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Arun Venugopal: You're listening to The Takeaway. I'm Arun Venugopal sitting in for Melissa Harris-Perry. Good to have you with us.

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Arun Venugopal: Now, you've probably seen it for yourself.

Speaker 1: Hi, gas prices are turning into a major speed bump as the summer travel season kicks off.

Speaker 2: If you want to go to the club or go to the bar or something, you got to spend money just to have fun.

Speaker 3: The typical American household now spending $250 more a month to purchase the same goods that they did last year.

Speaker 4: Food prices went up, gas went up. [unintelligible 00:00:37] clothing going up, vacations going up. You can't even catch an airplane.

Speaker 5: Millions of Americans are priced out of buying a home and rents are skyrocketing too.

Speaker 3: Pork, chicken, even coffee.

Arun Venugopal: Prices are high and they're going higher. In June, the labor department reported that a key inflation measure, the consumer price index, had increased by 8.6% year over year, the largest 12-month increase in 40 years. New numbers will be out this week and they are expected to stay high. In response to this inflation and in order to stabilize it, the Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point in mid-June, the biggest hike since 1994. The Fed has indicated that additional rate hikes are expected in the coming months.

While these higher rates are supposed to cool the economy down, some economists worry that this could hurt the job market, cause higher unemployment, and potentially trigger a recession. We wanted to know how you were feeling about all this, and as usual, you had a lot to say.

Dorian: My name's Dorian and I think that the economy feels like it's always felt for people who aren't extremely rich in that we don't feel like we have a whole lot of say in what's going on. We suffer the consequences of whoever makes the decisions and get very few of the benefits.

Karen: This is Karen in Maple Grove, Minnesota. My spouse and I are a few years from retirement, and honestly, I'm feeling very overwhelmed and rather scared about how the economy is going right now.

Arun Venugopal: Thanks as always to all of you for sharing. To walk us through all of this, I'm joined now by Damon Jones, an economist and professor at the University of Chicago. Welcome to The Takeaway, Damon.

Damon Jones: Thank you.

Arun Venugopal: Just to start, we've been hearing a lot about rising inflation for the past few months, but could you explain how we got here and how people are being affected?

Damon Jones: We had the pandemic. That would be one of the root causes here. Because of the pandemic, we've had a lot of disruptions to what we call supply chains both in terms of a labor shortage or people coming to work or people finding workers to fill positions and in terms of the manufacturing change, so getting goods and inputs around the world to places where they're needed to produce goods. When you have less supply of goods and services, that's going to cause inflation to occur. More recently what we have is also the Russian war in Ukraine, that's caused a disruption in particular to oil. Those are what we call supply shocks.

They've restricted some key inputs that we need to make things, less to be supplied, so prices go up in the market when you have less supply. During the pandemic, we have policies to give people relief through stimulus checks. We gave people support through unemployment insurance. We had the Fed make it easy to borrow money, and that led some people to have more cash. The other thing that happened during the pandemic is you were buying less of what you normally would buy and people saved more because there was uncertainty and maybe they had more cash as well. That extra money also led to higher demand for goods and that's a little bit of how we got where we are.

Arun Venugopal: Let's talk about this week's consumer price index report. What are you expecting to see?

Damon Jones: A lot of signs are beginning to show that the inflation may be coming down some. The consumer price index is going to be measuring things that are happening with a lag, so things that have just happened previously or not currently today, but I think we are seeing a lot of signs that some of the inflation is slowing down, and hopefully, that'll show up in a consumer price index. It may not yet, but some early indicators are showing that some of our costs may be coming down or slowing down in terms of inflation.

Arun Venugopal: All right, so to combat rising prices, the Fed raised interest rates. What exactly does that do?

Damon Jones: That can have a couple of effects. It can make people spend less money now, and because interest rates are higher, you may want to save more and do less spending now. That can cool off the economy because you have less spending that might cause businesses to have less demand for their goods and that is one of the things that can maybe cool off the economy, but also makes it potentially more expensive for businesses to invest or expand their operations. That also feeds into slowing down the economy.

One of the effects could be that slows down things and brings down inflation. If it happens too quickly, it can also cause things to slow down into what we call a recession, and the other thing it does is it makes people maybe a little less concerned that there will be inflation down the road, and that's another way that it might help to slow down inflation.

