Moody's Talks - Inside Economics - Debating Inflation Significant Digits

Episode Date: April 12, 2024

The disappointing March report on consumer price inflation is the fodder for this week’s Inside Economics podcast. The team considers just how big of a disappointment it was, and conclude it turns on second and third significant digits. Yes, that’s what it has come to when assessing just when Fed officials will feel sufficiently confident that inflation is headed back to their target and begin to cut rates. Of course, there are threats to the inflation outlook, most immediate being higher oil prices, which the group takes up. Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by a group of my colleagues, my two co-host, trusty co-host, Chris DeReedie and Melissa DeGantali. Hi, guys. Hey, Mark. How are you guys doing? Happy Thursday. This is a rare Thursday taping of the podcast.

We normally do this Friday. Why did we do this on? To accommodate my travel schedule. Oh, where you headed? To Philadelphia for the all-hand day. But I'm going tomorrow. Yeah, we have our all-hand. day next week. So you're coming early? Yeah, I'm coming early to see friends over the weekend.

And then I'll see everybody on Monday. Everyone going to be there? I should say we also have Chris Lafacchis and Matt Collier. You see how well I did that, Matt? Nailed it. I'll be there. I'll be there. Chris, Mr. Lafacchis, you'll be there as well? Oh, yeah. Okay. Good. It should be good. This is our second all hands day since we went fully remote or we've been fully remote since the pandemic but officially fully remote i think this is number two right in the second one yes yeah okay and i was just talking to carl my brother uh and he was saying uh who runs the joint and he was saying you you guys have big parts don't you chris and marissa you have big parts in this thing he's he's got a big question yeah yes yes he's got a big question yeah he's going to put up

on the spot, right? Right. What's the world going to look like in 20 years? Not next year, not 10 years from. I go, I go, Carl, why 20 years? Why not, why not 10? He goes, well, 10's too soon. I go, really?

Okay. Okay, very good. Well, safe travels. Thank you. Yeah, I just flew today. I guess I'm the only one here traveling. I flew today from San Francisco. I was on a plane.

Oh. Yeah. Okay. It was no internet, which is, Beautiful. Is there ever reliable internet on, I have yet to actually purchase internet on an airplane and have it work. No, no, no.

To the point where I can work. Really? Never. Ever. No, no. Usually it works very well. Yeah, it works very well. Like you can get on to VPN and you can.

Yes. Yeah. I've never had that successfully happen on American Airlines. No, I've never had a problem. Maybe it's those planes that fly out of the L.A. I don't know. I don't know. I don't know.

Anyway, well, this is a big week, right? We got the consumer price index for the month of March, CPI, a really important statistic in the context of, well, everything. And it was a bit disappointing, wasn't it, Matt? Yeah, it was. Especially for you. It was really disappointing. Actually for you.

For you in particular, personally, it was very difficult. Yeah, I've come to terms with it, I think. I haven't. I have it. I have it. I tweeted out. I was so confident. confident in your point two.

You're going to have to explain what I mean by point two. But anyway, tell us about the report. You know, why was it so disappointing? And I'll say, too, I made the mistake of reading the comments to that Twitter post of yours, which was not wise. See, I never do that. Yeah, I wouldn't do it again. Yeah, but jumping into it, the headline CPI in March rose 0.4%.

the forecast our forecast consensus forecast was for a 0.3% increase. So hotter than expected again, which is a familiar story in 2024, the annual rate, the 12-month rate for headline CPI rose from 3.2 to 3.5%. I would say that that's maybe a little overstated. There are some base effects, even if CPI came in as we expected, it still would have lifted the annual rate, but nevertheless, disappointing report prices were moderating gracefully in 2023. That seems to have stalled at the start of 2024.

Moving into kind of some of the big components. Energy price. What was core? Core rose 0.4% as well. Or meaning X food and energy, which is kind of we look at that because that gets to, we think, sort of the underlying trend in inflation. Right. And that's one because it's the underlying trend.

And it's also the more painful spot here because that was the 0.2% you're referencing. That was the forecast that we put out that was a little bit lower than consensus. Consensus was at point three, a lot of rounding up. So very close to point two, but point three. Point two, just for the listener, the difference between point two and point three is like night and day. I know I'm giving you a hard time, but you'll thank me for 10 years from. now. Yeah, I appreciate that. Yeah. So if, let me ask you this, Matt. So core came in at point three and to the second significant, was it, no, point four. Point four, I'm sorry,

point four. Consensus was point three. And we were at point two. And can I also ask on the point four, was that, was that rounded up to point four? Do you know? Yeah, we were at. I think. Okay. 0.36 was the, something like that. To the second digit. You see what we've come to.

We're going to focus on the second and third significant digit here. But anyway. Right. So can you just get, I'm just, this is really instructive. Why did we think it was going to be 0.2 and it came in at 0.4? You know, what was, explain the difference. What was the error? So there's the big components that go into core CPI, shelter famously.

has been slow to moderate. So we expect rent prices to come down and they... But hold on, hold on. That wasn't the cause of the error because you know. Right. We're nailing that. So it's the question, why did I come in at point two? Yeah, why did we say 0.2 and the actual was 0.4?

You know, what was the reason for the difference? The biggest is auto insurance. Let me put it another way. You screwed up. Sure. Screwed up. Right. And I want to know why.

Right. Well, I'm doing gymnastics to minimize the mistake. But the biggest is auto insurance. Auto insurance is jumped by 2.6%, which is bigger than any monthly increase during, you know, supply chain crunch in 2021, 2022. Insurance premiums, if you look back to 2019, are 40%ish higher than late 2019. car prices are about 20, 25% higher for new and used vehicles. So there's this expectation, especially after some moderation in February,

that auto insurance, and this goes to auto repairs too, makes sense why they tracked for a while, but there's this expectation that it should start to roll over now that they've kind of premiums represent what insurance companies have to pay out now that cars cost more. So that 2.6% increase, even if you don't hear a lot about the CPI for motor vehicle insurance, mouthful as it is, but it is a big part of household budgets.

It gets a big weight. We thought there would be an increase, but a much more modest one. We're about two percentage points low. And that's the bulk of our forecast misks, which is, I think, plagued a lot of people. But that's, yeah, about half of our miss on the CPI. Oh, go ahead, Marissa. I mean, do you know how important it is in the to core? to core?

Like it's not big of a weight that it, that that. A little over three and a half percent would be my guess. It's 2.5, I think, for headline. Yeah, I think it's 2.5 in the total. So the core would be three and a half, maybe. Yeah, I guess three and a half, but I would say between three and three and a half. When I say three and a half, three, so the listener, three and a half percent of the index is, of the core CPI index would, and we're making that up, but roughly right,

3.5% of the core CPI indexes is the cost of vehicle insurance. And then if you throw in vehicle repair, which is also, I think, part of the error, I think you're now closer to almost 6% of the, 5.5% of the index, a core CPI index, something like that. So it's small, but it's not inconsequential. And when you get a big number, big increase and you do the multiplication, it adds, it's not tens of basis, a tens of percentage point, but it's enough of a basis point difference that that explains, you know, 0.2 rounded down versus 0.4 rounded up. You know, you see what I'm saying? Right.

