Marketplace - The Fed’s last gut check

Episode Date: September 9, 2024

When the August consumer price index is released Wednesday, it’ll be the final major inflation report before the Federal Reserve’s policymakers meet next week, when they’re expected to cut interest rates. But how important is the CPI as a gut check this time around? Also in this episode, backup generators are too expensive for many older Texans who need them most, China makes electric vehicles that seem impossibly cheap, and U.S. leaders show interest in a sovereign wealth fund.

On the program today, differences and why they matter. From American public media, this is Marketplace. In Los Angeles, I'm Kyle Rizal. It is Monday today, the 9th of September. Good as always to have you along, everybody. The program today will be a study in differences. Differences in how we measure inflation in this economy and differences in how Chair Powell and the gang at the Federal Reserve

balance their two responsibilities, which are, of course, stable prices and maximum employment. But let me back up. We're going to get a fresh reading on inflation Wednesday morning, the Consumer Price Index. The CPI is not as regular and perhaps even occasional listeners will know the central bank's preferred measure of prices in this economy. That's the Personal Consumption Expenditure Price Index, the PCE, the differences between which those two coming up later.

But this CPI is going to be the last inflation reading the Fed is going to get before it meets next week, which makes it, thus, the Fed's last gut check on its much anticipated rate cut. The question at this point in the game, and most particularly after the not quite as clear as anybody had hoped unemployment report that we got last Friday, the question is, how important is one inflation data point? Marketplace's Kristin Schwab gets us going with how the Fed is balancing the differences between its two mandates.

For more than three years now, the consumer price index has been a highly anticipated data point. This time around? I think this week's CPI reading is important. Julie Smith is an economist at Lafayette College. But really probably in the scheme of things, not all that important. Smith says an interest rate cut is probably coming from the Fed, sort of regardless of what happens with CPI. And that's because we're far enough along in this battle with

inflation where it's not just about the headline number. For the Fed, it's about all the little numbers. Say inflation for food is a little high, then a bird flu outbreak drives up the cost of eggs. And if they can see, well, it was factor X that caused the inflation reading to be higher, then they can sort of discount that as they move forward. And as they move forward, the attention is not on whether a cut is coming, but how big it will be. Ken Kuttner is a former staff member at the New York and Chicago Fed. Twenty five basis points, a quarter of quarter percentage point is in the bag. But if we saw a good CPI number,

if the CPI continued to go down, then they would probably see their way clear to even maybe doing 50 basis points, half a percentage point. The fact that we're even talking about 25 versus 50 means there's real concern about how well the Fed is holding up its other mandate, maximum employment, especially after last week's slightly sour jobs report. We really need to do something about the labor market weakness, but we don't have a lot of room to move because the inflation rate is still out of our comfort zone. Kuttner says this is the turning point. And traditionally, the Fed tends to move conservatively.

At the same time, the Fed was criticized for moving too slowly when inflation began. And it doesn't want to make the same mistake again. I'm Kristin Schwab for Marketplace. On Wall Street today, 2550 rate cut, shmate cut traders were just in a buying mood. We will have the details when we do the numbers. Here's an idea that leaders of both major political parties seem to be open to. A government-led fund that would invest in infrastructure and energy, technology, maybe some stocks, private equity, too. The Biden administration has reportedly been working on a plan for such a fund.

Republican nominee Donald Trump floated the idea in a speech last week. There are, we should say, plenty of countries that already do funds like these. China, Saudi Arabia, Kuwait and Norway. Marketplace's Henriette has today's primer on sovereign wealth funds. Basically, we're talking about a pool of money controlled by a government, says Wendy Wong, an assistant professor at UT Austin. Think of them as massive, picky banks that government use to invest and grow their jobs. Most existing funds are in small countries, with money they made by exporting oil, says

Bill Meginson at the University of Oklahoma. If you try to invest several tens of billions of dollars a year in your home market, you have a small domestic capital market, it would simply explode. You'd have the mother of all asset bubbles. So instead, these countries try to make a return by investing internationally. Norway's sovereign wealth fund owns office buildings in London, Paris, and Berlin. Saudi Arabia's fund financed a pro-golf league. U.S. companies have seen a lot of investment from these foreign funds, but the U.S. does

have something like sovereign wealth funds at the state level. The benefits long-term have produced billions of dollars for New Mexico. Charles Wolman is the communications director for New Mexico's State Investment Council, which he says manages $57 billion worth of assets. Texas and Alaska have similar funds. New Mexico's has grown thanks to a boom in oil and gas drilling on state land, but that won't last forever, Wolman says. Once oil and gas starts to decline or ends, that production won't produce the revenue anymore, but these funds will be here instead.

