, so what I'm arguing in this article is that because we live in this world of overlapping emergencies where we have intense shocks, two specific prices that change relative prices and that these shocks can be so intense. which can actually alter the overall price level, we have to think about price stabilization more like, um, the way we think about writing and real wars, um, what is it, we want to be prepared, we want to understand what triggers our horse that we love. When wearing a helmet, we want to be as safe as possible because we are preparing for our trip.

The logic we are using in this paper, actually based on input-output analysis and input-output analysis, was first formalized in the context of the second world. war when one of the pressing issues was how to boost the German economy in the most effective way and they wanted to understand what are the points of the economic system that if those points collapse the entire economy stops working, it was a question of strategy Bombing now what we are What we are doing in this paper is using the same type of method to see what the points of greatest vulnerability are today, where if shocks hit these types of sectors, this has the potential to alter price stability for the economy as a whole. , this requires that we think of the economy as a circular circular flow, as Leon TF argued, so in input-output analysis we use a method to systematically quantify the mutual interrelationships between the various sectors of a complex economic system, which means We can trace the effect of an event at any point and the ways in which it is transmitted to the rest of the economy step by step through the chain of transactions that links the entire system.

This also means that, in stark contrast to Friedman's written theory, a notion far from being independent of each other, the cost price structures of all separate industries are nothing more than links in a vast network encompassing the entire national economy. This means that we are taking the general dependence between wages, tax profits, um as the starting point of our analysis, we are arguing that someone's prices are always someone else's costs, which means that Costs and prices between sectors are interrelated. In fact, we can find a statement by Leontier from the same year as the frequency and which states exactly the opposite of what Friedman said, as Leonty has said, that in fact the problem of inflation cannot be addressed in aggregate terms either if there were a inflation in which all prices and incomes move in parallel, no one would care that real inflation is a change in relative prices, not just in the average price level and in fact we can find similar statements also in Keynes if We think of inflation as a matter of changes in relative prices.

This means that this is important because it has immediate redistributive implications. This is based on the assumption that there is a downward rigidity of prices, which means that if a price rises It does not mean that another price immediately rises by the amount necessary to keep the average constant. From this perspective, higher levels of inflation may arise due to shocks in important sectors. sectors that matter in the network of costs and prices and these shocks can be an expression of political events such as wars, climate disasters, speculative increases, etc. The research question we are addressing in this paper is whether inflation is not always everywhere a macroeconomic factor. phenomenon as the current mainstream would consider it, but which can be triggered by microshocks on the supply side, we need to identify which sectors present points of vulnerability for monetary stability or, in other words, have the greatest potential to become systemically significant for inflation, that is, a bit like with the strategic bombing exercise you want to understand what the points of greatest vulnerability are if those points are being reached you want to understand how this filters through the entire system in our empirical analysis we first offer a model of TF de León price and then we simulate the inflationary impact of a price shock in each of the 71 sectors of our economy, one at a time, that is, we simulate what happens if there is a shock in the first sector and then we do the same with the second, the third until we get to point 71 and in terms of the magnitude of the shock, we first use the average price volatilities as observed before the pandemic and then secondly we use the real price movements in the covid-19 pandemic, dividing them into what I am calling the post-lockdown economy in 2021 and the economy during the Russian war against Ukraine.

This allows us to classify the sectors according to the impact of inflation and, as we argue, is a way to identify through the first exercise using the volatilities which sectors are latently systemically significant, that is, they have the potential to become the sectors that trigger general or B inflation in those sectors that really become systemically important during covid-19 inflation. I have a graphic here to explain what an input-output table consists of. case that is not familiar to the audience I omit it for reasons of time, for now what we do in this model is take the value of the production of each industry, which is made up of the value of national inputs, so that everything that a industry buys from other industries added value, which are profits, wages and taxes and the imports that an industry buys from abroad, which are imported inputs, then we divide this value of the production of an industry by the total production of this industry which gives us prices per unit of production and this is important, the price here then is made up of the value of the domestic inputs plus the value added plus the imported inputs which we can solve again for the prices, which then gives us an equation where each The price of each industry is interrelated with the prices of all other industries, which allows us to decompose the shocks we are simulating into direct inflationary impacts where there is a change that a specific price change induces in the CPI in the consumption baskets and the impact indirect inflation that occurs through the impact of that price change on all other industries, so if you take the example of oil, the price of fertilizers will change if the price of fertilizers changes, the price of wheat will change the price of wheat changes the price of bread will change, so at the end of the day the change in the price of oil has a fairly large indirect impact on overall inflation and we combine this direct and indirect impact on inflation to get a measure of impacttotal in inflation. and then we classify sectors based on this impact of total inflation which we use to identify systemically significant prices.

This graph is intentionally such that you cannot read it. I just want you to look at the shape of these figures. These are the classifications that If you analyze the impact of total inflation on sectoral inflation, you can see that it is distributed very unevenly; In other words, some sectors clearly matter much more than others, so if we zoom in on this and look at the latent systemic importance that is made up of a direct effect. in an indirect effect, as I just explained, where these green dots indicate the magnitude of price volatility from 2000 to 2019. We find that the most important sectors from the perspective of the pre-pandemic world are oil and commodities, oil and gas extraction Grow food and beverages into tobacco products and then into the Federal Reserve Banks, which is a strange industry and input-output setup, which is why I'm ruling it out and can explain in more detail why we have chemicals housing utilities wholesale trade and other retailers other retailers are kind of a basket case so I also rule this out this leaves us with eight industries that appear as systemically significant and all of these eight industries appear again at the top of the ranking when we use the actual price changes as they occurred in the post-lockdown economy, that is, the quarter of 2021 and when we use the price shocks as they occurred in the second quarter of 2022, so the time when the war in Ukraine was already in full swing swing, that's not the correct terminology to use here, sorry, but it was already happening.