Yeah. So, but this, this is actually this conversation is quite interesting in the sense that it shows you how we're parsing the data here, parsing the data very finely to understand what's going on. You know, the old joke about economists. sense of humor, right? Yeah. What's the joke?

How do you know an economist has a sense of humor? How do you know? They use a decimal point. Oh, that's right. So imprecise. But we're going out to the second. I forgot that joke. That's a good joke.

Yeah, it's a very good joke. And true, very trough. I was going to say, what was I going to ask? Oh, but, you know, my proclivity is to think that inflation's coming in. and I look at that data and I think to myself, well, I think you mentioned this, it's the cost of vehicle insurance and maintenance is very closely tied to vehicle prices, right? So if vehicle prices are higher and they surge during the pandemic and for new vehicle prices up until this past couple months, they've been surging, then the high vehicle insurance and

maintenance costs reflect those higher vehicle prices. So if vehicle prices start falling, that would suggest, obviously, with a lag, that it should take some steam out, we'll take steam out of the cost of insurance and maintenance. Is that roughly right? Yeah, I think so. And it makes the acceleration of that much more surprising that the catch-up has happened. And it is a lag, but it starts show signs for auto insurance, the science of moderation. And now there's this big, strong pickup in March, which was definitely a surprise. In vehicle prices, both new and used fell in the month of March, right?

Right. So used vehicles fell about 1.1% from February to March. They're down almost 2% relative to a year earlier. New vehicles fell again, and that's five with the past six months, monthly declines in new vehicle prices, and they're about flat when you compare them to a year ago. So hard to argue, unless insurance premiums were really under counting some kind of risk in their payouts for claims that this divergence between a 40% increase in insurance premiums

and a 20% increase in cars, there's kind of reasonable to expect that that gap won't continue to widen. So the increase in March, yeah, it stinks and it explains a big forecast mess, but I don't think representative of kind of more cyclical consumer spending type of inflation that really concerns Federal Reserve and predict is a lot more persistent. Yeah, okay. So, I mean, the listeners, people are listening to this and we're really into the weeds and it may not be exactly following along with everything we're saying. But the bottom line here is the difference between the point two and the point four,

point four of hair on fire, markets are selling off, people are changing their forecast for the Fed. If it came in at point two, it would be the exact opposite, the market would be taken off. lots of green, Bonneal's would be falling. And you're saying to me, and this is how am I hearing it, that the difference between the point four and the point two is vehicle insurance and maintenance costs, and those things probably should be declining and probably will be declining in the not too distant future because they're tied ultimately to vehicle prices and they are now falling and they're falling more

fundamentally. So, right? Do I have the wrong? I agree with the explanation of bad, but no reason to sign a three alarm fire. What about a two alarm fire? There's one fire alarm going off, I would say. Okay. I wouldn't even turn on the alarm, but okay.

You're saying one, one. Okay. Well, that's instructive. Okay. So let me, there's one other point about this. You have made to me in email conversations is the difference between the way vehicle insurance is calculated in the C. the consumer price index and the way it's calculated in the consumer expenditure deflator. And just for the listener, it's the consumer expenditure deflator, another measure of inflation.

That's what the Fed ultimately is looking at when setting policy. Their target is 2% inflation on the core excluding food energy consumer expenditure inflator. So what's the difference there in what are the numbers like? So the direct mapping for what goes into the PCE deflator, the inflation measure that the Fed target actually comes from the producer price index that has as granular detail as the consumer price index, but for businesses. So we see intermediate products, final demand products, the stuff that businesses pay to each other to make their goods and services. and the PPI for auto insurance is what gets mapped and goes into the PCE deflator. And that rose just 0.1% in March. We got that data this morning.

That's a significant difference from the 2.6% increase in the CPI's measure of auto insurance. And there's already been this widening between CPI, more specifically core CPI and core PCE in a way that's made the Fed a little bit more calm about these hot CEPs. CPI prints because it's not what they're focusing on. And I think the not just shelter, but now what we see with auto insurance are two factors that juice the CPI report, but don't necessarily translate into PC deflator and could potentially or are likely to widen this gap that we see between the two and make it not so simple to say inflation has stalled entirely or is re-accelerating because the other measure is not subject

to the same type of, you know, jumps like we've seen in the CPI. Do you know offhand, Matt, you said the PPI is being used for the consumer expenditure deflator. What is the Bureau of Labor Statistics using for the CPI when they measure vehicle insurance? Do you know? That's a good question. I don't offhand. Can you find that out? For sure.

For next time. Because that's a big difference. Point one versus 2.6. the CPI measures 2.6% increase. The PPI measures 0.1. It's a big difference. And I wonder if that kind of suffers from the same thing we've seen with shelter inflation, right? Is this long lag to kind of incorporate more current changing conditions into the CPI?

I mean, when you buy a vehicle or you get auto insurance, usually you're doing that once a year or once every six months that your rate might. change. So I wonder if there's a similar timing component with that as well. Interesting. Yeah, we should, Matt, maybe you can investigate that too. I don't know the answer to that. Yeah. So we now have the consumer expenditure deflator coming up. That's going to be released. Is that next week? Next Friday? Two weeks. Two weeks. Later than usual in a month. Okay. And now we have CPI for the month of March. We now have PPI for the month of March. We now PPI for the month of March. What are those two things imply for the consumer expenditure deflator for March that's

going to be released in two weeks? Do you have an estimate for that? Early estimate is 0.3%. If we're just rounding to 1 decimal point, 0.3% growth for both the PCE deflator and the core PCE deflator. We have a good amount of input data and understand how the PCE weights certain things. So that'll be the expectation now. And again, we're talking 10th of percentage points, and that's more encouraging.

Okay. If you go to the second digit, what is it? On the low side. I want to say we're rounding up from 0.27. We would round up to 0.8 or to 0.3 for the 4 PC. So there's a bias towards the lower end. So maybe I'll talk myself into rounding down again and stick my neck out there. Don't do it, Matt.

For all the nice people on Twitter. Right. You did notice on my Twitter feed, by the way, at Marksandy, just saying, I did call you out. I said my crack team of economists. Yeah. That's you. Sure. I like it.

Sure. You and Justin and the team. But I jest, of course. I mean, forecasting this stuff month and month is crazy, crazy hard. There's so many variables and moving parts and, you know, and the difference, as we pointed out, between 0.2 and 0.4 is like, yeah, you know, boils down to who knows what. So very difficult to do. Any other component of the CPI release that surprised you both, let's say on the upside or the downside, let's begin with the upside. Any other component surprise you?

