The costs of inflation: Your questions answered Part 2

On today's episode of the 5 Things podcast:

Inflation. Everyone is feeling the pinch of high food and gas prices. And the worry that a recession is just around the corner plays on just about everyone's mind. But believe it or not, consumers are actually in a good position because of the financial help given during the pandemic. In fact, according to Macroeconomist Julia Coronado, consumers are 70% of the economy, so even if though they are getting hit with higher gas and food prices they are in a better position to weather it than at anytime before.

In part two of everything you need to know about inflation, Paste BN's James Brown talked with Coronado about the impact of inflation on everyday people. Coronado addresses food prices (why are chicken wings so expensive?), car prices, buying big ticket items or holding off, concerns about a recession, the US dollar's status as a reserve currency and more. She even gives her outlook on the economy. Spoiler alert, it's positive.

For part one click here

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To follow Julie Coronado on Twitter click here.

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Hit play on the player above to hear the podcast and follow along with the transcript below. This transcript was automatically generated, and then edited for clarity in its current form. There may be some differences between the audio and the text. 

James Brown:         Hello, and welcome to Five Things. I'm James Brown. It's Sunday, May 1st, 2022. I can't believe it's May. Can you? On Sundays, we do things a bit differently, focusing on one topic instead of five. This week is part two of our discussion on inflation with macroeconomist, Julia Coronado. She's a professor at the McCombs School of Business. That's a part of the University of Texas at Austin.

                               I asked my followers on social media and my friends and colleagues in real life what they wanted to know about inflation. I got dozens of responses, and Julia had plenty of answers. Some of them are pretty surprising. We talk about everything from food prices to concerns about a recession and why she says we should hold off on buying big ticket items if we can for now. Now, part two of my chat with Julia Coronado.

                               All right, Julia, I want to get to a few of our questions. This is one of my favorite ones. It's from my colleague, Taylor Wilson. "If one or several of the richest people on earth pulled all their money out of banks and burned it, would it cause inflation? Would it make inflation better or worse?"

Julia Coronado:      If the wealthiest people burned all their money ... The thing about wealthy people is that they tend to hold their money in assets. One of the things that we know is that wealthy consumers, they save more than they spend. They have a lot of savings. So if you burned a lot of their money, that might affect asset prices more than it would affect the flow of money in the consumer economy. The wealthy have gigantic holdings of equities and bonds and companies. If they burned those holdings, that would affect probably the stock market. That would probably ripple through to the economy as people's 401ks fall and so on. So it would definitely be a disinflationary event, but it would hit asset prices before it hit inflation, I would say.

James Brown:         As I understand, I think as you're hinting at, if you're very, very wealthy, let's say you're Elon Musk who's getting all kinds of headlines right now, most of your money's not in cash.

Julia Coronado:      Exactly. Most of your money is not in cash. It's in stock. Look at what he's doing. Most of his money, he's not going around spending on sofas or sheets or cars. He's spending it on maybe buying Twitter, that that's just one swap of assets for another. It's not going into the consumer economy.

James Brown:         I got many, many responses about food. Why do chicken wings cost so (beep) much? When can we expect food prices to come back down?

Julia Coronado:      Again, there's been a number of different things affecting, for example, chicken wings. During the pandemic, we saw meat processing plants get very disrupted by waves of COVID, and they would have to shut down. Then when they reopened, they would have to have new procedures for social distancing for their workers. That basically slows down the production process. So meanwhile, you're eating more because you're staying at home and you're barbecuing some chicken wings, but there's less capacity. So we see prices go up.

                               Capacity has improved in food processing, but now we've got a whole other source of food inflation and that's coming from the war in Ukraine. Ukraine is a big grain producer and they may not ... So, one, we're not going to get the flow of grain out of Ukraine that we're used to. Then the bigger risk is they won't even be able to plant their fields this year. That would create a longer-term constraint on certain foods. So the war inflation we're seeing is actually another wave, both on the energy side and the food side.

James Brown:         Another question, is it wishful thinking for me to put off buying things?

Julia Coronado:      No, it's not. I encourage you to wait to buy a car. The car makers are solving their problems. We are building more semiconductor capacity that will be coming online over the next year to two years. So this time next year, you should have a much stronger bargaining hand if you're buying a car. There should be a lot more cars available. You should walk into a car dealer and see a lot more cars on the lot, and you're going to have more bargaining power than you do right now. So if you can wait, particularly with big ticket items like furniture or cars, wait. You'll get a better price a year from now.