I think I'm fine for the sake of time. I'm also going to skip this and just point out that we basically have three groups of systemically significant sectors, the first is basic needs, i.e. housing, food, farms, utilities, oil and gas products, the second are the basic production inputs, such as oil and gas products, again, oil and gas extraction and chemicals, but also the basics of circulation, such as wholesale trade and trucking, which is a sector that it only appears in the context of the covid-19 pandemic and I would say that it is a specific sector that had specific bottlenecks but it is related to oil and gas, at the end of the day, we also do a similar type of exercise in which we did not assume as we did in the reference model.

I have just shown you that profits and wages simply remain what they were before the shock, but that workers can now get their back pay by increasing the nominal wage in a way to offset price increases for the staff they are purchasing or companies can increase their profits in a way that offsets declining profit margins due to rising costs this is what we call conflict inflation based on raw funds um important work from the 1970s, if we run these simulations, We find that the classification of systemically significant sectors remains practically the same, but we can also see that, basically with the exception of oil and gas extraction, in all cases, this line increases more between The second and third model, which is The change from profit adjustment to wage adjustment means that we would need a larger page adjustment to offset the price increases than the magnitude of profit adjustment we would need to offset the increases. price increases, in other words, this means that if there is no such weighting adjustment, real wages are more affected than profit margins buy these shocks at systemically significant prices or, in other words, workers bear the brunt of these shocks, in conclusion, then we can say that if price fluctuations become systemic because we live in overlapping emergencies, it is not feasible to react. with rate increases every time an action, a sector is affected by a shock due to the reasons that Yeva has laid out for us, economic stabilization requires a form of disaster preparedness to absorb shocks and systemically significant sectors, this requires a change of mentality and requires monitoring capacity for these systemically important sectors, as well as institutions and laws for emergency price management, which may involve buffer stocks, regulation of financial speculation, which is important for the entire commodity sector , prohibition of price speculation in times of emergency, antitrust measures, limits on price increases.

Investments to increase medium-term resilience and a Reserve Authority for emergency price stabilization and systemically significant sectors if the systemically significant sectors are so important that they can disrupt the economy as a whole, this also raises the question of whether the public no longer needs to have a voice in these sectors just as central banks were once private in history thank you very much thank you very much Isabella so the needle is to say that it is another document another word that you should eliminate, you may think that all this indirect impact of the prices is simple or the connection between sectors, but most of the analysis doesn't really go into, uh, yeah, level, it's not even a level of detail, right, don't get into that approach that doesn't develop the analysis from that. perspective, okay, so we have our final speaker, Torsten, in person, um, so I'm a little nervous because I'm obviously not qualified to talk about this because I've never ridden a horse there.

I'm also a little shocked by the reminder that Americans got their mortgages fixed for life, they got their mortgages fixed for the life of their mortgages, whatever in the US, in the UK, whoever doesn't have that pleasure is about to be as I'll be switching to snacks around my head, uh, for the next few years because of rising mortgages uh bills anyway um so I thought I could deal with all that trauma for um uh Me I'd like to repeat much of the discussion about the macroeconomics of the current crisis, so I'll touch on that a little bit at the end, but I said I was thinking of doing something much simpler, what is the impact of what's happening in the UK, which It's not the same as what's happening in the US, what the impact is on people and different types of people. of that shock and what we might think of comes next broadly as three things to cover so I'm going to try and do it and I'll do it reasonably quickly, maybe we don't cover all of this well, in fact we have some slides that are working well, so This tells you the obvious, everyone knows it: we have seen the highest inflation rate in 40 years, we have also seen the highest and therefore fastest increase in the inflation rate in 40 years, so it is not Only this thing appeared, it was a complete surprise if he had shown them four cars.

This is the Bank of England's latest forecast from last month, but if I had shown you all the forecasts that started from this time last year, going backwards. Basically, they all look like two percenters stretching toward the horizon in a nice straight line, so it's always nice to be surprised. In life, the same would be true if I showed you fed forecasts for the United States too, so that's the most important thing everyone knows. Well, this covers some similar ground to the graphs you've seen, so I'm not going to dwell on it other than to say that for the UK I think this is one of the reasons why the UK and most of European countries are Obviously, it is very different from the United States.

The euro zone should not be considered, since we are talking here about fairly small but very open economies. First, two. The gas price problem is a much more important issue in Europe. Much bigger than in Europe. in the United States because we don't produce it, obviously, thirdly, for consumers, it's a bigger problem in the United Kingdom because not only do we use gas to light our houses, we use gas to generate electricity to a much greater extent than most European countries and these things. It really matters when you get to the point where you say how individual prices feed into broader inflation metrics, so this tells you in general terms what you probably already know, so you have two general things on the international side of things. here.

Basically we have energy related costs at the bottom, pushing up, then we have other goods and I put it there because most of them are traded internationally to some degree or another, some of the services are also in the green basket and a lot of that has to do with, as I'm going to go back to some of the questions about what has been the demand from the US versus what has been the demand from other countries during this phase, but generally speaking what I'm telling you is In terms of the inflation rate we're seeing today in the UK staying away from the macroeconomy, it's rare to talk about whether rates need to be raised, but in terms of what we're seeing today, it's definitely driven by goods. and, in particular, obviously, energy costs.

At the time, just a footnote. on the macro debate before moving on, which is simply to say that the entire economic debate is dominated by the United States. That's because all economic debates are dominated by the United States, if you haven't gotten used to that yet and you've chosen a query in economics, you've chosen the wrong career, it's not going away anytime soon, um, but this just gives you shows that the big phenomenon behind the railing that, um, the other two speakers have covered excellently in the United States. States about the causes of inflation, which generally speaking is because people had too much money and have basically spent it on buying a lot of goods and in particular durable goods, here we are talking about cars and Ledger Goods, right , they bought every ukulele they can find. in the US every sports team has, I don't know, I don't know how people do so much sports, but they bought a bunch of sports equipment anyway, okay, and they've kept doing it a little bit.