On the upside, I think, surprising or not, I think it's a good story. And that's when you kind of lump in grocery prices, new and used vehicles, which we touched on, airfares, hotels, they're cyclical. When consumers are lining up to buy these things, prices get bid up, and consumers line up to buy those things when they're taking home stronger wages. So they are a proxy for the kind of demand that's really hard to bring out of the economy. And in those element, and across those categories, prices were either flat or declined, as we saw with new and used vehicles. I think that's a positive story. On the negative side, which has its own implications for the PC deflator, but medical services, it has a 0.6%. We have a 0.6% increase in March, which was a little bit above

our expectations, not a huge miss, but it's given a lot of weight. It's more the trend and then kind of the underlying dynamics in healthcare that I think make it one of the few components that we're forecasting a stronger growth in 2024 than we did in 2023, marginally, but most things are moving the other way. You've kind of structural stuff. Healthcare prices are set far in advance. It's very labor-intensive, hospitals, nurses. Hospitals had a really hard time staffing their operations famously,

and those increased labor costs are starting to flow more and more into prices. So I think you're going to see pretty sturdy medical care or health care, over the next year and it's given significant weight. So I think it's going to come under a lot more scrutiny. And I think we see that in March with a 0.6% rise. So those are two things that I would touch on. Yeah, just as a point of interest, the weight of medical care in the CPI is lower, much lower than it is in the consumer expenditure deflator, the PCE definitely.

Because the CPI is out of pocket and we tend to use insurance and other things. And so it has a smaller rate in the CPI. Okay, Marissa, anything in the CPI report that you want to call out that, you know, that Matt didn't focus on? I mean, we did, we mentioned shelter. It's good that it didn't accelerate, I guess. You know, it's just hanging in there. It's not coming down.

It's not accelerating. It's still. It's coming down, no. I think it's coming down. The rate of growth, Lynn. Huh? The rate of growth for a rate. The rate of growth, yeah.

0.5 to 0.4. So, yeah. It's moving. Okay. Right? Mm-hmm. No? Yeah.

Okay. Yeah. I'll take it. Point 4 is lower than 0.5, yeah. Yeah, all right. Right. Okay. Yeah, but it's still too strong.

And we still are, we still are not seeing this, right, real definitive slowdown that we're hoping to see. And it's still 60% of the change in CPI. every month. Is it a big part of the story? It's the biggest part of the story still. So that's where we really need to see the movement. Right, right. Chris, can you just, you know, we've done this ad nauseum, but it's so complicated.

I keep forgetting, you know, exactly. How do you explain, what's your favorite explanation for why it's taken? the cost of housing services to slow down. It's slowing. It's moderating. It continues to moderate, but very, very slowly. More slowly than one would expect based on historical leads and lags. What's your pet explanation for, you know, what's going on there?

Pet explanation. Well, I guess we're talking about rent of primary residence, specifically versus the owner's equivalent rent. Both. Both or both. Okay. Yeah. Right. But just on the rent, you know, straight up rent should be easy to measure. I think it is. But I think we have some compositional issue, right? A lot of rental is on the lower end, perhaps. And that that is a part of the market, a segment of the market that continues to have some significant demand. So it's possible that that's preventing that rental growth from receding as fast as we might see on the, When we look at market rents, I don't know, it comes down to how the sampling would be done. The rents only change once a year typically. So there are some lags here in terms of how those rental effects are incorporated in the CPI. The owner's equivalent rent, and we've already talked about this in the past, I think that has more methodological issues just in terms of how you estimate a rent for someone who's owning their own. home based on rental properties in their similar market.

You can try to control for other factors, but it's still at the end of the day, a pretty complicated process. And I don't think we have sufficient data in a lot of markets to really nail that down properly. So the way I articulate it and let me do it and tell me, I've got this right, is we've got an affordable housing shortage. We've got a very severe shortage of homes. lower price points for lower rent. High end of the market, much less so, particularly in the rental market.

We've got a lot of units coming on, vacancy rates are rising, rents are a lot weaker. But we have a lot of weakness at the low end, a lot of strength at the low end because of the shortage. But when the BLS goes and tries to calculate, in some many markets, they, all they have is they don't have enough, there isn't enough variety in the housing stock in the areas that they're looking at, that they're using the rental measures for the affordable part of the market for the rest of the market. And therefore, it's making it look like rents or across the market or stronger than they really are. Is that, did I get that roughly right? That's right.

For the owner's equivalent rent. For the owner's equivalent rent. Yeah. I think that's right. I think that's a reason to explain why that's been stickier than we might have expected. The rent of primary residence, though, is a bit different, right? There, we don't have that issue. We're just counting. So there, it's, it could be the compositional effect again, that there just is more demand at that lower end of the mark and that skewing the overall picture. But, yeah, it's more, I guess the mystery is why is that so persistent relative to what we're seeing. on new leases, right?

If you look at all the other market data, leases are flat, even down in certain markets, right? Apartments, even single-family homes are much weaker than what this CPI would suggest. All right. Okay. All right. Well, the way I kind of frame this conversation around the cost of housing and what it means for overall inflation is we've been talking about the so-called harmonized CPI.

The harmonized CPI excludes owners equivalent OER. And in fact, in many other parts of the world, particularly in Europe, the statistical agencies there don't include OER because they throw up their hands and say, we can't measure this. It doesn't provide any real information. It's not useful as a guide towards inflation. And the Bureau of Labor Statistics has been publishing a harmonized CPI now for some time. on an so-called experimental basis. They're not, you know, out there. It's not in the, I don't think it's in the press release,

but you can go, you can Google it. You can say BLS, Harmonized CPI. And if you look at the Harmonized CPI, this was going to be my statistic for the game. Damn. But I'm going to give it up right now. If you look at it. Oh, well, let me ask you, let me ask the T, let me ask in another way.

What do you think Harmonic core, meaning X food and energy harmonized, excluding OER, CPI growth year over year through March was. What do you think that was? One point nine percent. Yeah, one point nine. Is that right? Yeah, exactly right. That was a guess.

Was it a guess? It was. I didn't know that. Oh, yeah. One point nine. I mean, it was an educated guess. Yeah. Yeah.

And it's been two-ish or below for more than a year, for more than a year. And this is on the CPI, not on the consumer expenditure flitator, right? So that is below Fed target, below Fed target. So the only thing keeping inflation, core inflation, underlying inflation from the Fed's target or below the Fed's target is the growth in the cost of housing services, which we all kind of in one way or another is saying we can't measure it. We can't measure it. Anyone I want to disagree with that comment? No? You agree?

We can't measure it well. You can't measure it well enough to provide any information that's useful, particularly in terms of understanding what's going on with inflation and how monetary policy should be set. Let's put it that way. Do you disagree with that? No. What about supercores rise of late?

Who cares? I mean, everything else is disqual. It just washes out. Things go up, go down all around. But we want to get to, the question is, the question, the fundamental question, is what is underlying inflation? What is, you know, abstracting from the vagaries of the data, volatility in the data, methodological issues, what is underlying rate of inflation?

