How Inflation Ends: Painfully

and of course coffee. Now the bakers are moving fast, prepping afternoon orders and getting ready to do it again tomorrow. So Jen and Tania are portioning out our black sesame cookies their way to eight grams, and then they roll them to make the swirl. This is like our cake decorating station. We're whipping up some Swiss maring butter cream to some Ube coconut cakes. That's Paula Wang. She's a co owner of Rose Avenue. Now that COVID is no longer front and center and the bakery is open to

the public again, she says they often sell up. All the bakers are here very early in the morning just so we can make everything fresh for the day and then um we're open until sell out or two PM. Sellout more time. You usually sell out between twelve and one. It really depends on the day Saturday, as early as noon. But like businesses everywhere, the bakery has struggled to keep up with inflation that's made just about everything more expensive.

I asked Paula what it's like keeping a small business afloat during chaotic times like this. We were only open two days and then yeah, and then we had to close everything down. We started doing pre orders maybe around July. It was really just a pickup system to keep our staff safe and customer states. And then as both got more and more comfortable to come in, we expanded the preorder system to two more days. And we were in that preorder limbo for almost half a year. So here

you are, business is good and then comes inflation. What's that been like? When did you start noticing things were starting to free up costwise? Unfortunately, it was simultaneous with us trying to open for more days that we started noticing, oh man, you know, the cost of eggs and milk and all these things are starting to increase and we need those. That's like the basis of our ingredients, eggs, milk, dairy butter, you know, it's it's a struggle every week

looking at prices. My partner and I actually kind of combine like where we order from, and we see where we can get the cheapest things from, like, for example, um, even scallions. Uh, you know you could you could have bought scallions, a whole bunch of scallions from maybe like less than a dollar, but now maybe like three or four pieces to go for a dollar fifty. And we

use scallions and most of our savory items. So that's something we even physically go out to like Asian markets, local Asian markets and buy from because buying in bulk from a distributor is so expensive. Have you been able to negotiate better prices or as a small business, you do not have that kind of leverage. Because our relationships with our distributes are a little new, it's hard to

have leverage. What we've been doing is seeing what is super expensive and kind of tailoring our menu to what we can afford to make our mass produce. If that means we have to take something off the menu temporarily because the item is so expensive to make, then we kind of just have to do that. What have you taken off the menu. Recently, something that's gone up um use you Pure that went from like twenty dollars to for a thousand grahams to a hundred dollars for US

thousand graphs of you superre. So we had to take off this very popular use you croissant because we just cannot afford to make use your card. Let me ask you about employees. Obviously, we've seen as the economy has gone through tightening, prices are increasing, a lot of places are having trouble retaining their talent. How has that affected you? What are you doing about? What have you seen in

your own workforce? In our particular bakery, one of the things that we really want to focus on is retention with our employees and making them feel like they're valued here. So with our full time stuff, we really want to pay them a livable wage. So no matter if that's something that's increased because of inflation, we will always try to meet it. So if it cuts through our profits as an owner, then it just cuts through our profits

as an owner. We believe in making sure that our employees can you live in the city if they need to, that that they have the benefits that allow them to live a comfortable life, you know, and have you been able to retain people? Are you finding that people are sticking around? Yeah, full time employees. Retention has been great, to be honest, we haven't had the problem of losing

people for because of money or whatever reasons. You mentioned that you're raising pay in order to kind of meet the moment, have you had to raise the price of your bake goods. Yes, so we did raise prices twice during the pandemic. Like what did a donut cost when you open versus now? Um? Yeah, when we first started, we were charging for we're talking some donuts, and now they're five dollars on average. It really depends what goes

into the donut. We don't want to go any more than that because it kind of seems through duduous to pay for like a six dollar donut. We actually made an announcement on our social media when we did the first price change, just to keep everybody in the loop that we're not trying to, you know, sell expensive genuts. It's just costs more to make them, unfortunately, and you know, the things that we need to make the donuts, like eggs and milk and butter have been one of the

hartists hit items during inflation. So when you look into the future and you know we have this high inflation time right now, can you weather this out as long as it last or do you worry at some point that that it's just gonna start to have a bad effect. Well, we do worry, but we hope to weather the storm

with the support of our community and our customers. We have a lot of loyal customers who have been buying since it was just pre orders, and you know, I think it helps to be honest with the customer as well. We had a lot of great feedback when we first had to tell everybody that we had to raise the prices. Everybody said, raise them however you however much you need to, so you don't close. And we love we loved hearing that because we were so worried that everybody was going

to be upset. But actually people really came together and supported our change for prices. So why has inflation hit so hard and how long will we be suffering with it? Bloomberg's chief economist Tom or Lick has answers after the break. I'm here with Tom Or Like Bloomberg's chief economists, Tom, thanks for being here. Great to be. It was Tom.