And they'll help pay for things like public education, he says. How exactly a national wealth fund would work in the U.S. is unclear, but one thing is certain, says Wendy Wong at UT Austin. They need clear rules and transparency to work well. And she says both political parties would need to agree on all of them. I'm Henry App from Marketplace. There are, give or take, a 100 electric vehicle brands over in China. Sticker prices for whose cars which, as compared to say here, are pretty cheap, $20,000 or so. Some of those companies are looking to go overseas, but they're effectively shut out of the

American and Canadian markets, both of which have 100% tariffs on Chinese EVs. The European Union's got tariffs too, not quite as steep. All three say Chinese EVs have an unfair edge because they are subsidized by the central government in Beijing. It's the marketplace, as Jennifer Pak said about discovering exactly how China does produce such affordable EVs. In Chongqing's Wanzhou district, rideshare driver Zhang Fenglian doubles as a local guide and takes me on the scenic route along the Yangtze River. It's a quiet ride because like many rideshare cars in Chinese megacities, this one is fully

electric. It's from top Chinese EV seller BYD. The model Qing is, he says, not perfect. Its standard range on one charge is supposed to be 280 miles. But I can get only 255 to 260 miles. And only if I don't turn on the air conditioning. The interior is basic, there's not even air vents in the back. But it's a practical car, he says. Of course, if you care about appearances, you wouldn't use this car to pick up important

clients or a big bus because the car looks cheap. But this car can fit five passengers comfortably. Plus, the trunk is big. And the price tag? Just $18,000, which would be a steal in the US. The cheapest EV you can buy in the States is around $29,000. And in the European Union, Canada and the US, Chinese EV exports face punitive tariffs. So what's so bad about these affordable EVs being available outside of China? In theory, there's nothing wrong. But in practice, there's a lot wrong.

That's the U.S. ambassador to China, Nicholas Burns. Because the government of China and their provincial governments are subsidizing the Chinese EV manufacturers so that there's no level playing field. And they take the cars, they sell them below the cost of production into Europe or Brazil or the U.S. China denies this, saying its subsidies are reasonable. And it's not just domestic car makers that benefit. The Chinese government also offered Tesla a sweet deal to set up a factory in China, says Bill Russo with the Shanghai-based strategy firm Automobility.

It's Tesla who broke through and showed you can be profitable. Tesla has previously denied reports that it might export its Shanghai-made cars to the U.S. But manufacturing in China has helped Tesla and Chinese brands lower EV prices globally, partly thanks to China's hardworking and low-paid labor force. In central China's Changsha city, there's a steady trickle of people going through the gates to the BID recruitment center. They're all carrying suitcases because they're out of towners. If they get hired, and many do, they can stay in the company's dorm and start work the next

day. A car assembly worker, Mr. Wu, says he's been working at BID for the past six months. I can earn about a thousand dollars a month. Not bad for factory work in China these days, except that it includes overtime, which they have to work to make a livable wage. Per month, I work 270 to 280 hours and get one or two days off. Meaning Mr. Wu earns, at best, about three dollars and 60 cents an hour, working at least 67 hours per week versus an average of twenty eight dollars for

auto factory workers in the U.S. Last year, BYD and other major China EV makers did not respond to Marketplace's request for an interview. Perhaps their biggest advantage is China's comprehensive supply chain, or vertical integration. You are your own supplier of the critical ingredients that go into the electric vehicle cake. Ingredients like batteries, says EV analyst Bill Russo. And by making lots and lots of them, the price comes down.

Back in Chongqing, driver Zhang Fenglian is playing music from his cell phone app because his basic model doesn't include an entertainment system. But BYD's latest commercials advertise that its newer models come automatically with tech features, like voice control to play the radio, or an app to start the AC from a cell phone. Bill Russo says they're appealing to technology shoppers. You know, this coolness factor of I'm bragging about something other than how it drives. So the next wave of Chinese EVs come with more smart device features. And he says compared to their foreign counterparts, they'll be less expensive in China and beyond.

In Chongqing, I'm Jennifer Pak for Marketplace. Coming up... There's some kind of thing that we all feel when we can connect to the people who were around before us. Houses and history. But first, let's do the numbers. Dow Industrial's up 484 points, 1 in 2 tenths percent today. I swear I thought we were getting it, the really happy music. What do I know? 40,829 for the blue chips.