Against all my expectations, um. While spending on services is below its long-term trend, so they've moved from spending on services to large amounts of durable goods and good spending, then that's the way, whether it's a demand, people had too much money or a supply problem that they couldn't. Not getting the things they wanted to buy is obviously a big part of what's going on. All I'm really telling you here is that whenever your opinion on that debate is not what's going on in the UK because it's all bullshit, that's fine. As if everyone's spending has dropped significantly from its pre-pandemic trajectory, you can see a shift from services like blue to green goods during the pandemic because any of you who were in the UK during the pandemic You will notice that you were unable to purchase anything. go out and they can go out and have a good time so they all bought junk for their house in the UK it was like a DIY kit because they are so upset about what was going to happen to her they might as well have a nice house if you're going to pay your mortgage well, so everyone went and bought DIY stuff in the UK, but again the overall level of spending is significantly low below what you would have expected if I could show you the same graph with income levels, I would show you a similar pattern, okay, so it's not the same.

The version of this graph for most European countries looks more like the UK than the US, so the US is a really special case to some extent and totally dominates. this debate about inflation, so stop it, it's basically this is my polite way of saying okay, sure, um, then let's move on to what all this means for real people, because that's what we should ultimately focus on . The first thing is that it's really really bad in terms of what's happening to household income, this shows income growth. These are measures of income growth from the national accounts.

If you don't want to talk about different measures, you get slightly different results, but generally speaking, this shows revenue. growth for households over the annualized year and it's basically two years, so the year we're about to end, next year, we're going to see a drop of about seven percent in household income, that is , something like £1,700 per household. Well, as you can see, it's not normal, even in very deep recessions, the financial crisis of the 80s you don't see income drops that big, okay now, if I do it, it shows you the same GDP graph, which you would obviously seeThese are really big GDP drops. in the pandemic it was really big, obviously we shut down half the economy so we weren't producing anything, but revenue didn't drop because government support basically stepped in, you couldn't get revenue from GDP, so you get revenue of the state is right, um, in many cases, a large increase in profits occurs at the same time, what has now happened is that we are now projecting a shallow recession, yes, but a very deep one.

Falls in household income. I think that's what's really important to understand. What is happening and the reason why it is happening is because the country has become poorer and that is because in the United Kingdom we produce almost no hydrocarbons. There is a reason why the transition to climate change is harder in the US than in the UK. We don't have anyone to put out of work and we don't have to shut down any gas fields, really, um uh, but in the US they do, um, and the result for us is that we get a lot poorer when you get a shock to energy prices and so we are importing it until basically one way of thinking about the whole political economy of the current phase of British politics is that we are simply deciding how we get poorer and who is right and when, that that's what a strike is, that's what a strike is that's raising taxes or cutting spending and that's all about power politics and deciding who pays and when they pay so this is a big problem that's what I'm saying this is very this is the equivalent of a very deep recession that is happening and is happening this year and next year, um, sure, um, it's not the same for everyone now.

I'm sure everyone in the room knows this, but just to wrap things up briefly, this shows you the riches of the poorest households on the left. households on the right what is the air inflation rate, given what we know are the differences in the consumption baskets for different types of households and then apply exactly the same CPI methodology but to those different consumption baskets and it basically tells you what you should know which is poorer Obviously, households consume energy as a much larger part of their consumption basket than middle-income households and richer households, and so do food, and food and energy are doing a lot of the work in this round of inflation that is basically giving us this. record gap between inflation paid by the richest households some parts of what's happening now are really bad for the richest households, so the richest households drive a lot more, so gas prices are actually quite high, but gas prices have come down a bit in some ways. that gas prices and therefore energy prices in households have not been good, um uh, so first of all, also poor households affect a lot more the balance between energy and food is quite unusual, so if we look back at previous rounds, generally, despite what people say, inflation rates are quite similar for different income groups over long periods of time, generally in the UK, okay, the exceptions in the recent past that you should keep in mind are before the financial crisis, when we were busy buying up banks, um, I can remember a phase of like six. months when rice prices, I don't even remember this, there was a price increase disaster because of the staple food price problem, but it was based more on rice and less on wheat, which is what we are going on now, this may seem like someone is looking like why are you talking about rice and wheat in the back uh anyway it's a reasonable question but I'm going to finish the point now uh um it was a big problem with that and that had Great distribution effects in different countries consume different things.

I don't have a graph here on pasta prices, I promise, but different countries consume different types of food and different groups and that was consuming different types of food and that was a big problem in that phase, you saw a big difference. Expansion of what poor and richer households are and then we saw the same thing in 2012 and 2013, which was the last natural gas price shock, yes, it was very small compared to this one, but that is the last time, so those are the times when we see that the poorest households are most difficult. blow when those are the things that drive and you will notice that they are all imported for the UK or they are all imported prices correct.