Arun Venugopal: Now, on Friday, we saw a pretty strong jobs report. What does the labor market look like right now, and how could these higher interest rates affect the labor market?

Damon Jones: The traditional measures have shown a pretty strong recovery if you look at things like unemployment. Unemployment is very low and we continue to add jobs with these jobs reports, and so if you look over the entire recovery from the start of the pandemic, that labor market part has recovered pretty strongly. Wages are slowing down a little, but unemployment continues to be low, jobs continue to be added. Those numbers so far are not the concerning part of the economic indicators that we're seeing.

The Fed and their raising of interest rates, because of those other factors that I mentioned, that could slow down the economy and that could lead to a higher unemployment rate as we take the pedal off the heating up of the economy, but we haven't seen that so far.

Arun Venugopal: One of the most consequential ways in which higher interest rates can affect average Americans is whether or not they can get a mortgage, buy a home. Are these interest rates now that they're going up this much, does that signify that we're going to see a lot less home buying in the coming years?

Damon Jones: When the Fed raises interest rates, that feeds into the rate at which people can borrow to take out a mortgage, and so those interest rates are already starting to increase. That is going to make it a little less affordable for people to buy homes, and so that might cause the housing market to cool off some.

Arun Venugopal: Now, some economists and analysts are saying we are seeing potential signs for a recession. What kind of signs are we seeing?

Damon Jones: Our measure of our total economy, our economic output. One measure is GDP. There was a negative GDP change for the first quarter of the year. That's one of the things that people, when there are recessions, they tend to be accompanied by at least two quarters of negative GDP growth, and so some people are looking to that as a sign of the recession, but a lot of the other indicators, especially unemployment in the labor market that we just talked about, are not there yet. Right now, it would be very hard to argue that we're in a recession right now given the jobs report that we just saw.

Arun Venugopal: Higher interest rates mean that people could earn greater returns on savings accounts and the likes, right, or does that really even matter in the big scheme of things?

Damon Jones: When interest rates go up, there may be more of a return for savings, and that's one of the ways in which spending today slows down because people are a little more enticed to save because of those higher interest rates, but higher interest rates also mean that it's more expensive to borrow, and that's what feeds into things like the housing market.

Arun Venugopal: Are we seeing a lot of other countries facing higher inflation as well?

Damon Jones: Yes. We're seeing inflation pressures on, for example, countries in the European Union, and again, that part of inflation that's driven by the Russian war and Ukraine, that's having even more of bite on their pricing for fuel and feeding into the prices that they're seeing.

Arun Venugopal: Damon, is there an expected timeline that you have where you expect inflation to come down measurably?

Damon Jones: It's hard to say for sure when that would come down. This tends to be a process that could last a while. If you look at financial markets in the midterm, so within the next five years, those markets are indicating that they're expecting inflation to come back down to what we call the target level which is 2% by the Federal Reserve, and so it could take some time for inflation to slow down back to those pre-pandemic level. I couldn't give you an exact time period, but it could gradually come down into next year, it's very hard to say with a lot of precision.

Arun Venugopal: How would you say you're feeling about the economy right now, Damon, are you a glass half full or half empty kind of person?

Damon Jones: Right now, I think there's a lot of uncertainty. I think what we are seeing is that there's indications that inflation will be slowing down. The major concern a few months ago was that inflation could maybe continue to be high, could go even higher. A lot of indicators are showing maybe that could be coming back down. A lot depends on what happens with Russia and the Russian war in Ukraine. If there are additional disruptions to oil supply around the globe, that could send us back in the other direction. The other fear is that, well, inflation is no longer the issue, but now a recession is the issue.

One of our problems could be improving, but then the question is that we have what's called a soft landing, or will we overshoot and will unemployment have to come up at a significant rate. There's a lot of uncertainty right now I think is the main thing, and when there's uncertainty, that causes people to be a little hesitant to do things, which can lead to slow down in the economy on its own. The labor market and the job report continues to be reassuring, and so we can hold onto that as a positive part. Really this is just maybe unprecedented times because of the pandemic, because of this war that's disrupted supplies of fuel, and so really just a lot of uncertainty.

Arun Venugopal: Damon Jones is an economist and professor at the University of Chicago. Damon, thank you for being here.

Damon Jones: Thank you. Thanks for having me.

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