Ryan Bourne, from The CATO Institute, breaks down everything you need to know about inflation, price gouging and how it all works. Watch!
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00:00Welcome back to the Headline here on Cheddar, where just about every day the biggest story
00:08and issue weighing on the wallets and minds of Americans is inflation.
00:13Just about everything we buy these days costs dramatically more than it did just a few years
00:19ago.
00:20Is that, as Kamala Harris has suggested, price gouging?
00:25Let's discuss with the editor of The War on Prices, how popular misconceptions about
00:30inflation, prices and value create bad policy, Ryan Bourne.
00:34Ryan, good to see you, my friend.
00:36Thanks so much.
00:37Your book, it debunks popular myths about inflation.
00:41What is the biggest myth?
00:44The biggest myth really is that inflation is driven by a host of malevolent actors and
00:49price gouging businesses across the economy.
00:52Inflation really results from a fundamental imbalance between the amount of money in circulation
00:58being spent and the amount of production going on in terms of goods and services by businesses.
01:04The simple truth is that most of the inflation, the vast majority, I estimate around 80 percent
01:10of the excess inflation we've seen since 2020 has really been driven by expansionary macroeconomic
01:19stimulus, monetary and fiscal stimulus here in Washington, D.C.
01:23But it, of course, suits the politicians to deflect blame for that on to corporations
01:28because they're ultimately the ones that change the sticker prices on their products.
01:32So just to back up for the audience that's just trying to consume all that, are you saying
01:37it's strictly government spending and the Federal Reserve that causes inflation?
01:44Yes.
01:45I mean, primarily, it's the responsibility lies with the Federal Reserve.
01:49We saw a huge expansion in the money supply, the amount of money in circulation from 2020
01:57through to late 2021.
01:59And that takes some time to filter out through the economy.
02:03And you add to that the fact that federal government is borrowing vast amounts, in effect,
02:08dropping money into people's accounts through that pandemic stimulus spending.
02:14And there's simply much more money in circulation being spent on goods and services.
02:19And when you have that big increase in demand for products and the economy isn't producing
02:24more or isn't able to produce that much more, that increase in demand drives up prices across
02:30the economy.
02:31And that takes some time to play out.
02:33So that's why we've seen kind of elevated inflation over the past three years.
02:37So is it fair to blame the Biden administration's spending for our current inflation?
02:44I think certainly it was a component of what we saw.
02:47Of course, there was vast amounts of spending under President Trump during the first year
02:52of the pandemic as well.
02:54And of course, the Federal Reserve's responsibility is to look at what the Congress and the president
02:59is doing and try to adjust monetary policy to keep that level of spending on a relatively
03:04even keel.
03:05So I think we can assign some blame all around.
03:08I think Trump probably engaged in too much stimulus spending in 2020.
03:13But certainly by the time we got to 2021, the economy was reopening.
03:17I think it was really unforgivable that the Biden administration lathered on all that
03:21spending through the American Rescue Plan, 1.9 trillion at a time when the economy didn't
03:26really need it.
03:27So certainly we can attribute some blame to the Biden administration.
03:31But a lot of that inflation was baked in through the result of the monetary expansions we'd
03:35seen in the early stages of the pandemic.
03:37Yeah, the lines have certainly been blurred in terms of government spending.
03:41Both parties have overspent for decades now.
03:46Should the Federal Reserve have raised interest rates sooner?
03:50Yes, the Federal Reserve should have raised interest rates sooner.
03:54I think a lot of people got kind of confused by what was going on.
03:58If you remember during the pandemic, with everything being shut down, that caused a
04:02lot of supply chain problems.
04:04And when the economy reopened and we saw all that demand surge, I think a lot of people
04:08looked at ports being clogged up and certain businesses not being able to serve demand,
04:13shortages of workers, and thought, you know, these are temporary supply problems.
04:17And once those supply problems iron themselves out, we'll see prices fall back again.
04:23So they thought this was kind of a, they called it transitory inflation.
04:26It was very temporary.