NASDAQ added 193 points, that's a little under 1.2% 16,884, the S&P 500 gained 62 points, also a little bit under 1.2% and it things at 54 and 71. You might have heard, perhaps, per chance, in your musings and wanderings that Apple held a new product event today. There's new Apple Watch, new AirPods, the Pro version of which will offer clinical-grade,

over-the-counter hearing aid functionality, by the way. And also you have, fine, the new iPhone 16. The cheapest 16 Pro Max will run you no less than $1,200. Shares on Apple, meanwhile? Yeah, basically unchanged. Bonds up, yield on the 10-year T-note. 3.70% you're listening to Marketplace. Hi, this is Rob from London, Ontario.

Marketplace is an amazing resource and part of my daily routine. I get highly credible information delivered in an intelligent, interesting, and at times humorous but always engaging manner. My day would be lessened without access to Marketplace. Join me in supporting Marketplace with a gift today. Go to marketplace.org slash donate. This is Marketplace. I'm Kai Rizdal.

All right. As promised, up at the top of the program, our second example of differences in this economy, how we measure inflation. As I said, the federal government produces two such measures, the Consumer Price Index CPI, the August version of which will be upon us on Wednesday. And there is PCE, the Personal Consumption Expenditures Price Index, the Fed's favorite as you might have heard. One might reasonably think they would come in about the same, right?

But as Marketplace's Nancy Marshall-Ganzer reports, think again. Turns out the CPI shows consistently higher inflation than the PCE. That's because the two measures put different emphasis or weight on different prices. Carola Binder teaches economics at the University of Texas at Austin and says, take housing. For a shelter, it's around 36% in the CPI and a little less than half of that in the PCE. So the high cost of a place to live pushes up CPI more than PCE, opening a gap between them.

That gap turned into a chasm last spring when the core CPI, which excludes volatile food and energy, was a full percentage point higher than core PCE. Wow. The two inflation yardsticks have narrowed their differences since then as housing prices have eased. But Sarah House, senior economist at Wells Fargo, says this gap hasn't gone away. Hardly. So right now the gap is about twice as large as it has typically been. The gap is also caused by differences in how data is collected. The CPI asks consumers, hey, what are you spending your money on?

The PCE measures all money spent by consumers and businesses. Skanda Amarnath, executive director of Employ America and a former Fed economist, says when there's a huge spike in consumer prices, that widens the gap or wedge between the two inflation measures. That wedge tends to blow out pretty dramatically, which is to say CPI drastically outperforms PCE in a big oil or food or any general energy price shock. Or say during a pandemic. Amarnath says as inflation settles down, the gap or wedge or whatever you want to

call it between the CPI and PCE will get back to normal, but it'll never go away. I'm Nancy Marshall Genzer for Marketplace. What might turn out to be the season's next hurricane is forming out in the Gulf of Mexico. Francine is a tropical storm, for now, but the good people of Houston, Texas still have the last one fresh in their minds. In July, Hurricane Barrel left millions in and around that city without power for several long, hot days. That has residents shopping for generators. They are not, however, a cheap solution, and they are hard to get, especially for people who need them the most. Marketplace's Elizabeth Troval has that one.

In a large activities room in the Baker Ripley Cashmere Senior Center in northeast Houston, local seniors gather around circular tables chatting and eating. Here I find Emily Berrier, who is wearing a blue baseball cap. She's 73. I've been through maybe five hurricanes. I lost everything. Since Harvey flooded her home in 2017, she's been living in a nearby apartment for seniors. That's where she was when the most recent disaster hit, Hurricane Barrel. That wind, I said, that's a different kind of noise. I ain't never heard that kind of, like a whistle. The lights flickered and went out. She grabbed her radio phone and a lamp. I just started praying. I said, Lord, just don't let it do us too bad. Roughly 2.3 million electric customers were without power like her.

And the Houston heat crept in during the electricity-free days that followed. It wasn't nice, but what could I do? But out of it. Let me tell you it's not the kind of heat that we was brought up in. This is a different kind of heat now. She says ambulances came for some of her neighbors who were on oxygen or couldn't take the rising temperatures. Where I lived we didn't have a generator. I don't understand it. It's a senior place for seniors that didn't pay their dues. It's ridiculous. That generator stuff, that's ridiculous. LESLIE KENDRICK-KLEIN For some, outages continued more than a week after the storm hit. Seven of the 20 recorded barrel-related deaths in Harris County were due to heat exposure from the power outages. All were people aged 50 or over. Emergencies like this spike demand for

generators, especially among older Americans. Aaron Yogfeld is CEO of Generac, a major generator manufacturer. For most people that threshold every time they have another outage, they get closer and closer to saying, that's it. I'm ready to spend money to solve this problem because I can't depend on whoever my utility is to provide power. In Texas, in-home consultations for standby Generac generators were five times more in July when barrel hit than the average from the previous six months. And so we see people getting to that tipping point in Houston much more quickly probably right now than anywhere else in the country. But with prices ranging from hundreds for portables to thousands for standby generators,

the people most vulnerable during outages often can't afford them. The great majority of low and moderate income people don't have any money, you know, to go out and buy a generator. Margo Weiss is head of the Texas Energy Poverty Research Institute. A lot of elderly people don't even have cars to get somewhere to go get a generator. Nonprofits have filled some of the gaps, offering a limited number of generators to seniors after barrel. Chenja Norman works with Korean seniors

for the nonprofit, Worry Hoontos. Many people left to go to their relatives, but the most vulnerable people cannot, no family here. She delivered ice and Gatorade to a senior apartment complex without power in the days after the storm. One older woman was very sick, and her husband was fanning her to cool her off.