And I would posit the best measure of that is core, harmonized, the harmonized core CPI, that feels like to me the best benchmark of underlying inflation. So, Mark, if someone gets a new loan and it's 6% or 7% and their cost, their monthly mortgage payment is elevated relative to the other guys that got in in 3% or 4%. We have to include that in the overall inflation estimate, right? I mean, it's a cost. I'd say Chris, this is what I'd say, Chris. If you could do that well, I'm all in.

If you can't do that well, you're just screwing things up. You're just messing with things. You're obfuscating the, you know, what's going on underneath. So I'd say, we want to get a measure that we feel confident in is giving us a sense of underlying inflation. And that, to me, is saying, we're there. you know we're there um i don't hear any strong objections to that no okay all right you're not convinced and of course i'm that view i just i'm expressing is certainly not the consensus view i don't think i don't think yeah i don't think so i think the fed is looking for at super core and core

you know this is what i get irritated about this whole uh you know people say and i won't call out names, but, you know, other economists, they get mad, they get annoyed when you start, say, don't conclude this, don't include that, right? They say, you're just, you're just cherry picking. And then they go, well, what about Supercore? Right? Oh, come on. What are you talking about? It's like, come on. I find that really annoying, you know, highly annoying. Anyway, I'm just, I'm just trying to find the truth here, guys, right? I'm trying to find the truth. Speaker of truth.

Speaker of truth. Okay. Okay. Well, you heard Chris Lafackas' voice, and we brought Chris on because something we haven't talked about yet, but the thing that worries me the most about inflation and the economy going forward is energy prices, oil prices more specifically, and they have moved up quite a bit. And they contributed to top line inflation, and that, you know, it has lots of implications for Americans. you'd pay more at the gasoline pump.

In fact, I think, Chris, correct me if I'm wrong, but you go back a year ago or so, we were kind of in the, for a barrel of oil in the 70s, firmly in the 70s, probably the low 70s. Now we're in the high 80s, you know, somewhere around there. So the question is, Chris, you know, what's behind this run-up in oil prices and should we be fearful that we're going to see further increases? in oil prices going forward here. So what do you think? Yeah, so I do think that we will get an increase in consumer energy prices,

regardless of what happens to oil prices just because of seasonality. We are entering a period of high demand in the Northern Hemisphere. And if you look at crack spreads, so-called crack spreads, these are the difference between wholesale petroleum product prices like diesel, jet fuel, kerosene, motor gasoline, and oil prices. these typically expand in the summer driving season. And the effect is significant. It could add as much as 20 or 30 cents per gallon to the price of the pump.

So even if oil prices kind of stay where they are right now, on a national basis, we are at $3.63 for a gallon of gasoline. That's as of today. We're recording this on April 11th. And if you add that 20 to 30 cents, increase, seasonal increase in the crack spread, just those two factors alone in oil prices stay where they are, we're going to get awfully close to $4 per gallon nationally. And there are some states that will absolutely breach that threshold.

And that's a very important psychological threshold. So we are going to flirt with that. I think in the summer month, you'll absolutely see some states will go above $4 per gallon. The hope is that it is temporary. We do believe that it will not be a persistent increase on a national basis because we expect oil prices to come in, not by a lot, but maybe two to three dollars from where they're currently at. And I'd be happy to talk about why oil prices have increased and what our outlook is going to. Before you do that, because you brought it up. So what you're saying is oil prices today are $85 to $90 a barrel, WTI.

West Texas intermediate is 85. I'm, you know, waving my hands here. 90 bucks on Brent. And at that 85 to 90, right now we're at $3.63 for a gallon of regular unleaded. Even if prices, oil prices stay where they are, which is what we're expecting. But even if they stay there, you're saying gas prices, gasoline prices, cost a regular gallon, regular unleaded is going almost to four over the next couple, three months. That's what you're saying.

Yes, in some states, definitely will reach that threshold. And nationally, we're going to get awfully close. And perhaps there's going to be a day or two where we do get over for just because of the day-to-day fluctuations in oil prices, retail and crack spreads. So we're going to get awfully close to that $4 threshold nationally and certainly will breach it in some states. Yeah. Okay.

And going back to then oil, why were prices so much? I mean, I think the surprise last year, and this was one, I think one of the reasons why the economy did as well as it did, surprisingly, was oil prices were low. They actually fell for much of the year. I think, as I said, we were firmly in the 70s on WTI and Brent, and now we're in the high 80s. What happened? You know, what's going on? Well, I think we can thank U.S. shale producers. They had a banner year. Prices are still above their break-even cost of extraction. Interestingly enough, we just got a data point from the Dallas Fed. Every year they conduct their energy survey.

And in March, they ask a special question to all the producers in the state is, at what price can you profitably drill? At what price of WTI can you profitably drill on your well? We were expecting that cost. cost to increase. It was $66 in the Permian Basin last year in last year's survey, and now it's gone up to 70. So that is an increase, and it's just like we're talking about, well, it costs more to make a house. It costs America more to make a car. You have to pay workers more, and it costs more for equipment and police rigs in order to establish new sources of production as well. And that's where the $4 increase in the Permian basin comes from. In the Permian, by the way, It is the marquee place to drill in provider of the marginal barrel of oil on the global market.

So that is increased. But still, if you compare 70 to where we're out right now, 85 for WTI, it's still profitable for U.S. drillers to establish new sources of production. And I think I've gotten a little bit more optimistic over the last month or two on the U.S. capacity to bring new barrels online because prices have risen. And part of that is because OPEC, what OPEC has signaled. But that should help us to put a cap almost on oil prices, or at least prevent them from going over $100, barring some kind of geopolitical catastrophe. So you're saying really the swing producer here is the North American shale producers,

frackers, last year in 2023, they ramped up production dramatically. As I recall, the increased production by about a million barrels per day to over 13 million barrels a day. And just for context, the globe produces and consumes a little over 100 million barrels a day, 13 million. That's a record high. And that's higher than anyone else on the planet. I think the Saudis are now, because of their cuts down to, what, eight, nine million barrels a day, something like that. Nine, yeah. And they were able to do that last year because they kind of took out of mothballs a number

of wells that they had started but never completed, but they completed them and produced a lot of oil. And that helped that all that oil came onto the market more than offset the production cuts by the Saudis and the effects of the sanctions on Russian oil. We had a surfeit of oil and that kept prices down. But here we are today, the North American producers are still ramping up production, but not nearly to the same degree. And we're still getting more global demand. Global demand continues to improve for oil.

Is that roughly right? Precisely. And all of that growth in global oil demand is coming from emerging markets. So if you look at OECD countries, oil demand in those countries is relatively flat. Or here in the U.S. has been down, right? Is it even rising here in the U.S.? us now? Yeah, I mean, you know, we can trade pick beginning and ending points, but yeah, you could say that.