James Brown:         How close are we to a recession?

Julia Coronado:      That's a hot debate. Of course, you may be familiar with the joke about economists. Something like we predict 10 of every five recessions. So there is a worry that because the economy is running so hot and the Fed is raising interest rates, that there's a rising risk of a recession. Add to that the war in Ukraine. You have to say that, yes, the risks of a recession have gone up. I still don't think it's the most likely scenario. We're pretty early stages in terms of the recovery.

                               Consumers actually look in great financial shape. They've got very low debt. They've got high credit scores. One of the unique things that we did, by giving consumers so much cash during the shutdown, consumers were able to make their car payments. They were able to make their home mortgage payments. We've seen loan delinquencies at all-time lows, which is usually we see delinquencies go up in a recession because people are losing their jobs and then they can't make their loan payments. We've seen delinquencies go down. That's amazing. So consumer balance sheets and their financial position is actually better than it's ever been.

James Brown:         That's logical, but surprising still that delinquencies would be at a very low level.

Julia Coronado:      Yes, yes, and this is what I want the media to talk about more. This is actually consumers are in an amazing position. It's not just the wealthy right now. We've seen car repossessions fall during the recession, even from levels that were low before the pandemic because the economy was good. They actually went down to very low levels because people made their car payments, even though they had a spell of unemployment. We never see that, and that's what happens when you give people support. They make it through. So credit scores have gone up, and people still have some of that cash that they got through the stimulus payments or the child tax credit in their bank accounts. So consumer cash balances are higher than they were before the pandemic. Consumers are in pretty good shape. Consumers are 70% of the economy. If they're in good financial shape, even though they're getting hit with some things from higher gas prices and higher food prices, they're in a better position to weather that than they were before. So I'm optimistic that we're going to make it through this period and that the expansion will continue.

James Brown:         I think someone listening to that would think, "Man, I'm paying $4+ a gallon gas, and my grocery bill has gone up." Another question I got was about the Dollar Tree going up to $1.25. I'm looking around my life and everything's costing more. My electric bill here, it has gone through the roof. Hearing that we're actually at a better place, I'm guessing when I hear that from you, you're looking at it from a sky high view, instead of perhaps day to day.

Julia Coronado:      Well, I'm day to day too. I'm a consumer too, and we all feel these higher ... Rent is another one that people are really feeling. So it's not like this inflation is a positive situation. It is a problem. It's a problem that the Fed is trying to solve. The war inflation is the hardest thing to solve because it's coming from a geopolitical development that's largely out of our control. So I'm not downplaying that the squeeze we're feeling right now is ... it hurts. It's challenging to navigate. So in no way do I want to imply that that's no big deal.

                               What I'm saying is that if we were in a situation where there was high unemployment so people didn't have jobs to help navigate this jump in prices, it would be a lot worse. Or if people did have low credit or were delinquent on their loans ... Now, people have a little bit more buffer. We've got a very low unemployment rate. People have jobs. Wages are rising. So it's not like you're not losing ground from this wave of inflation. People are, but it's not also catastrophic. It's not like you are going to ... at risk of necessarily getting kicked out of your home or losing your car because of these higher prices. You've got resources to help navigate this period.

                               Meanwhile, the Fed is trying to cool those prices down, and producers are trying to produce more and solve the supply chain bottleneck. Over the next year or so, we should see some relief. Already, gas prices have started to come down. Prices at the pump have been falling for the last couple of weeks. We hope for some relief, and people are hard at work trying to provide that relief.

                               So what I'm saying is, it's a nuanced thing. We could have experienced something like this and if we were in a weak economic position to start with, then it could knock the economy into a recession. Given that people are on average in a much stronger financial position, then it's manageable. It's not that it's not painful, but it's manageable. Therefore, we're less likely to see a recession where this is the catalyst for waves of job losses and a contraction in the economy. I just think we've got a strong base to weather this blow.

James Brown:         Are different parts of the country impacted by inflation differently?

Julia Coronado:      Yes. The answer is yes, and different people. Depending on your age and what you're buying, you're impacted differently. For example, rents. Rents have gone up a lot more in some places than others. I am in Austin, Texas. It is a boom town. A lot of people moved here during the pandemic. There wasn't enough housing. Rents have risen really high. So if you are in a city where rent inflation is very high and you are a renter, that is going to hurt. That's going to be very challenging. That's the biggest part of your budget.

