Inflation Blues
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Welcome to Inside Economics. I'm Mark Sandy, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Chris DeReedes and Marissa DiNatale. Hi, guys. Hey, Mark. Hey, Mark. And we got Matt Collier. Matt, good to see you. You too, Mark. Chris, Marissa. Matt. Matt's always here because this is Inflation Week. We got the Consumer Price Index, the Producer Price Index. We got the Consumer Price Index.

All that adds up to telling us what the consumer expenditure deflator, we'll get into that. But, you know, when it's inflation week, we've got Matt. Matt's all thing inflation. So talk about that. Might play the game here a little bit. But I guess before we dive in, though, we have to acknowledge the Eagles' victory in the Super Bowl, no? Absolutely. Yeah. So you're going to go to the parade tomorrow? What about you, Matt? The parade. The parade?

I hate to admit it, but no, I'm not going, which is like pretty wild to think about. But there's already been one. Like growing up, the idea of missing an Eagles Super Bowl parade is insane. But logistics, I don't know. Pretty tough. Life has changed for you. Life has changed. Yeah. Traffic, the kind of things you think about, I guess. You've grown up, Matt. I know. It is. Yeah. You're getting old. I feel old sometimes.

Yeah. Chris, you're not going? I know you- I was not aware of a parade. That is hard to fathom. Is that true? That's true. You're not paying attention to the- I'm not paying attention. Wow. Did you watch the Super Bowl, Chris? What's that? You watched the Super Bowl? Are you putting me on this? I did watch and then-

I didn't watch all of it. I fell asleep. Well, I'll have to say if you're not an Eagles fan, that game must've been pretty boring. Right. I mean, yeah. Cause it was never close. It was never for an Eagles fan. That was like, couldn't have been better. There was no, there was always tension. I always kept thinking they'd come back, that the Kansas city chiefs would come back, but yeah,

We were leading by so much the whole way. So it was really, really pretty cool. It was exciting. Yeah, pretty cool. And they got a good team. Anyway, we're not here to talk about the Eagles. We're here to talk about the economy and inflation. Matt, do you want to give us the rundown on the CPI?

consumer price index? Yeah, for sure. In a word, bad. Not a great report. The January consumer price index came out Wednesday and the headline CPI, so the basket of goods that the government produces, puts together to estimate the price index of the things we spend our money on rose 0.5%.

from December to January. That's above expectations of 0.3%. So not a small miss. That's strong. That lifted the year ago rate from 2.9% in December to 3% in January. Fastest monthly increase since August of 2023. It's also now four months in a row that year over year rate has ticked up. Not the kind of, certainly what I didn't expect.

I think we'll touch on the underlying components and what's going on there. Right off the bat, there's some discussion about seasonal adjustment factors. We can get technical there, whether some measurement issues were driving this inflated increase in January. I think there's a story there, probably less so for this figure than Core CPI, which we'll get to.

But yeah, all in all, bad report. We can put some optimistic spin on it, but it's not what anybody wanted to see. So what you're saying is that usually when you see a report, an economic report that's kind of out of bounds compared to expectations, and expectations are based on some pretty hard work. I know you dig deep into the

bowels of all kinds of economic statistics to get a sense of what is going to happen with the CPI. You break it down by component, you use car prices, new car prices, medical care inflation. I mean, you're really digging deep and for us, for us to miss and for everyone else to miss by this much is doesn't, it happens. You know, there's, there's times when that happens, but it's unusual. Yeah.

Usually when it happens, it's because there's some kind of measurement problem. And one intuitive measurement potential issue is that this is January. In January, businesses raise prices typically for the year, many of them. And of course, the BLS, the Bureau of Labor Statistics, knows this and tries to adjust for it. It's called seasonal adjustment.

But in the wake of the pandemic, because that scrambled the economy throughout the year, those seasonal adjustments are much more difficult to do. And it could be that this go around, they just got the seasonal adjustment right. So January is bad, as you say, but it's bad because of measurement issues. And if it's because of measurement issues, particularly seasonal adjustment,

That's not that that doesn't suggest anything about the future. If anything, it means we'll get a report down the road here or two where it surprises on the good side of things because it all balances out. But you're saying what I think you're saying is no. Maybe if you stretch it, you can see a little bit of what they call residual seasonality. But, you know, it's a stretch.

Yeah, I would talk to that a little bit. I think there's something there, but it didn't make an okay report a bad report or a good report a bad report. It's a bad report and that residual seasonality is on the margins and wouldn't really change anybody's perspective if it were not the case. So on the face of it's bad, with making this adjustment for the measurement issues, the residual seasonality that we're calling it, is it still bad or is it

Okay. Or how would you characterize it? I would still characterize it bad just based off of the kind of array of underlying components being- Different shades of bad. It's just not the dark shade. It's a light brown shade of bad. That works. Yeah. Okay. That works for you, Chris? That description? I don't know. I'd like to... Well, now my interest is speak. So where do we miss? What did the market miss? What were the components that-

we're all stronger than expected used vehicles i think used vehicles is interesting for a lot of different reasons um but if you want to make the residual seasonality case that behavior has changed in the wake of the pandemic whether that's permanent or whether that's just a near-term behavioral shift uh that seasonal factors of previous years

aren't catching i think we'll we can see some of that in the automotive market i think that's the strongest case so used vehicle prices jumped two percent i have that right maybe it's 2.2 they jumped in january and that's strong and there's a lot of yeah there's some kind of

maybe some strong demand getting ahead of tariffs before vehicle prices start to rise. That's again an idiosyncratic effect now that is happening this January that seasonal factors wouldn't capture from last January or January before that. So there is some behavior, there's an argument there. But about hurricanes or wildfires or? The BLS say that what was going on in California wasn't a dramatic or it didn't have any kind of meaningful impact.

