Understanding Inflation: A View of the Economic Landscape

0:00:01 – Announcer:

You are listening to the National University Podcast.

0:00:10 - Kimberly King

Hello, I'm Kimberly King. Welcome to the National University Podcast, where we offer a holistic approach to student support, well-being and success - the whole human education. We put passion into practice by offering accessible, achievable higher education to lifelong learners. Today we are talking about inflation, and this may be a good time to take a business course and learn about macro versus microeconomics, what we want to have versus what we need to have, and, according to a recent article that just came out, this is about inflation. For tricks to managing inflation, consider strategically downsizing, reduce or delay certain purchases, keep investing in your future and, of course, review your budget. This again is from the National Foundation for Credit Counseling. Stay tuned to today's show.

On today's episode, we're discussing inflation and how it impacts our economy, and joining us today is Dr. Kenny Roberts. His educational background includes a variety of economics, finance, management and business disciplines. Both his undergraduate and graduate degrees focus on economics and finance, and he went on to earn a PhD in finance and management. His work experience includes working in the federal government, academia and Fortune 500 environments. He served as a lecturer, assistant professor and associate professor with the federal government, as well as the academic program director for his program, the Bachelor of Business Administration. His research and teaching experience led to post-doctoral studies and being selected as a national researcher, plus answering requests for consultation with Fortune 500 firms. Today he spends his time serving as the academic program director for national university, with a focus on finance, economics, business administration management, business risk management and web-based technologies. Wow, this is somebody you want on your team for sure. We welcome Dr. Kenny Roberts to the podcast. How are you?

0:02:16 - Doctor Kenny Roberts

Doing great. Thanks so much for having me, Kimberly. I really appreciate it and looking forward to talking to you guys about some questions about the economy today.

0:02:25 - Kimberly King

Oh boy, we have a lot to talk about, don't we? Why don't you fill our audience a little bit in on your mission and your work before we get to today's show topic?

0:02:34 - Doctor Kenny Roberts

Yeah, so my background is primarily one of both economics and finance and I like educating people on and doing what I can to help people understand, because a lot of times there's a lot of misunderstandings about what finance is and how the economy impacts our day to day lives, and sometimes there's just a misunderstanding of how these things work just because they are complex topics.

But once you start to unpack them a little bit and understand them a little bit more completely, they begin to make sense and kind of realize that oh okay, it's actually not that complicated and I understand that. I enjoy helping people come to that understanding and help doing what I can play a small role in that and that way, because there are different ways of looking at these things in different perspectives, and I try to help people come to a better understanding of these, without any biases or anything like that, so they can come to their own conclusion. Because I think that's the most important thing is to be able to discern these topics and then come to your own conclusion on where your perspective falls on that. So that's what I enjoy doing and that's kind of my mission and role, I think.

0:03:44 - Kimberly King

Excellent. Well, today we are talking about the inflation and how that relates to the state of our economy. Today, again, a lot to talk about. So, Dr. Roberts, what is inflation?

0:03:55 - Doctor Kenny Roberts

Yeah. So I'll start first with the textbook definition of what inflation is and then we'll kind of put it in more what some may call layman's terms or the average everyday non-econ student term. So, technically, inflation is defined as the reduction in consumer spending power. So what does that mean? Basically, in simple terms, it's the rise in the cost of stuff that we buy, whether it's things that we need for luxury or actual needs, you know but the rise in the cost of both things, and what we have to have and what we want to have. And so, as the price of things go up but wages and earnings don't go up, that is, simply put, what inflation actually is.

0:04:45 - Kimberly King

Okay, I love that. Would you say what you want to have and what we should? What did you say?

0:04:50 - Doctor Kenny Roberts

What we want to have, what we want to, things that we want to have and things that we need to have. So food, shelter, clothing - those are obviously all needs, but also the rise in the price of, you know, things that we want to have.

0:05:00 - Kimberly King

So I love it and it is so true. And if we can teach our kids that at a younger age, right, right. What impact will inflation have on the average citizen?

0:05:12 - Doctor Kenny Roberts

Yeah. So that's one that I try to spend time talking to people about, because a lot of times we have this tendency to think oh well, you know we see these new stories about, you know, inflation and all of these things happening. But we can sometimes have a tendency I'm guilty of this myself at some point. You know what is? This isn't going to impact me, this is only going to impact other people. But in the grand scheme of things, it actually will impact all of us in some way, shape or form. So the way that it impacts, I'd say, the majority of individuals is.

