Macro Updates

My interview with KXAN - Austin and inflation

KXAN-interview-Screenshot Screenshot from KXAN Interview with Mike Brandl

Here is an edited version of my interview with Taylor Girtman at KXAN on June 14, 2022.

You can watch an abbreviated view of the interview (and see what was broadcast) by following this link.

Here is the link to the interview reproduced below:

AUSTIN (KXAN) — From record gas prices to high grocery bills, inflation is hitting hard.

The consumer price index, which tracks changes in consumer prices, rose 8.6% over the last year, according to June 10 data from the U.S. Bureau of Labor Statistics. The largest increases were in the shelter, gasoline and food sectors.

KXAN spoke with Michael Brandl, an economics professor at the University of Texas at Austin, about inflation and how it may impact Austinites. Brandl's areas of interest are the global economy and financial markets.

Read our conversation below.

Q: Can you give a big-picture overview of inflation today?

A: We hear all this talk that we live in a global economy, and that is true. So what's giving us inflation in Austin, Texas, actually has a lot of its roots on the other side of the world. Because what's happening is a combination of things all went wrong, kind of at the same time, to push up oil prices, which we see in higher prices at the gasoline pump and also for things like jet fuel and diesel fuel. Part of it was the Russian invasion of Ukraine.

Part of it was also a response to COVID where a lot of the refineries just shut down because the world's use of oil fell, and so they just stopped refining oil. You can't just flip a switch with refineries—it takes a while.

It's just a convolution of a bunch of bad things happening at once that are leading to higher gasoline prices. That's where a lot of people are really feeling it. The problem is gasoline, diesel fuel and jet fuel are used by a lot of firms to transport food to our grocery stores. So we see food prices going up. It also makes summer travel, if you're gonna fly somewhere, so much more expensive.

So it's like life. When something goes wrong in life, there's usually not just one single cause to it. It's the same thing with markets in the economy. When things go wrong…there's not just one single cause. So there's not just one single solution for it.

Q: What are some of the industries we're seeing impacts in right now?

A: Usually, what happens when there's inflation is there are two industries that get hit immediately and dramatically. And that is food and energy. You see it every time you go to the grocery store—higher prices. You see when you go to the gas station, you go to fill up the gas tank.

Q: Where are we going to see inflation impacts in Austin?

A: In Austin, what we're also going to see is inflation work its way into higher prices for real estate — whether that's renting or whether that's trying to buy a new home. Because what's happening is higher fuel costs are going to be passed on to the home builders and the apartment builders. There are also various supply chain problems and bottlenecks. So it becomes this kind of snowballing effect that's really going to hit Austin, especially in the housing markets where we already have a problem in the sense that prices continue to go up and up and up.

People have put off vacation plans, and they want to want to go travel somewhere and maybe they see family. Expect not just long lines at the airport, but also expect that you're gonna be paying a lot more for those tickets. The fuel costs for the airlines go up, and they're gonna pass that along to customers in the form of higher ticket prices.

So no matter how you want to go try to see your family—whether it's flying, whether it's driving—it's going to cost you more. It's going to hit Texans hard because we drive so much. We drive a lot more than say, people up in the northeast where they have opportunities for mass transit. 

Q: Beyond Austin, what impacts might we see in Texas as a major oil state?

A: One thing that some people are thinking about and talking about: what are the long-running ramifications going to be on the energy industry? If you go back in history and look at the last time oil prices increased significantly in the '73-'74 oil supply shock and supply shock of '79, it had dramatic effects on a number of industries, including the automobile industry.

Could this oil supply shock wind up decimating the oil industry? Could this be the tipping point where people are now going to say "No, we're not going to go back to the old ways of doing things. We're not going to continue to rely on fossil fuels. Instead, we'll switch to renewable energy"? So it's very interesting to think about, not just the immediate impact, but what are the long-run impacts of this going to be?

Q: Does inflation impact urban areas differently than rural areas?

A: One of the biggest areas is transportation. People who live in rural areas still need to drive, right they need to drive to be able to get to work, they need to be able to drive to be able to get to the store a lot further than somebody living in downtown Austin, who could simply walk to the grocery store or walk to a restaurant or take a bicycle when it's not 103 degrees outside.

In addition, the Federal Reserve has increased the money supply for far too long and kept interest rates far too low for far too long. Now that's coming back to bite us.

People who live in urban areas have alternative transportation methods that a lot of people in rural areas don't. They're going to have to drive, and they are going to be impacted very, very quickly by these higher energy prices and higher oil and diesel fuel prices that may not decline.

Q: What happens next? Is there an estimated timeline of how long we'll see these impacts?

A: The answer is we don't know. And the reason why we don't know is: how are we going to get these bottlenecks in the energy industry straightened out? One answer is refining, but you just can't flip the switch and bring the refining all back. It takes a long time. It's very, very costly. Some people are saying that the high energy prices may be with us through the middle part of next year. Some people are saying it may continue for another year.

So unless what happens is there are some significant changes in how we use energy—how we get from point A to point B—these higher prices might be with us for a very long time.

If there is a solution to the war in Ukraine and if political stability returns to Europe, some other things could change to bring those energy prices down. The Federal Reserve may decide to raise interest rates in an attempt to try to reduce the overall level of spending to try to stop the knock-on effects of these higher energy prices. But that's that can be painful because those higher interest rates could slow the economy down. That's, unfortunately, the only way we've been able to stop inflation in the past.

Q: Is there something you want people to understand better about inflation?

A: This is a complex issue, and it has a lot of things that have caused this problem that had been years in the making. So be careful of people who offer "the silver bullet solution" and say "Just do this one thing, and everything will be fixed" or that there's one person that's responsible for these market outcomes. It's going to take a while to be able to work those things out and a number of things have to change before we can come to that solution.

Note: Some answers were edited for clarity and brevity.

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