I don't know how much confidence I can say that with. I think there's a good argument that cars are destroyed. People have to go buy cars. That's a run up in demand, upward price pressures. Probably is some of that going on, but I haven't seen anything that's particularly conclusive or points to that as why the vehicle market was rising.

Talking to our resident guru in the automotive market, Mike Brisson, he's persuaded me that it's more of the getting ahead of tariffs. Dealers know that. Dealers have some interesting things that they're doing and big drop in incentives this month, which is what dealers do or are able to do when they feel demand is strong. So what you're saying is

is people are out buying cars in anticipation of tariffs. They want to get a car before the tariffs. And the dealers know this, therefore they're pushing up the price? And they don't have to offer as much incentives? That's pushing up the price. Right. Yeah. That's fascinating. That's fascinating. Wouldn't that be more on the new vehicle market than the used fuel? If people are trying to get ahead of tariffs, they'd be buying new...

that would apply to new cars, unless it's a downstream effect where inventory for new cars is being... Now, that argument, which was like a very intuitive first step that I'm thinking is, well, according to Mike, is what's happening is there's kind of a compositional shift, which is these higher model new cars aren't actually what's being sold. Dealers are holding on to them. They're more profitable. And instead, it's the lower like

I'm going to really struggle to come up with a car example from a premium model to the lesser model. There's a lot of incentive for the car dealerships that know or the

Gar dealerships know these tariffs are coming, prices are increased. They have inventory of those things before the tariffs, before tariffs are applied and prices have to rise. They hold onto them, they sell them later. Ostensibly with the tariff increase, they can apply that and kind of increase margins even more. But right now it's been a shift to selling

lower models, cheaper models. So newer vehicle prices, if you look at what's actually being sold, that compositional shift is keeping new vehicle prices relatively flat in the way that the BLS measures them. That's slightly conjecture from Mike. I'm laughing because this is mind numbing. This is mind numbing. Yeah. To be fair. You know what? Just goes to a big, a broader point. Harrah's

The effects of tariffs are so multifaceted and cross-currents and all kinds of things to consider. I mean, just think about what you're saying here, all the different effects this is having on the marketplace already. Amazing. And conjecture is, I mean, there's like a lot of inventory data that says that those lower models, even if they're new, are being sold and that's lowering the average sales price. Can I, where you going and give us any other insights

any other things that were affected by so-called residual, potentially residual season, where we missed. Just the residual seasonality, I'm going to try to explain it, but I may botch it and you can take a crack at it. But basically, the Bureau of Labor Statistics and other statistical agencies, they have this really statistical algorithm from decomposing movements in things like prices or jobs or whatever it is,

into different components, a cyclical component, a trend component, and a seasonal component. This happens every year and we account for it. So they seasonally adjust based on that kind of algorithm and calculate a seasonally adjusted series. So stripping out effectively the seasonality and leaving the trend and the cycle in the data. And you do that because you want to get to the underlying trend to get a sense of what's actually happening that's not seasonal.

But to calculate residual seasonality, you run that –

that algorithm again on the seasonally adjusted data and you see if it teases out more of a seasonal factor. There's still seasonality in the data after the BLS is seasonally adjusted. That's so-called residual seasonality. Did I get that roughly right? Yeah. That's how I would describe it for sure. Okay. Were you impressed by that, Marisa? No. Very. Okay. Yeah. Yeah.

Thank you. I appreciate it. Okay. So what else did we get surprised on? Used vehicle prices. What else? Food was a bit stronger. So food, food at home, grocery store prices. So look, 0.5% increase in January. That's not just eggs.

It's not just eggs, though. Eggs rose 15.2%, which I think is probably too obvious for somebody for the numbers game. But yeah, for the month from December to January, 15.2%. Chris threw his hands up. So that's 53%. 53% year over year.

A lot of media coverage there, outbreak of avian flu, likely everybody's come in contact with that, not the flu, but that story, driving egg. We have egg rationing lines now out here, I saw at some Costco's where you have to actually get in a line early to get eggs. And how much do you pay? You pay like, I don't know, eight bucks for a dozen eggs or something in California. Did I read that right?

Some outrageous number. Like nationwide, I think it's four bucks something for a dozen eggs. I don't know. I buy like...

expensive eggs as it is that are normally made box. So I don't even know what they are now. There's all kinds of expensive eggs. I mean, you buy the, like the premium, the primo. I buy these like organic. You know, the chicken get a small treatment before they're slaughtered kind of eggs. I got it. Got it. Okay. All right. So what else in food was a surprise other than eggs?