I will briefly say that older households also face a higher inflation rate. This is our own work using the same methodologies that I just showed you, uh, showing you 80 old households, that's because the old households don't spend much other than eating well, now you might not feel as sorry for them because they have like five rooms per person, okay? and all. the rest can do it, but that's part of what's happening in older households in the UK, not only do they have much bigger houses, they have much leakier houses and they don't spend any other money, so they have high levels of Older households in general are being more affected by what's happening right now, so Isabella touched on this, but politics is like even though everyone says the FED is doing all the work, the FED is obviously doing the work to the extent that and the Bank of England and how to address inflationin a similar long-term perspective, but in almost all countries, but definitely in all major European countries, fiscal policy is doing a lot of work, as is regulatory policy, and this is just a touch of some of the elements this chart shows again. poor households on the left richer households on the right the levels and distribution of fiscal support to households this year 2223 in blue and next year 23 24 in red okay because now we know what the government's support package will theoretically be for next year fingers crossed unless energy prices don't go down and what this tells you is two things in 22 23 everyone got quite a bit of support so this is like an energy price guarantee that limits all energy bills to £2,500 checks for the poorest households. and universal payments delivered through the energy bill system, so those of you who don't pay your energy bill get £400 off your energy bill per household - if you do, everyone does whatever that they have their income, so they have a nice Universalist System and you have it and it is quite big, it has been done in a very haphazard way, it is obviously not a good way to do it, but forget about all the micro things, it is big, it is a large amount of cash per household, then you have what is happening. next year we will have a more progressive system, significantly more progressive, but it is much less generous, so next year about two-thirds will go to the bottom half, while overall the bottom half only got about half.

This year, this is mainly done. Payments of £900 are made to each household on means-tested benefits or for some older households, and then there is the energy price guarantee, which caps prices at £3,000, the equivalent of £3,000 for one user. typical energy starting in April, compared to 2,500 today. um now and obviously energy prices end up being higher than this red bar would go up because we would be capping the cost of that cap would go up well um now what I would take away from this is the energy price cap is obviously affecting what The actual measured CPI is correct, but it is not going to affect what the real inflationary pressure is, we are simply deciding whether it is borne by the state or the individual, that is what I am telling you.

We're deciding who's getting poorer, how we're getting poorer, um, uh, the other thing is I don't have it here on the slide, but it's the system we're using to cap total wholesale energy, so prices of retail energy through the energy price cap. which other countries are making other versions of, so the French played a lot from the beginning. We will limit these price increases. Increases are in parentheses. We won't talk about it much, but we'll absorb the cost of that. with Insider nationalized the energy sector until we don't want to take it anymore and then we'll start letting it happen, but you had it, you can use, you can use regulatory policies, the limit Energy prices stop flowing wholesale prices or you can leave the wholesale prices flow and then you can use simple fiscal policy to allow them to help people manage those prices correctly and in the end, that's why it's really important to form a household perspective, it's not just about interest rates , these policies make a big difference and if wholesale prices stay where they are next year it is a disaster for this reason, even if they stay exactly where they are now, you have to find a big additional right and anyone who has reached the low income of Great Britain knows it.

They don't have a thousand pounds just sitting around paying a higher energy bill. Oh sure, make it work then, since there is so much support. Why is it difficult for us to face all this? I just want to give you a reflection on why in Britain in particular we are not in a good position to deal with this crisis and say that behind this is a view that Britain is a country with high inequality since the 1980s, not high, not high, it hasn't increased recently, but yes High, eh. Higher inequality in a large European economy plus a slow growing economy is well for at least the last 15 years growing more slowly than our comparable economies.

One of the effects of that, far from the only one, is the amount of our spending. As households using Essentials have increased over time and that is what this graph shows, the poorest households at the top the richest households at the bottom in blue we are showing the position in 2006, how much percentage of people's budgets spent on Essentials? and then we'll show you what it's changed to today, so the green is the most recent data, okay, and we say focus on, for example, on the top right, we're saying that in 2006, less than 52 percent of the budgets of the poorest households.

I continued with Essentials housing transportation energy things you really can't stop spending on to live your life food uh and in 2019 it's over 58 okay now the reason why this matters when a price shock occurs energy is because it is another increase in the cost of essential goods. But the way to deal with the energy product when the central price rises is by cutting non-essential spending, but the poorest households do not have as much of that. Remember in the pandemic why rich households saved so much money because they couldn't. I no longer go on fancy vacations to a staggering extent.

Every time I look at the data on what the rich spend on vacations, it's a lot of money, people like it, it's more than you can imagine, even every time I talk about it with someone. I mean, I'm very tight, but they spend a lot of money, that's why they saved so much. The way these households cope with the energy price shock is that next summer they will go on a slightly less stylish vacation. Okay, these homes are not going. be doing that right because they don't have the margin adjustment, the same thing I think it would be if I showed you the exact same graph with savings, these people have savings that they can use in case of a temporary price shock, these people don't, um, here there is another. way of thinking about this that comes from a survey, a survey that is now done almost weekly.

I'm not sure why they do it weekly, but they are doing it, showing you how people are responding to this energetic pressure again. the poorest on the left the richest households on the right this is actually due to the deprivation of the area because they don't have complete data on income, but I think the pattern is generally fair to compare, so for households poorest 58 are already cutting back on food and other essentials because as I just showed you in the other graph, that's what they have to cut back on as everyone is going through tough times so even a third of the best off are going back to some of them, so even wealthy households don't have the heating power on as much as they normally would, but 58 at the bottom if you look at them who is investing in energy improvements for their home who is doing it 35 of the richest households are doing so compared to only 24 of the poorest income households, so the way this shock translates into how people can cope is very different, the coping strategies that exist aredifferent, you may be less worried about younger people because many of them have just returned to their parents to deal with the situation.

Surprise, you might be more right about them because they're back with their parents and that's not what anyone should be doing right now. Umm, yes, they are Italian. We can do it well. We're going to briefly jump into the future, so I. I'm going to start with optimism, that all things being equal, many of the things that economists, particularly economists, policy-oriented, have been worrying for the last couple of years they seem to be getting better, so a lot of the things that they drive, particularly these, the international imported part of the impact that is happening on the data is being a little bit better than we thought.

We could have waited, so we're not going to go through that. All of them, we will have a document on this in the next few weeks, but this shows you the producer prices, like the prices of inputs or products, of what companies are actually doing, where you can see that we are already past the peak of inflation. Hopefully that's good news for everyone, um, come on, let's go secondly, because as we were discussing earlier, inflation expectations are a big part of the anxiety, so why is the Central Bank saying that we have to try hard because they are saying?