Right. But, and that, that's just industrialization of emerging market economies, you know, India, China, Southeast Asia, and that, that train has left the station. So every year, we need to come up with an additional one to one point five million barrels of supply. And the U.S. carried the bulk of the load in 2023, but they did that by drawing down on their inventory of uncompleted wells. These were wells that were started maybe during the pandemic, but were not completed. And what I mean by that is you can drill a hole, but it's not going to produce oil until you frack it. And fracking it is actually two-thirds of the cost of establishing production. So if you just drill the well and then you don't do anything with it, you can keep that is kind of inventory, but you have to pay Baker Hughes or Halliburton or companies like this to, in order to frack it. And that's two-thirds of the cost. So they've been reducing their inventory of drilled but uncompleted wells substantially in 2023. And actually right now, we're at the lowest levels of inventory on record. And that series goes back to 2014 for drilled

but uncompleted well. So the theory is that U.S. production will slow because now all of a sudden you have to come up with an extra third of the cost in order to establish new production. So did I hear you write the so-called ducks are at a record high? I thought we worked those down. Oh, record low. Oh, record low. Okay, fine. Okay. They're lower than they have been at any point in the series going back to 2014. Right. And so now what that means is you have to actually rent the Ricks. and drill the holes in addition to fracking. And that extra cost of establishing production is something that we expect to weigh on production growth in the U.S. in 2024.

Now, it certainly helps when oil is at 85 than when it is at 70 or 75, like it was a year ago. And I think that that's gotten me a little bit more optimistic about the U.S. And our forecast actually calls for prices to fall by $3 or $4, even while OPEC production remains at its current levels. Because OPEC has decided over the past two years to bring in quite substantially their oil production. They have in effect ceded market share to non-OPEC producers, especially the U.S., where most of that production is going. It's there, the levels of excess capacity, meaning how much oil production Saudi Arabia could bring online And really, I mean, it's OPEC's spare capacity, but Saudi Arabia accounts for the lying share of that.

That excess capacity stands at above 5 million barrels per day. That is historically very high. It has been very difficult historically for the cartel to maintain this level of discipline for such a long period of time. But they have signal to the market that they don't intend to unwind production cuts, at least in the foreseeable future. that has caused oil prices to rise. That's been the main contributor to the rise in oil prices. Also, we've gotten past a period of weak seasonal demand. Also, there's geopolitical concerns with the war between Israel and Amos and how that might

conflict rate and spread to Iran-Israel conflict as well. So there's really a number of factors that have contributed to the rise in oil prices. But that, you know, an old adage, the cure for high price. prices is high prices. So it has given producers the opportunity to establish new source of production. And I feel good about the U.S. adding maybe 300,000 barrels per day to a half million barrels per day in 2024. And I would say if you asked me the same question a couple months ago, I would have said, you know, 250,000 to 350,000 barrels would be my estimate. So there is kind of a silver lining to the increase in oil prices that we've experienced in recent months. Okay.

So what you're saying is last year, production increased dramatically in the shale fields because they had all these ducks sitting out there. What does that stand for? Drill but completed. Yes. And they just took them out of mouthballs. They fired them up and produced a million barrels more of oil a day. That's done. They can't, the inventories of ducks are a record low.

They can't really go there anymore. But prices are up. We're in the high 80s. And according to Dallas Fed, break-even is $70. So that's, you can make real money, you know, at that, at the current price. And therefore, they're going to start drilling more wells, putting more rigs in the ground and start investing more because they can make money at doing it. And they feel reasonably confident because,

OPEC is not going to start pumping a lot of oil, and all likely the Saudis are going to keep production where it is, and they can feel reasonable, there's no confidence in this at all, but there's reasonably confident that they're going to get that price. Yeah, absolutely. And I think, like, what becomes more imperative is that Baker Hughes rec counts, and they were kind of less important in 2023.

They were actually, just to go into the weeds a little bit more, they're actually an input into the EIA's model to forecast real-time oil production on a weekly basis. There's a weekly petroleum status report that comes out every Wednesday at 1030, and they estimate U.S. production. And part of an input into that model is Baker Hughes rig counts. And so the EIA was estimating low levels of production because no one was drilling in 2023. But in fact, production from the actual, the hard data, was, was substantiated. substantially higher because they were using ducks to establish new source of production. They weren't drilling as much.

I think now with the inventory of ducks depleted, the rig counts become a little bit more important than they have been over the past nine months or so. That's not to say that ducks can't continue to fall. It's just that it becomes much harder to rely on that as a source of production when inventory levels are so low. Have you noticed any pickup in rigs, rig counts yet? I mean, not substantially. So just a little bit, but it's something that I'm keeping a close eye on.

Yeah, and you expect it to happen. I think it will happen. I think, you know, especially with what's happened over the past month, month and a half or so, and it does take some time for it to show up and recount. So basically the sequencing is that prices have to rise. You know, a CEO has to decide we're going to drill more, two more. months later, after they make that decision, you would see it in rig counts. And then in additional two to three months, you would see it in actual hard production data. So there's a bit of kind

of like sequencing that we have to go through. We haven't really felt the full effects of the recent rise in oil prices on rigs and subsequently drilling. But it's going to play out over the spring and into the summer. Of course, the other fact, you mentioned this, but just to put a finer point on it, the unrest in the Middle East. You know, you can notice day-to-day movements and oil prices are closely related to events in the Middle East. I mean, right now they feel a little bit juiced because of the concern that Iran is going to retaliate for the Israeli bombing that occurred a week or two ago. And everyone's kind of on edge and, you know, wondering what that means. What kind of premium is built into the price for that kind of, let's call it geopolitical

us, do you think? Yeah, I think it's, I think it is substantial. I mean, I think it's around $4 to $5 per barrel, just because Iran is a major oil producer, and, you know, we're moving into this conflict situation. And then there's also, like, the impending invasion of Rafa, which could cause geopolitical issues for Israel as well. So I think the market participants are viewing this and they're viewing the attacks on oil containers that are moving through the Red Sea and they're assigning a risk premium on that. I mean, and it's not just the premium, but like it also affects dollars and cents because many shippers have chosen to go around the Cape of Good Hope instead of travel through the Red Sea. And that adds not a huge amount

of time and money to shipping routes, but I mean, it has a marginal effect maybe of a dollar or two per barrel because the transportation has gotten more expensive. Okay. All right. Okay. So the bad news is that gas prices are going up that's kind of baked in. It's going to happen because of the, as you get into summer months, the crack, so-called crack spreads, the margins that refiners get will rise and it reflects the, the, the, the, the,

the mix of gas that has to be produced. The good news is that you think we're at the peak in terms of oil prices because we will get more production, particularly coming out of the shale fields that will be sufficient to meet the demand. And most more, even more fundamentally, there's still a lot of excess capacity out there. So if prices start to rise to any significant, if we get into the 90s, then the pressure, the economic pressure for OPEC to start. cheating on its quotas will be such that we'll get more oil.

