Inflation: Food prices remaining elevated 'hurts the most vulnerable,' economist explains

Lakshman Achuthan, Senior Fellow at Harvard Kennedy School, and Megan Greene, Global Chief Economist at Kroll Institute, join a discussion on the economic outlook for 2022 amid rising inflation for food and gas prices.

Video Transcript

- Welcome back to "Yahoo Finance Live." We were talking about the big economic data released from this morning. The Consumer Price Index showing prices in November rising by 6.8% year over year. Core CPI, if you strip out those more volatile components, clocked in at 4.9%, but that 6.8% figure, the hottest that we've seen on a year-over-year basis since 1982, again, when Olivia Newton-John was topping the charts, quite a while ago. So let's talk a little bit more about what we saw in that inflation print with Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, alongside Megan Greene, chief economist at Kroll and also senior fellow at the Harvard Kennedy School.

It's great to have both of you on the show right now. Megan, I want to kind of direct this question to you first regarding what we saw in the report. Yes, the headline, we've explored that at length, but what I was hearing was that it's really all about the breadth of the price increases across the board that might be more informative in telling us how persistent inflation might be. What do you see in this morning's report that tells you what we should expect to see in 2022?

MEGAN GREENE: Well, so a lot of the increase in prices was driven by energy, which is no real surprise, but it wasn't just that. Airfares were up pretty significantly. All the cars, new cars, used cars, those prices were up pretty significantly. That doesn't suggest it's broad based. The fact that this has persisted for so long I think has led some to believe that this is broad based.

But I will say that 6.8% was what economists expected, so it does suggest that economists are kind of wrapping their heads around this idea that we have higher inflation for a while at least. It's a backward-looking indicator, the CPI data, and so it says nothing about whether we're going to continue to buy goods once this pandemic is sort of contained rather than services. And all the inflation has really been in goods. There hasn't been really any inflation in services, and before the pandemic, 2/3 of what we were buying were services.

Now our composition has totally changed, and, overwhelmingly, we're buying goods. So this print doesn't give us much of a sense of that, and that's what we need to know to figure out how long this will last. But it does suggest that it was largely driven by energy and by a few of these indicators that are affected by reopening the economy. It's not totally broadly based, but it has lasted a while.

JULIE HYMAN: Yeah, and, Megan, sort of to your point, I'm kind of like, OK, we knew this was happening. Now what? Lakshman, I would take it to you with that. And there are two components to that now what.

Let's leave the Fed aside. I guess, there are three components. Let's leave the Fed aside for a moment.

Component one, is this going to damage consumer spending at some point, right, and when is that point? And what's the rate of inflation going forward? I mean, how are you thinking, Lakshman, about those two elements?

LAKSHMAN ACHUTHAN: Well, we look at this cyclically, which is a little bit different from, I think, mainstream economists, and it is a cyclical upturn in inflation. That's what we're in right now. And as we were saying at the opening, you're hitting these 30-year high in the rates. And it is something that's cyclical is pronounced.

You can see it on the chart. It's persistent. You can see that on the chart, and it is pervasive. In addition to goods, and energy, and things, I mean, food prices, that's some of the things that are moving like crazy. It's a small component of overall CPI, but it really hurts the most vulnerable the most, right?

You have to eat. You have to drive your car and put gas in the tank, and you have to put a roof over your head. These non-discretionary things where we have inflation are really painful. They do therefore impact other spending, and so, again, from a cyclical point of view, we see slowing in consumption and-- because the discretionary spending is tougher when all the stuff that you have to buy you have the prices going up.

And wages, yeah, we're having some wage inflation. That's a good thing. It's just not keeping pace with overall inflation. So real wages adjusted for inflation you're seeing are actually down by 2 and 1/2%. So that's why people on Main Street don't feel great even though the recovery continues apace.

And so going forward, to your question where is inflation going-- because we saw this inflation cycle upturn. It wasn't a surprise. The cyclical forecast came in in the fall of 2020. The markets woke up to it at the beginning of 2021.

