Moody's Talks - Inside Economics - Dissecting CPI, Ditching Hoagies

Episode Date: July 15, 2022

Mark, Ryan and Cris are joined by a bevy of colleagues to dig deeper into the June Consumer Price Index report and the sources of inflation, including energy, vehicles, food and shelter. Full Episode TranscriptFollow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon 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 my two trusty co-hosts, Ryan Sweet, Ryan's Director of Real Time Economics, and Chris, Chris, Chris, who went AWOL last weekie. I see her back, Chris. I'm back. I'm back. How was your vacation? I caught the podcast. What's that? You were gone for a long time. Yeah, yeah, three weeks. Yeah, you look rested. Yeah, it's a little bit of a... I was until I heard the last podcast. We were, why? What, what, what we sound?

A little trash talking there. Oh, really? Oh, you don't remember that right? I won't bring it up. Oh, I remember it. Oh, you do? Yeah, you're so sensitive. Got Chris back on Twitter, so.

What's that? Your trash talking last week got Chris back on active on Twitter, so. Oh, that's right. It was not to motivate me, yeah. You, you, Chris, are, because you've been avoiding, you were like the maven of LinkedIn, and now you're you're you have joined twitter right so what's your handle middleway econ oh that now that makes perfect sense yeah perfect yeah right down the fairway economics right yeah i like that and uh so what made you decide to to join the twitter sphere

uh you yeah me it was uh you know the trash talking uh you know had to had to get back on see what what was actually going on. Well, I'm still trying to figure it out, though. It feels like you're just going to be on social media all the time now. No? No. No.

All right. Okay. Very good. Well, it's good to have you back. We missed you last week. We had a good podcast. And we're also joined by, I think this is the right word, a bevy of colleagues, folks that have been on before.

I think everyone's been on before. We've got Mike Brisson, Mike is the fellow who looks at everything vehicles. Good to have you, Mike. Good to be here. I should say to preface all this, obviously, I guess I was just taking this for granted. We're talking about inflation.

That's what we're talking about here. That consumer price number, index number that came out on, I guess it was Wednesday. Is it Wednesday? Yeah, Wednesday. Pretty ugly. And then the producer price index that folks don't follow nearly as closely. But that was pretty ugly too, wasn't it, Ryan?

It was. The only good inflation news came out this morning with import prices falling. Oh, I saw that. Yeah, I saw that. We can talk about that as well. But we got, you know, obviously one big aspect of, oh, so we've got all of the, all our colleagues here, because we're going to dig deep into the consumer price index, what's driving the high inflation. And to do that, we got Mike, because Mike person who's going to talk about vehicle prices, which was a bit of a surprise, at least to me, increased in the month. We've got Chris Lafacchus and Juan Pablo Fuentes. You guys are energy, all things energy,

and obviously that's a big part of the inflation story, so I want to dig deep into that. We have Jesse Rogers going to talk about food prices. Food prices are up a lot. Everything's up a lot, but food prices in particular, and we have him for that. And, of course, we're going to talk about rents and housing services costs, but I think, Chris, you're going to cover that for us as well. So we've got all our bases covered. So welcome, guys. Good to have you.

Hi, everyone. Hello. Hello. Good to have you. Yeah. So any words of wisdom before we dive in? Jesse, you're always good with philosophical statements. Do you have any statements?

I just hope we get to food because I came hungry today. I don't know if I'm going to leave happy depending on how dismal the conversation gets, but at least eager to join. Well, yeah. To be with everybody. Jesse, you're right, because sometimes I invite you on and I don't invite you to speak. That's kind of rude. Yeah, it's our dynamic.

That's our dynamic. Hang tight, buddy. Let me warm the bench for a little while. We might get to you next March or something. but just hang on hang on yeah by the inflation's uh you know that hopefully coming down by which is really a shame because you have a lot of really cool things to say we were talking about sorghum prices before we went on and you know all about sorghum i like i didn't even know what sorghum was it's a burgeoning market a burgeoning and you can use big words too which is

really good all right all right very good to have you guys okay all right let's get down to business oh And we are going to play the game, but we can't play the game with all the bevy of colleagues. That would take forever. But we'll play the game, the statistics game. Everyone knows what that is. We'll come back to that. But before we get there, let's get a lay of the land. So, Ryan, what the heck?