It was just across the board? Yeah. I looked because there's some fruit, citrus stuff going on, whether it's weather related. There was an invasive bacteria that I messed orange, citrus crops in Florida earlier or later last year. Inflation is hot there, but nothing that you can singularly point to and say, okay, it's eggs and this that are driving food prices up, kind of broad based within food. But that explains a little bit more of our myths and acceleration from December's pace.

Year over year, still relatively mild for grocery store price. Grocery prices, 1.9%, but that's ticking up. So how sticky did it- Yeah, because that was close to flat not long ago. 6, 12 months ago, it was basically flat. So it's re-accelerating. Okay. Any other product that surprised you on the upside in terms of the price increase? Energy, slightly. It was 1.1%, weaker increase than December, but a little bit stronger than we expected.

So that's not a terrible miss. Anything surprise you on the positive side? It came in.

weaker than anticipated? Healthcare? So I think there's more and more evidence. And maybe this time last year, mid 2024, it was okay, healthcare, it's slower moving, it's digesting these input cost increases, like nurses, you know, negotiating salaries in a tight labor market, all those things were going to take time. So it was a matter of how high is that year over year growth rate and healthcare inflation going to go? I think we can be confident that it's rolled over and it was 3.5, 3.6 at its highest. So we're

Medical care services was flat in the month for January. It's at 2.7% year over year, and that's two or three months now that year over year rate declining. It's a big input in the CPI, even bigger in the PCE, and inflationary pressures there look at least under control in a way more sooner or sooner than I would have anticipated.

And maybe this gets to the producer price index, the PPI. And this is, we're recording this a day early. I don't know why, why did we do it a day early? Because I'm traveling tomorrow. Oh, Oh, it's you. Eagles parade from California. Yeah. I'm flying to the Eagles parade. Okay. Got it. Got it. But this morning, was it this morning? PPI came out. Yes. Thursday morning PPI. And that's like a wholesale prices. And that,

It showed some pretty, and you showed them to me in an email, some pretty substantive declines in various types of healthcare, physicians, dental offices, hospitals. It looked like, if I got it right, pretty much across the board, some actual declines in price.

Yeah, across the board, whole PPI, producer price, healthcare related indexes that we look at, all of them were down. And if you saw the top line PPI number that came out this morning, and it was also strong, it was 0.4%. And that follows, and that's December's number was revised upward significantly, certainly surprising. Initially looking at it, it was first reaction was that this was another bad data point when it comes to inflation, but bond markets, you see,

Investors didn't have that reaction and instead felt pretty good. You saw 10-year treasury drop, the 10-year treasury yield dropped 10 points, 10 basis points. And that's about what it rose the day before and why, long-winded way of getting there for that exact reason. Those healthcare components are what bleed into the PCE deflator, the Fed's preferred inflation metric. They were all soft. So what that portends is,

Yes, the CPI was strong in January, but the inflation measure that the Fed cares the most about actually won't be so hot. This is more of a measurement difference between the two, and there's actually some good for the Fed to look at when it comes to inflation. So we have the CPI, the Consumer Price Index, bad. It's good. Bad. Yeah. The PPI, Producer Price Index, comes out today, not so bad, maybe good.

And the two of those things together go to make the consumer expenditure deflator, which we're going to get, I guess, in a week or so, which is the key inflation measure for the Fed. That's the inflation measure they target. It's got these cross currents from the CPI strong and bad and the PPI weak and good. So what is the PCE going to show? 0.3% is the forecast. And that's for both headline and core PC. So it's still pretty strong. Still pretty strong.

strong, but you'll see just based off of the base effects that year over year rate is what draws a lot of eyes. That's going to fall for both if those forecasts are right. And they usually are much more accurate because we have so much input data at the time that the PCE deflator is released. That's a decline from 2.6% to 2.4% in the headline PCE deflator and from 2.8% to 2.6% in the core PCE deflator, which is

That's what markets digest immediately. That's the kind of good news that we were expecting as these base effects that I drone on a lot about start to come into effect in 2025. Okay. So on a year over year basis, consumer expenditure inflator, the top line is going to be 0.3 on the month. And you said 2.4% year over year. And on the core, excluding food and energy, that's 0.3 on the month.

and 2.6? That's right. And of course the target is two. So, you know, we're still, you know, within, as I've been saying, and when I've said in the past, it was in spitting distance, but not quite there. Would that,

Be fair characterization? Yeah. Okay. That's right. Okay. I want to now think about the forecast, but before I do, let me just turn to you, Marissa, first, and then Chris. Anything you want to add on the inflation front, on the inflation statistics? We're going to talk about inflation expectations and the things, but in terms of the CPI, PPI, and the consumer expenditure inflator, anything you want to add or-

I think I noticed Matt, tell me if I'm wrong, that auto insurance was back up and reaccelerated again. And that was a big, something that stood out to me. I think it's up almost 12% just over the year. Some of the personal services and goods seem to be either deflating or not really inflating. I remember when we did,

I don't know when we did that webinar, Mark and Chris, like six or nine months ago about inflation. And we looked at all these different components within services and personal services were

a big part of service sector inflation back then. And that looks like it's coming in a bit more. I see a lot of negatives there, just over the month changes and even the year over year changes. And some of those things are down. Things like recreation services, subscriptions, pet care, those kinds of things look like they're coming in relative to where they were.

