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Economist Claudia Sahm joins Rob Isbitts to talk inflationary pressures (1:10). Are tariffs inflationary and who ends up paying them? (4:35) This is an excerpt from a recent Investing Experts conversation.
Transcript
Rob Isbitts: I’m Rob Isbitts and you may know me on Seeking Alpha under the profile name, Sungarden Investment Publishing. I also lead the investing group, Sungarden YARP Portfolio.
So my guest today, and I’ve followed her work for a long time, and it’s great to finally meet her, Claudia Sahm is the Chief Economist at New Century Advisors and a former Federal Reserve economist. She is also the creator of this Sahm Rule that is spelled S-A-H-M if you’re googling it, which you should. That’s a recession indicator, and we will certainly talk about that in the next few minutes.
Highly regarded expert on monetary and fiscal policy. She has had a lot of experience over the years advising key decision makers at the Fed, at the White House, in Congress. So she’s just about done it all under the topic of economics and economic strategy. So it is a pleasure to welcome Claudia Sahm.
Claudia Sahm: Thank you. It’s wonderful to be here.
RI: I have three questions on the subject of inflation.
First, when you look back just few years, was it inevitable that we would get higher inflation in ’22? And then I want to talk about where the balance of risks is now, and then we’re going to hit the T-word, tariffs.
CS: To some extent, the pandemic and some of the public health responses, which I think were necessary, created an environment that was going to cause inflation.
And then this goes back to what I was talking about with these supply dimensions, right. And it’s not just that countries shutting down or putting real public health restrictions on say, global supply chains, really ground to a halt. And so we had issues in terms of getting goods there.
But one aspect that I don’t think it’s talked maybe enough about is at the very beginning of the pandemic, there were initially restrictions on people being able to go out and buy services. And then even in places that didn’t have the restrictions, the pandemic itself was a restriction. People didn’t want to get sick. They were afraid. So you saw early in the pandemic this massive pullback on spending on services.
So it is true that the government gave out a lot of stimulus relief to families, particularly like bottom 70%, 80% by income. But you had also higher income families who just weren’t out there spending. And so you can see this like just outsized divot in the amount of spending that happened.
Well, that also was part of the what later was referred to as the excess savings. Like even just that pent up demand of where we had a bunch of money that had been set aside, people hadn’t been able to go out and spend. And then when the vaccines came out and the world started to really open up and people felt comfortable, that surge in demand was going to have inflationary effects.
So we had some things that were built in from, there was a pandemic, it really changed people’s behaviors and then that unwinding of it was going to cause, there were just pressures on supply or big changes in behavior like moving from goods to services or from services to goods really rapidly. All of those were going to be inflationary pressures.
And then on top of that, there was a lot of support sent to households, businesses, and localities to keep demand going, get through the pandemic. We went at this as if it was a big demand-driven recession. That piece of it probably could have been better tailored, maybe not quite as large.
But we do see if you look across the world, there is a very common experience of inflation picking up and even remaining elevated to some extent. And there’s quite a bit of variation on how much of that say, fiscal relief, went out.
So we were going to have inflation. I think there certainly could have been policy decisions that maybe would have made the inflation less. I don’t think all of it was inevitable, but a substantial portion of it goes back to the pandemic and the disruptions it caused.
RI: I have a top economist with me here. And so I have to ask, because I think I know the answer to this, but who would know better than you – are tariffs inflationary and who ends up paying them?
CS: So the details do matter in terms of, in the past, you can see cases where if it’s really easy to kind of get around the tariff, like source from a different country, then the importers will make efforts to not pay the tariff and then there’s not anything to pass on to consumers.
There have been cases even during the first Trump administration where if it’s not as possible to get the sourcing, well then there is a cost and it’s at least partially paid for by the consumers in higher prices. That has been the experience.
Now, you can get into an argument about whether it’s offset in other prices and really is it aggregate inflationary? But I mean, on the goods that are tariffed, the experience, again, it depends on the details of the tariff, but if they’re broad-based and putting broad-based on Canada and Mexico with limited opportunities to have other sourcing, well, that’s a recipe for consumers paying more.
And it’s really kind of interesting. I wrote about recently for Bloomberg Opinion and done some work on various kinds of surveys and polls that have gone to consumers, there’s more awareness of tariffs than I would have expected.
But I think we’re in this moment where people are inflation weary. This has been a difficult several years of higher price increases and now we have a higher price level.
And even there was a recent poll in December, consumers really take President Trump seriously, like that they’re going to be big broad-based tariffs, like they’re ready for this. Even among Republican respondents to this one poll, there’s an understanding that at least a portion of this is going to be paid for by consumers with higher prices. And the go-to for a lot of people as well, we’ll just try and get ahead of it and buy early.
There’s maybe even some signs in some of the data we’ve gotten from December, whether it’s imports or durable goods, that people may actually be doing this. And that has its own effects, but I think there are costs coming.
Now the question, it’s an economic policy and then you can have discussion about, well, are those costs justified, right, in terms of increasing domestic production or decreasing the Mexican, Canada tariffs about fentanyl and immigration. So it’s complicated, but it does look like at least on the goods tariffed, there is likely to be a price effect.
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