I think the CPI number was even hotter than you expected, right? And you expected a pretty hot number. So why don't you give us a sense of the statistics? the CPI statistics. I feel like I repeat myself every month. It was another ugly CPI print. So the consumer price index, which measures prices for goods and services

that you and I are buying. That was up more than 1% again. But I think the concern is that the price pressures are broadening out. So more and more of the components of the CPI are rising and rising very, very quickly. And that caught the attention of the Fed and financial market.

So after the CPI came out, which was much hotter than people were anticipated, was up on a year ago basis a little bit more than 9%. And that's, you know, an enormous numbers, the highest since the early 1980s. Markets started pricing in 100 basis point rate hike. And we can get back to this later, you know, in Fed tightening in July. So that's that's a full percentage point. There's a full percentage point. That's, yeah. So last month, the Fed raised rates by 75 basis points, which was, the mostly done since 1994. So this is even more aggressive. And I think part of the reason is that, you know, it's not just attributed to, you know, one or two components to the CPI anymore. It's starting to really broaden out.

And so when you look at the July or the June CPI, energy prices were a big factor. They added 3.6 percentage points to year-over-year growth in June. So we had 9.1% year-over-year. 3.6 percentage points of that was just attributed to energy. That's heating oil. That's electricity utility costs. Gasoline was an enormous part of that. And then, of course, we have to look at supply chain constraint components. Just so I understand that, is that just the direct impact of higher energy costs? Correct. That's the direct effect.

So it does not include the impact that energy is having on everything else, the indirect effects? Correct. So, you know, economists, we look at the core. CPI, which strips out food and energy, which is just a direct energy effect, because that's a good idea of where core inflation is going to be in the future. But energy prices filter down into other parts of the core CPI, say, for example, airfares or public transportation. So that's not measuring that indirect effect. Or food. Energy. Right. Exactly. And just we'll get to get to that. But energy is all over the place, and it's affecting a lot of the prices that you and I are paying. So what you're saying is consumer price inflation year over year through the month of June was 9.1.

If energy prices were just, and that's gasoline and electricity and natural gas, if that was just flat, had not changed, overall inflation, that 9.1% would be down by 3.6 percentage points. And that's the direct effect. It doesn't consider what higher diesel means for food. It doesn't consider the jet fuel prices for airline tickets, you know, so forth and so on. So it feels like, is it fair to say, roughly speaking, that if energy prices, not that they, if they don't even have to fall, they just have to go sideways. They just go sideways for a while. Then inflation would be roughly half of what is today. Yep.

At least half, yep. at least have still very high but manageable i mean it'd be easier for the fed to bring that down than you know what they're doing right now okay okay fair enough and this is obviously why we've got chris and in one pablo on the call because we this is critical to understanding future inflation what happens with oil prices what happens to natural gas going forward that's key to the inflation out yeah that's why july is going to be much better because you know gasoline prices have come down global oil prices have come down. So we're going to see some relief in July.

Okay, and we'll come back to that. Okay, so go on. You're decomposing the 9.1% you now have accounted for the energy. What else is going on? So the biggest headache, of course, is energy. Then second comes supply chain issues. And what we did was we go through all the components of the CPI and identify what was, you know,

those components that are being significantly affected by supply chain. So think new and used vehicles, audio, video equipment, children's apparel, things like that. And that added 1.1 percentage points to year-over-year growth in the CPI. So energy added 3.6, tack on another 1.1 for this temporary effect of supply chains. The good news is that we're seeing some improvement on the supply chain front. In fact, that the supply chain constrain components to the CPI are adding less and less over the last several months to year-over-year growth in the CPI. So would vehicle prices be part of the supply chain?

Yes. Okay. They're like the poster child for a poster child. Yeah. And when you even decompose like the supply chain contribution, like most of it is becoming, is coming from new and used vehicles. And just to connect the dots, you go back now almost a year ago, the Delta Wave hit of the virus. It shut down a lot of Asia, particularly Southeast Asia, chip plant shut down. It can't produce chips.