We were just talking to some people at a local bakery in d C. And they were talking about how prices are rising for everything and the challenges they have with keeping employees and all the other things that come to running a business in a time of high inflation. We're are feeling it too, no matter what we do. Can you just start out by letting us know, what is the city of the U. S Academy now as an academies When you look at it, what do you see?

So inflation is still really high? Was and I think it's interesting to think about how we got to where we are. One way of framing it is to think about the current inflation being suffered in the US is coming from two different sources. On the one hand, you've got shocks to labor markets, not enough workers, too many openings, and that's driving wages higher. And when wages go higher, households have more money to spend, and that pushes up prices.

The other big driver of inflation it's been really important for the last couple of years, is shocks to specific

sectors of the economy. So that's all the stuff that happened to semiconductors, when supply chains jammed up as a result of COVID lockdowns, all the stuff that's happened to gas and other energy as a result of Russia's invasion of Ukraine, and of course we're talking supply chain that has been up ended through the COVID crisis, and now indeed we see potentially even you're Russia Ukraine adding to some of those supply chain issues, Noble gases key of

course to the chip sector. And it's these two drivers together, the tightness in labor markets pushing up wages, and the shocks to particular sectors like semiconductors and energy and agriculture coming together which have pushed US inflation up to these astronomical levels. So let me ask you a very basic question, why is high inflation a problem other than things casting more.

You can imagine a world where all prices and all wages go up quickly together, So all the prices in the economy and everybody's wage goes up ten percent every year, and it's kind of weird, and maybe every few years we need to drop a zero off the denomination of our bank notes. But because everything is moving in exactly the same pace, it's not really a big problem, and fortunately that's not how things play out when inflation takes off.

Often you have inflation accelerating ahead of wages. Often you have different prices moving in different directions, and that creates a bunch of different problems. Imagine the household which is facing a teen percent increase in their grocery bills and their gas bills and their rent, but their wages are not keeping up. They're going to be suffering. Imagine the small business owner which is operating in a competitive market.

They're facing competition from Starbucks or Amazon, so they can't raise their prices, but their workers are all leaving because they can get more wages elsewhere. That small business is going to have a problem. And these are the sort of reasons why economists think low and stable inflation is a kind of a fundamental good, the fundamental basis which

is required to keep the economy growing. We've heard how wages are rising because employers have to pay more in order to retain and recruit people in a tight labor market, But those wages have not kept up with inflation. So how is it that so many people are sitting out of the labor market when prices are high? And wages, though higher, aren't keeping up. So when you have a really really big shock, and the COVID pandemic was a really really big shock, then you can get some big

adjustments in the economy. And I think we're seeing those playing out in the labor market. And I'm not sure anyone has a kind of a perfect handle on what all the factors are and the magnitude of their impact and how long the impact is going to last. But I think you've got people reconsidering their priorities, people thinking, you know what, life short, I don't want to work so much. I want to spend more time with my family.

You've got a reorganization of the economy. Firms which were kind of really successful pre COVID not so successful post COVID. Other firms which weren't doing so well before the pandemic now doing better. And that shift in the kind of the structure of the economy also means a shift in where workers are needed and what type of workers are needed. And then you've got specific factors like people being sick because of COVID, people suffering from long COVID, people deciding,

you know what, I'm vulnerable. I'm the kind of person who gets sick easily and doesn't recover quickly. I don't want to risk going into the labor market right now and then other people just losing their jobs and finding it difficult to get back into the game. So I think all of these factors are at work. They're all

restricting labor supply. And when you combine restrictions on labor supply with strong demand for workers, that's when you get a lot of pressure for wages to rise, and that contributes to the problem with inflation that we have right now. A lot of the things you're describing are happening in the US. Are we seeing the exact same thing happening

elsewhere in the world? Eight point nine is the inflation right now for the Eurozone, we have higher than expected Japanese inflation with the first time inflation has hit double digits in forty years. Inflationary pressures are also moving beyond

energy into food costs. So that framing that we used to understand what's happening in the United States inflation that comes partly from really tight labor markets pushing up wages, and partly from shocks to specific sectors like oil or semiconductors. That's also a useful frame for thinking about inflation globally. So if we turn to Europe, Europe's got really high inflation, higher than the United States right now, but it's coming

