skip to main content
Gallup Podcast
Dean Baker on Inflation: How Bad Is It, Really?
Gallup Podcast

Dean Baker on Inflation: How Bad Is It, Really?

Dr. Dean Baker, cofounder and senior economist at the Center for Economic and Policy Research, joins the podcast to discuss inflation in the U.S. and what is to come. Is a recession on the horizon? How does he think the Federal Reserve and the White House should address the situation?

Below is a full transcript of the conversation, including time stamps. Full audio is posted above.

Mohamed Younis 00:07

From our studios in Washington, I'm Mohamed Younis, and this is The Gallup Podcast. In this episode, we take a deeper dive into inflation and try to get our mind around what's happening with the global economy. Dr. Dean Baker is a cofounder and senior economist at the Center for Economic and Policy Research. Dean, it's great to have you on the show with us.

Dean Baker 00:27
Thanks a lot for having me on.

Mohamed Younis 00:28
We've picked up in our polling just the current worry about inflation at a level we haven't seen in the public for generations. From an economic perspective, give us a taste of sort of how bad is it? And more importantly, does it look like it's going to wane off anytime soon?

Dean Baker 00:44
Yeah, well there's a couple things here. First off, there's the prices that everyone sees. And I've had people yelling at me -- everyone can see the gas price, and those have gotten very high. And obviously for a lot of people, that's a really big deal, because many people have no choice but to drive and with gas in some cases over $5 a gallon, that's a lot of money out of their pocket. So that's a really big deal. But I separate that -- people go, "We can't just separate," well I understand that. But if I'm asked as an economist, what's the underlying issue with inflation? There, we're looking at a broad range of goods and services, all the things we might buy -- the, the services we buy, we go to a hotel, go to a restaurant, go take an airplane, we have our car fixed, goods, buying a car, buying clothes, all the other things we might buy. And we ask what's going on with those prices?

Dean Baker 01:36
Now those did rise rapidly in 2021. And this was the big debate. The argument -- was that transitory? Was this, is this an underlying problem? And the transitory argument was that we have supply chain problems: that the problems associated with reopening from the pandemic; that we have, many factories have been shut down in China, in Thailand, in other places that we're importing things from. We were also buying much more goods than we would ordinarily, because people weren't spending money on services. So during the pandemic, people weren't going to restaurants as much as they would have otherwise. They weren't going to movie theaters. They weren't going to gyms.

Dean Baker 02:16
So instead, they were doing things like buying cars, buying clothes, buying all sorts of other things. So that, the argument about being transitory was these were sort of one-time stories. Once we get the pandemic under control -- which it seems to be largely under control now; not completely, obviously, but largely under control -- we should expect those price increases, that inflation to slow. And the evidence that I've been looking at -- we'll get a new report on prices on Friday -- but the evidence I've been looking at suggests it is slowing; that we're not seeing the sort of 1970s wage-price spiral. That workers see higher prices, go, oh my God, I need higher wages to cover for that. And then companies go, oh my God, we're seeing higher costs; we better raise our prices, and it gets higher and higher. And of course in the '70s, we end up with double-digit inflation. We don't seem to be seeing that; both wage and price growth seem to be moderating. And to my view, that's, that's a really good story. That's what we need.

Dean Baker 03:12
Now, coming back to oil. What's the story with oil? Well, the big thing there is the war in Ukraine. I mean, I don't think anyone doubts that's led to some oil being removed from the world market -- of course, Russia being one of the world's biggest exporters -- and a concern that more could be. And that's pushed oil prices up over $120 a barrel. I think they're down a little bit today. But that's, that's a huge problem. And there's not an easy solution to that. If there's a cease-fire, if there's some agreement in Ukraine -- which hopefully there will be before too long; I'm not being, I don't think wildly optimistic on that -- that should send those prices back down. Maybe not as low as we would like, but certainly to more acceptable levels. But I'm pulling out the, the issue with oil from the inflation picture more generally, and I say the inflation picture more generally looks pretty good. But again, I understand: People are very unhappy about paying $5 a gallon and, you know, that's a big issue for, for many, many people. And, you know, I -- my guess is that until there's some progress in, as I say, at least getting a cease-fire in Ukraine, we're going to see pretty high oil prices.

Mohamed Younis 04:19
So Dean, you mentioned the war in Ukraine. And of course, oil prices are key for all economies. I think for emerging markets also -- places like Turkey, Egypt, others -- they also have this huge dependency on wheat and grain exports from Ukraine. Tell us a little bit about those ramifications of the war and, you know, are they any more concerning than the oil price for people kind of in the advanced economies?