They go into vehicles. You can't produce vehicles. Inventories collapse, nothing on dealer lots. Vehicle prices go skyward. So that's what you mean by supply chain disruption and vehicles being the poster chava for that. Yeah, supply chain. I mean, it's both supply, like the supply of containers or, you know, looking at a number of ships that are parked off. the port of Long Beach. It's also demand as well because consumers, you and I were buying a lot of

stuff over the last year, two years. And that exacerbated the problems that we were experienced with the supply chains. And that drove prices up, you know, through the roof because, you know, we got retail sales this morning. They're really strong. And retail sales are goods. And most of those goods, we import. And that's, you know, a key source of the inflation that we're experiencing. So you got energy, number one, supply chain is coming in, number two. And then you have the still reopening effect. So as the economy is coming back, you know, those areas that were, you know, hit really, really hard by the pandemics, I think restaurants, for example, hotels, motels,

even airlines, you know, they're starting to raise prices pretty aggressively. But that only added 0.3 percentage points to year over your growth in the CPI in June. So 3.6 percentage points came from energy. 1.1 came from supply chains. 0.3 came from the reopening. So if you exclude those, if you exclude energy, reopening, and supply chains, the CPI was up 4.1% on a year ago basis in June, which is still high. And that's stronger than 3.7% that we got in May. And I think that's one reason why the Fed's getting a little bit more nervous is that some of these price pressures are broadening out.

Well, just to complete the story, suppose, and I know it's hard to calculate, but your sense of it, if I account for the indirect effects of the higher energy prices, what would inflation be, CPI inflation be? Close, what would it be? Three, three and a half. Okay. three and a half. Let's say just be conservatively speaking, three and a half percent. And the Federal Reserve Board's target for CPI inflation high end,

I would put at two and a half percent. Two and a half. So what you're saying is then, you know, when you say exclude, people say, well, why are you excluding? I mean, the point is that these things are indeed temporary. more or less. They're not persistent.

Let's put it that way. Temporary people think next month, they're not persistent for a long period of time. Because it goes back to things like the pandemic, it goes back to things like the Russian invasion of Ukraine. I guess we need to talk about that more, and they could last for longer and be more disruptive for longer going forward.

But if they simply not go away, because I don't think Putin's going to stand down anytime soon, the pandemic's not going to go in a way. We're going to get other waves of the virus. But if they simply are like this, we've seen the worst of the disruptions by those, those big shocks to the economy. What you're saying is that inflation should moderate back into something

around the mid threes would be, exactly. And I think people have jumped off to the transitory bin wagon. And I think one reason is that people kind of put a time horizon around it. When I view transitory, I look at whether or not it's fundamentals. versus these temporary supply shocks. And all our inflation problems are supply shocks.

It's not fundamentally being driven by changes in population or a really tight labor market. We got Russia invading Ukraine, which juiced up oil prices, the pandemic, which oiled supply chains, the reopening of the economy, which is temporary, and that's boosting inflation as well. And just to make it clear, to strike the point home, If energy prices simply go flat and the supply chain issues continue to iron themselves out and moderate,

that's going from 9-1 to 3-5. But if they actually decline, if energy prices actually decline, and we're going to come back to, it feels like at some point, and they've already declined since we're at the peak back a month ago, So that's going to put, at least on top line inflation, going to put significant downward pressure. And we could be below the Fed's target at some point here. Yeah, we will. We most likely will. And that's kind of assumed in our baseline is that we get a lot of goods disinflation

and goods being like stuff that we buy. Right. And that's needed to offset because of plain devil's advocate. If we don't get that goes disinflation, if something else goes wrong, you know, if China locks down again. And we have services inflation that is really beginning to accelerate. So one thing I didn't mention was that rents picked up. So they're accelerating. And they added two percentage points to year over your growth in the CPI in June.