04:28And as a result of things going on as we came out of the pandemic, I think that was a fundamental
04:33misconception.
04:35And actually, what we recognized as time went on is that actually, that inflation was much
04:41more permanent, the price level increase was much more permanent.
04:45And that was just simply because, in fact, you know, what we saw wasn't being driven
04:49by temporary supply problems.
04:51The supply problems were the result of excessive spending.
04:55And that was putting huge strain on ports.
04:57It was putting a huge strain on businesses because they simply could not keep up with
05:00the level of demand being driven by excess spending in the economy.
05:05Transitory.
05:06One of those words we hear that Jerome Powell probably would like to take back at this point.
05:11So let's come for a circle back to where we started.
05:13How much do retailers, how much control do they have over prices?
05:18Well, I mean, in the technical sense, I guess any retailer is free to set whatever price
05:24they like.
05:25But in reality, if they set a price that's so divorced from what people are willing to
05:30pay or their customers or sorry, their competitors are charging, then they'll go out of business.
05:36They either make severe losses or they lose all of their custom in time.
05:43So really, what they're able to charge is determined by the broader market conditions
05:48of supply and demand.
05:50How much consumers are willing and able to spend on their products and whether competitors
05:55are there to undercut them.
05:57And and so this really gets to kind of this idea of price gouging, because, yeah, a company
06:03could try on selling a higher price than their kind of cost dictate in the short term.
06:07But if they do that, other companies have huge incentives to try and undercut them and
06:11steal their business.
06:12So this idea that an economy wide level price gouging can can drive inflation is is really
06:18another misconception, because there's big incentives for other companies to undercut
06:23businesses that are trying it on with their customers.
06:26But as you look at it, are there examples where there are industries, companies that
06:30are actively price gouging?
06:34We have to be very careful with the terminology on price gouging.
06:36Price gouging assumes that they kind of charge in excessive amounts, kind of unfair amounts
06:42or whatever.
06:43But ultimately, for businesses to be able to charge higher prices on a sustainable basis,
06:49customers have to be willing and able to pay those higher prices.
06:53And the reason that customers were able to pay those higher prices is simply because
06:58there was more money floating around.
06:59And so what looks like price gouging sometimes is just the actual result of excessive stimulus
07:06in the economy.
07:07And as I say, the ultimate responsibility for that falls on the Federal Reserve, who
07:12are supposed to keep inflation under control.
07:14Former President Trump may be studying this ahead of the September 10 debate.
07:19So when people hear Jerome Powell, an economist, say we're getting inflation under control,
07:25they don't see it.
07:26They don't feel it.
07:27Will we see prices ever return to where they were pre-pandemic?
07:31And do you see inflation under control?
07:34Well, inflation measures the increase in the general price level across the economy from
07:40one year to the next.
07:41So it's certainly true that inflation has come down.
07:45But what that does not mean is that prices are going to return to where they were back
07:49in 2019, 2020.
07:51The rate at which prices are going up has slowed, and that means inflation has slowed.
07:56But we've seen a permanent increase in prices as a result of that monetary mismanagement.
08:01Groceries are currently 21% above where they were in 2021.
08:07And unfortunately, that's not going to change.
08:09In time, as people's wages go up with economic growth, we may see a period in which relative
08:17to wages, prices become more affordable again.
08:21But for now, for the foreseeable future, when people go into the grocery stores, they are
08:25going to be paying those higher prices.
08:28And that's a reality.
08:30Now, would it benefit us if we got prices all the way back down to 2019?
08:35No, because the only way that the Federal Reserve and Congress could get there would
08:41be to really collapse demand, and that could risk very high unemployment.
08:47What we really need here going forward is to try and keep inflation at target and to
08:51allow economic growth to grow people's wage packets so that food and other essential goods
08:57become more affordable relative to wages again.
09:00Nice to cut through the political noise and get the facts here.
09:03Our thanks to Ryan Bourne from the Cato Institute.
09:05The book is called The War on Prices.
09:08You can get it wherever books are sold.
09:10Thanks so much, Ryan.
09:11Appreciate that.