Dean Baker 04:47
Well, the, we've seen worldwide jumps in prices, certainly of wheat and most other grains. And you can't put that all on the war, but that's clearly the biggest factor. So the concern is, at the moment at least, Russia is preventing Ukraine from exporting grain. And the concern is that that will continue. And if Ukraine's grain is kept from going on world markets, we will be seeing higher grain prices persisting for some time into the future. So that's a totally real concern for, you know, certainly for developing countries, where it's harder for them to absorb increases in basic food prices. And again, this is, from the standpoint of a wealthy country, if we pay more for bread, most of us could still afford to eat; we're not gonna go hungry. In many developing countries, what they eat is bread, and it's not as though they could substitute something easily for that. So that is a real cause for concern. Again, one hopes that the war will, you know, we'll get a cease-fire.

Dean Baker 05:44
There has been some talk that Russia might end its blockade because, in fact, they've been preventing Ukraine from exporting its wheat. There, again, there's been discussion, some efforts of mediation; obviously, I have no particular insight on how this has been going, but Russia has been engaged in those discussions. So it's certainly possible that, even with the war going on, they might agree to allow for Ukraine to export its wheat, which would have a big effect in lowering world wheat prices -- and again, maybe not back to the prewar levels, pre-pandemic levels, but it would certainly be very helpful for, well, the whole world, but again, particularly, developing countries.

Mohamed Younis 06:23
Of course, Dean, there are no crystal balls in any of this, but a lot of people are starting to talk about a global recession as maybe an outcome, a byproduct of inflation. Do you take that view? If so, why not? How concerned or not concerned are you about this triggering a recession?

Dean Baker 06:43
Well, one should always be concerned about a recession, because it's very, very bad news if we see one. I mean, the idea that we get unemployment rates, I mean if we go back to Volcker -- the last time we had serious inflation, Paul Volcker was the Fed chair -- and he's given credit for ending the inflation, which he did, but he also pushed the unemployment rate above 10%, which was pretty horrible for a lot of people. But I'm reasonably optimistic. The Fed has been raising interest rates, of course, and indicated they'll continue to. And Jerome Powell, the current chair, has been singing the praise of Paul Volcker. And I guess I'm not too worried about him singing the praise; I'm more concerned that he actually does, doesn't do what Volcker did, and that's raise rates through the roof. If we go back to 1980, the interest rate controlled by the Fed -- the short-term overnight money rate -- was raised to 20% at one point. We're at about 1% now, so if we get to 2%, 2.5% -- those were the rates we had just before the pandemic -- that, to my mind, should be fine, in the sense that's not gonna bring on a recession. I'm hoping that will be enough to bring inflation down to levels that the Fed considers acceptable. I mean, they don't care whether I consider them acceptable; the question is whether Jerome Paul and the rest of the people of the Fed consider them acceptable.

Dean Baker 07:57
I think they've actually made a huge amount of progress, and this hasn't been appreciated to my mind in the reporting on this. When we got the jobs report on Friday, which showed strong job growth, and the unemployment rate stayed at 3.6%, which is a very low rate. But the other thing that didn't get the attention deserved was we have moderating wage growth. So if you take a look at the annualized rate of inflation, what I like to do is look at the last three months. So this was a May report. So this was March, April, May; compare it to the prior three months -- December, January and February -- and say what would that rate be annualized if they continued that through the whole year? And the answer to that was 4.3%. And that's way down from where it had been in 2021 or the start of this year. And the reason for my saying that's good -- I mean, I usually like to see good wage growth, but it has to be wage growth that's consistent with more or less reasonable inflation rates -- 4.3% wage growth is only a little higher than where we were before the pandemic. So if we stay there or go a little bit lower, that's a rate of wage growth that's consistent with moderate rates of inflation.

Dean Baker 09:13
So that to me looks like the Fed has largely done its job. They wanted to slow down the rate of wage growth -- again, we'll get price numbers on Friday; my expectation is that will be looking better, but we'll see. And if you've slowed rate of inflation down to acceptable levels, given what they've done already -- and needless to say, their commitments about future rate hikes have an impact on the markets -- that will mean they don't have to keep pressing. They don't have to do a Volcker; that they could just say, yeah, we did what we wanted to do. We brought inflation down to a rate that we could live with, that people should be able to live with and there's no reason to push it further. So I think that's a likely outcome. Again, I'm betting on two things here: what actually happens with wages and prices, and then what the Fed's reaction is. I mean, I know what I think they should do, but what matters is what they think they should do. And I'm hoping they see the economy at least somewhat the same way as I do.