And that was the largest contribution since the early 1990. So we have a rental inflation problem coming. And it's only going to get worse this summer and later this year. So we need that we need that goods disinflation. We need energy prices to come down. or inflation is going to be higher for longer. Oh, that's, I didn't realize that. So the acceleration in the CPI for housing services, which obviously is tied back to the very

strong growth in rents, added two percentage points to inflation, CPI inflation in the year ending in June. Yep. And that was the largest since the early 1990s. And we'll definitely come back to that as well, because that, that is more persistent. Yeah, those are sticky prices. So another way you can kind of easily look at the CPI, break it down into, and I think the Atlanta Fed does this. They break it down into sticky components versus more volatile components.

And sticky inflation is picking up. And most of that is because of rents. Right. Okay. All right. Let's just stop there. Let me turn to Chris. Because, you know, I've kind of guided the conversation in a certain way here.

and I'm just curious what you think. Well, first of all, can fill in any holes in what Ryan said? Did he miss anything that we should be talking about in the report or inflation more broadly? And kind of sort of what the implications are. So what do you think of that conversation we've had so far? I think Ryan did a great job of summarizing. Well, that's- But I'll underscore.

That just doesn't sound right, Ryan, when he leads with a compliment that always makes me sweat a little bit. He's getting to the butt. Oh, the butt had, with the butt, slow on the butt. Okay, there you go. Oh, no, not so much a butt just to underscore. This was a bad report. This was terrible.

It was, uh, Ryan mentioned it was the, it was widespread inflation. It's not just concentrated in a few items. It's, it's everywhere. And it's in items that we also thought we're not going to experience a lot of inflation, like furniture, right? We had expected with the supply chains and Target and Walmart saying that they have a lot of excess inventory now, that we wouldn't see much price growth. We'd actually get some relief in those products, but you actually saw some acceleration in the prices of those products as well. So I don't want to, I don't think we need to sugarcoat this report.

It was pretty bad. And we're hopeful that things, that it's at the peak and things will improve. But I still think there's a lot of risk out there. It can't get much worse. I can't get any worse. I mean, that was awful. I seem to recall that statement back in March, right? Yeah, true.

Very good. But that simply goes to the timing of the oil price peak, right? I mean, the thing that we didn't expect in March, or, you know, we were forecasting was that European Union would not sanction oil, right? And therefore, they did. And oil prices jumped again. And therefore, we got the peak in June. which is the data we're talking about, right?

So, yeah, but, you know, there can be other shoes to drop. Okay, fair enough. Yeah, fair enough. You know, we're still, and we'll get into the energy markets, I'm sure, but we're still issues both on the supply and the demand side. The sanctions, yeah, they haven't really gone into effect fully yet, so we don't know all the ramifications of that. Yeah, I guess to your point about the broadening out, the one thing that did make me,

well, everything about the report was, as you said, bad, ugly. But the one thing that kind of made me particularly nervous was the acceleration in inflation for medical care because that has been up to this point pretty modest and tame. And that's not such a big part of the consumer price index, right? CPI, it's a very, I think the share of the CPI that goes to vehicles is greater than the CPI that goes to medical care. Because the CPI measures kind of out-of-pocket expenses, and a lot of the medical care that we consume is insurance companies covering that.

But that goes to the difference between the CPI and the core consumer expenditure deflator, which is actually the measure of the Fed is generally most focused on. There, medical care plays a much larger role. It's a much larger share of that index. and that makes me, that makes me particularly nervous that that's picking up. Any insight on that? Because we don't have an expert here

going to talk about that. But you just got to be careful with the medical components of the CPI, you know, including physicians and hospital prices, because the response rates, so what's the share of the universe that they're going out and surveying, the Bureau of Labor Statistics every single month has dropped. It's like, to the point where it's, it's very unreliable.

I don't think it's a complete sample of what prices are actually doing. Yeah, that's a good point, right? Okay, all right, well, that's good. So, okay, let's now dig deep into some of these components of the consumer price index that are, have been and are adding a lot to inflation. And we're doing this to try to better understand what's driving that higher inflation, and then perhaps more importantly, what does it mean about where, inflation is headed over the next 12, 24, 36 months. So to that end, Mike, Mike Brisson,

let me start with you in vehicle prices. As I mentioned earlier, they rose, both new and used vehicle prices rose in June. And that, for me, was the biggest surprise in the report. I had expected and used vehicle prices to client because you have taught me to look at auction prices and our own index that you construct based on auction prices, actual transaction level prices. And that showed a big decline in June, right? And it's not showing up in the CPI. So can you give us a sense of what's going on there, Mike?