I know I wrote a new story a few weeks ago about the cost of eggs going up significantly, I think. Depending on where you lived, it went up more than others, but I think across the country there was a three or four week spurt there where eggs went from $2 for a dozen and got all the way up to $10, $15. And that's a very niche example of how this can affect us. But you start thinking if the price of everything goes up we talked earlier about needs and wants but if the price of the majority of food items start rising significantly, or the price of gas, that's another one that we can all usually relate to.

Even if we take public transportation, it still impacts us because now the price for whatever public transportation modality we take goes up as well. So the way that it impacts most people is we spend more on the things that we have to have those needs and then we have less money left over for the things that we want to have and econ and finance. We call that money left over for the things that we want to have. We call that discretionary income. So we're left with less discretionary income the more inflation goes up, and if it goes up significantly enough to the point where it gets out of hand, we might not even have enough money for the things that we have to have like food, shelter, clothing and things like that. So that's how it impacts the average American citizen.

0:07:07 - Kimberly King

Let me ask you a little bit about what categories do not get factored into this inflation number.

0:07:16 - Doctor Kenny Roberts

Yeah, so good question. There's a bunch of different types of inflation. Without getting too into the weeds about it, you've got core inflation, you've got the CPI number. There's a bunch of just like you might have different brands, like Nike and Reebok and things like that. You've also got different versions, if you will, of inflation. So it really depends on which version of it that you're looking at. So it depends, but the most common number that is referred to is the CPI, the Consumer Price Index, and what that tracks is it tracks an average bundle of goods that the average American consumer purchases and it basically what it does is it buys those goods today and then it buys them again in six months and then it tracks the change in price and then it's basically just a simple percent change formula. It tracks the percentage change from day one to six months later and then it comes up with the number that you have for inflation.

0:08:23 - Kimberly King

Okay, so is solving inflation a political issue, or is it something that both parties agree on?

0:08:30 - Doctor Kenny Roberts

Yeah, so it's actually both. There are, as you would imagine, there's different political parties, and each political party has their own idea on how we can solve inflation. Now there's mutual ground in that they will both agree that high inflation is not good. High sustained inflation is not good for the economy long term. But where there is disagreement is okay. Well, how do we get that number lower? How do we get to low inflation? Is it with government intervention? Is it through free market economics and letting the market correct itself? And that's where we get into the disagreements on how it should materialize. How do we get inflation down? What do we do? Do we do you know? And that's where it becomes more of a political issue.

0:09:26 - Kimberly King

Yeah, there's a lot of that discussion happening right now, along with are we or are we not for heading into recession?

0:09:36 - Doctor Kenny Roberts

Yeah, so there's actually much. You wouldn't think that there's much debate about that, but everything's become very politicized lately. So there's actually some debate on whether or not we are heading for, or are already in, a recession, and basically a recession again. Economics 101, or recession, is defined as six months or longer of a business cycle contraction, basically meaning the economy shrinking for more than six months. All right, and recessions and periods of expansion in the economy are all normal. You know, the economy ebbs and flows just like the tide in the ocean, so to a certain extent it's normal, but we don't want to have a prolonged period of economic decline, and that prolonged period is defined as six months or greater, and that's what we call recession.

So, depending on how you measure a recession, which is typically GDP gross domestic product, which is basically a way of tracking how much is spent, for lack of better time and trying to keep things very simple, there's a lot of data to suggest and support that we are currently in a recession currently, but it's. It's a recession unlike what we've felt before, and a lot of times we look back to 2007, 2008. What was the great recession? And we think all recessions are like that and they're not. That's why it was called the great recession is. It was a very significant, very prolonged, very pronounced recession. So a lot of times we have a tendency, myself included, to look to that as the benchmark for what a recession is not a very significant and severe recession.

0:11:23 - Kimberly King

So We'll go back to inflation for just a minute. How does the rising interest rates help inflation?