That's, in a nutshell, what you're saying. Yeah, absolutely. And like people like Iraq are more likely to cheat in that scenario. I do think the range for Brett is between 75 and 95. And I would agree that we're at the higher end of that range currently. Yeah. You know, we forecast lots of stuff. Some I feel pretty confident in like inflation is going back to the Fed's target.

It's some not so much, like oil prices, which, you know, a lot of, a lot of intrepidation there. Okay, let's play anything else on oil. We didn't even go into natural gas, but we're getting long in the tooth here. Any other burning points you want to make, Chris, before we move on and play the stats game? No, I mean, I think so we have there's uncertainty with the forecast, but we are forecasting for prices to kind of tread water and fall down. And yeah, I mean, that's it in a nutshell. And I'm happy to play the game.

Okay, let's play the game. The stats game. We each put forward a statistic. The rest of the group tries to figure that out through questions, deductive reasoning, clues. The best stat is one that is not so easy. We get it quickly. One that's not so hard we never get it. One that is apropos to the topic at hand is really, really good.

And, Marissa, you're up. You're always lead on the stats game. So here you, here's your chance. What's your stat? Okay. My stat is 7.37%. A second significant digit. Is that, is that important, the second significant digit?

It is. Oh, okay. I think so. Okay. Inflation related? Not directly, indirectly. Year over year? No.

Is it a growth rate? No. Is it a share? No. Oh, my gosh. It's not a share. It's not a growth rate. It's not a percent of any type.

Is it a mortgage rate? Yes. It's the bailing mortgage rate at the end of the day to day. But you see how she does that. It's just not fair what she's doing. I just, I object. What are you object to? I say, is it a percent and you delay?

I didn't say no. Well, that's my point. You didn't say yes. So the number I put forward was 7.37 percent. So yes, it's 8 percent. I thought that went without saying. Oh, okay. Sorry, I apologize.

Answer the question. I didn't hear the percent. It was a percent. Okay. Oh, okay. I missed it. Sorry. I did say it.

You did. I'm sure you did. Yeah. Did she say it, guys, did she actually say it? Yes. Okay. All right. Okay.

I rolled the tape. Roll the tape. Okay. Well, that's a good one. The mortgage was fixed mortgage rate. Why did you pick that? Yeah. I mean, it's back up above 7%.

It is jumped on the CPI report, along with bond yields in general, when the CPI report came out. So definitely, and we didn't really talk about this, what our expectations are for the, what the Fed is going to do, but the expectation now is in the market is that there won't be a rate cut soon, right? There won't be a rate cut in the next couple of months, given the hotter inflation data. So the cent, the 10-year treasury yield higher, the cent mortgage-backed security yields higher, the cent, the mortgage rate higher, all up the curve. Yeah. Yeah, not good. What do you think, Chris, 7.37, what kind of damage is that going to do to the housing market? You know, you're still out of the money, right?

You were out of the money before, so I don't know that it doesn't help, certainly, but I don't know that it changes a lot of the supply dynamics, but more on the affordability side, right? So it's, yeah. I kind of think of it. There's a psychological break going, you know, like jumping above seven, when it went above, like people have these whole numbers in their mind. That was my thought.

I think anything over seven, the market goes, to a deep freeze. Anything south of six, that feels like life comes back to the market. Yeah, but that's a good one. Good one, Matt. Good good good get. Why don't you go next, Matt? You're up. You're up next. 4.7 percent. CPI related? No. PPI? No. Inflation related? Tangently. Labor market related? Yes.

Okay. wages for something. Yeah, Atlanta Fed wage tracker. That's right. Yeah. Yeah. So the three-month moving average of annual wage growth as measured by the Federal Reserve Bank of Atlanta, which- Okay.

Explain. How well do you know that data? The composition of it? Just how it's constructed. Anything of you have a good sense of the data? I know that it's timely and I often reference it because for that reason. But it's down from 5% in February to 4.7% in March. It's the lowest rate since late 2021.

So I think it's a positive story. I mean, very hard to continue having these above target inflation if wage growth continues to lower and lower. So I think it's a good story there. It's still too high, but it's trending in the right direction and, you know, in a week of not the most encouraging date. I think that was a positive spot. Doesn't the Atlanta Fed track individual workers, right?

And they, I think from the CPS data, is the CPS data? They use the CPS. That sounds right. Yeah. And they calculate it calculated a median, right? So they look at the entire distribution. And then they look at the median in that distribution. And it's like a three, they also, they do three-month moving average and they do 12-month

moving average. Yeah. Something like that, to smooth out the volatility, because I'm sure there's a fair amount of volatility, which is, you know, the control for mix issues, right, because you're following the same worker. So it makes it valuable. And they also have all these demographic breaks, you know, parts of the wage distribution, male, female, age, switchers versus people who are staying on the job, you know, all those

and then by region, they do it by region as well. So it's pretty cool data. The thing, though, is, does the level of the growth rate matter? I mean, because 4.7% is higher, meaningfully higher, than kind of the 4%-ish we were getting on the average hourly earnings. And I think the ECI, the employment cost index, which we all look at as well, and that's generally taken as the gold standard for wages for measuring wage growth. That's closer to four by some of the measures.

The difference between 4 and 4-7, again, this whole theme of this whole podcast is we're parsing everything down to decimal points here. But that could be material, right, in terms of is that consistent with the 2%? What's consistent with a 2% inflation target? 4.7% probably isn't, right? Because 4.7, 2% inflation, let even say 2% productivity growth, you're still, that's still, that's more consistent with 3% inflation than 2% inflation. You see what I'm saying? Do you know what I'm saying? So does the level matter here or not? That's tough to say, but I would say the trend is unambiguous. And to me, that's kind of the encouraging part of it, but 4.7% is not what the Fed estimates to be compatible with their targets.

So there's that issue, but it's not the primary wage measure they're looking at. But I think the decline in a pretty consistent decline in the first quarter is encouraging, levels aside. Is the Atlanta Fed tracker consistent? Historically, has it always been higher? If you go back? I don't think so. Okay. That's my mind's eye.

All right. The construction of that has its biases in it, too. What are they, Marissa? Well, in order to be counted in there, as you said, they're looking at the same worker, right? Like in this month and then they're going eight months out and looking at that worker again. you have to have a job in both. They're using the CPS. So you have to be employed in both places,

which inherently there's a bias there because it's not going to pick up on people that are new entrance into the labor force or people that may have been out of the labor force and come back in and are going to get these big wage gains. It tends to oversample older workers, they think, for that reason, people that steadily have like the same job over and over. So that can bias the estimates of wages on that, on that one.

Is your sense, is it would, given in the current context, that it would be biased higher relative to actual? Well, I don't know. I mean, I think there's an argument. I'm not sure because I haven't like dug into this, but you could argue it would actually bias it lower because if you are an older, if you're a more experienced worker and you have the same job, you're not getting big increases in your pay year after year, right?