The Fed seems to have only recently kind of woken up to the fact that it's not transitory. And while the overall rate of increase of inflation is going to be easing a bit, I suspect, with the economy slowing down, the levels of prices are not going to recede that fast, and so I think there is a tough kind of road ahead in 2022. It's not necessarily Goldilocks there.

BRIAN SOZZI: Megan, if these levels of inflation persist deep into next year, at what point does consumer spending start to pull back noticeably?

MEGAN GREENE: Yeah, I mean, I think it's right to focus on real wages because even though people are making more so their wages have risen, they're not rising as fast as prices are. And so I think this will start to bite into demand, and part of why we're seeing this surge in inflation, as I mentioned, is because we're consuming different stuff now. But it's also because we've reopened the economy. Right now it's coinciding with the Christmas holidays when stores are trying to stock their shelves. At the same time, we have supply problems. But overall demand is a piece of that story, and I think we can expect that to wane if inflation remains apace.

I also think we're near a high watermark for inflation, and I would disagree. I would say that inflation is actually transitory, but it entirely depends on how you define transitory. And so to your question, could this last deep into next year, absolutely. I think we could continue to have supply chain disruptions through next year up until Chinese New Year 2023. That's my base case scenario. That means we'll have higher prices for sure.

That will drag on consumer demand. I think we'll still grow above potential in the US, but, structurally, I don't think anything has shifted. Yes, we're buying goods now, but there's been a multi-decade trend away from buying goods towards services. So if we can go out and get services without worrying about ending up in the hospital, will we buy services again? That's the big question. And I think the answer is yes, but the jury's still out.

- Yeah, I mean, alongside the inflation call, one of the other calls that was kind of wrong about 2021 was that by year end we were going to rotate more heavily into services. That wave hasn't necessarily happened. Lakshman, I want to direct this question to you with regards to the dynamics at play here because what has been interesting is people are talking about the excess savings levels, which still remain quite elevated right now, and saying that's what makes this different from previous cycles because of the just unprecedented amount of fiscal stimulus that the economy got in the depths of the pandemic. Do you feel like that introduces any sort of dynamics here that might tell you that inflation could be more persistent if there is more pad that people have in their wallets?

LAKSHMAN ACHUTHAN: Well, again, so the level of prices, I don't think that's going to come down very fast. We had a run up, and for the prices to decrease, the level of prices to decrease, probably going to be a little sticky. But the run up part, the accelerating part, I think, probably has an opportunity to top out in 2022 in part because of a cyclical slowdown in growth, which is the opposite of what a lot of people are expecting.

A lot of people are expecting Q4 revival on a sustained basis into 2022. Forward-looking cyclical analysis does not show that. Now on the savings, excess savings, I wonder, right? I mean, it depends who you are. If you have a lot of assets-- I don't know-- that doesn't really impact you too much.

If you don't have a lot of assets, that's a big deal. And those excess savings on the lower end have kind of been used up. You're starting to see the credit card balances go up again. And more importantly, I mean, we serve a consumer. It's not a secret, and they're all totally not excited about the future, I think, in part because of the rise in inflation and the weakness in real wage growth.

And so they are telling you, no, I don't think it's a good time to buy a lot of stuff, including services. And so the growth there, both on goods and services consumption, is really going down for high-end consumers, middle-end consumers, and lower-end consumers, and you can imagine that the middle and lower-end consumers, those households are seeing a sharper decline in their sentiment. And so I am waiting to see kind of what goes on here with the head fake. I think there's a lot of excitement about Q4 rebounding, reopening, all of these things, and there probably will be some pop. I think it could be a head fake given what we're seeing in the forward data.

- All right, well, we'll have to keep close eyes on that. But Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, and Meghan Greene, senior fellow at Harvard Kennedy School and Chief Economist at the Kroll Institute, thanks so much. Have a great weekend.