Look, if inflation expectations get out of control, getting them back will take really high unemployment words, if we can keep expectations low we won't need to raise unemployment that high without having a big argument, that's what they say, if you agree . them or not, that's what they're doing, so this just shows you inflation expectations, they are two different measures, there you have it, the blue line shows you companies reported inflation expectations, what do they expect to happen within a year and start to fall? Well, I mean, in general, the way all inflation expectations measures just track actual inflation overall, so don't get too excited, but the point is, they're not shooting up to 10, okay, and this in red shows you the measurement of the home.

Inflation expectations again seem to have peaked, meaning the Bank of England on that front may feel they should relax a bit more now, I think the danger is that we could easily spend. I think there's a serious danger that We spend the start of 2023 with everyone at Economic Policy World saying, "Well, things are actually getting a little better." I'll give you another example: the UK's public finances will probably improve because interest rates were probably being charged on our debt. They're not going to be as high as they were quoted in this recent fall statement, they're probably going to save us a pretty significant amount of money, so I think there's a lot of areas where people are saying, Oh, it's not as bad as we thought.

German industry can cope with less gas than we thought, hopefully I think the danger of this is that for households that's not what's going to happen because the fact that things might be a little less than they thought that they were going to be It doesn't help that they are receiving and that's what's going to happen to households, so these are going to be three ways of thinking, the first is to show you unemployment, this shows you the Bank of England in uh . whatever is light purple and the Office of Budget Responsibility, which for those of you who are not from the UK, is our Fiscal Council, the kind of independent forecast that does the government forecast to underpin our fiscal arithmetic, showing their expectations of fairly large increases in unemployment next year. or over the next 18 months, actually, the obr is like we're talking here, it seems small in comparison, but we're talking about 500,000 people, okay, the Bank of England number is a million people.

Now, again, in terms of the US, you can divide what you can by five to get to the approximate impact that we're talking about, so there are a lot of people, that's a very concentrated effect, most people won't lose their jobs, but those who That was a very big effect. I remember the UK welfare state doesn't protect your income if that happens to you unless you are on a very low income in the first place, but then we have what I was starting. Previously, on what's happening to people's mortgages, in the UK, as I said, remember that almost no one has a fixed mortgage for the duration of their term.

Let's not get into the reasons why what happens is that we have some people with variable mortgages. Are you okay with the red, green and blue bars who are already starting to see their mortgages increase with the bank base rate and then with the larger population who have fixed term mortgages but on very different terms sometimes two years three years five years some lucky people in ten years over the course of the next five or six years will flow over time as their current deal ends up in New Deals and those deals will have much higher interest rates and as they do, to give you a idea of ​​what the next election will be like in the UK is at the end of 2024, five million people in households, I should say, you will have seen that there is no interest, interest bills will go up, we are not talking about a little, they will go up like four or five thousand pounds on average. it's a lot of money, okay, now these are middle-income households in general, obviously, they're younger, they're going to be younger, there's going to be more affluent parts of younger cohorts that are going to be absolutely hit.

Does anyone buy a house in the last year here because you shouldn't have done that uh, um anyway, I'm afraid that, um, because those unfortunate people will get higher interest bills but they won't get the lowest house prices , which can be seen the day your data is published. This morning we showed you the pretty big house price drops, they're already starting, like there's no way we can sustain current house prices at three and four percent interest rates, so if you're going to buy , wait a bit, everyone, yeah, I mean, you probably can. I'm not getting a mortgage anyway now, but at that point the last reason is just to show you the revenue forecast from the office of budget responsibilities, so the same measure that I started with correctly and show you what this means.

I just want to explain how bad it is. What's happening is, since the financial crisis, we didn't get much revenue growth here, we had a good phase, there was a good phase around 2015, which was the drop in gasoline prices, a rapid increase in employment and when wages increased, a little later this Brexit thing happened, remember? Generally speaking, you haven't had much revenue growth since, as I say, they weren't big drops in the pandemic really because politics made a big difference, but they were huge drops, that's the seven percent drop. I was talking to you about the beginning, we don't get back to where you were in the pandemic until the second half of this decade, yeah, so anyone in the economics world says, "Oh, things aren't that bad next year, which I promise".

I think that's the most we'll be in that world possibly in March and we used to look at these kinds of charts and think that's what matters, not the fact that it's a little less difficult for you and your interest rate. rate setting is not the exam question here the exam question is what is happening to people trying to deal with high food costs. Remember that for people what matters is the price level. It's the price level, so the fact that oil and gas stocks stop rising is less significant than it is much higher than I'm used to remembering.

We're used to the average energy price basically being around £1,100 per home over the last year. 15 years small fluctuations over time, but basically and now we are talking about three thousand, so the fact that inflation does not get worse and exceeds 3000 is not much better for you because you still cannot afford even your camping holiday because it's two and a half times what you're used to uh I'm not going to go through this because I said all that, that's what I concluded but you heard that and we already have time so in the end thank you very much Justin.

If I hadn't convinced you to check out the work of the resolution foundation, I hope you are now convinced, just so you know, I hope that, like me, you feel that it was a great panel of different approaches, but that also made us very aware of the problem we have. I'm going to face, I feel like uh, yeah, I was in Isabella, it gave us an upbeat and then touristy and, yeah, bleak vibe, and I'm sorry, I should have said that Martin couldn't come with us, we had a mix-up about the time and he's in Australia and decided to sleep rather than join us, so you know, that doesn't make any sense, but I have a feeling Martin would join the tourists in a grim approach in the sense of discussing how inflation It is now a liberal area, sorry it has moved from the price. to asset inflation and so on, which would have been a big discussion, so yeah, I mean, if you all agree that you can stay a little longer to resolve the technical issues, then we'll probably have a 10-to-10 discussion. 15 minutes, so I'm not going to say anything because I can see that's the incredible audience I have on the IPP students here.