Mohamed Younis 10:08
So I'm 41. I grew up in the era where unemployment rates and the numbers of jobs created were kind of like what people watched to decide whether or not the economy was doing well or moving in the right direction or not. Maybe that's really a leftover of the Great Recession. But really that was a huge focus of the Obama administration and a lot of other administrations. It feels like things are a little more complicated now, in terms of getting our minds around how the economy is doing. Beyond inflation, what exactly is wrong with the economy right now, if anything, on the macro level? Do you feel like there are kind of pieces that are not making sense and big corrections are coming? I think about like the housing market and how crazy that's been; the stock market has obviously been a roller coaster. Beyond inflation, what's wrong with the economy?

Dean Baker 11:00
Yeah, I would -- you mentioned housing, and I would certainly agree with you. That's, that's been problematic. So we've seen substantial increases in house prices really through most of the last decade -- I'm thinking pre-pandemic, so 2011, 2012, once we were recovered from the Great Recession or at least partially recovered from the Great Recession right up to the pandemic, we saw house prices outpacing inflation through that whole period. And the story there was, we weren't building enough housing. So we were building housing very rapidly during the bubble years. This is, I date that as about 2000-2007, we're building over 2 million units a year at its peak. Then we get the bubble bursting -- 2007, 2008, 2009 -- and construction just goes through the floor; we're under 1 million, I believe, one or two of those years. And, in any case, it stayed very low. So having one year of little construction isn't that big a deal; having a decade of little construction is a big deal.

Dean Baker 11:53
So we had a serious shortfall in housing going into the pandemic. And then with the pandemic, we saw mortgage rates plummeted; people had more money because they got the $2,000 checks, the different government payouts. And also, you had a situation where people actually had need for more housing, because you had a big increase in remote work. So a lot of people decided, well, they're not, they're not commuting. So they've saved money on commuting. But on the other hand, they might need a house with another room in it because they need an office. So we saw a big increase in demand for housing, and supply was already in short, was lagging. And that, that led to this big jump in house prices. And that really, the, house prices nationally have gone up by about 30% over the last two years. That, that is a really big deal. And rents are now rising pretty rapidly as well.

Dean Baker 12:47
I think the Fed really did its work here though. So even though they've only raised rates a relatively small amount, the mortgage interest rate, which is what matters for housing, obviously, that's going from around 3%, I think even a little bit under 3% back last summer, to 5.3%, 5.4%. And that's put a big damper on the housing market. And there, we don't have enough data yet to be able to say about this any conclusively, but anecdotally there's any number of reports how the market has changed. Used to be the case, everything would sell immediately, with multiple offers above list price. That has changed. So my expectation is we will see house prices -- not plummet. We're not gonna, this isn't a crash. We didn't have a bubble. That was being, it was being driven by fundamentals in the market. But we will see house prices moderate, and again, I think nationally, probably fall a little bit. In many places, we might see 10% or 15% drops.

Dean Baker 13:43
And I think it will also be an improved picture for rent, because this is a story -- I've argued with people, but I feel pretty comfortable in this -- when you have people buying homes, and in a lot of cases, if you have a case where I'm living in a three-bedroom home, I move in another three-bedroom home, that doesn't change the supply, you know, the available supply of housing. On the other hand, if I had a two-bedroom apartment or house, and I was looking to move to a four bedroom, well, I was gonna take up more space. So there were a lot of people in that boat that won't be buying the four-bedroom house, which means that there's going to be more room for other people. Also, a lot of people buying homes today, obviously more affluent ones, they're getting second homes. So if they go, Oh, well with a 5% mortgage rate, I can't afford to do that, well that's another home that's available for someone else to either buy or rent.

Dean Baker 14:29
So I think we are going to see a better story in housing in the pretty near future. So it doesn't mean everything's gonna be great, but I think that's going in the right direction. I should also imagine -- mention that we have seen a big increase in construction. So we're up around 1.8 million, but because of supply chain issues, completions have only been around 1.3 million. So as we're getting supply, supply chain issues resolved, I'm expecting we'll see completions pretty close to, to starts. I mean, no one deliberately builds a home to have it only half completed. So that also will be a factor helping the housing market. So, again, housing has been a big problem. It's not as though all the problems are about to go away, but I think we will see an improving situation.