- You see, your first point, the insurance, I should have mentioned in my convoluted vehicle description, there was a 2% increase in motor vehicle insurance in the month. And it's like, again, it's been a hot button topic previously.

Okay, vehicle prices have largely stopped increasing after 2022. Why are insurance premiums still going? I think the argument there is noise. I think insurance premiums that inflation has rolled over, you get a big jump in January. It's come after a few months of slower growth and I think that's probably the trend. Repairs were a little bit stronger too, but I think it's the same story. So as far as personal services, that's not something I've spent a ton of time focused on that's interesting. I mean, there's really demand driven things that suggest

kind of a pullback by consumers, which is certainly interesting. Chris, anything to add? I guess point out that the housing cost growth has stabilized. We did get a little bit of a pickup in hotels. So is that a one-time, you know, goals gained type of event or is it something that would persist? I don't think so.

Yeah, the lodging away from the hotel prices is volatile. It has jumped around a bit, but perhaps the PLS is listening to the podcast because OER, the owner's equivalent rent that we don't like, they reweight everything. And that actually has a lower weight now, very, very slightly, but it is diminishing as a weighted component in the CPI in terms of its importance.

Small, but it was adjusted. So not as important moving forward. Because on the Inside Economics podcast, we are not fans of OER. Never have been, never will be. Never will. At least it's behaving like you would anticipate or close to. It's moderated. Getting better. Just in with the events we've observed. Okay. Let's talk about the forecast. And our baseline forecast, kind of in the middle of the distribution of possible outcomes, has been...

inflation would continue to moderate and ultimately get back to the Fed's target. It's taken longer than anticipated to get there, but even in our current baseline, we have it getting there by the next few months, certainly by the spring. Get from that 2.4, 2.6 on the top line core, really down to two on a year-over-year basis. I'm beginning to wonder whether that's

at all possible now, in part because these numbers are a little stickier than anticipated. But a bunch of other reasons have come to the floor, least of which is this recent increase in inflation expectations. I'm not sure how much weight to put on it, but it does feel like, to your discussion we had previously about the tariffs and the impact on people's behavior in terms of vehicle purchases,

It also feels like people are starting to anticipate higher inflation because of the tariffs, and that's starting to show up. You saw it vividly in the University of Michigan survey, and I don't know how much weight to put on it, but because it's affected by people's political prism, Republicans think something very different than the Democrats. But it feels like in some of the other surveys, the New York Fed survey, and certainly in the bond market, if you go look at inflation expectations,

in terms of what bond investors think, that has risen since it became clearer that we're going to have tariffs and some of the other policies that might lead to inflation. And if you have higher inflation expectations, or maybe better put, fragile inflation expectations, I just feel very sensitive to me, to any news or any actual increase in inflation,

that that makes it less likely that we're going to get back to that target, that it's going to be increasingly the case that those expectations are going to be embedded in people's wage demands and how businesses price and how aggressive they are in their pricing. And again, going back to that example of the vehicle industry, the dealerships are already responding to the potential tariffs and able to charge a higher price. It's already having an impact on pricing.

I don't know what you guys think. You know, my sense is in this, we haven't changed the forecast, but my sense is that we may not get back to target here.

Certainly not in the next year or two as we work through these higher tariffs and other immigration policy and other things that could potentially lead to higher inflation and higher inflation expectations. Chris, what do you think of that? Yeah, no, I certainly agree. I think the risks- You do agree. Okay. At least the risks are in that direction. If anything, inflation may come in stronger than what's penciled in our baseline.

And I think that's consistent with our kind of evolving view here in terms of the Fed and the number of potential rate cuts, right? There too, I think the risks are fewer, not more, given that all these factors that could influence inflation. There are very few that you can point to on the other side that actually would lead to more disinflation. So you would concur that when we sit down and do the forecast for March,

we may end up in a different place. We may not end up back to the Fed's target. In fact, the disinflation, the slowing in inflation that we've enjoyed now for, what, two and a half years? I mean, inflation peaked in the summer of 2022, that that is now over, at least in the near term, in the next year or so. At least in the near term. And again, there's lots of uncertainty here, of course, on the policies and whatnot. Things could happen. You could play in a scenario where

This, this inflation does accelerate, but given all the factors that we've identified in terms of policy, it's more likely than not that, yeah, it's going to be stickier inflation

What do you think, Marisa? What's your perspective on that? Yeah, I think I agree with that. I think the odds are rising that we're not going to get back there and we may not get two rate cuts this year either. I think markets are now expecting one rate cut. Is that right? Yeah. I think you have to think about, okay, well, what are the major sources of inflation now or to this point?

We're still watching shelter, and that looks good. That is one of the single largest components in the CPI. It's less of a big component in the PCE, which is what the Fed is looking at. But I think if shelter prices can continue to come in, then we can make some progress there. We have to see how much.

Much of this theory about residual seasonality is true. I mean, we'll find that out in a couple months after a couple more CPI readings, I think. You know, the thing with food is tricky because a lot of that is just being driven by various viruses and shortages and weather. And that is very difficult to predict.

So, yeah, I mean, I do think that tariffs represent the biggest threat here to getting inflation further under control.