0:11:32 - Doctor Kenny Roberts

Right. So the, so the Federal Reserve, and will, I suspect we'll talk more about them and a little while the Federal Reserve it has, over the last I'd say about a year and a half, maybe 18 months or so, has been on a track of reducing or, I'm sorry, not reducing raising interest rates in order to reduce inflation. That's the goal is to try to cut inflation down. So they've been raising rates. That is supposed to slow the economy, which in theory would then lessen the amount of spending, which would then hopefully reduce the amount of rise in cost of goods that we have. So by raising rates, the Federal Reserve is trying to slow the economy down in order to lower inflation. That's the goal that they're trying to fulfill.

0:12:23 - Kimberly King

Okay, so does it. Does a recession mean we'll all be making less money?

0:12:30 - Doctor Kenny Roberts

It depends on what a recession normally means. A lot of times you'll have employers may cut back on the amount of jobs that they are providing, so you may experience job loss, so in that instance, you would certainly be making less money. There is also a possibility, depending on what sector you find yourself in in terms of employment, that you might also be making more money. Recession affects different people differently, but again, we're talking more broad picture with the macro economy. So as a whole, on average, yes, unfortunately, a recession would likely mean that you would be making less money or that the price for other things might be going up. At the end of the day, what it most likely means that you will have less discretionary income, that money left over to spend on the things that you want to spend.

0:13:28 - Kimberly King

Wow, okay, that's a good answer. It's true we're all in different areas, but I guess we have to make sure that we are Earring up for something possibly right and just right. Let's ask about the stock markets and the economy.

0:13:42 - Doctor Kenny Roberts

Are they fixed to one another? Yes, that's a great question. So to a very large extent, yes, they are, but also in a sense, no, they're not. So it's. It's kind of one of those gray areas. Again, the economy as a whole, like we're saying right now, the economy, I said earlier, there's data to suggest that we are currently in recession, but we see the stock market soaring to new recent highs for the year. So a lot of times there can be a disconnect there and that's what.

That's what's confusing for a lot of people.

And it's confusing for a lot of people actually in the industry as well, because it would make logical sense that if the economy is doing poorly, that the stock market would also be doing poorly. But depending on what sector in the stock market you're looking at, it could possibly not be as accurate. And then, in addition to that, when you say the stock market, there's all different sectors of the quote unquote stock market and you know you've got the NASDAQ, you've got the Dow, you've got the Russell. All of these are different indices within the stock market that track different industries and that's a really fancy way of saying Each one has different types of businesses and it, like the NASDAQ, has more technical and you know, like technological companies and things like that, like Amazon, Apple, Netflix and things like that, whereas others know the Dow has more industrial type jobs. But so they are fixed but at the same time they're not and it is possible, even perhaps common, to see them diverge in the economy being a recession but also see the stock market doing quite well.

0:15:28 - Kimberly King

Okay, this is great information. We have to take a quick break, so more in just a moment with Dr Kenny Roberts. Stay with us, we'll be right back. And now back to our interview with Dr Kenny Roberts, and we're discussing whether or not we're heading into a recession and the current state of the economy. A lot to talk about, and it's been very interesting. So, Dr. Roberts, does the state of the economy have an impact on my retirement account?

0:15:55 - Doctor Kenny Roberts

Yeah, so great question and one of the things that we just talked about with regard to the economy and its alignment or for potential disalignment, if you will, for lack of a better term to the stock market.

I mean it absolutely does, and I think that question with regard to whether or not the economy has an impact on one's retirement account obviously first and foremost hinges on what your retirement horizon is.

So if you have, if an individual has 30 or 40 years before they plan to retire, I would say the impact is, in the grand scheme of things, very little and, as someone from the financial industry, I would say that's an opportunity going forward, if you have an economic downturn, to perhaps, if you have the ability to do so, to maybe lean in and invest a little bit more into your retirement account, whereas if you're someone that is five years or less outside of retirement, you might want to if you don't already have it in more traditional or not traditional, like that's the wrong word to use. But if you, if you're five years out of retirement, put into sectors that are lower risk, that way it's not as adversely affected, because there is a very real possibility, if we have an economic downturn, for retirement accounts to be affected because, depending on what sector they track they could track the stock market, the bond market, individual company shares of stock there's a very real possibility that that can have a negative effect on one's retirement account. So the key takeaway there, I think, is just be cognizant of where you are in terms of your plan for retirement with regard to time and then make decisions based on that. If we, if there's an economic downturn on the horizon that is expected, or if we're currently in the middle of one, good advice.

