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Regular Guy Neel Kashkari Has The Perfect Analogy To Explain Inflation To His Fellow Non-EconomistsSurge pricing may suck, but it’s necessary, just like recession-triggering higher rates.

• Author:Jon Shazar
• Publish date:Jan 4, 2023

Surge pricing may suck, but it’s necessary, just like recession-triggering higher rates.

Unlike his fellows on the Fed Open Market Committee, Neel Kashkari is a normal guy. In spite of his position as head of the Minneapolis Fed, he’s no egghead economist. He chops wood and builds sheds in his free time. He eats Cool Ranch Doritos and chicken tenders; drinks cheap beer and Coke (specifically of the Cherry and zero variety); has a bit of a Twitter addiction. He hates how the big banks took the public for a ride (via him, of course, but he’s come to see the errors of his ways) and generally thinks the whole thing stinks. He’s mystified but intrigued by crypto. A real salt-of-the-/down-to-earth kind of former Goldman Sachs banker and failed California gubernatorial candidate.

So he sympathizes with the average American struggling to make sense of the inflation. And he’s got the perfect analogy to help them understand.

One feature of ride-sharing apps such as Uber and Lyft is “surge pricing”…. Imagine a rainstorm hits, and the price surges from $20 to $90. But imagine, in my analogy, the ride-sharing company owns all the cars, and the drivers are its employees. When the storm hits, the company notifies all their drivers that they will pay time and a half. So, all the drivers come out to drive. The company doesn’t raise wages even more because they are car constrained: All their cars are deployed….

My story is of course too simple—just a demand surge, rather than both increased demand and disrupted supply—but the resulting characteristics resemble the economy we have been experiencing: Prices soar. Corporate profits climb. Income for drivers climbs, but not as much as prices. Real wages actually fall. Even though worker incomes are up, labor’s share of income is down. Labor markets are tight, but capital is the constraint on supply. Inflation has soared, but it soared because of supply/demand dynamics—what I will call “surge pricing inflation.”

Anyway, now that we all understand the problem—even, presumably, Kashkari’s lemming underlings who “pushed back on me when I made these arguments to them,” a position Neel is all too familiar with—he’s got some good news and some bad news.

While I believe it is too soon to definitively declare that inflation has peaked, we are seeing increasing evidence that it may have. In my view, however, it will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked…. I have us pausing at 5.4 percent, but wherever that end point is, we won’t immediately know if it is high enough to bring inflation back down to 2 percent in a reasonable period of time…. To be clear, in this phase any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher.

And plunging the economy into a recession. But that, presumably, will be the next FOMC’s problem.

Why We Missed On Inflation, and Implications for Monetary Policy Going Forward [Minneapolis Fed]

Tagsterms:InflationRidesharingCoining A Phraseinterest ratesNeel KashkariSurge PricingFed

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