You're much more likely to get a big bump in pay if you go from nothing to something or you switch industries presumably or you. So I don't know. I don't, I think it could depend on the time period we're in, but I could see an argument for it actually biasing it down too. Okay. Yeah, this is this, this is this data, this way, has been bothering me a little bit because it's on the high side of it's not consistent

with a 2% inflation target. It's more consistent with the 3% inflation, which is kind of where things are stuck. So if you buy into the Atlanta Wage Tracker, you're saying, oh, inflation is not going to get back to two. It's at least not unless the labor market eases up and we get further deceleration and wage growth here. I mean, all the trend lines look good, as you point out. They're decelerating, which is good. There's no reason to expect that that's going to stop, but nonetheless, it's been bothering me a little bit. Well, that's a good one.

That was a good one. Okay, Chris, Elle, you're up. Okay. My number is 24. 24. Inflation related? No. It's energy and a little bit politics.

Oh. 24, are there any units on that or? No. Yeah, it is a counter. That's what the guess is. There's 24 of them. Right. Yes.

There's 24 or something. Is that right? 24 or something? Yes. Energy related to political. There's 24 states. Yes. Okay.

Yes. That's right. 24 states where gas prices. are above $3? $4? We're above $4. But that's incredible, Mark. Yes.

I love being described as incredible. I love that. I should get the cowbell out for that one. I think you mispronounce. That's incredulous. Yeah, exactly. Incredulous. Yeah.

There were 24 states in which gas prices were $4 or more two months before the last midterm election, which the Democrats did well. I'm trying to give you a little bit of solace, Mark, because gas prices I know are a key factor in our presidential election model, and they could swing the election one way or the other. And so I went back at the last midterm election to determine how many states were gas prices about $4 a gallon and it was 24. And still, I think by all intensive purposes,

the midterm election was either a draw or a win for the Democrats based on basically what the polls were indicating. So I think that, like, it is certainly something for us to pay very close attention to in terms of the elections that are coming up in November, but regardless of the energy climate, I think that there's still some substantive issues that will decide the outcome of the election.

So what's your gas price forecast for November for the election? $3.70, no, $3.62. Oh, really? Okay. And what was the, what was the, there was a tipping point in the election model mark, where if it was a $4, for, Brendan. And our colleague who has been working on this with Justin Begley, Brendan Lasserta, calculated it's $4.9. So if oil prices average $4.9 for three months, not for a day or a week. So that means it's got to be well into the fours, I would think, for some period of time.

All else being equal that flips the election results. We are currently, given Chris's forecast of $3.62, forecasting Biden wins with 3008 electoral votes. But if it goes to 409 on average in the second quarter of the year, then we're all-als equal, it goes to Trump. Trump will win. So that's how close it is. That 409 was January-February approval ratings and consumer sentiment type of inputs, too. Do we think that has changed? No, it's all-out-se equal.

I mean, for consumer sentiment and approval, we're just taking the current value as the forecast. Okay. No, no change there. But the approval rating doesn't matter in the model. I mean, it's very, and consumer sentiment doesn't matter all that much either. Conference board, is that in? That's in the, yeah, but you have to go read the paper. I don't want to go down the rabbit hole, but it's not, those aren't particularly useful, you know, and trying to understand the, you know, how this thing.

The other thing that will swing at, though, is mortgage rates. Anything over eight, that'll swing it. All else equal. So if you go to, let's say you go to 7.75 and a gas goes to 390, well, then, you know, I'm making that up, but the model probably would, it could flip, you know, at that point. So it's very close. It's very close. All right.

Let's do one more. Chris DeReedies. What's your statistic? 88.5. Is it a participation rate of some sort? Is it a diffusion index? No. Inflation related?

Chris? It's not inflation. Is it a rate? It's not a rate. He said a participation rate. That's what Chris said. Chris L said. Oh, no.

That's what's not a rate. It's an index? It is an index. It came out this week. ISM didn't come out this week. Oh, NFIB. NFIB. NFIB.

NFIB. Hey, I'm just saying I've been pretty hot. You're killing it. I'm killing it. You're on fire. Yeah. Go on. What's an off week, Marissa?

I'm letting my boss win. That's tragic. I'm going to see him next to. Please do. Anytime you want to do that, feel free. Feel free. I have no problem with that. I'm just saying.

Lafacchus would never do that to me, but, you know, ground me into the dirt if he could. We'll play the game. We'll play the game. Yeah, yeah. Best man wins. All right, Christy. Why did you pick that one? It is very low.

It's lowest level since... Yeah, what the heck? December of 2012, small business owners are nervous. They're, at least according to the survey, they're saying they're not particularly thrilled about the economic prospects. They're feeling pressure on their sales. Right? They still have problem hiring.

and are finding high quality workers. So, you know, something to bear in mind. At least the small business community is signaling that things are not. You don't read much into that, though. I mean, really, it's like the University of Michigan Consumer Sentiment Survey. I don't really, you know, I don't. I think it's got a political bent to it as well. Yeah, very political.

Pretty empirically. It's like dramatic swings by who's in the white house. Really? Yeah, yeah, more than the University of Michigan, which they've all become a little bit more. partisan, but NFIP for sure. Yeah, I don't, I don't know. That's interesting, though. I did notice I was looking at one of your decks that you put together that business formation,

which has been very elevated since the pandemic, that is starting to come off the boil a little bit. Yes. It's not a whole lot, but it's down. It's still high, but it's coming down a little bit. It's coming in. Do you think, well, I was going to ask another question. but we were already pretty long. I thought we'd end the conversation.

And I already gave you my stat, the 1.9. So I'm, I've played out. So let's move. Let's go to the last part of the conversation. And what this all means for the Federal Reserve in markets. And as we were discussing earlier, the hot 0.4 percent increase in CPI, core CPI, hair on fire. I think the stock market sold off over 500 points on the Dow.

You see the 10-year treasury yield? I think it increased like, I don't know, 20 basis points or something. Some crazy increase. It's a 5%. Yeah, no, it's a 450, 4.5% on the 10-year. 4-56. Is it 456? 4-56.

Let me turn to you, Chris. What did the CPI do to expectations for the Fed? If I go look at the futures markets, what are they saying? Yeah, I push them out. So June had been the, I guess the mode or the median up until the CPI came out. And now that's off the table. And I'm pushing out the expectation to September for the first cut. Looks like two cuts this year, December, September and December.

Yeah. And what's the probabilities? Any sense of probabilities? Oh. If not, no worries. I just remember. But it's, I mean, is it now basically they don't know when the markets and don't think there's any chance for a June rate cut?