0:17:58 - Kimberly King

What is the Federal Reserve? We've talked a little bit about it, but what does it do?

0:18:02 - Doctor Kenny Roberts

Yeah, so the Federal Reserve is the central bank for the United States and they're oftentimes referred to as just the Fed. So if you hear me in this interview talk about the Fed, we're really just kind of shorthand, if you will, for the Federal Reserve. But what the Fed does in terms of the, the Fed does a lot of things, let me say that. But in terms of economic impact and financial markets impact, the thing that they do that is most impactful is they control interest rates and they control the amount of reserves that banks must have on hand. Those are the two most important things that the Fed does with regard to the economy. Okay, you must see. The basic one of those will focus on a little bit more during our interview today, and that's going to be the interest rates, because that's what's almost always in the news in the feds.

They have a quarterly meeting in which they discuss whether or not they are going to raise, lower or keep interest rates the same. So that's the most important thing they do, and for the last 18 months they've been on a cycle of raising interest rates. And I will also point out one other thing that the fed Is this getting a little bit more into econ 101 territory. But the Fed is what we call institutionally independent, which means that they are not elected officials. They are appointed by elected officials, but they themselves are not elected officials, in order to try to insulate them From politics. Now we know that that's not going to be 100% Possible, but it does help that they are not directly elected themselves.

0:19:47 - Kimberly King

So well, there is that, but, yeah, interesting. So thank you for talking about that and how there really are in charge of those interest rates. What would I read? News articles about the Fed being hawkish or dovish. What does that mean?

0:20:04 - Doctor Kenny Roberts

Right, right, right, so okay. So, like I said a moment ago, the Fed meets to either raise or lower interest rates. All right, On one hand, you have raising rates, that would be referred to as hawkish. On the other hand, if they are going to lower interest rates, that would be looked at as dovish. Okay, so basically, if you have a hawkish Fed which is what we've had for the last 18 months you have a Federal Reserve that is keen on raising rates or slowing the economy. Okay, if you have a dovish Fed, you have a federal reserve that is keen on either keeping interest rates the same or lowering them in order to stimulate the economy. Okay. Now, I don't necessarily know how we came to these terms and these slang terms to refer to these. That's a conversation for another day. We could get into that, but it's neither here nor there. But that is what those terms mean, if you do hear them in the news. So hawkish, slowing the economy. Dovish, trying to stimulate the economy.

0:21:08 - Kimberly King

Okay, thank you. That makes it easy to understand now. How did the policy decisions of the Fed impact our lives?

0:21:16 - Doctor Kenny Roberts

Yeah, so they, like I said, the biggest policy decision they make that impacts our lives on a day to day basis is the raising or lowering of rates, and that oftentimes confuses people. They're like what, what rate? What they're, what they're adjusting, is what we call the prime rate. In econ 101 land we call that the federal funds rate. That's basically the rate at which banks lend to one another overnight, which is the prime rate.

All right, the way, the reason the prime rate or the way that the prime rate affects us, is, say that I want to go get a loan for a car. Okay, and you know my credit score is, you know whatever it is, and they deem that I'm average risk to extend financing on a car.

So they'll take the fed funds rate, what we call the prime rate. They'll add in whatever risk features they deem me as being a risk whether on high risk, low risk, medium risk and they'll add that percentage rate to the prime rate. And that's how I get my car loan rate right. And this this applies to credit cards, this applies to personal loans, this applies to home loans, this applies to all loans. So when the Fed raises rates, that impacts us all, because now we're paying more to take out a loan, which then guess what slows the economy, because people see that and they're like, oh now I might not be able to borrow as much because the interest rate just went up, so I can afford less, so I'm going to spend less. And that's how the Fed raising rates or at least that's how it's supposed to be that the Fed raising rates is supposed to slow the economy.

0:23:02 - Kimberly King

So my son just bought his first house year ago and we've obviously been watching the interest rates. What talk to me about the housing market and where we're going now?

