Economists debate what is causing inflation. : Planet Money The last few months have made us acutely aware of inflation. We all agree that it's making our lives harder, but economists disagree about what's causing it. | Fill out our listener survey:

The debate over what's causing inflation

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript




For the past few months, there was a hope that maybe, just maybe, the high inflation we've all been experiencing had peaked, that inflation would start to come down. But that's not what happened. The latest economic data for the Consumer Price Index, or CPI, shows that over the last year, inflation grew by 8.6%.


And we have heard a lot of explanations for why the high inflation is happening. Like, I'm sure, Wailin, by now, we can both just rattle off a few off the top of our head. So why don't you go first?

WONG: Oh. Oh, boy, pop quiz. I'm ready. OK, pandemic supply chain disruptions.

WOODS: Low interest rates.

WONG: War in Ukraine.

WOODS: Workers being sick.

WONG: Ah, yes. Anything else? What else is there?

WOODS: Lockdowns in China.

WONG: Corporate greed.

WOODS: Thank you for being game to do my pop quiz, Wailin. I appreciate it. Now, one economist thinks that all of these reasons are just a distraction. He pins basically all the blame on one thing - government borrowing and spending.


WONG: Hello, and welcome to PLANET MONEY. I'm Wailin Wong.

WOODS: And I'm Darian Woods. Today on the show, two recent episodes of PLANET MONEY's daily show, The Indicator. These episodes debate what is causing all this inflation.

WONG: First up, the $5 trillion question - did all that money the government spent during the pandemic cause the pickle we're in? We'll talk to someone who makes the case that maybe, yeah. It's a fiery, hot take and by no means settled, but we want to hear this out.

WOODS: Meanwhile, other economists are blaming the Federal Reserve for not acting sooner. So in the second part of the show, we will look at some potential reasons why, like the ghosts from Jerome Powell's past. These are ghosts that have haunted him throughout the pandemic and which may have contributed to the inflation mess that we're in right now. That's all coming up.

WONG: John Cochrane is a senior fellow at the free market-oriented think tank the Hoover Institution. And John has also been running a blog for over 10 years called the Grumpy Economist.

JOHN COCHRANE: I'm not really a grumpy person, but I was reading the op-eds one morning and Paul Krugman had written some particularly outrageous thing, and I spilled my coffee and my children dubbed me the Grumpy Economist, so I thought that would stick.

WOODS: And to explain where John Cochrane's views fits among economists, he asked us to picture a rowdy scene.

COCHRANE: Mainstream economics is like a bar fight. So there's a lot of difference, but broad consensus - inflation ultimately comes from monetary and fiscal policies.

WONG: Monetary policies mean stuff that the central bank, the Federal Reserve, does, primarily by changing interest rates. And fiscal policies means the amount that the government borrows and spends. And so most economists agree that most of the time, both monetary and fiscal policies are the main drivers of ongoing inflation. But they might argue over which is more important. A lot of economists emphasize the power of monetary policy, the power of the central bank.

WOODS: In the metaphorical bar fight of macroeconomists, where were you standing?

COCHRANE: I'm standing in, yeah, off in a corner. I specialize in what I call the fiscal theory of the price level.

WOODS: The fiscal theory of the price level - this means that John Cochrane thinks that inflation is largely caused by government borrowing and spending. So he's standing in the same bar as the mainstream economists who are arguing about which is more important, monetary or fiscal policy. But he's definitely to one extreme. He's emphasizing fiscal policy - and specifically at the moment, the three COVID stimulus and relief packages that totaled around $5 trillion.

COCHRANE: It's just a difference of emphasis relative to other people.

WOODS: So you think the Federal Reserve, the central bank, is maybe less powerful than some others would say?

COCHRANE: Yes. That's right. So our current inflation, I think, has a very clear source. The government spent up about $5 trillion and sent that as checks to people. Now, many of those people really needed the checks, but a lot of people didn't. They overdid it. And that causes inflation.

WOODS: So if we dial the clock back to around the time of the relief packages and the stimulus packages from the government - there were three main packages - what were your feelings and comments at the time?