I want to hear them as questionable, so I see two members of the Positive Money Think Tank, which is another thing, I think you should check out their work, so yes please. just ask who would like to be first everyone shy here we go, come on, can you hear me? okay, go ahead, very good, thank you very much for the presentation, but you can't hear me and I have a question for you in particular, it's a question. a question for you if you ever accept this framework that there are microeconomic determinants of inflation. He likes all his work.

However, I wanted to ask if there is a role and what is the role of traditional easing or monetary policy. in the inflation that we are seeing because of course there are supply bottlenecks etc. but also when you look at the amount of money in circulation there is a huge increase that that played a role or um so are you letting yourself go? I got it, yeah, I wasn't trying to be optimistic, by the way, if that's okay, yeah, I was. You know, my prediction has been that we won't see that soft landing and I think that's what some people are hoping for, but Well, so the amount of money in the economy is not a very important variable and I'm very Keynesian on this topic, so It is not the amount of money that matters, but the amount of spending and when, if any, monetary policy.

The impact on the economy is not in terms of the amount of money or changing the amount of money, but actually a change in interest rates that has most of its impact through asset prices, so which central banks can't do much when it comes to production labor prices, but they can be very effective in terms of asset prices, whether it's blowing a bubble or, you know, deflating a bubble. I mean, you just have to look at the cryptocurrency market and see what's going on there. being eliminated because the FED increased the interest rate, so in that sense it has been very effective there, to the extent that there is room for monetary policy.

I very much agree with Keynes on this that we have to keep interest rates low and just maintain Basically, we will not use them forever as a tool where we raise them, lower them, raise them and lower them because it has an impact of financial instability , so it's kind of Minsky and um, in that sense, right, so I would say keep interest rates low to the extent that we're trying to address certain bottlenecks, then low interest rates help um to um, you know, they're not going to encourage more investment in certain areas, but at least they're not going to be prohibitive in that sense, so you know. allow low interest rates and then try to invest in certain areas like housing in case the US renews local energy and things like that, the areas that are the bottlenecks, I think how monetary policy can help thanks, Thanks, next question, um, okay. this sounds a lot like um, you know, even the image of the war destroyed, um, actually, because there was a moment when Saudi Arabia and China and you know there was this, there are these moments where you realize the politics of the military.

Russia's policy is, actually, you know, we're only seeing one-fifth of the war being fought in Ukraine, the rest is happening through these kinds of pressure points, you know, and it's like, Is this on your mind on purpose? The thing is that this is not only sensitive to themanipulation in other ways, but it is actually a war zone, these are war zones where you are trying to map their fragilities and the second question is exactly what you said, what was raised. Now is how can you overcome if there is some price control or if there is some other methodology, how do you not inspire people to stop investing in that and this whole oil conundrum and try to divest and stop when in reality we need to burn that oil to make solar panels.

It's more of a question like you said: who, how, who gets poorer, it's actually how we do the things we need to do, rather than how we stop using this, so all this sorry war and the future how It's happening amazing I think they're small questions, yeah, I think they actually cut across the panel, yeah, I heard it was meant for Isabella because of the war, uh, yeah, so if you want to take that, yeah, yeah, I mean, let me too I start by saying that I am not an optimist, I mean, I am calling for economic policy to be prepared for disasters, because basically I think we need something like a fire department for economic policy because more shocks are going to happen and, as Yeba has illustrated, the institutions that We are not prepared to fight these fires, so these fires are in progress.

I mean, we hope they don't explode. We hope everything is okay and I mean, maybe that's the word we're living by. I want to say that everyone should hope and work towards it, but more crises will most likely happen, so we should prepare better. I mean things like the Mississippi River drying up green and no longer being able to ship through the US will create another crisis in the grain market, so I mean the shocks are already happening, whether of the same magnitude, probably, maybe not immediately in 2023, maybe again in 2024, I don't know, but it seems likely that more will come, um that.

It kind of connects to the question of geopolitics that I mentioned here, so I am of the opinion that, in particular, in relation to China, I think that we only have one chance as humanity to really manage the crisis that we face if somehow way we managed to create a new framework for a stable Global Order because I think if we are at war between the major powers in the world and we are trying to fight climate change, we are pretty much doomed so as a precursor um but that being said, I was surprised Quite enough to see what happened in Europe how clearly European countries were engaged in a form of economic warfare with the sanctioned regimes but they did not prepare their own economies for the extremely predictable repercussions of this economic warfare in which they were involved.

To be honest, it was really shocking and disconcerting to me and I think this has a lot to do with the economic mentality that people have, where there seems to be an idea that you can deal with a war economy type situation, buy market free. economic policies and this for me is simply a total illusion. I think history shows this to be wrong. I also think that we see that every time major awards are given there is a phase where everyone thinks they can deal with these shocks and continue with the usual terms and then they discover that it is not working and eventually they start to mix in new types of measures such as measures that that person has been talking about in terms of fiscal responses and so on to the question of price controls and the energy sector, um two points. the first is "I agree and disagree with the person that first I agree that we have to distinguish between price controls which are basically price caps that work through tax subsidies and price caps which are actually price caps." regulatory prices that say you can't charge." a price that is higher than So to have a sustainable price civilization response to the crisis of honest opinion, we would need some form of price stabilization at the European level which could involve a total wholesale cap, as some have been arguing.