from different sources. They don't have the tight labor markets pushing up wages in Europe. What they do have is really severe shocks to specific sectors, and of course is no mystery where that's coming from. It's Vladimir Putin and Russia's invasion of Ukraine and Russia turning off the gas to Europe, which is pushing energy prices up really high. A lot of the discussion we hear about inflation is

how it's difficult to find workers. Why isn't there more discussion about how corporate profits are very high when some of those profits could, at least notionally be used to pay people a higher wage. This idea that louging corporations are a big contributor to the inflation that we have right now is an idea that's kind of percolating in the debate, and it's one you hear very often from

the left side of the political spectrum. You hear it from Senator Elizabeth Warren, for example, attacking the problem of price gouging by saying, to giant corporations that have more than a billion dollars in profits, you're going to have to pay. And the argument goes something like this, corporate power is so concentrated now, the big corporations in agriculture, in energy, in technology, in retail, they own so much

of the market that they're immune to competitive pressures. And what that means is that they can jack up prices without having other firms jump in and steal their market share. So the argument in favor of this view focuses on the market power of big corporations and how that's increased over time, and it also looks at things like the

announcements by big companies. If you listen in on the earnings calls of big companies over the last few months, you hear chief executives who are positively gleeful about their capacity to raise prices and raise profits. The argument against the idea that concentration of market power is a big contributor to high inflation is basically, well, why now, market power? The enormous size of the big firms in agriculture and energy and retail and tech is not a new phenomenon.

So why is it suddenly a big contributor to inflation when it hasn't been a big contributor to inflation in the past. One of the arguments, I guess I've heard is that companies are raising prices the inflation and using inflation as an excuse for raising prices. That's the liberal argument, right.

The market power was there before, but what we're now seeing is big firms kind of seizing the moment, seizing the opportunity when all of these prices are rising to kind of gauge the consumer and boost their profits and add to problems for American households. And J Powell as he attempts to bring inflation under control. J Powe, of course, the chairman of the Federal Reserve, and we're going to

talk about him in just a minute. So when you look at this argument on one side or the other of this, as an economist, what do you think are the biggest drivers of inflation? Is it on the labor side, is it on the private side, is it something else? I think there's been an evolution of factors. Right um. At the beginning of the pandemic, it was all about

the shocks to specific sectors. It was the lack of semiconductors, which meant it was hard to produce new automobiles, and so automobile prices rose really high, and that pushed up inflation.

But then we had the massive fiscal stimulus in the United States, and what that did was drove very very strong demand, and that then meant there was a kind of handoff in the drivers of inflation from shocks to specific actors like semiconductors, to the kind of inflation that we get when labor markets are tight and wages arising quickly. And then Rusha's invasion of Ukraine brought the industry specific

shocks back into the picture. Russia's invasion of Ukraine pushed commodity prices higher, and that gave another lag to the inflation story. After the break, my conversation with Tom Orlick continues, I'd like to take this opportunity to speak directly to the American people. Inflation is much too high, and we understand the hardship it is causing, and we're moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to

restore price stability. On behalf of American families and businesses. Time you've spelled out where we are and how we got here, and now comes the big question, what do we do about it? How does inflation eventually get under control? So let's come back to our sort of initial framing of inflation as coming partly from shocks to labor markets, pushing up wages, and partly from shocks to specific sectors.

Most of the tools which policy makers have for bringing inflation under control are focused on the first one of those drivers. Central banks, the Federal Reserve, the European Central Bank raise interest rates, that makes it more expensive to borrow. That chokes off demand in the economy, including demand for workers, and so wage gains start to come down or maybe even stagnate, and that overtime lowest price pressure. So that's the kind of big macro policy tool which economies have

to fight inflation, and it's in operation right now. The Fed has already done a bunch of big rate hikes. There's some more still in the pipeline. How about the second driver of inflation, the inflation that comes from shocks to specific sectors. Well there, Unfortunately, the tools that policymakers have are much less comprehensive and much less powerful. So

think about the shock from high energy prices. For example, President Biden can open the Strategic Petroleum Reserve and release a bit more energy, but the amount of petroleum in the Strategic Petroleum Reserve isn't that big relative to the size of global energy markets, so that doesn't do much.