COCHRANE: This is a massive waste of money.

WOODS: Even ones where I saw, you know, people lining up throughout my block for donated food?

COCHRANE: Parts of - it was - yes, parts of this was very important. And I agree that parts - so the government - in a big shock like that, the government has a proper role, which is essentially insurance. But we left insurance behind trillions and trillions of dollars ago. You know, why does a retired government employee with a government pension and Social Security, owns their own house - why do they need an extra check? Now, I'm sure they'd love an extra check. We'd all love an extra check. But I'm sorry, money doesn't grow on trees.

WOODS: And this is why he's called the Grumpy Economist, not the magnanimous economist.

WONG: Yeah, maybe look for another economist to buy everyone a round after the bar fight. But, you know, John says that it's not that government spending per se is inflationary. What matters for inflation is how the three major coronavirus spending bills are paid for. And they were paid for by the government borrowing, going further into debt.

COCHRANE: Governments can borrow and print an enormous amount of money if they have a clear plan that they're going to pay back the borrowed money and soak up the money when the time comes. The fact that there wasn't a clear plan for paying it back really is one of the key reasons why we're seeing inflation now.

WOODS: A plan like raising taxes - raising taxes can suppress inflation. Households would have less money to spend on kitchen renovations and dinners out, meaning businesses can't raise prices as much. And that hasn't happened.

WONG: OK, so it's fairly settled that fiscal policy, i.e., government borrowing, at least contributed to the high inflation we're seeing now. But what about monetary policy, the Fed keeping interest rates low? Isn't that contributing to inflation?

COCHRANE: Now, here, I want to represent the bar fight correctly because I was just at this bar fight. It was very polite. But we had a conference here at the Hoover Institution, and we talked about exactly this issue. So is the Fed's slowness to react - does that year of letting inflation go ahead and keeping interest rates at zero - is that by itself an additional stimulus? And one end of the bar fight said absolutely yes. That is just going to zoom the inflation and make it worse.

WONG: But John doesn't agree that the Fed is to blame.

COCHRANE: We spent years with interest rates stuck at zero, and inflation went nowhere. And Japan spent 30 years with interest rates stuck at zero, and inflation went nowhere. So the theory that says if interest rates stick at zero no matter what, inflation spirals out of control is directly contradicted by those years of evidence. So it's not as crazy as it sounds.

WOODS: It's not as crazy as it sounds. I love the disclaimer. And to be clear, John agrees that the Fed could have raised interest rates earlier. Maybe in the middle of 2021, it could have slowed the economy and nipped inflation. But that doesn't mean that the Fed caused inflation.

WONG: OK, so what about, you know, the stuff we talked about in the lightning round at the beginning - the pandemic itself and also the war in Ukraine? You know, are the supply shocks not meaning it's harder for manufacturers to make stuff and restaurants to find staff, so it's not driving up inflation?

WOODS: Yeah, and so here, John defines what should happen in a supply shock. Things are harder to make, so we're all poorer. We can't produce as much. So prices will go up, but wages won't. With higher prices, this is the way that the market is essentially rationing limited goods. But he's saying in the real world at the moment, that is not what's happening. Wages - yeah, it's true, they haven't fully kept up with high inflation, but they are going up by a lot - around 5% over the last year, more than normal. So John thinks that we are seeing something closer to a classic inflationary spiral - prices of stuff going up and wages following suit. And those boosted wages and the boosted prices are both driven by all those stimulus packages.

WONG: So John is worried, but of course, he would be.

COCHRANE: I'm kind of the guy who's been holding that world is ending sign for the last 10 years.

WOODS: Uh-huh. So if people knew, oh, John Cochrane, he's going to be, you know, saying spend less, he's going to be warning about these impending doom.

COCHRANE: I was worried about that in 2008.

WOODS: Right, right, right.

COCHRANE: And I was wrong. You know, there's that old story about the hypochondriac who put on his tombstone when he dies at 95, see, I told you I was sick.

WONG: So John downplays the role of the Fed in supply shocks and driving up inflation.


