Inflation is a constant conversation right now. It’s all over the news and media. People want to know how bad it will get and what it means. What is the Fed going to do about it? James will talk about the practical understanding of inflation and how to think about it in this environment. 

We also need to understand what this talk about inflation does to our minds. We need to realize how it impacts and influences our behaviors. The last time we saw inflation this high was in the 1980s. Many listeners have no context for dealing with an inflationary period. James helps us understand inflation better to avoid panic, fear, and anxiety.

 

Episode Highlights: 

[02:09] We haven’t experienced inflation like this since the 1980s. A lot of people have fear and anxiety about the future.

[03:07] Things don’t go forever in the direction that they are going. Our economy is incredibly diverse and robust. It’s constantly pushing and pulling in different directions. There are self-correcting forces that end up moving the trend line.

[04:08] When we see all of these headlines, keep in mind, the world didn’t end in the 1980s. The economy is a lot stronger and durable than we think it is.

[05:40] Inflation happens when there’s too many dollars chasing too few goods. We just had a season with a lot of money out there.

[06:16] We’ve also had supply constraints at the same time. We also saw commodities spike when Russia invaded Ukraine.

[07:24] What we think inflation is going to do actually drives a lot of the inflation that we are experiencing.

[08:19] The Fed helps alleviate inflation by raising interest rates and getting money out of the system. The main reason this works is that injecting uncertainty creates an economic recession. 

[09:57] Consumers are beginning to behave differently and shrink their consumption. A lot of this happens just by the Fed talking.

[11:06] When we start to think that things are going to get bad our expectation of inflation goes down, because we assume we’re going to have a recession. 

[11:43] We are starting to see the self-fulfilling prophecies come true. We saw an inflation spike. We’ve now seen it start to alleviate. The next step is that we will probably shrink back too far and underspend. 

[12:43] We predict there will be less unemployment which will soften the recession. 

[13:16] How does this compare to past experience?

[14:18] What everyone is missing is that in the 1980s when rates went up really high it was coming off the back of a 10-year cycle of problematic inflation.

[15:57] In the last 10 years, we haven’t had hardly any inflation. It hasn’t been an unstoppable 10-year cycle like in 1981 and 1982.

[16:38] Please don’t panic. Let out your fear and recognize the reality of about average inflation.

[17:53] Don’t overreact and tighten the belt too far.

[19:43] Moving to an economic cycle where things seem normal would be great.

 

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