0:23:12 - Doctor Kenny Roberts

Yeah. So the housing market takes a lot of cues off what the federal reserve does with regard to interest rates, and anyone that's bought a house within the last, I'd say, 10 or 15 years has known that. And we're still in a period, even now, of historically low interest rates. Even though the Fed has been raising rates for a year and a half, we still have historically low interest rates. So the way that this impacts the housing market is obviously, if interest rates are low, you can afford more house, meaning you can afford a bigger house, you can have more people that would have previously not been able to afford a house. So it increases and stimulates the housing market when rates are low.

Now, even though we still have historically low rates, we've gone from, you know, where you could get a 30 year fixed mortgage at 4, to now you're looking at maybe six and a half percent, maybe seven percent, even though that is still, especially if you go back to the 1970s and 1980s. You know, you know someone break their arm to get a mortgage for that percentage rate. But today, you know we've been, we've become accustomed to getting a sub 5 percent mortgage for 10 years. Now that it's, you know, creeped back over six, maybe even seven percent. People are a little bit more hesitant to buy a house. That also means new home, new home purchases and building has slowed, then that slows. It's a domino effect. So when the housing market slows, the rest of the economy slows, because there's a lot of industries that are tied to the housing market.

0:24:44 - Kimberly King

So that's a really very good point, it's true. All of a sudden, you think everything comes up. So, uh, yeah, it is, it's hard to turn around. But, um, what kind? What do we do to learn more about the macroeconomy?

0:25:02 - Doctor Kenny Roberts

Yeah, one of the um, one of the things that you can do is take a course, some of the courses that we teach at National university. We have macroeconomics, we have microeconomics. A lot of what we've been talking about today is definitely much more on the macro side. However, that doesn't mean that microeconomics is not beneficial or worthwhile, but it's just- The majority of what we've been talking about today is macroeconomics and I would say the first thing I would recommend someone to do, especially if they don't have a, if they don't have a background in business or anything like that consider taking a class.

Even if you're a non-degree seeking student, you can go take a single class and learn a lot more about it. It helps with all walks of life. It helps you from a financial literacy perspective, helps you if you're a business owner or an entrepreneur. Just having knowledge of these things helps out quite a bit. So, if that's not in the cards for you, I'd say you know, just be careful of what media you consume, because there's options out there for you know, YouTube and all sorts of great resources out there that you can, you know, educate yourself about and things like that, so that's an option as well.

0:26:14 - Kimberly King

Great, great advice. I remember my dad actually, back in the day, didn't have a college degree but ended up taking some courses in business and he had a very successful business just after learning the macro, macroeconomics and all so good, good advice. How, how can a better understanding of the state of the economy help?

0:26:33 - Doctor Kenny Roberts

Yeah. So kind of what we just talked about with the last question as well. When you understand these things better, you understand the cause and effect relationship between them and then you can have better planning in place and you say, okay, well, I know it's a possibility that the economy could go into a recession. If you're a business owner, for example, if that were to happen, what would be the likely chain of events and what could I do as a business owner in order to prepare for that, for that worst-case scenario, what could I do? And it allows you to have better business planning. It allows you to better understand how these events kind of work together and just having a a better and a more expanded knowledge so you can make better decision making in the here and now, in the present as well, as well as planning for the future.

0:27:29 - Kimberly King

So and that kind of really leads me to my last question, and that is what? How do we prepare during this economic downturn? Do you have any tips for us?

0:27:40 - Doctor Kenny Roberts

Yeah, I would say, um, yeah. So just you know, minimizing debt is always first and foremost. If you can afford to do that, that's always great. Um, it's definitely going to help, because if you have less discretionary income or if you have reduced wages coming in, if you have less of a debt burden, it's going to be able to free you up to meet those obligations and things like that. Spend less, save more. That's the easy way.

0:28:07 - Kimberly King

I mean, it's easier said than done but, yeah, right, but good advice all the same. Well, this has been excellent and really a lot of things to think about as we head toward different times in this world. Now, right, so, but we thank you for your time and if you want more information, you can always visit the National University website, and that is nu.edu. And thank you so much for your time, Dr. Roberts. We look forward to your next visit.

0:28:32 - Doctor Kenny Roberts

Thanks so much.

0:28:35 - Kimberly King

You've been listening to the National University podcast. For updates on future or past guests, visit us at nu.edu. You can also follow us on social media. Thanks for listening.