WOODS: But a lot of economists think that, despite whatever has been causing inflation, the Federal Reserve, which is chaired by Jerome Powell, they've been really slow to act on it. They've been slow to raise interest rates and start reining in all that excess cash that's been driving up inflation. So why hasn't the Fed acted sooner? After the break, Indicator co-host Adrian Ma and I will turn to the scars of Jerome Powell.



So the big economic news of this week...


JEROME POWELL: It is essential that we bring inflation down if we...

MA: ...Was that Jerome Powell, the chair of the Federal Reserve, the U.S. central bank, announced that the Fed was raising interest rates by three-quarters of a percentage point.


POWELL: ...That ongoing increases in that rate will be appropriate.

WOODS: Zero point seven five - this is the highest rate increase we've had since 1994. It's meant to bring down high price inflation by making it harder for everybody to borrow and spend. But this big jump is quite a change in strategy than what the Fed has had over the last year. It's kind of had this extremely slow and steady, boil the frog gently kind of thing. Like, Jerome Powell took a very long time to start announcing that the Fed was going to raise interest rates, which it started doing this year, even though inflation was really high last year.

MA: You know, there are a lot of people, a lot of frogs, that said this approach took too long. Like The Economist magazine, for instance - they ran a headline a few months ago that said "The Fed That Failed."

WOODS: Brutal. And there were a lot of reasons why the Fed kind of took its time to fight inflation. But we really wanted to understand the psyche of the Fed and its chair, Jerome Powell, and in particular, two episodes from recent history that shaped Powell's thinking.

To better understand the Fed's thinking, we're going to start with what's called the taper tantrum.

MA: Ah, yes, the fabled taper tantrum. So bring your mind back to 2008, the height of the financial crisis. The Fed had already brought short-term interest rates down to zero, but the economy still needed a further nudge in the ribs, right? It needed more stimulus. And so the Fed tried to do something new. It started to buy up what would eventually become trillions of dollars of assets to help drive down long-term interest rates. And this is what became known as quantitative easing, or QE.

WOODS: So essentially, the Fed wanted interest rates really low, so it bought a bunch of bonds, which meant that those bonds didn't need high interest rates to attract buyers. And those low interest rates were intended to stimulate the economy.

MA: But quantitative easing was meant as a temporary measure - right? - something just to get the country through the 2008 crisis. And so several years later, by 2013, some members of the Federal Reserve Board, which decides monetary policy, they were getting antsy. And one of the people on that board was Jerome Powell. So him and a couple of other buddies on the board said to Ben Bernanke, look, we got to get back to something closer to normal. We got to reel in this bond buying.

WOODS: In a Fed meeting in June 2013, Jerome Powell got even blunter. He acknowledged that, yes, no kind of action was risk-free. But these are his actual words - we've got to jump. So he was meaning they need to get out of QE.

MA: And so that day, because of that pressure that Jerome and his colleagues were putting on Bernanke, Bernanke walked over to his usual press conference, in front of the reporters and the cameras, and he announced a scenario for slowing down QE purchases, for tapering off the buying of bonds. And just listen closely to this 'cause this might be one of the most expensive sentences ever uttered in the 2010s.


BEN BERNANKE: If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the...

WOODS: Oh, it sounds so innocent and, you know, dull almost.

MA: Yeah, no.


UNIDENTIFIED REPORTER #1: We all know it. When Ben Bernanke talks, the markets listen.

UNIDENTIFIED REPORTER #2: A major sell-off on Wall Street as the markets stand and revolt against Ben Bernanke and the Fed. Worry about interest rate rises down the road.

WOODS: The bond markets are essentially crashing in this way that Jerome Powell and his colleagues hadn't anticipated. The financial press dubbed it the taper tantrum, and this was like the Fed had slammed on the brakes when it was only talking about eventually easing up on the accelerator.

MA: Jerome was reportedly pretty shaken by all this, saying, oh, my goodness, to Ben Bernanke, who replied something along the lines of, don't worry. You weren't here for 2008. This is nothing. But for Powell, it was something he would carry. I mean, here he is talking about it in 2019.