Yeah, so our auction is a wholesale price index. Our auction index are the Moody's Analytic sale price index. We're looking at hundreds of thousands of transactions each month that come out of the auctions, about 80% of auction transactions, are shown in our data. But the CPI, they're looking at 480 observations at retail stores. So do a picture across the country and you add on the sales tax as well in each part of that country and you're looking at just 480 observations.

And it's not seasonally adjusted, whereas our index is seasonally adjusted. Rightfully so, it's not seasonally adjusted. There's not the large peaks and valleys that you. have in the auctions where in the spring you have dealerships that load up on inventory, so prices go really high, and then they unload inventory towards the end of the year. And so there's a lot more seasonality in the auctions than there are in the retail. So the CPI isn't seasonally adjusting either. But the CPI is down from its peak, over 1%.

We're expecting it to go down. It's CPI has been, it lags the wholesale auctions. So you imagine dealers go to the wholesale auctions, they pay a certain price and they pass those prices on to consumers. So if they're paying less now in June, like we're seeing at the wholesale auctions, presumably later in the year, the CPI will go down in response. Okay. So you're saying it's a matter of time. Yes. Well, I believe the wholesale auctions will stay relatively steady because new vehicle supply still remains low over the rest of the year. But I do think that the CPI will come down a bit over the rest of the year from what we're

seeing in the wholesale prices. Yeah, and most fundamentally, as I mentioned earlier, it goes back to supply chains, chips, lack of production, lack of inventory, vehicle prices go higher. And give us a sense of that dynamic. I mean, my understanding is chip production is starting to improve. Vehicle production is starting to improve. We're getting a little bit of improvement. If you look hard, I think, at the data in inventories, they're still incredibly lean, but they're off bottom, I think. And that that does argue that the very rapid increase in prices should come to an end. And we may even see some, as we were discussing, price declines. Is that kind of a reasonable description of what's going on?

Exactly. Yep. So in the U.S., the production issue is different all over the world. And it wasn't this way last year. No one could produce last year. Right now, the U.S. is producing almost back at 2019 levels. We're about 10.7. SAR seasonally just an analyzed rate.

in May, 10.5 million in April. The 2019 average was 10.9 million. So we're right there for the six quarters before that. It was 9.2 million in the U.S. So we're back up to where we were. In Germany, or Europe in general, but Germany I look at for Europe, it's probably down a little less than 20 percent from 2019 levels. In Japan, where they're closer to China. And so they were subject to all the COVID lockdowns. They're about 35% below where they were in 2019. So the US is producing pretty much where they were prior to the supply crunch. Germany, they got hit by the Ukraine crisis, a lot of the internal components that they

were running through Ukraine and all those industries slowed down or shut down. So they were hit by the war. So they had some supply chain constraints there. Supply chain constraints there. And Japan has hit the worst because of their exposure to. the Chinese lockdowns. Should we expect vehicle production to pick up in Germany and Japan? I mean, or we should.

Okay. Yeah. Let me ask another question, and this is tangential, but it's bothering me. Vehicle demand, you know, the actual number of units that are being purchased, that remains very depressed. I think, wasn't it 13 million units, I think in June, something like that? Yeah, that was the SAR for June was 13. But demand, I like to look at.

That's the miles driven. And the statistics I would have used if I was playing the game would be $3.75 trillion. That's how many miles were driven. You see how he does that. He sneaks in the game. You see? Yeah. And by the way, I would have gotten that.

No problem. Mike, I'm just saying. So it's the highest May reading in history. So the miles traveled in the U.S. is the most ever despite high fuel prices. So demand is out there. And the high prices show demand is out there. It's a supply issue that's keeping our. the new vehicle sells down.