We now have tariffs on steel and aluminum imports, broad-based. We don't know what's going to happen with Mexico and Canada. Especially with Canada has the potential to raise housing prices even more. We get a lot of Canadian lumber and other inputs, a lot of metals from Canada. So

The risks are certainly on the upside. You know, I mean, I think I think there is a greater and greater chance that we don't get back there. Yeah, it's we're we're far enough away. It seems like we were right there. And I think we're far enough away that it's possible we don't get to two percent by the end of the year. Yeah. Yeah. And on tariffs, it feels obviously a boatload of uncertainty here. I mean, who knows how the president's going to play this?

but it does feel like he's more serious about broad-based tariffs doesn't he i mean we're now today the news is around reciprocal tariffs so you know if a country has a higher tariff rate than we do then we raise our tariff to be consistent with that uh which you know our tariff rate is low so that would suggest tariffs or rates are going to go up on lots of different countries and lots of different products

here in the not too distant future. It feels like at least directionally, it goes to, if not universal tariffs, across the board tariffs, pretty clearly in that direction, doesn't it? It feels that way.

Chris, what do you think? Yeah, you agree with that? Okay. Chris, what do you think? Certainly. I don't know if the plan calls for matching lower tariffs. Is that to a extent? A country has a lower tariff. Would we match it? Oh, that's a great point. Oh, that's so... It can't be too many of that, but that's interesting. No, but I'm curious. I haven't heard anything along those lines. Oh, that's a... It took me a second to understand what you were saying. Yeah, that's pretty funny. Okay.

Well, you know, the president argues, I'm just curious how you would respond to this, that it's just fair. Look, the other countries are charging us a higher tariff. Some of them are, there's developing countries, but there's also developed economies like the Europeans. I think our effective tariff rate is 3%-ish. Theirs is, I'm making this up, but 5%-ish. So it's not Apple's, you know, it's not widely off, but it's still, you know, they're still a little bit higher tariff.

How do you respond to that logic, that argument? Or how do you think about it? That's just fair. It's just plain fair that we should have reciprocal tariffs. I mean, on the surface, it sounds somewhat logical, but there are...

It goes to the comparative advantage of the different countries. We may not be exporting or importing the same good. We're competing in different markets. I think this is right. We import more from Europe in terms of goods, but we actually export more in terms of services. What does it mean to tariff the products or the services equally? I don't see how that works.

is optimal or certainly is enhancing the trade, if you will. I think at the core there's a legitimate argument. There are vast differences in trade practices, tariff practices. There are clearly cases where it's certainly justified.

I don't know. I think those are few and far between when it comes to Europe. I think there are certainly greater grievances as we think about China and some of the imbalances there. Yeah. I mean, I think it's easy to say. It's incredibly difficult to actually measure. I mean, because there's so many different ways that countries affect and restrict trade beyond tariffs. There's

Tax subsidies. Think about the Inflation Reduction Act tax subsidies made in America. There's non-tariff trade restrictions. There's the movements in the currency. I mean, there's a gazillion different elements to the calculation of is the tariff fair or not fair? I mean, that's why we had the World Trade Organization to adjudicate those things, because that's a difficult question.

And to just to say, oh, they're 3% or 1%. By the way, as you point out, these may not be the same products at all because in all likelihood, they're not. There's all kinds of differences between the two. To say that, I mean, it's just easy to say, intuitive to many people, but I'd say a complete mess to try to implement. Complete mess. Anyway, Matt, I want to give you a shot at the question

about whether we're going to get back to target here on inflation anytime in the near future. What do you think? Luke Gromen : I wouldn't call myself a convert, but I have, the past few months I've said, "Okay, shelter's moving in the right direction. I understand goods prices are going to go up a little bit. We can live with that. It's a little bit of a mismatch on timing, but we'll get there." But I'm just surprised, just whether it's inflation expectations manifesting as higher goods prices already, to the extent that that's happening,

Yeah, I could see that I've maybe underestimated goods inflation and it's going to be a little bit more elusive to get to that 2% is going to be more elusive than I previously anticipated. I still feel relatively okay that shelter is coming down. Yeah, I think the car example is a good one. We can sell some of it in Q4 GDP data. The behavioral changes are maybe underway since the election.

Those are inflationary as a lot of the policy proposals that the campaign put out were determined to be. Right. Yeah. Just to restate a point, because I'm not sure I said it explicitly clearly enough. You've got this view that tariffs are a one-off increase in prices, just a one-off pop to inflation. The tariff goes into place.

It gets into the retail. The retailer jacks up the price of the product to compensate for the tariff. The consumer pays it, and that's the end of the story. That may be the case back in 2018-19, and it wasn't.

because I think there was some pass-through, but more so back then, because inflation expectations were very, very different than they are today. If you go back then, no one even... What is inflation exactly? No one even knew what that meant, because inflation had been so low for so long, well below the Federal Reserve's target. It was suboptimal. The Fed had been fighting for... Well, since the financial crisis to get inflation back up, inflation expectations were...

dead as a doornail. They were just, they're not, you know, people didn't react. This go around, it just feels like inflate people's, you know, they're, they're Uber sensitive to inflation. Any sign the price is going up for anything.

