As global financial systems react to economic shifts, a new book from the director of the Rhodes Center for International Economics and Finance at Brown University explores the causes and impacts of inflation.
PROVIDENCE, R.I. [Brown University] - As the global response to tariffs and concerns about inflation reach a fever pitch, Brown University political economist Mark Blyth is rethinking conventional economic wisdom on why prices go up and how policymakers can wrestle them back down.
In his forthcoming book, "Inflation: A Guide for Users and Losers," Blyth and co-author Nicolò Fraccaroli analyze common assumptions about inflation and what drives it in the modern global economy, from climate shocks and demographic change to geopolitical tensions.
"The world is in a profound moment of change," said Blyth, a professor of international economics and international and public affairs who directs the William R. Rhodes Center for International Economics and Finance at Brown's Watson Institute.
"Inflation: A Guide for Users and Losers" will be published on Tuesday, May 6. Blyth is the author of several prior books including "Angrynomics" and "Austerity: The History of a Dangerous Idea." In this Q&A, he offers his perspective on inflation and the impact of the U.S. presidential administration's tariffs, and explains why he's optimistic about the future.
Q: Inflation has been a constant topic in the news, especially in relation to the price of eggs and groceries. How do you define it?
It's pretty straightforward: It's not when houses get expensive or when eggs get expensive - it's all prices rising at once and continuing to rise.
Q: What causes inflation?
If you've taken an economics class, you'll get this idea that inflation is caused by the government printing too much money, that money chases too few goods, and prices go up, which is not wrong. But there are also supply-side shocks, like the world running out of personal protective equipment during COVID, and workers asking for wages that exceed productivity gains. The inflation that we had in 2021 and 2022 was mainly the pandemic meeting the energy crisis from the war in Ukraine - a simultaneous supply and demand shock. Many of the goods you consume travel across three or four borders, and if any of those systems begin to break down, then the costs go up.
Q: What inspired you to write this book?
Every time there's inflation, we go back and raise interest rates. But if this problem is a supply shock, which is what it seemed to be during the COVID shutdown compounded by the energy price crisis and the war in Ukraine, why is raising the price of money, which primarily affects things like the housing market and business investment, the right response to what seems to be a totally different thing? We get many of our ideas about inflation from the 1970s, but we're in a really different world now, and the "how to fight inflation" playbook that we draw from the 1970s is perhaps not appropriate. Essentially, the new book explores: "Who wins and who loses from inflation? And why do we keep thinking we're in the '70s when we're obviously not?"
Q: How does inflation impact the average consumer?
First, there is no such thing as an average consumer, and that is important. Second, we commonly hear that everyone suffers from inflation equally, but that's not true. The further down you are on the income scale, the more of a percentage of your paycheck you spend on consumption. That's why inflation really hits those at the bottom of the income distribution the most.
In contrast, who benefits from inflation? The folks at the other end of the income scale. For example, in 2022, American oil and gas companies made $220 billion in profits over their pre-COVID baseline. Fifty-one percent of that was given away to shareholders as the shares went up in value, and in dividends, most of which went to the top 1% of earners - about 3.3 million shareholders. That more than offset any costs that they suffered through inflation. They actually profited from inflation.
Q: One fear with inflation is that once prices go up, they will never come down. How do you respond to that?
There are certain sectors where prices are not returning to where they were before. Let's take climate change, for example. Whether it's in the form of insurance costs because of big wildfires or whether it's because of the impact on food supplies, there's going to be more of those types of supply shocks that are going to feed into inflation. There's also a "levels" effect where once the price level jumps, people get used to it, and it stays there.
Q: What are tariffs and why is the U.S. imposing new tariffs on its trade partners?
Tariffs are basically a tax on foreigners that often rebounds as higher costs in the country that applies them. More specifically, they're an attempt to make something coming into the United States more expensive to benefit domestic producers. Donald Trump is imposing these tariffs because he wants to rebalance the global economy so that America exports more and other countries that are exporters import more. Will other countries retaliate and turn that into a trade war? You bet, which is why this strategy will not work.
But other countries shouldn't be shocked because we've been at this for the past eight years. Trump initiated new tariffs during his first term, and Biden kept them and added to them as a part of his signature Inflation Reduction Act, which was an attempt to reindustrialize the economy around green sectors. Trump wants to do the same, reindustrialization behind tariffs, only much more aggressively and with a focus on carbon-based industries.