One in five. Oh, one in five. Yeah, and that's the ship from, it was only about 55% before yesterday's data. So people were starting, and they were starting to be shipped a little bit away to begin with, but it dropped from a majority to, yeah, 20%. And is the preponderance of the probability now in September

as opposed to, because there's a meeting in July too, right? Yeah, July is, the majority is, a slight majority is expect another pause. And then in September is when you start to see a tip to the majority of participants. It gets a little convoluted over time where people are going to be. But the majority of investors expect at least one cut in September. Okay. So it gets over 50% probability at the September meeting. Right. Okay. Because I think we'll have to sit down and discuss this, but I think we're definitely going to push out when

we have our first rate cut to, I would argue September, right? Yeah. In terms of the OER component, does the 7.37% level on the fixed mortgage rate boost that? And to what extent? No. No. No, it's not the mortgage payment, Chris. It's the equivalent rent.

So not directly and not maybe over a long period of time. It has some impact. But, yeah, not not directly. I think you're going to Canada, if you go to the Canadians, the way they, and the way we used to calculate it here was a mortgage payment. So if the mortgage rate increased, the mortgage payment would increase, and that would show up in the CPI. But that changed here when, Chris, back in the 80s or something.

84, 83. Yeah, something like that. But the Canadians still do it that way. So you have to be careful when you look at the Canadian data. And the Europeans throw it out altogether. Remember, they harmonized so they don't pay. attention to it. UK too.

Yeah. In terms of financial markets, it looks like the financial, they'll handle it reasonably well, maybe sell off a little bit, but as long as they're convinced that the next move is down instead of up, they'll handle it gracefully. But if for whatever reason they think that more hikes would be necessary, then that would be like a def-com-for scenario for financial market. Yeah, it's a whole different ballgame. Let me, to that end,

Turn it back to Chris DeRides. I mean, what would it take for the Fed to actually begin cutting rates? I mean, it feels like to me they're focused on the inflation statistics at this point. They're not really focused on the job numbers anymore. They feel like the job market has cooled off. We are getting a lot of strong, we are getting very strong job growth, but it's okay because we've got all this labor supply. Unemployment is actually not just a little bit higher here.

and wage growth is normalizing. So, you know, they're not worried. They're not worried about that, but they're really worried about the inflation numbers. Are they coming in or not? Are we stuck at 3% or are we going to 2? And what is it do you think they would need to see to convince them that, yeah, we are going to 2,

that they're sufficiently so that they start cutting interest rates, which we're saying by September this is going to happen. Do you have any sense of that? My sense is they need to see. three, four months of consecutive, you know, trend down in the inflation rate that we are clearly on the path towards that 2% target, right? No stalling out. It doesn't have to be, you know, immediate, but it need to see those 0.2.1% prints.

You've got to get that direction in there. Yeah. That's my thought. I mean, it feels like they need three months. that kind of average out to 0.18%, you know, percent. So that's what they need, right? Something like that. You can get a 0.2, but you need a 0.1 thrown in there.

And you need it three months in a row. And that's how you get to September, right? Because you get an April, May, June, you know, you're going to get one bum month in there, July. That takes you to September. Maybe July, maybe, but you've got to have pretty good luck here to get point twos and point ones for the next three months. And I think it has to be definitive to really make the case for July, right? It has to be even more of a downward slope.

I guess that could change if something breaks in the economy or we start to slump, which is possible. I mean, I don't know if you notice by our tracking estimate for GDP now is in the low ones. I don't know if you noticed that. So it feels like things have cooled off here pretty significantly coming into. Yeah, well, policy missed up is our number one risk, right? Yeah. Yeah, exactly. Right. Okay. All right. Mercer, anything you want to add on that on the Fed front? The Fed front? Say that three times fast. No, I just, it's becoming increasingly more difficult for them, I think, to navigate this. And now we're looking at potentially a first move that's

right before the election, too. Oh, that's a great point. That's a great point. I mean, let's say they get the three consecutive months of 0.2.1, and now you're looking at September, maybe decide to wait until right after the November meeting is right after the election, right? Yeah. Do you really want to get-

The day after or something? Yeah. Do you really want to get caught up in the politics of that? It's a really interesting point. but isn't pausing a political consideration for the independent central bank? Yes. Great point. Great point.

But it's easier to not, if you move, that it's different than if you don't move, right? I guess it depends on how it's definitive the data is. If the data is screaming at you, you morons, it's, you know, we're a target and you're taking a chance here, then they got to go. You're right. But if it's not screaming at them, you're a moron, then maybe they wait. But I think that the odds that you get that, this very smooth, consistent month after month, deceleration and inflation are low, given what we saw.

I mean, you could have made the, well, you did make the argument that they could have moved on the data at the end of 2030, 2023 and award rates. And they did it. They didn't. And then they'd be in this situation where they would have moved and then they would have had hot inflation readings, right? So. Yeah.

But you arguing for November, December, Mercer? Well, no, I'm not arguing that they, what they should or shouldn't do. I think what I'm arguing is that I think it's unlikely that they're going to have from here on out inflation readings that are 0.3, 0.2, 0.1, 0.0. You know, I think that's unlikely. And so they're going to be in this position where, well, it depends how you read it. If you take this out, if you do a three month. moving average, if you take a six-month moving average and... You go to the second decimal point.

Go to the second decimal point and you round up or you round down, I think it's going to be, I don't think it's going to be as clear cut as what they would like it to be. I suspect it's also not going to be clear sailing on the economy either. Something's going to happen somewhere. We're going to really slope significant... I think the probability that we slow down is much greater than we re-accelerate here. or something breaks in the financial system because you've got this inverted curve. The Fed's got his foot on the break.

It just feels like, and then you're going to say, okay, you know, do I really need a 0.18? Maybe I can live with a 0.23, you know, something like that that can cut. I don't know. It's going to be interesting, though. Okay. Very good. Anything else, guys, before we call it a podcast? I think that was very important a bit.

And Matt, I was just, you know, pulling your, as I think there's a phrase called pulling your chain, right? Isn't that? I think so. That there is, yes. It's funny. When I say these sayings and I start thinking about them, I go, is that really a saying, you know? Have that ever happened to you? Pulling your chain?

No. I think so. It's like, you know, this is the same thing as your password. Once you start thinking about your password, you go, oh, what's my password? I can't think of my password. you know you go into a panic mode right because you just type it you don't even think about it and then once you start thinking about it you go oh my gosh what was what is it what is it what is it yeah am i just me is that just me or is that everybody i do that with my i do that with my address my

home address oh do you really yeah like the that's weird i start questioning when i say it out loud i'm like that doesn't sound right is it a four or a three something's wrong marissa something's It could be. Could be. Could be. I do it with my age. That too. Yeah, that too.

Yeah. Yeah. Isn't it like the Heisenberg principle or something? Whatever you focus on, you mess with it, you know? Makes sense, yeah. I don't think that's the Heisenberg principle. I don't know. Is that something you just made up?

I could see. I could have. I could have. Exactly. That's exactly it. All right. Anyway, we're going to call this a podcast. Take care, everyone.