you know, their inflation expectations are jumping and they're going to ask for higher wages and businesses are going to jack up prices because their expectations are rising that they're going to have to pay more for everything. So if you're in that kind of a world, a world with more sensitive and higher inflation expectations, you get more pass-through. You know, you get more pass-through. And here's the other thing. If you have tariffs that are very narrow, like the tariffs that President Trump imposed in his first term on China,

you know, that's one thing. But if you impose it across lots of different countries and products, that's a totally, you know, different thing in terms of, you know, what it means for retaliation, what it means for business investment decisions and hiring decisions. It's a whole different ballgame, I think, in terms of inflation. So this argument that

you know, this is one off. I don't, I, you know, maybe, but I'm increasingly of the mind that, you know, that's not going to be the case here. This is going to, this could potentially set off,

you know, a chain of reactions that means that inflation is going to be, you know, higher and more sustained as a result of the tariffs. Does that resonate? Marissa, does that resonate with that argument? Resonate with you? Yeah, I think it's totally different from his first term. I think we're in a different environment and the tariffs seem to be way more broad based than they were back then when they were very specific. Yeah, I... Okay. Okay.

I agree. Are you going to change the forecast? Are you thinking about changing the outlook for the Fed, what the Fed's going to do? We have two cuts toward the end of the year. Are you sticking with that? Well, I'm very close to concluding that we need to raise our inflation forecast here because it's

Even we've been we have assumed some significant increase in tariffs in twenty twenty five. But I'm beginning to think that this this may end up being more of a problem in terms of inflation. Not not percentage points difference, but tens of basis point different. But I'm not. There's also going to be growth effects. This is going to hurt the economy.

And that's going to show up by the end of the year, I think, in manufacturing, in agriculture, transportation distribution, retailing. It's going to show up. And so you're going to get towards the end of the year and the Fed's going to say, oh, this doesn't feel very good. But I think the growth effects...

And I haven't made up my mind. I'm just talking, thinking out loud that the growth effects by the end of the year will still outweigh the inflation effects. Even though inflation is higher, the growth effects will still be more pronounced.

than and when the day and the Fed still begins to cut interest rates. And I still am of the mind that the so-called equilibrium rate, we talked about this a couple of podcasts ago, the kind of the R star, the rate, the federal funds rate, the rate the Fed controls that's neither supporting or restraining economic growth is elevated, but it is coming in and will be meaningfully lower than

uh, by the end of the year. So giving the Fed more room to ease. So I'm not, I, I'm, I'm much more confident in inflation is going to be higher, uh, than what we have in the baseline, but I'm not nearly as confident with regard to a shift in, in Fed policy, you know, at this point. Um,

And that gets to another set of concerns around inflation, and that is the economy's potential growth rate, which goes to the equilibrium rate, is slowing. It's going to slow, right? I mean, we've had this very kind of exceptional period over the last couple, three years where the economy's potential growth, that rate of growth, which is consistent with stable unemployment and inflation,

has accelerated. And that goes to labor force growth, that goes to all the immigration that has come into the country, immigrants that come into the country. That has put a lot of pressure on communities across the board. But one of the benefits of that is it's increased labor supply and employment. Those immigrants that came, many of them, most of them applied for work authorization. They got it within nine, 12 months and they went to work. And that took a

And of course, you had a surge, might be too strong a word, but a strong period of productivity growth for lots of different reasons we've discussed. So when you're in that environment of strong potential growth, that really eases the pressure on inflation. And that's been really critical to the disinflation that we've enjoyed. So if you buy into that story,

Then you think, oh, oh, no, the economy's potential growth rate is kind of slow here. It already is. You know, we can see it in the immigration statistics. There's a lot fewer immigrants coming across the border and there will be a lot fewer than that in the not too distant future given immigration policy.

And that's going to hurt labor supply and potential growth. And then productivity growth is also slowing because some of the reasons behind the pickup last year or two are proving to be temporary. And so the economy's potential growth rate is coming back in. And that creates an environment where you can't grow as much without generating inflationary pressures when you're in a full employment economy. I just said a boatload right there. Chris, what do you think?

uh makes the framework makes sense now will ai pay off here and we'll get some productivity gains not in the next six months i don't think no yeah is that is that your hope you're hoping you're pulling out the ai rabbit technology well the productivity has to come from somewhere right so you got some small businesses so small business formations were still high last year so you know that could you see i put chris in a very awkward position because he's a

Oh, you're the productivity bull. Yes. Oh, so you're defending your productivity story. I got it. Got it. Yeah. But is it enough, even if the productivity growth accelerates a bit, is that enough to offset the...

the labor force drag that you're talking about. That's a legitimate question. And you can be a productivity bull longer run, but in the near term- Yeah, yeah, exactly. And I am, right? So yeah. I mean, it is slowing. We've seen it in the last few years. And we have been arguing one reason for the pickup in productivity growth back a year, two or three ago was

all the folks that quit and took on other jobs that were better suited to their skills. And that's a one-time pop that goes away. And it feels like we're on the other side of that pop right now. Right. So you could have a lull in productivity growth, even though you could be like, I am a productivity bull longer run AI. Okay. Yeah. Okay. All right. But you see, you get my, my point here though, right? I mean, broadly speaking,

We got really lucky in this period of high inflation because of this surge in the supply side of the economy, supply side of the economy, which got crushed by the pandemic and the Russian war revived and then some because of the surge in immigration and the factors that drove that surge in productivity growth.