I personally think it would be good to have some price flexibility on the LNG part, but I mean, whatever the design of that is, we would need something at EU level now if we do it fiscally. Financing price gaps as the UK has been doing and as Germany has been doing, which I have been working on, depends on policy design. but if you design it in a way that it ends up being measured in your CPI and says that the CPI goes down, then yes, the first place is a statistical effect, but since we live in a word of central banks that adapt their response to inflation based on the CPI measured and on expected inflation, because of the way we have designed our economic policy institutions, this has a real effect because it takes some pressure off the ECB in that case, which I think is important in terms of the possibility of have some arguments against aggressive interest rate policies, but even more important if these fiscally financial price gaps are designed in a way that they are combined with an income tax that is designed to ensure that the decrease in cost thanks to a The fiscally financed price gap is actually transmitted throughout the value chain by companies, then you can have an instrument that reduces inflation also substantially, not only as a statistical effect, but actually throughout the value chain to a substantive measure now if we were to do the real price.

The controls do not fiscally finance subsidies that support price gaps, but rather price controls that dictate prices to companies, which I think would be a possibility in the case of oil and gas in the US, we need to talk about the level, etc., but I think in theory it could be a possibility, what effect would this have on investment in production? This was the question I was asking myself now. I think, contrary to their initial intuition, they think that it is okay if the price is capped, this means that production can go down. Actually, this is not what This is going to happen because if you look at the profit cards of the fossil fuel companies and look at what they are doing right now, then they are talking about having the best times and in fact we have a document of next post where we are tracking oil. and global gas profits are having the best time producing less at spectacularly high prices with lower costs why is this?

Because during the pandemic they took many of their assets off the grid, so they stopped producing with the high-cost assets and instead use the low-cost assets to produce now the costs went down their prices went up their profits skyrocketed they don't have no incentive to increase production if you said your price would now stay at I'm not saying we necessarily want more fossil fuel production. I'm just saying in terms of the ways in which the price cap operates that it can even be a situation in these extreme scenarios that we're talking about in times of emergencies where the price cap can encourage greater production and this is something that also we have seen historically in the context of wars.

Thanks, yeah, okay, I've got Simon on anyone else so I can get two, okay, oh yeah, okay, see you, oh, okay, then go, Simon, yeah, I agree, I don't know It's not about the amount of money, but about demand and spending, um, but isn't there an argument? What monetary policy can do is encourage. that people spend less by saving and delaying their consumption, so that's not the argument and I guess it's related to that, well, you know, I agree with the efforts and obviously you know saving investment grade savings and things like that When people talk about increasing all this investment to address these supply chain problems, you know that many countries have found out about it when they have done industrialization campaigns, such as in the Soviet Union, Japan, China and others.

They are inflationary and they have to encourage savings in other sectors of the economy, so in addition to this investment in the things that we need, we must also restrict investment in other sectors that are less necessary and we must also encourage savings great, eh, You can see it here? I can't see, yeah, okay, yeah, just more. Obviously we're talking about the stagflation of the 1970s, supply side stores, lack of optimism, probably with China's globalization and climate change saying that things may not necessarily be better. in the future and that change of thinking from Keynesianism to laissez faire or the emergence of monetarism in terms of long-term macroeconomic and political perspectives, what are the solutions that we think of, such as the Green New Deal or the Marshall Plan for developing countries? , that they can really solve these problems in the long term and be a little more optimistic towards them thank you, I'm going to get a third one and then we can all do it together yeah, that's a question for everyone, can everyone here?

Yes, okay, I understand your argument that inflation right now is supply-driven. Do you think this is always the case or do you recognize that inflation can be driven by demons at least in certain sectors such as housing or the commodity market? Sometimes Isabella in your article you mentioned ubiquity and volatility like um. two drivers of, as you say, the systemic importance of sectoral prices, so my question is did we change the tools that we use to combat inflation and adopt tools along the lines that you proposed and this influenced some volatility, for example, that would alter the results of your input-output regression and uh top 10 yeah, how do you get a shallow recession with a deep form of income?

I've had them, they can even last, you know, they'll probably go up and yeah, I'm sorry, but you almost have inflation expectations like the five to ten year range. I used to forecast inflation, I mean, you never do that, always. It's great, so there's a lot going on, should we get started? of them, then the investment, the question of investment, I think is leaving out the similar details of Soviet-era industrialization, but there is one general thing that is in the UK party debate in particular, but in You actually see versions of this in the US, obviously there are and Particularly, this is seen across the political spectrum, but it's probably a little more prevalent on the left.

There is a recognition that we need greater investment. Future. Well, whether it's public investment, whether it's through, um, because of the Net Zero transition. or if it's because we'd like our companies to really grow at some point because we haven't had a pay rise for 15 years, then what's almost not discussed is what the implications of that will be, where the funds for that investment would come from. from the um and the offsets that come with it, which are like at the most basic level, obviously, your broad options would you like to have, would you like to have lower consumption for a fairly considerable period of time for households, or would you like to borrow . from abroad to fund investment and you'll notice the UK already does a lot of that, not least because of energy prices at the moment, yeah, so there's basically no discussion about who it is and why.

What is a problem. because if you are in favor of that high investment, then you should really care about whose consumption falls and how, and that will have effects on the broader form of your economy, because the disadvantages of consumption, which for some people diminish, They mean other people's jobs, right? It's the same thing when everyone tells me that it's very important that we keep modernizing a lot of houses and that that will create a lot of jobs, so you know that's true on the micro level and on the macro level, it's not going to create a lot of jobs. of work, it is going to move a load of activity from this part of the economy to this part of the economy, it is going to do it by reducing it depending on how it is paid, reducing part of consumption, other things, so that households pay for it themselves themselves.

We'll go out to eat less, right? I mean, it's what will also save the planet, so we should do it right, but the general thinking that we always tell ourselves that the investment will pay for itself quickly enough that there is no way to consume it is basically nonsense um, and you do. I need to think about that kind of thing if you are interested in a natural economic project instead of just saying some things there, so that's good, how can you get a shallow recession and a big incomeforeigners the answer is because the country is getting poorer and it is not that we are producing less it is that we can buy fewer goods we are an open economy so we can buy less goods around the world so we produce in pounds, that is, the prices of energy have gone up, we consume a lot of them and almost all of them are imported, so we become poorer as households even though our level of real production, I mean, is a separate thing, you still get some production.