                               Meanwhile, think about homeowners. People that already owned their home saw mortgage rates fall. They refinanced and actually lowered their home payment. This is another one of those situations where if you're a renter, which means you're either younger or lower income, you're more likely to be impacted by rising rents than if you're a homeowner, and you actually saw your house payment go down because of low rates during the pandemic. So yes, there are unequal impacts.

                               Consumers, lower income consumers, also tend to be just generally spend more of their budget on food and energy. So when food and energy prices rise, they get impacted more. That's a national phenomenon, but in terms of ...

                               Inflation hits people differently by geography, by where you live, by what age you are, and by where you are in the income spectrum and what you spend your money on. If you have a car and you didn't need a car in the last two years, then you haven't experienced car inflation, which has accounted for a third of all inflation, of all core inflation, has been just car prices, new and used car prices. So if you already had a car and didn't need to buy one, then you haven't felt that inflation. So yes, there's all kinds of different ways that inflation impacts people differently.

James Brown:         What's a reserve currency, and under what circumstances could the dollar lose that status?

Julia Coronado:      The definition of a reserve currency is just that it is a currency that is stable enough that governments and investors around the world see it as a safe haven and hold onto it as a store of value.

                               The dollar is the global reserve currency, the premier global reserve currency. The Euro, the Japanese yen, these are all currencies that are stable enough that investors, all kinds of investors all over the world, are holding them as a store of value.

                               Could the US dollar lose its reserve currency status? Certainly, it could, but that scenario, the bar for that is very high, because if you're going to move away from the dollar, you need an alternative. That's probably the dollar's biggest advantage. One of the dollar's biggest advantages right now is that there aren't good alternatives. The Chinese currency isn't really an alternative. It's not a currency that's available in a market flexible way. The Euro is a reserve currency and it is an alternative, but it also has the same kind of challenges. If you're worried about the dollar because of money printing or policy decisions that have been made or debt, the US is actually not in the worst situation relative to other potential competitors.

                               Cryptocurrencies, one of the motivating factors is to be an alternative to government-backed currencies, but they have their own problems. They're extremely volatile. Who stands behind them in a crisis? That's really, at the end of the day, what determines a reserve currency is that somebody stands behind it in a crisis. The dollar developed its status not at the inception of the United States, because we didn't have a reserve currency back then. We had a volatile emerging market style currency, and we developed the stability over time through waves of crises, that we created the FDIC to ensure bank deposits. We created the Federal Reserve to manage the stability of the currency. We created layers of institutions whose job it is to ensure the stability of the US financial system.

                               While they're clearly not perfect, we've had crises and volatility over time, they're better than a lot of others. So the dollar has continued to enjoy the reserve currency status, despite something as momentous as, say, the housing bubble of 2008 and 2009, where we caused that global recession. That came from within, and yet the dollar came out and continued to be the reserve currency.

                               It's, of course, possible to lose that status over time; but what it would really take, I think, is a catastrophic breakdown in US institutions that manage the stability. That's one of the reasons you see the Fed right now very focused on raising interest rates and cooling off inflation. They understand that their credibility and the financial stability of the United States is at stake, and they take that very seriously

James Brown:         To sum up that answer, I think I took from, A, an alternative would have to exist or be created. B, there would have to be a levels-of-magnitude worse situation than we're in right now in order for that to happen?

Julia Coronado:      Yes, and it's not just about the amount of money we create or the amount of inflation that we have right now. It is also about the stability of our institutions. Do we have a credible, independent central bank that is standing aside from the political pressures and making decisions in the interests of the medium term functioning of the economy? So far the answer is a decisive yes.

                               Other countries have seen that break down, like in Turkey where the central bank became more tied to the political leaders. They've had a lot of volatility in their currency as a result of that. We should value the stability of our institutions and the integrity of our institutions because that's what's given us that status.

James Brown:         Well, Julia Coronado, I've had a good time. I'd love to have you back. Thanks for joining me.

Julia Coronado:      My pleasure.

James Brown:         If you like this show, write us a review on Apple Podcasts or wherever you're listening. And do me a favor, share it with a friend.

                               Thanks to Julia Coronado for joining me. What do you think about all this and Julia's take on things? How has inflation impacted your life? Let me know at @jamesbrowntv on Twitter, or email me at jabrown@usatoday.com. We might tell your stories on the show or maybe even have you as a guest.

                               Thank you to Alexis Gustin for her production assistance. Taylor Wilson will be back tomorrow morning with five things you need to know for Monday. For all of us at USA Today, thanks for listening. I'm James Brown, and as always, be well.