And that came at an incredibly fortuitous time when the economy was definitely overheating, inflation was an issue, and the Fed was jacking up interest rates. But because of the improvement in the supply side of the economy and the improvement in potential growth, they didn't have to raise interest rates as much as they might otherwise would have. And maybe that was one of the reasons why we didn't suffer an economic downturn when everything said that we should have. We actually...

got lucky in some respects, but now we're on the other side of that lock. We are definitely by, and some of it's by design, you know, that's the, that goes to immigration policy. Some of it's just, it, it, it's just, you know, part of the dynamics that are play out with regard to productivity growth. But, you know, if you, if you go from this role of the supply side, helping you out to an environment where it's not that, that's another reason to think, Oh my gosh, inflation could be more of an issue here than I'm thinking.

Matt, what do you think of that argument? I think it's a sound argument. We'll see. I mean, I don't know what your timeframe is. I know what the current baseline looks like, but are you adjusting when you think we really, is it,

near term that you expect inflation to start picking up? And is that inflection point in Q1 instead of Q3? Yeah, I don't know. I got to think about that. I mean, the thing that really I found fascinating was your vehicle story, the dealerships. That is a fascinating story. I got to talk to Brisson about that. I got to make sure. Yeah, he'll articulate it better than I did. Well, and I never disagree with Brisson. Brisson is always- Sure. I mean, he's just-

The guy's a god when it comes to vehicles, you know, somehow, some way. But I'm going to talk to him. Marissa, what do you think? Are you into it? I mean, I think most of what you laid out is mathematical. We know that immigration is going to – it already has slowed significantly, right, from where it was back in 21, 22. Yeah.

And looking at our I was looking at our forecast yesterday. I mean, we have net international immigration lower than it was during President Trump's first term. I mean, we're talking very low levels of immigration. That is a huge shift.

to go from 3 million people coming into the country a couple of years ago to less than 500,000, you know, over the course of the next couple of years. So just mathematically speaking, we're going to have a labor force that is depleted on that front. We're not going to have the supply. And then,

Yeah, I mean, I don't know what's going to happen with AI. I can't be as bullish as Chris. He has to defend his position here. I mean, I think it's probably too soon right now to be seeing massive benefits from that. I think it'll be interesting to see, too, what happens with we're going to have a lot of unemployed federal government workers coming

potentially hitting the job market here. And it'll be interesting to see what the composition, what happens with those people. Will people truly retire or are people going to be entering into the private sector? What does that mean for productivity? What does it mean for the unemployment rate? I'm not quite sure yet. I don't think we know the full extent of the numbers that we're talking about here. Yeah.

But they could be significant and that might be too. Yeah. A lot of cross currents. Okay. Well stay tuned. We've got a few more weeks before we have to put pen to paper and produce our March forecast. So we've got to think about this more deeply, but I'm coming to the mind that,

Inflation is going to be higher for longer than originally thought because of all these dynamics. Let's play the game. And we're going to end with the game. We each perform a stat. The rest of the group tries to figure that out through questions, deductive reasoning, clues. The best stat is one that's not so easy. We get it immediately. One that's not so hard. We never get it.

And if it's apropos to the topic at hand, inflation, anything inflation related, all the better. It doesn't have to be though. Marissa, you're up as tradition. Okay. My number is 100. 100. Ooh, that's a nice round number, 100. Is it related to inflation? Not directly, no.

Is it commodity price? No. Directly. Is it an index? It is an index value. It is an index value. Okay. Base period for an index? Yes. Yes, that's right. Some index is at 100? Yes. NFIB? Yeah, it's in the NFIB. Oh, NFIB.

Oh, yeah. It's in there. Do you know which one? But that was 102, right? Or the headline. No? Plans to raise prices. Price-related, I assume. Well, it's in the NFI, National Federation of Independent Business, the Small Business Survey. Yeah. I just saw Dunkelberg yesterday. He's the keeper of the data from the beginning of time. And I don't know which component. Which component is it?

Okay, this is NFIB's uncertainty index. Oh, uncertainty. Ah, okay. Right. It's for the month of January. And this is the third highest reading on uncertainty ever in the history of the index going back to 1986. Wow. The previous two, the index readings that were higher were in September and October of last year. So right before the election.

And the uncertainty jumped from 86 in December to 100 in January. The way they calculate this is the number of people that say that they don't know or they're uncertain about the answers to these questions about the future, like will the economy get better or will prices rise and these kinds of things. So it's just representative of, I think,

What we've been talking about. Up in the air, everything is. And these are small businesses that are trying to plan their operations and they're very...

uncertain about what the economy is going to look like a year from now. You're going to say that index tends to have more of a Republican slant. Yeah. That's right. So this is even- It's meaningful. More meaningful. Yeah. Because it's very, all these surveys, people are looking at it through their prism. You see the UMIS survey. You've always seen it in the NFIB survey. It's very

politically dominated. And it's things are great when you have a Republican in office. Things are terrible when a Democrat's in office. So I've always discounted it. But the fact that

This, even this Republican-dominated index is saying, you said there was two other times in history. Which were the two other times, did you say? September and October of last year. Oh, going to the election? Yeah, right before the election. But it plummeted after the election result? Well, after the election results, and now here we are in January, I think all of this back and forth and vacillating on tariffs and policy, right? And then it spiked up again.