When I saw that kind of thing, I was heartbroken, okay? Her group was able to crowdsource a small generator, van, and AC to create a common area where people could cool off. But the elderly wife still had to go to the hospital. That's why for seniors, Norman says, backup power is essential. We are pushing generators. All senior housing, right? They need to have a generator.

She says, as the city and state face power reliability issues during extreme weather, more needs to be done to make generators accessible. In Houston, I'm Elizabeth Troval for Marketplace. We've been doing a little series the past couple of weeks about the history of various home styles in the United States. And a bunch of people wrote us to say we should look at the history of Sears houses. Home building kits sold in the first half of the 20th century through the Sears catalog,

to which we said, all right, you ask, we provide. Here's today's installment of our series, Adventures in Housing History. My name is Judith Chabot, and I am a recently retired French and Spanish teacher at the high school level. I am also a Sears House seeker. I work with a group of about eight or 10 other people who just look for Sears houses around the United States.

We've got over 18,000 houses on the R List now. When Sears first started selling house plans and supplies to go with them, it was 1908 and they started selling these as a whole mix of all the things that you would need, not just the framing lumber, but all the finished products, including the faucets and the sinks and the bathtubs and the staircases and the window screens and everything. And it just kind of took off from there. In the catalog image of the floor plan, like they'd say, and then you could put your divan here

and you could put your whatever here and there. And it would help them also to suggest to people, we'll sell you every single other thing you need for the house. Sears offered mortgages. And in fact, that's one of the ways that we have found a lot of the Sears houses through looking at historic mortgage records.

Mostly these were marketed to just the average homeowner who couldn't afford to hire their own architect to design a home for them. So I think they were just looking at Mr. and Mrs. Joe America. But another interesting thing that a lot of people who've researched Sears houses point out is that African Americans were a little more able to get into this market because Sears just wanted to know, like, do you have a job? Can you pay for this? Do you have a lot?

We're happy to send it to you. They stopped doing the mortgages in about 1933. I'm sure that it had to do with the Depression. They didn't have any new catalogs after 1940. This big list that we have, this national database of Sears houses in the US, this is not a list of anything that like Sears left for people to see. We Google Drive around. We know areas where they're more likely to be, so we look there. We also look through the real estate listings on Zillow, you know, just about every day. One of our members refers to this as the big treasure hunt, the big national treasure hunt,

because it's just really fun looking for them. It's kind of like bird watching. I think other people have mentioned that because, you know, you spot one and you say, oh, I think that's a burwin, you know, and then you double check the windows and you say, yep, okay, got another burwin for the list. There's some kind of thing that we all feel when we can connect to the people who were around before us. It's some kind of a connection, I guess. Judith Chabot in St. Louis, Missouri.

She did say, by the way, that Sears Houses get misidentified all the time. So if you think you've got one, send her an email. SearsHouses.com is the email address. She and her fellow Sears House seekers will help you figure it out. This final note on the way out. Today we end as we began with inflation and yes of course there is what the feds doing and the differences between CPI and PCE.

Forget not though, you and me, consumer expectations of what prices are going to do, which can data show, affect what prices actually do. Anyway, looks like we're good. The New York feds most recent survey, which is for August, shows we are thinking inflation a year from now is going to be about 3% that is unchanged from July anchored as Economists like to say our daily production team includes Andy Corbin Elise Hassan Maria Hollenhorst Sarah Leeson Sean McHenry and Sophia Terenzio I'm Kyle Rizdal. We will see you tomorrow everybody This is a p.m.

Come on, everybody. This is APN. Hi, this is Emily from Paxton, Nebraska. I live in a rural area where the written local news has been outsourced to a bigger city, and the local newscast is not very good. I enjoy listening to Marketplace programs because they are informative and thought provoking. I learn about things, places, and people that I would not have found anywhere else. I am so grateful for Marketplace's dedication to bringing the news to the people. Join me in supporting Marketplace with a gift today. Go to marketplace.org slash donate

and thank you.