STEVE INSKEEP, HOST:
Claudia Sahm has been listening with us. She is a former section chief for the Federal Reserve and is now chief economist at New Century Advisors. Welcome to the program.
CLAUDIA SAHM: Good morning.
INSKEEP: OK. Let's begin with what we heard the president say there, quote, "I love the inflation." And based on his explanation, I understand him to mean it's not so bad, and it's going to go down as soon as I end my war. Is that an accurate read of the inflation we have?
SAHM: So it could be worse is a really tough sell at this point in terms of the inflation. And it is entirely possible that those energy prices will come down, but that's cold comfort for the fact that they're high right now. And until they come down, we're still at this risk of the higher energy costs spilling over into other prices. So we are not out of the woods. It's far too soon to love the inflation data.
INSKEEP: What is driving inflation besides the war?
SAHM: Well, coming into this year, we'd already had inflation that had been higher than usual for a full five years. Now, in the pandemic, the higher inflation was all over the place and was much higher than now. But even coming into this year, we were still dealing with some service prices were higher. And last year, we really watched the tariffs kind of push through the goods prices coming up. We're kind of at the tail end of that now, but now we've got energy prices. So there still has been some elevated inflation, these price increases of higher than normal. And then the energy layers back on top of it, and we're moving even further away from what would be a good level of inflation.
INSKEEP: You've just alluded to a number of specific events. There was a pandemic, you talked about the president's tariffs, and then we have the president's war and energy prices and so forth. So you have these individual events that drive inflation. But then you remind me, elevated inflation for five years in a row, which makes it feel to me that this is not about one event. It's a permanent change in the economy. Is it?
SAHM: Right. And that's absolutely the case for people, right? When we go to the store, we pay prices. We don't pay inflation, right? And so it doesn't - you know, oh, it's been a whole bunch of one-off events. Well, yes, that's true. And I think that for policymakers, that's important in how they respond. But the reality of where you are at the other end of this, the price level is quite a bit higher than what we would've expected five years ago. And wages haven't kept up with that. So I think that's where you got to kind of think about the cumulative effects of all this. It's not just a one-off event.
INSKEEP: And, of course, the Fed's goal is 2% inflation. And when you say elevated inflation, you're telling me we haven't hit this in five years or more.
SAHM: That's correct.
INSKEEP: Which makes me think also about how the economy is changing. I mean, there was this period from the financial crisis all the way up to the last few years where inflation was frequently below 2%, sometimes almost zero. Sometimes people worried about deflation. It was miraculous for people. It was great for the government. They could borrow so cheaply. And when it ended, there was this period where people thought, oh, it's transitory. It's temporary. Do we just have to get to the idea that the economy has fundamentally changed here?
SAHM: Well, the economy is always changing. So, you know, and there's no one number for inflation that's a magic number. I will say, it may seem a little counterintuitive, but when inflation is really low, when interest rates are really low, that's not always a good sign. Like, that economy after the global financial crisis, the Great Recession...
INSKEEP: Oh, yeah.
SAHM: ...It was pretty weak, right? So in some ways, with inflation, we want kind of a Goldilocks. You know, you need some inflation, needs to be really predictable so people can plan. They can, you know, make sure they get their wages in line with it. But you don't want zero inflation. That's a really, like - the economy is having a really tough time.
So but we just - we're not quite settled into a good, you know, moderate pace of inflation. And we keep getting these one-off - what appear to be one-off shocks, but they add up. And the world may have changed in that way. We may see more of, you know, the geopolitical, the different related to climate or policy, right? So, like, this may be the world we're in. And people need to prepare for that. But I'm not ready to call that change quite yet.
INSKEEP: Got it. So we may be going to a world of one-offs, as you say, where something is always going wrong. Let me ask you about Kevin Warsh, who's about to chair his first meeting as head of the Federal Reserve. If he called you up and asked you for advice, what would you tell him to do?
SAHM: I think they need to keep watching the inflation data. I don't think this is a point where the Federal Reserve should be raising interest rates. You know, we need to see where the energy prices are headed. Right now, things are relatively contained. A lot of this is energy. It's probably not a moment for the Fed to step in and start raising interest rates. But they need to be ready because we might get there. Things started out pretty contained at the beginning of the pandemic inflation, and then it spread. So they need to be vigilant.
INSKEEP: I guess you wouldn't have Kevin Warsh follow Trump's advocacy for lower rates either.
SAHM: No. No, they need to be watching the inflation. We need to see those energy prices coming down. We need to see the conflict resolved before the Fed would start putting more demand in the economy or else they could make the inflation worse. We don't want that.
INSKEEP: Claudia Sahm is chief economist at New Century Advisors and a former section chief at the Federal Reserve. Thanks so much.
SAHM: Thank you. Transcript provided by NPR, Copyright NPR.
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