And how long is that? Is that, that goes all the way back to the beginning of the, of the survey? I guess it does. 1986.

Yeah. Wow. Okay. I got to look at that. That's so cool. That's so interesting. And I tell you another really interesting thing I found in the NFIB is that I never really looked at before, but they have to break out the optimism index into their hard components and their soft components. And the hard things are things that are measurable, like how many job openings do you have and your inventory level, right? The soft is all this...

expectations and how do you feel about the economy? And remember that this index surged right after the election interest in terms of the overall index, but that surge is purely because of these soft things, right? None of the hard index components really moved at all.

It's all these expectations and how people are feeling that explains the increase in the index. It's not actual. Matt knows that because he does that for the purchasing manager surveys. We've done it for both. You can back into the ISM index and it's hard data that tracks government, hard components that track government data historically. And then you can just look at the softer stuff and it's amazing how much of a deviation. It's just

just kind of cones out. It wasn't always the case, but the NFIB one, there's a political salience to that. That's like, which makes the January uncertainty thing really interesting. I didn't know that. Yeah. Very interesting. Did, is that in the date of a Faye Marissa, the series? If not, can you send them to me? Can you, they are. Okay. I'll go, I'll go find them. Yeah. Very, that's very cool. That's a great statistic. Hey Matt, you're up.

MRSAs is better than mine, 0.3%. 0.3%. It seems like everything in that CPI survey was 0.3%. That's the trick. And monthly rent growth. Yes. Owner's equivalent? No. Owner's equivalent rent. No, more. Broader. Is it the super core? No, but it is a sub-aggregate index within the CPI. Is it minus shelter? Yeah.

No, that would be higher. Not quite much, but yeah, no, it's not that. Okay. So some aggregate in this consumer price index, CPI, the percent change on a month-to-month basis. Don't overthink it. Well, you're not going to say it's core CPI, are you? Well, it's not core. A step further. Yeah, right. Core X, I don't know, pick something out there. Core X-

Core goods. It's core goods, 0.3% increase. Largest, fastest increase since May of 23 goes to what we're saying. Tariffs don't get applied to services. They're going to be on goods. Are we seeing some preempting, some early purchasing on stuff within core goods as vehicles? So kind of unsurprising there.

I referenced GDP data earlier, Q4, almost a percentage point added to growth from durable goods consumption, which was surprising. If it's happening, I think these are early indications that people are lifting their expectations for inflation and also acting upon that and trying to get ahead of price increases. Great. Very cool. Okay. Let's do one more. Chris, you're up. What's your stat? $4.77.

That sounds like a price of a dozen eggs. I think it's higher than... It's higher at my local supermarket. No, I think... Oh, it varies a lot by across the country. I didn't know that. I guess the avian flu affects pricing in different parts of the country. So that's not what it is. So it's a price. The price of gas is... Wow, wow, sell this item.

Yeah, does Wawa sell it? Wawa does not sell this item. It's not copper, is it? It is. It is. It's copper. It's a throwback. Wow. Is it that high? It's that high. Wow. It was $4 at the start of the year. It's $4.77. What's going on there? You tell me. It sounds like it's, you know, that's our Dr. Copper. All things clear. Growth is- Growth is strong. Yeah. I mean, is that-

What's that? It's the counter? What's the counter argument to that? Well, we're in a commodity price cycle and all commodities are rising fast. Are going up? Okay. Going up. It's a reflection. That's interesting. Gold hit an all-time high earlier in the week. What did? Gold prices. Coal, you said? Gold. Gold.

Oh, G-O-L-D? Oh, gold, gold, gold. As you can tell, I don't own any gold. We had a great question about gold. I won't go into it, but Chris and I were on a call with a bunch of risk officers and they brought up gold prices and the Fed's ownership and the price. But we'll come back to that in the podcast. Oh, so historically we thought of copper above four as gold.

Strong economy, strong global economy. Yeah. That's a demand for construction and manufacturing. Yeah. I mean, it's strong. Right now, the growth is strong, right? So it would be consistent with that, right? You know, if you look at our survey, business survey, when I would ask folks, if you please contribute to the survey, the weekly survey, it's also strong and consistent with a global economy that's growing above its potential.

And that would be consistent with copper prices at $4.70, $4.80, I think. So maybe that's what it's reflecting. But interesting. Has Trump tweeted at the Chilean president today about tariffs? Wouldn't that be where most copper comes from? Yes, indeed. Yeah. I think. It does. Yeah. It's huge. Yeah. I don't know. I don't know how up-to-date Chris's prices are.

Yeah. They're real time. Real time. Okay. We call them real time. Chris. Ooh, I like the sound of that real time. Chris. I think that you should be on your LinkedIn page. Real time. Chris. Yeah. Real time. Yeah. No, you don't like it.

Real time with Chris. That's good. Seems to be taken. Anyway, we got to call it a podcast. This was, this was fun. Very good. Very informative. You could see how we think out loud, thinking out loud about what's going on. Hopefully you found it of some value and we'll talk to you next week. Take care now.