Petr Sedláček: On inflation and experience abroad
What is research like abroad compared with the Czech Republic?
Can we predict what inflation we will face next winter?
Read the first part of the interview with the macroeconomist Ing. Petr Sedláček, Ph.D., laureate of the Neuron Awards 2021 for promising young scientists in the social sciences
Part one
You received the Neuron Award in 2021. What did that honour bring you?
It was a great motivation for me; I do not often have the good fortune to win an award. It was a great honour and it was nice for my parents too, who accepted the award. The media whirl that started after the Neuron Award was pleasant as well. It was interesting for me to talk about my work with people who are not necessarily from economics. It was very unfamiliar and still is, but it is good training. I think it gave me a chance to broaden my horizons.
Could you describe one of your current projects?
One project that is nearing completion is about whether economic growth is partly driven by demand. That may sound obvious, but it is not so simple. When someone demands ever more goods, someone has to produce them. And in order to produce them at the same price, they have to be more productive. Even when there is a lot of demand, growth is still created more on the supply side. So we are trying to explain to what extent demand can create growth. We look at it from the side of accumulating customers. It turns out this is currently a major factor for a lot of companies. It is not so much about what the costs are or what the technology is, but about whether they are able to attract enough customers. We try to explain to what extent companies get incentives to innovate, to do research and development, if they accumulate customers and expect to have a larger market in which to sell their products.
"What matters is the microcosm you have around you. Having excellent colleagues around you matters far more than being at a university with a great name and enormous prestige."
You now work at the University of New South Wales in Sydney; in the past you worked at the University of Oxford, in Amsterdam and at many other universities. Do you think experience abroad is a condition for Czech scientists to do good research?
I can only speak for us economists. I think there are very good institutions in the Czech Republic. The Institute of Economic Studies of Charles University, CERGE, for instance. There are a lot of fantastic people there. From that point of view I do not see any necessity to work abroad.
Of course, once you are working at a high level you get abroad through conferences or research exchanges. Having contact with colleagues abroad is of course necessary. But I do not think it is essential to work abroad for x years. What matters is the microcosm you have around you. Having excellent colleagues around you matters far more than being at a university with a great name and enormous prestige where you meet nobody on a daily basis and have nobody to talk to about your research. So I would not divide it strictly into whether you have to go abroad or not.
Inflation — anchored expectations and uncertain forecasts
How would you explain in a few points why prices rose so sharply?
A few causes are relatively clear. Inflation began rising during the covid crisis in mid-2021. So the pandemic was an important factor. For several months people had nothing to spend money on; after restrictions were lifted demand rose, but supply could not keep up, because there were problems in certain parts of the economy — disrupted international transport, the suspension of global supply chains, factories in China closed until recently, so supply was missing in some places. Distribution networks took a very long time to recover. I know that from my own experience, when the ship with our belongings from England arrived about seven months late. That is an example of what ordinary businesses had to deal with. That is where the crisis begins. Then of course at the beginning of last year the war in Ukraine started and energy and food prices went crazy. Those are two external impulses whose consequences are now working through the economy.
You say "prices went crazy". Did prices really rise only in sectors where it was necessary, or did they also rise in panic where it was not so necessary? Was the sudden jump in fuel prices, for instance, the result of such panic?
It would be very hard to determine to what extent prices rose because of panic. I am not saying it did not happen, but it is hard to determine how much it contributed to price rises.
I think it is important to realise that as soon as impulses such as the pandemic crisis and the war in Ukraine come along, how interconnected everything in the economy is becomes more apparent. When you mention fuel prices, almost every business has them as a cost. In such a situation it is hard to say whether someone raised prices "justifiably" or "unjustifiably", too soon or too late. It is also important to realise that it is not about average costs but about the cost of supplying additional goods. I understand your question, but it is very hard to put it down to panic. To some degree it had an effect, but to what degree I do not know.
Changes are very hard to predict. If someone had told you a year and a half ago what the price of gas would be, you would have said they had gone mad. Nor can we predict a mild winter and falling prices. Everything happens with some delay, and it is clear that people are frustrated by it.