Okay, so, okay, okay, so vehicle production is picking up, but you're saying this hasn't picked up enough to start feeling, filling dealer a lot sufficiently that they can sell more cars. Correct. Got it. But that's going to happen. It feels like that's happening. We're moving in the right direction.

Let's put that way. It's coming. It's why I'm happy to defend that forecast. I like that. And here's the other thing. Use vehicle prices have shown some softness. They rose last month, but they go back a few months ago, we had seen some declines even at a retail level.

New vehicle prices, no such thing. They keep every month, it's up a lot. I mean, if I were to assemble all the OEMs and say, let's collude and restrict supply as much as they have, you can raise prices. It's the amount of supply that's out there, you're able to raise these transaction prices, you cut off incentives, you're able to increase profits, just go back to your industrial organization class. You restrict that supply. You can raise prices. The transaction prices come up. And that's what's going on. Okay. So you're going back to there's nothing on dealer lots yet.

Therefore, prices aren't going to come in. It's only when we start to see enough production long enough that in inventory start to come off bottom that we'll actually see prices roll over. Yes. So you weren't implying collusion, though. No, no, no. I'm saying if I were to design it, this is how I would have designed. Oh, I see. I see. It was a perfect storm for them. Profit per vehicle sold has never been higher. Right. Okay. And they're able to raise MSRPs. OEM is jargon.

That is... Original equipment manufacturer. Yeah. So the producers. Yep. Right. Okay. Okay.

Okay. So, all right. My takeaway, Ryan and Chris, correct me if you have a different takeaway or let us know, is that we've got some optimism. We should have some optimism here from a prism of inflation. we're going to see prices start to come in here pretty significantly for both used and new. Maybe, you know, month to month, who knows. But certainly by early next year, this time next year, we should be seeing definitive declines in vehicle prices.

Yes. Wait, wait, Mike's got answered that question. And then we react to that. Oh. Definitive declines this time next year? Yeah. Yes, right now it's a year over year price growth is about 7% of the CPI. It feels like around 10.

It's higher for new, lower for use. Yes, for use, it's about 7%. New vehicles I have a different outlook for than the used vehicles. I think I can see more price gains in the new vehicle market. The difference between new and used prices is over 20% right now. They historically track themselves. So depending how far down, used come down and how high up new come down, those will have to equal out. So that 20% gap has to close somewhere. So it might be raising the used vehicle prices

and the new, or raising the new vehicle prices and used vehicle prices coming down 10% each, or use vehicle prices come down 20%. Oh, okay. Okay. Extracting from all. That's, I get it. But in aggregate, is it fair to say, and I don't want to put words in your mouth, but I want to put words in your mouth. No. Because, you know, there's a, you know, there's a, just want to make sure my forecast is right. A year from now, sequentially month to month, year, year, over year, that's a little trickier. But even year over year, we should see some declines in aggregate vehicle prices. Use new, combine it however you want to do it. Yes. And it will be concentrated in the used. Okay. That's a big swing, right? We've gone from

stratospheric increases to declines. That should have a meaningful impact. By the way, you add it up. I think new and used are 8% of the CPI index. So it's not inconsequential. It's a consequential part of the index. Yeah. Okay. All right. And we just, we, it just, oh, by the way, Ryan, Chris, anything there?

Ryan said, yeah. He agrees with that. Yeah. I mean, a used vehicle can't be an appreciating asset forever. I bet that's unheard of. Can it be right. Yeah. Best in four runners last week.

Yeah. Chris? And prices will come down in a recession. So yes. There you go. See? Chris is coming to the dark side. Rude.

Well, even in a non-recession, what do you mean? Because Chris is, Mike's forecast is based, I should say, these projections are based on no recession. Recession, we're in a different ballgame. Yeah. Okay. Yeah. All right. Okay.

Very good. Anything else, Mike, you want to bring up on the vehicle front? before we move on to the next. No, I think we're good. We got the trajectory. Okay. Well, thank you for that. Pretty rare, though, for like, you, for like, be able to see.