Obviously, it falls um. because it is more expensive to produce some things that use them as inputs and households are responding, but generally speaking you can, when the terms of trade shock is driving much of what is happening in households, it does not have to be transferred to production, an enormous production force. Nationally, great, thanks, you've got us. I think there's room for a savings policy, um, if you're in a situation like full employment. So, for example, Keynes talks about that about how to pay for war. I've used that same type of approach. and papers on the Green New Deal, which is another thing that came up.

I think in general we have to think about spending as a use of resources and then, you know, if there's too much spending, then we're using too many resources, right? It can be public spending and it can also be private spending, so the question for me is not how do we limit spending so that sometimes it is necessary, but right now I think that's not really our problem. If we get to two real jobs, then obviously yes, how? Do we limit spending so we can avoid inflation because inflation can also be demand-driven? I just don't think the current inflation in particular is driven by Germany, so I would distinguish between true inflation, which is what we start to see when we get to full employment and that's basically Keynes' definition of true inflation, so I think we can rethink how we do fiscal policy, so this kind of indiscriminate fiscal policy I would call the free market approach to fiscal policy where we just give people money. and let them spend well I think that's the wrong way to do it, which is why modern money theory economists have been advocating for targeted fiscal policy in the form of guaranteed jobs, for example, the green new deal can obviously be very important, I think in the future.

In the long term, something like the Green New Deal is that this inflationary investment requires resources at the time that investment project is made, but in the long term it pays for itself in the sense that it creates more capacity, so What if we invest in renewable energy today. Yes, we need more workers to say build the solar panels properly, but long term we have that capacity now that we can leverage in terms of energy so that it can reduce energy costs in the long term, so you know, public investment in general in particular. areas, whether it's housing, whether it's energy, I think energy, especially because it also helps us address climate change.

Well, we address climate change. We also know how to create jobs and hopefully good jobs and expand the capacity of our economy if we have to do something like that. and if we are really reaching the capacity of our economy, then we can think of some ways to facilitate things like Saving Right, but I don't think this indiscriminate increase in interest rates is the right way to do it, we can try to think of other policies in which we can encourage people to say, in general, I'm back with Keynes that saving is a two-part decision: first you decide how much you save and that depends on your income, so if you can't even cover your needs Needs obviously they're not going to save regardless of interest rates, just like those low-income households that Thorson was talking about, they're not going to save regardless of higher interest rates, higher interest rates are going to be going to asset holders, which in a sense are the richest households, when interest rates change, it's just a mix of assets from one asset class to another, right, it's the second step of the decision to save, how Is savings distributed across different asset classes?

That's where interest rates come into the picture, so I think I've addressed all the questions to a certain point and at this point I have to apply because I have a class to teach, so I'm just going to say thank you for inviting me. I thank you very much thank you later thank you bye Isabella please um so I'm not sure I heard the question correctly, but I gather that it was about the dimensions that feed into the systemic meaning in our model, so it was. How would your budget model show different results if your policy regime were adopted?

That is, would those with different areas become significant? Not only did you have the strategic oil reserves in the way they are operating right now, but let's say they were backed by the FED doing open market operations for oil and what really stabilizes the price spikes and the oil, which is something that people like salamarova for example have been suggesting and fat is quite good to buy when no one else is buying and selling and no one else wants to sell so that's the kind of business they have been doing for many decades, Let's say you have that. type of policy and there was no longer the extreme volatility in oil and gas prices, then clearly in our model that sector would decrease in its systemic importance for inflation, all we are seeing here is inflation as a relevant variable.

If for housing there was a big push for public investment in housing, say, or you had preferential interest rates for first-time buyers, which reduces the cost of buying houses, it could reduce the measured cost of housing, then yes. that would affect the ways in which this enters the CPI, among other things, the weight of these expansions would decrease in the CPI, which would mean that in our model the importance would decrease perhaps once we reflect on this whole investment question. I'm not saying this is necessarily going to happen, but I think there is a serious question about whether these supply chain shocks are really going to become more intense and whether we will see a further breakdown of global supply chains, in the context of a huge crisis. geopolitical tensions about whether then we might not be reaching real physical limits to investment in ways we haven't seen in a long time, which means that if you want to make large-scale investments in green things, let's say you could be in a situation where that certain critical components needed for that are not available in sufficient quantity, which raises a whole new question of industrial policy in which it is not simply a matter of putting the money where it is needed, setting the right priorities with fiscal spending, but It also raises a whole new question about state capacity, as in the work I have been doing in the government commission.

I mean, one of the big questions that loomed in the background was whether we should be doing I'm sure that systemically significant activities have enough and cheap enough gas available if the gas crisis is going to get worse, the answer is that currently the States They are not prepared to even understand what the systemically significant parts of their economy are and they do not even have the capacity. to understand how at the end of the day a form of physical rationing could work now I'm not arguing rationally that's not the idea here, but the idea is that it is noticeable that depending on how this global energy crisis develops and if we are serious about treating of transitioning to a green economy in a way fast enough to do something serious about climate change, so we might be reaching some physical limits, which then raises the question of physical allocation in new kinds of ways, thanks Isabella okay so if you want to continue this conversation just join us upstairs for a few drinks uh obviously Isabella can't join us but after your first drink you can write a question and you can say uh but yeah please join me for thank you Isabella and Ever from like join us on the other side of the Atlantic.

It's interesting to be here in person, but also you three for having been doing this work on an issue so important to all of us. Yes, thank you very much.