Mohamed Younis 15:10
That's a really great insight. And, you know, it's fascinating how housing played such a huge role -- really, subprime mortgages played such a huge role -- in the last meltdown, and how that shortage of housing and the ramifications of that meltdown are still really with us. It's just absolutely fascinating. We also ask Americans every year, Dean, whether it's a good time to buy a house. We had a record low this year, just a month ago, of people saying it's a good time to buy, but it's still the No. 1 investment people think is the best place to put your money, here in the U.S. at least, when we ask it, and has consistently been. Let me shift to kind of my final question. Dean, in terms of leadership. You mentioned the Federal Reserve; also, President Biden have been trying to really shed some light for the public on where the economy is going. If, when -- sometimes they do call you in the middle of the night and say, "Dean, what should I be doing on getting the economy, keeping it on track, back on track" -- however you view it -- what should they be doing right now, the White House and the Federal Reserve?

Dean Baker 16:17
Well, first off, I would say, don't panic. And I understand, I do talk to people in the administration, not that I say they're panicked, but obviously they're worried. And they see the polls; you know, they know that their approval ratings aren't very good right now, particularly on the economy. But I think most things look pretty good right now. Again, oil prices are bad, there's no doubt about that. What I would like to see -- and I think the Biden administration's try to go in this direction -- is focus on the longer term. I mean with oil, we know that we have to move away from fossil fuels; global warming is real. We can't pretend. You know, we might not like it, but that's the world. So trying to move away from fossil fuels and do what we can to accelerate that.

Dean Baker 16:57
But the other thing -- I've mentioned this before, I mean, the war in Ukraine, I mean, I understand; I'm not going to say, oh we should end the war in Ukraine because we want lower gas prices. But just, again, my read on the war in Ukraine -- not my area of expertise, but other people, it is their area of expertise; they say we more or less know the outlines of a cease-fire, maybe a peace agreement. That you're going to have a situation where Russia will probably still be in possession of Crimea and a chunk of Eastern Ukraine. And if you could get that done as quickly as possible, and again, I'm trying not to be cynical here, but I mean, it doesn't make sense to have a lot of people killed over a few hundred feet -- if that's, at the end of the day, what we're talking about.

Dean Baker 17:40
So I appreciate, understand, respect the effort of Biden and the other Western countries to arm Ukraine so it can defend itself. But on the other hand, I think also they, and they may well be doing this -- They need to be talking with Zelensky: What does a cease-fire look like? What does peace look like? And trying to get there as soon as possible. And again, that will have a big impact on, certainly on oil and gas prices, and we were talking earlier, it will have a big impact on food prices. So this has been enormous disruption to the world economy. And again, I don't try to make light of this at all. I mean, I'm Jewish. Hitler, you know, we grew up learning about the Holocaust, you know. So would I say, should we pay more for gas to keep Hitler from taking over the world? Yeah. In, in a second, of course. But I don't think that's the situation we're in today. So I'm hoping we could see a peace agreement, a cease-fire there, whatever, a stop to the fighting, as soon as possible. And that, that I think, if we're talking short term, that is far and away the best thing we can do for the economy.

Mohamed Younis 18:42
And absolutely, I'm happy you said that, Dean, because it is certainly not a dichotomy between, you know, Ukraine keeping its sovereignty and people having lower gas prices. But it really is a matter of whether or not the war is spreading. And luckily for everybody, it doesn't look like it is, and it does look like there is an end in sight. But it will be really critical, as you mentioned, to see how that war unfolds, and also just see how this economy rattles along, for better or for worse. Dean Baker, senior economist at the Center for Economic Policy and Research, thank you so much for being with us.

Dean Baker 19:14
Thanks a lot for having me on. I enjoyed the discussion.

Mohamed Younis 19:15
That's our show. Thank you for tuning in. To subscribe and stay up to date with our latest conversations, just search for "The Gallup Podcast" wherever you podcast. And for more key findings from Gallup News, go to, or follow us on Twitter @gallupnews. If you have suggestions for the show, email The Gallup Podcast is directed by Curtis Grubb and produced by Justin McCarthy. I'm Mohamed Younis, and this is Gallup: reporting on the will of the people since the 1930s.

Gallup World Headquarters, 901 F Street, Washington, D.C., 20001, U.S.A
+1 202.715.3030