No, wait, Chris, Chris, no, no, no. I'm leaving away here. You follow, you follow me. Okay. I'm moderator. So let me moderate. Because we've got a lot of ground to cover. I want to get to you.

But before I get to you guys, I'm working backwards because energy, obviously is very important. but let's go to Jesse next because if I don't go to Jesse now, we'll never get to Jesse. So Jesse, let's talk about food prices, which are up a lot too. I think in aggregate food at home and at restaurants is up double digit year over year, I believe, in the CPI index. So what's going on with food? What's driving those higher prices?

It's driving higher prices. it's really a confluence. I like the word perfect storm that Mike use, the phrase perfect storm. It's higher energy prices. Food manufacturing is energy-intensive. Agriculture as an industry is energy-intensive when it comes down to fuel, electricity costs, fertilizer. And of course, we've had the almost explosion in commodity prices

from the war in Ukraine. Markets have since rationalized a little bit. There was a spike when the war started, wheat prices, grain prices, particularly because Russia and Ukraine are so important, you know, to global agricultural production, specifically in emerging markets. And, you know, as, you know, global shippers have figured out

ways to move Russian wheat. Grain prices have come down. So, you know, food prices are high, but, you know, they're probably going to level out. Level out. Okay. So that means, it means like, what does that mean? Year over a year, food prices go flat, essentially? Yeah.

So I think, so, you know, usually, you know, prices. for food, the stuff we consume, whether restaurants or at the grocery store, it typically responds to changes in commodity and energy prices with a lag. Just because food producers are locked into long-term agreements for their inputs. And we've seen food prices kind of lag the overall CPI and are rising and kind of broke into this double-digit range more recently. over the past couple of months, we've seen prices for raw materials, you know, mainly grain prices, but also energy a little bit, come in. And that's eventually going to keep food prices, you know, from rising, you know, over the next couple months. If we kind of look at that medium

term outlook, you know, we're going to, you know, they'll remain high for, you know, things that are going on in the global farm economy that we can talk about. But in terms of contributing to inflation, that, you know, food prices are going to, you know, food will be expensive, but, you know, we're not really seeing, you know, gains on a month-to-month basis going forward. Going forward, right. Yeah, going forward. So, you know, food prices are high, you know, they've come in and that's going to reduce pressure on, you know, on producers, both on the, you know, the raw input side and in food

manufacturing. And, you know, so, you know, food's contribution to overall inflation. which is common, you know, hot and heavy, but with a lag, that's going to ease over the next, you know, both on a month to month basis and year over year. It doesn't mean consumers won't hurt, you know, because, you know, food prices are high. But in terms of, you know, contributing to further price gains, I think it's fair to say that we've seen, you know, most of the run-up and we're past the peak. Okay. And kind of in my, you may have said this, but just to reiterate, there's two broad forces at work pushing up food prices. One is the Russian invasion of Ukraine

and the disruption to ag markets. The Russia, Ukraine produced a lot of wheat, corn, sunflower oil, that kind of thing. And that's disrupted markets significantly. Fertilizer, you know, obviously is important to a lot of different types of agricultural activities all around the world. Second thing it's been driving food prices is the higher energy prices. You've got to get the food from the farm to the store shelf in a proverbial, proverbially speaking, and you put it on a truck, so diesel prices are way up. By the way, they haven't come in as much as gasoline prices over the last month or so, but they're very elevated.

Those two things have driven this double-digit, what we're now saying through June, increase in food prices. And in going forward, well, we're saying we're going to come back to energy in a second, but that, you know, it does, we're expecting energy prices to moderate, at least not rise any further. And we're saying on the Russian Ukraine front that while that conflict is going to continue for the foreseeable future, the impact of that on ag prices, we've seen the worst of it. Is that a fair characterization of your view? Yeah, I couldn't have said it better myself. I think one thing on, you know, in Russia, you're not sucking up. Now he's sucking up. Now he says it does that. No, well, I mean, when it's fair, it's fair. You know, I like to,

you know, let the chips fall, you know, where they may. Okay. Very good. That's very fair. I think that's excellent. So if you, so if I told you a year from now, in June of 20, 23, year over your CPI food inflation was zero or close to zero. You'd say what? That sounds about right to you. Yeah. Or even unwinding. We could even see, you know, small on the negative side.