"I think it would at least be sensible to continue shifting energy consumption to alternative sources or outright to consumption that is not so energy-intensive."
On the subject of difficult forecasts, let me ask one more question — how should we prepare for the winter of 2023/24?
That is more a question for political scientists; it is not really my area. Nevertheless, if the war in Ukraine continues we will be in the same situation as this year. With the expectation that filling reserves will be harder. So I think it would at least be sensible to continue shifting energy consumption to alternative sources or outright to consumption that is not so energy-intensive.
Market prices reflect the situation of supply and demand. Changing prices is always complicated, it is never free, and an imbalance is always created somewhere. Someone has to pay for it, or it has to be determined who may consume how much. So it is "simpler" to let people decide according to prices. When the price is terribly high, people have an incentive to shift their consumption elsewhere or to start economising. Of course there is the question of how to help people for whom it makes a real hole in the budget. Then the state has to step in and help them with some support measures. But predicting these things a year ahead is really very difficult.
Should we expect even more people to end up on the edge of poverty? Can they rely on the state to "hold" them in such a situation?
That is purely a political decision. As an economist I can say roughly what will happen if the state proposes some measure, but saying what the state should do is very complicated. Of course there is a large group of people for whom the increases are a terribly great challenge. But doing something about it is a political decision. The simplest thing is to impose a price cap. That is a simple, easily comprehensible and easily implementable decision. But I am not sure it is the best solution. When you impose a price cap, people have no reason to change their behaviour. But I understand that if you do not give them a price cap you have to help those groups quickly, and that is very complicated to implement.
So it is what the Czech government has communicated too, that targeting individual vulnerable groups is very complicated and that it therefore resorts to across-the-board measures?
Yes, it is complicated. If I define group x as having an income below x thousand, the measure will not apply to groups with an income of x+10.
"From a monetary policy point of view we have the advantage of having our own independent monetary policy."
As for inflation, we are, together with Hungary, the worst off in Europe. Why is that? And is it possible that if we had adopted the euro the impact of the crisis would have been smaller here?
On the one hand I would find it hard to estimate how differently prices would have developed if the Czech Republic had had the euro before the crises. It is possible that a more integrated market would have produced a different course. On the other hand we have experienced inflation caused by things the Czech Republic has nothing to do with, and it is therefore an advantage that we have our own monetary policy. Interest rates rose more than in the eurozone. If we had the euro we would not be able to do that. At the moment, from a monetary policy point of view, we have the advantage of having our own independent monetary policy.
It is probably hard to take anything positive from these crises. But I wonder whether the current crises are teaching states and individuals some "crisis behaviour". Will we be able to apply mechanisms that proved themselves more quickly and effectively in future?
That is an interesting question. There is research showing that people who go through a crisis, or people who have lived through a period of high inflation, behave differently from those who have not. From that point of view it is possible that individually it will change certain behaviour in future. People may take a somewhat more conservative approach. But the biggest problem is still that these periods create enormous imbalance.
"The moment people or companies start thinking that in 5 years there will still be 10% inflation, prices start changing now."
Is there anything about inflation you would like to stress in closing?
One aspect that is terribly important is expectations. Inflation changes when an imbalance arises between supply and demand. That is simple economics. A complicating factor, though, is that prices are set with a view to forecasts of the future. And what companies and consumers think about that future matters enormously. Central banks call it "anchoring inflation expectations". Because we had mild inflation for several years, central banks managed to anchor expectations where they wanted them. So far it looks as though expectations are still anchored. But central banks are responding to current inflation relatively aggressively, even though it is largely created by factors they can hardly influence (energy prices, logistical problems). And they do so precisely because they fear expectations will become unanchored and that people will stop believing inflation will come back down. That is why good communication from central banks to the public and to companies also matters. The public and companies have to believe that the central bank will do its job and that inflation will come back. The moment people or companies start thinking that in 5 years there will still be 10% inflation, prices start changing now. Later that belief confirms itself — yes, prices really did rise.
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