Can political candidates actually follow through on their inflation promises? We find out

MELISSA TOWNSEND: We're talking now about inflation. Prices for things we need are going up, and for those of us who are strapped for cash, that's a real problem. According to poll data, many Minnesotans say inflation has been financially stressful for their households, and nearly half believe it will only get worse. That's according to a September poll from MPR News, the Star Tribune, and Carol Levin.

Now, since it's election season, some political candidates are campaigning on promises to curb inflation. But what can they really do here in Minnesota? That's a question. I want to ask my next guest. Akshay Rao is a professor of marketing at the University of Minnesota, and he's on the line with me now. Welcome in Minnesota Now, Professor Rao.

AKSHAY RAO: Thank you for having me, Melissa.

MELISSA TOWNSEND: Thanks for being here. Inflation has been in the headlines for months now. So at this point, can you tell us if it's getting worse or better?

AKSHAY RAO: I can tell you a couple of things that I think are pertinent to the topic. So the primary drivers of inflation are too much money chasing too few goods. So if there's lots of money in the economy and there are supply chain constraints and there's a shock to the system with a war in Europe, then you will naturally see inflation rise, particularly with increases in the price of crude oil and the resulting increase in the price of gas.

MELISSA TOWNSEND: So when you're looking at inflation, what I'm hearing you saying it's incredibly complex. We have supply chain issues. We've been talking about that a little bit on the show, and then the war in Ukraine is another issue. Tell me about the American Rescue Act. Did that have an impact on inflation? People were getting money because they couldn't go to work.

AKSHAY RAO: Right. And so the way it is currently been framed is that the government spent this huge amount of money, and that was inflationary. But remember, at the time, we were dealing with and continue to deal with a pandemic. What were the choices that we had as a society? Allow people to go into work, get sick, and die? Allow people to go into work and spread the disease to other people?

Just as an objective outside observer, I think it is a good thing to keep people away from social contact-- even if you had to pay them to do that-- so as to limit the transmission of the coronavirus. And while that turns out to have been, I think, inflationary, it's most likely saved lives.

So the trade off that we were confronted with as a society is, do we worry about inflation down the road and not spend any money and lose a couple of million more of our fellow citizens? Or should we do everything we can to save these people and worry about the inflationary impact later on?

MELISSA TOWNSEND: Let's get a little specific here. When we're looking at Minnesota, what are the items where you are seeing substantial price increases? Are there specific items that stand out?

AKSHAY RAO: Well, the typical response when you ask any consumer is grocery store items-- eggs, milk, staples, and of course, the perennial price of gas. That said, gasoline is very different in terms of consumer perceptions than grocery store items for a couple of reasons.

One is when I go to the store, I buy a basket of goods. I buy bread. I buy eggs. I buy milk. I buy a whole bunch of other things. Whereas when I go to fill up my car, I just buy gasoline. So it's that much more salient to me what that cost is. It's not hidden amongst a whole bunch of other products.

The second thing is I drive by gas stations pretty much every day, and there are two pieces of information that they're tossing in my face every time I drive by them. One is their brand name. This is a Chevron station, or this is a Holiday station. And the other is the price, and so it is easy for me to track that numerical information.

So when you talk to people, their focus on the price of gasoline is greater than the focus on other products.

MELISSA TOWNSEND: Got it. So we talk about inflation in terms of being a problem. It's certainly a problem for consumers who maybe can't afford some of these goods, but is it a good thing for businesses?

AKSHAY RAO: I knew you were going to ask me that question. It can be. As it turns out, corporate profits tend to go up in inflationary times. And what happens is if you think of a cup of coffee-- let's say the cost of the coffee beans that went into your cup of coffee were $0.40.

And because of inflation, they went up to $0.50. And you were charging $1.00, so you have the opportunity to raise your retail price from $1.00 to $1.25. And that is a lot more than the $0.10 increase that you're faced with, and that's why your profits go up.

MELISSA TOWNSEND: Right. So in times of rising inflation, you're often, you're saying, seeing companies become more profitable. That is normal to see, and that's indeed happening right now. I read companies in the US are seeing record profit margins, the widest since 1950?

AKSHAY RAO: Well, it depends on the sectors that you look at. I'd be careful about making broad generalizations. It is true that the fossil fuel industry has done quite well, particularly relative to during the height of the pandemic when people were not commuting very much, and then suddenly it was like the lid of a pressure cooker had been lifted, and people were out and about and driving and driving to work and to school and to restaurants and the like.

MELISSA TOWNSEND: Makes sense. Makes sense. We're saying that these higher prices are a problem for consumers. And yet, people are still paying for products, right? Consumer spending is not going down, and in fact, it's up. What's going on there?

AKSHAY RAO: Look at how low unemployment is and look at how wages are going up. People have money to spend, and they are surfacing from a period of frugality, fatigue. They spent a lot of time being told that the sky is falling on their heads and being afraid that the sky was falling on their heads-- legitimately, justifiably. The COVID pandemic was nothing to sneeze at.

Now, all of a sudden, there is this psychological sense of, "I think we've come out on the other side, and I've got money in my pocket. And yes, things are expensive, but you know what? I might as well buy what I can while I can."

MELISSA TOWNSEND: Is it possible-- I know you don't have a crystal ball. Is it possible that these prices may be the new normal?

AKSHAY RAO: It ultimately depends on whether consumers are willing to pay that price, right? If consumers say, "Yes, your costs went up. All right. I understand that inflation is making your lives tough, so I have to pay more for a cup of coffee," then the coffee retailer is going to make more profits.

I certainly hope not, because there are different groups of people, and some people are being affected much worse than others. And so if this becomes the new normal, we're going to see the impact of income inequality, affordability, become even worse, particularly as it gets colder, as the winter approaches.

MELISSA TOWNSEND: Now, I've seen a billboard for GOP gubernatorial candidate Scott Jensen, and it says something like, he'll stick it to inflation. What can a state lawmaker-- say, a governor-- do to lower prices?

AKSHAY RAO: My intuition is not a lot unless he or she has a magical hotline to the Federal Reserve or to the Kremlin or to OPEC and is able to jawbone those people into changing their behavior and is able to magically loosen supply chains across the world.

It's a talking point, but it has teeth. And the reason it has teeth is because voters, particularly low information voters, tend to use shortcuts in their decision making.

And it's an easy thing to do for them to say, "Yes. He's going to stick it to inflation, and the current guy didn't do a darn thing about inflation, and he's been in office for several years. And so maybe if we change horses, then our lives will change regardless of whether or not there's any policy behind the claim that I'm going to stick it to inflation."

MELISSA TOWNSEND: I know is a very nuanced and complex topic. What is it that will kick inflation?

AKSHAY RAO: Well, two things-- an increase in the supply of products and a reduction in money supply. And if those two things happen, there's less money floating around, there's more product available, then prices ought to fall.

But this is such a huge economy, and there are so many forces at play that that simple answer, even to me, sounds simplistic. There's a lot more factors that will determine it.

MELISSA TOWNSEND: Thank you, Professor.

AKSHAY RAO: OK. Bye, Melissa.

MELISSA TOWNSEND: Akshay Rao is a professor of marketing at the University of Minnesota.