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.Episode transcripts: seekingalpha.com/wsbShow links: Dollar sinks on economic worries ahead of the Fed meet-Currency RecapWholesale egg prices drop, but retail rates could take time to catch upFederal Reserve expected to hold rates, while uncertainties put the dot plot, SEP in focusSign up for our daily newsletter here and for full access to analyst ratings, stock quant scores, dividend grades, subscribe to Seeking Alpha Premium at seekingalpha.com/subscriptions.
Chapter 1: Who are the hosts and guests of this episode?
Chapter 2: What is Claudia Sahm's background and expertise?
I'm Rob Izbits and you may know me on Seeking Alpha under the profile name Sun Garden Investment Publishing. I also lead the investing group Sun Garden 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 Somm is the chief economist at New Century Advisors and a former Federal Reserve economist.
She is also the creator of this SOM rule that is spelled S-A-H-M if you're Googling it, which you should. That's a recession indicator, highly regarded expert on monetary and fiscal policy, 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 Somm.
Thank you. It's wonderful to be here.
I have three questions on the subject of inflation. First, when you look back just a 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.
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Chapter 3: Was higher inflation in 2022 inevitable?
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 this goes back to what I was talking about with these supply dimensions. And it's not just that countries shutting down or putting real public health restrictions on methods, say global supply chains, really ground to a halt.
Chapter 4: How did the pandemic contribute to inflationary pressures?
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, right? People didn't want to get sick.
They were afraid they did. So you saw early in the pandemic, this massive pullback on spending on services, right? 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 who just weren't out there spending.
Chapter 5: What role did consumer behavior play in inflation during the pandemic?
And so you can see this like just outsize 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, like 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 like that unwinding of it was going to cause like there were just pressures on supply or big changes in behavior, like moving from goods to services or from services to goods really rapidly. So like 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 kind of keep demand going, get through the pandemic. So we went at this as if it was a big demand crisis. driven recession. So that piece of it probably could have been better tailored, maybe not quite as large. But we do see across, 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 So we were going to have inflation. I think there certainly could have been policy decisions that maybe would have made the inflation less. So 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.
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?
So the details do matter in terms of it has been in the past. You can see cases where if it's really easy to kind of get around the tariff, right, 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, you know, if if if it's not as possible to get the sourcing. Well, then then there is a cost and it's at least partially paid for by the consumers and higher prices like that has 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 tariff 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 like have other sourcing, that's a recipe for consumers paying more. And it's really kind of interesting.
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