POWELL: The taper tantrum left scars on anybody who was working at the Fed at that time. And I think the takeaway was that the market could be very sensitive to news about the balance sheet.

MA: This was the lesson - be very slow and steady with your tightening messages, so slow and predictable, it's like watching paint dry. And Jerome Powell carried this lesson into the pandemic when the Fed launched a new round of quantitative easing.


POWELL: We will purchase at least 500 billion of Treasury securities over the coming months.

WOODS: So then in 2021, when the American economy is doing surprisingly well and inflation is rising...


POWELL: No decisions were made...

WOODS: ...Powell's hints and slow buildup to tapering had prepared the markets...


POWELL: A gradual tapering process that...

WOODS: ...So that when the announcement finally came in November...


POWELL: It is time to taper, we think, because the economy has...

WOODS: ...There was not a 2021 equivalent of a taper tantrum.

MA: So it worked. Lesson learned, right? Well, the flip side of not spooking the markets was that, in the meantime, inflation grew and grew to the point that now people are talking about the Fed needing to trigger a recession to help bring it down.

WOODS: OK, so the taper tantrum was Jerome Powell's first ghost. And the second ghost can be illustrated from the closest that Fed economists would ever get to joining a rock band tour bus. So it was this road tour in 2019 called Fed Listens. It was this round-the-country consultation with union members, with small business owners, community college leaders. And now, they were to hear essentially how America was feeling about the economy and whether the Fed should change how it thought about it.


MARK LEVINSON: And I think the Fed has been slow to recognize that. The dynamics between inflation and the tight labor market, you know, are not what they were in the '70s.

MA: This is Mark Levinson, chief economist at Service Employees International Union, and he's speaking at one of these Fed Listens meetings in New York. And what Mark was saying was that in the past, low unemployment often meant high inflation. You know, as a hot labor market gained steam, that might raise wages and put inflationary pressure on the rest of the economy. But in the years before the pandemic, unemployment was actually getting really low, and inflation was also really low. And so he was saying maybe there isn't such a trade-off. Maybe this could actually be a win-win - low inflation and low unemployment rates, which could also have benefits for groups of workers that have been historically marginalized.


LEVINSON: The benefits of tight labor markets - real wage gains that noticeably go to lower- and middle-class workers, that go to African American workers...

WOODS: And that year, where the Fed Listens tour had started, in 2019, the Fed started lowering interest rates, making it easier for companies to borrow and hire more people. And unemployment fell so much that low-waged workers, Black workers and Latino workers were getting pay rises. And for a moment, income inequality was falling, and inflation wasn't rising very much. It was another lesson for Powell, which he also took into the pandemic. And here he is at a press conference in September 2021.


POWELL: We also said we wouldn't raise rates just in response to very low unemployment in the absence of inflation. So that was another aspect of it because we saw that that really benefited, brought, you know, labor market participants in a broad and inclusive way.

MA: Jerome Powell learned not to raise interest rates simply because unemployment was low. And that was along with learning to give the markets a long lead time before the Fed makes big adjustments to its tightening policies. Those were the big lessons from the 2010s, but they weren't lessons that helped much to stem our current inflationary spiral.


WOODS: If you have more questions about inflation and the weird and wild ways that it is playing out across the economy, please tell us. Send us an email or a voice memo. Send it to You can also find us on social media. We're on Facebook, Twitter, TikTok and Instagram. We are @planetmoney. And you can subscribe to The Indicator podcast wherever you get your podcasts. We'll have more on the Fed and this debate about inflation coming up.

The original Indicator episodes were produced by Jess Kung and Nicky Ouellet. They were engineered by Robert Rodriguez (ph), and they were fact-checked by Catherine Yang (ph). The Indicator's senior producer, Viet Le, edited both episodes, and Kate Concannon edits The Indicator.

This PLANET MONEY episode was produced by Willa Rubin, and it was engineered by James Willetts. It was edited by Dave Blanchard and Molly Messick. Alex Goldmark is our supervising producer. I'm Darian Woods. This is NPR. Thanks for listening.


Copyright © 2022 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.