He can swallow his pride and get on the plane to Saudi Arabia and fist bump MBS and ask him to increase oil supply across the Crown Prince of Saudi hever you're talking about there, We're Biden visited and didn't get much. That trip. Whilst it cost Biden something in terms of diplomacy, didn't deliver much in terms of increasing energy production or bringing energy prices under control. Think about shortages in supply of semiconductors, big driver of inflation earlier

in the pandemic. Governments basically don't have any tools to address that problem. In the United States, we think cooling the economy is going to mean the FED has to take interest rates all the way up to five. Cooling the economy is a kind of polite euphemism, and what we actually mean when we say cooling the economy is

pushing people into unemployment. Our US economic team thinks that more than two million people are going to join the ranks of the unemployed in the United States in the next two years, directly as a consequence of the Fed's campaign to bring inflation back to its two percent target. Is there a scenario in which the Federal Reserve could bring down inflation in a way that doesn't require so many workers to be fired. There's a kind of an

optimistic view on this. It's kind of sometimes referred to as immaculate disinflation, disinflation which takes place without kind of hurting anybody. The idea goes something like this, the inflation that we've got in the last two years is a consequence of a massive and unpredictable shock to the economy, the COVID crisis, the war in Ukraine. The COVID crisis is already kind of receding into memory here in the

United States. The war in Ukraine continues, but without the kind of catastrophic impacts on global oil prices that we saw in the first part of two So perhaps the dislocations which caused high inflation will disappear, just as quickly as they arrived, and the FED will be able to get prices back to its two percent target without having to raise interest rates too much further and without having

to push too many people into unemployment. That's the kind of the underpinning of the hope for the sort of soft landing which FED chair J Powell says he's aiming for, but acknowledges is going to be difficult to stick. How likely do you think it is that that happens. Our US team has a recession in the second half of three as their base case, so we would see a soft landing and a limited rise in unemployment as a positive risk scenario. Not the most likely thing to happen,

and it is the same true in Europe. The situation in Europe is a bit different because so much of inflation in Europe has come from the surge in energy prices. The capacity of the European Central Bank to do anything about it is reduced. The European Central Bank hikes interest rates, that impacts labor markets and wages at the margin that impact energy prices. But really what's determined energy prices is Vladimir Putin and his pipeline and his decision on how

much gas to send to Europe. Now, what that means is that whilst we expect the European Central Bank to hike interest rates, we don't expect them to go as far as the federal reserve. Labor markets in Europe also work differently to labor labor markets in the US. In the US we have kind of read in tooth and claw capitalism. The government doesn't want to sort of impede business capacity to hire or fire. And what that means is that as the economy goes up and down, unemployment

actually moves quite a lot. In Europe, they have more of a kind of a social contract, and what that means is that there's labor market regulations which make it harder to fire people in the bad times. Of course, the downside of that is businesses are also more reluctant to hire them in the good times, and so the economy goes up and down with a smaller impact on unemployment. We haven't yet touched on other very big academies in Asia,

in particular China. How is this impacting China now? China right now doesn't actually have a problem with too much demand and too much inflation. They have the reverse problem. They have a problem with too little demand and their producer prices that's a kind of measure of inflation in the industrial part of the economy, not the consumer part of the economy, are actually falling. That's a reflection of their sticking with COVID zero, which is hammering their growth,

and a big downturn which is underway in their property sector. Now, for the rest of the world, this is actually providing a bit of an assist. Think about a world where China is firing on all cylinders and buying huge amounts of energy and buying huge amounts of corn and soybeans. That's a world where commodity prices are much higher than they are right now, and the challenge for the FED and the ECB and bringing inflation under control is harder.

So right now, weakness in China giving the best of the world a bit of an assist on their inflation problem. A question looking into three is, well, what happens when China opens up At some point, we think in the second quarter of next year, China is gonna start reducing its COVID zero restrictions. The economy is going to grow more quickly. People are going to be doing more traveling around.

It's going to drive stronger global commodity prices for your own Powell at the Federal Reserve and Christine Lagarde at the European Central Bank. What that could mean is that in the middle of three, at exactly the moment where they're kind of what mopping their brow and prepared to take a well deserved break after bringing inflation under control,

China reopening actually lights of fire under prices again. And it's that kind of geopolitical dynamic and the potential for shocks happening in China to impact the United States and shocks from the United States to impact the rest of

the world. That's going to be the focus of discussion at the Bloomberg New Economy Forum in Singapore this week, and you can see all of the coverage of the Bloomberg New Economy Forum where government leaders corporate executives are gathering to discuss these big issues at Bloomberg dot com. Tom or Look. Always a pleasure to talk to you. Thanks for taking the time. Great to be here, was thanks for having me on the show. Thanks for listening to us here at the Big Take. It's the daily

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