All right, Jesse. I'm holding you personally accountable for this. All right. While's Hogi Fest is expensive this year. Isn't it? Oh, yeah. This is the best time of year. It's Wawa's Hogi Fest and prices are up.

And what makes it a, like they'd sell hoagies all year round. Why is this a fest this time of year? I mean, what makes it a fest? Well, they reduce the prices. Oh, they do? Oh, okay. Yeah. Yeah.

Oh, but it's still very elevated the price? Yeah. Yeah, compared to last year. I mean, think of what goes into a hoagie. I mean, it's Brad. You're at, yeah, you're at Wawa all the time. I've sworn off hoagies. I'm telling you.

It's all in salami. If I eat a hoagie, I won't eat for a week. You know, you're not allowed to live. in Philadelphia. But Mark, you noticed the 16% increase in hot dog prices, right? I love hot dogs. It goes right to your budget, right? I love hot dogs.

They're really, they're up 16%. I knew wings were up a lot, at least last I looked on wings, chicken wings. That was Chris's number. That was. That's good. No way for this week? Oh, sorry. It was backup.

Oh, it was backup. Are chicken wing prices still rising quickly? I didn't look. No. Mike, Mike Brisson, he's shaking his head. No, they're not rising as much. I'm in upstate New York, but mainly chicken wings for food around here. So they're going up in retail. I know that. What did you say? He said in upstate New York, that's what we eat. That's like, yeah, Buffalo wings. It's all over upstate. Yeah. That's right. Buffalo. Buffalo, yep. All right. Very good. Okay. All right, Jesse, that was very helpful. I really appreciate that. Chris Ryan, anything, any push back on? Be careful.

Jesse's very sensitive. You can't. What about the weather? Oh, yeah. What about that? That's a good point, actually. Yeah, what's going on? I don't know.

I'd be a little cautious. Yeah, this summer could be an issue. Yeah, I mean, I think it's important to mention that food prices were really high in the first place, right? To, you know, well before the war in Russia and, you know, Russia's invasion of Ukraine. And that goes to just limited, you know, really bad climate conditions in your major bread baskets, North America, South America, Europe. And, you know, when you think of it, right, that, you know, when you look at green prices, you know, they've shaken off the increase from Russia and Ukraine, but they're still trading,

you know, at the upper range. the UN food price index is another great metric to look at. And that's been tracking record highs. But when it comes to inflation, it's all about the increase, right? And how much worse can climate conditions get? I mean, they're pretty bad. I mean, farmers in Brazil are like up to their waste in soggy fields. You know, Kansas is dealing with drought, you know, wheat and soy producing regions.

are really struggling across the world. And yes, that just goes back to the thing. Food prices are going to continue to hurt, right? Inflation's the change in food prices and how much more expensive they could get. And like you said, Mark, we've kind of reached, you know, we're near the peak of how much they're going to contribute to inflation on a year ago and month-to-month basis. But in the background is that, you know, food prices are high. Let's move on to energy prices.

And we've got both Chris, Lopacus, and Juan Pablo Fuentes here for that. Okay, guys, so you heard Ryan's decomposition of inflation and energy is a big part of it. Obviously, energy prices, gas prices, diesel prices, jet fuel prices, or pick whatever it did, natural gas prices. They all seem to have peaked back a little. over a month ago tied into, I think, the European Union's decision to sanction Russian oil. They announced that in early June. Prices have come in since then.

If oil is our poster child for this, then we're $120 per barrel, 125, I think maybe on Brent at the peak. We're now down below $100 a barrel. What's going on in the oil market, the energy market? and where do you think we're headed? And I'll begin with Chris, and then I'll turn to Juan to kind of fill any gaps. Sure. So I think what happened was we had the Russian invasion when before that started to get priced in, oil was around 70, give or take, and that started to get priced in.

It happened. We had a spike up. There was a lot of uncertainty. Prices fell when there was more certainty. the market participants felt that the EU was not going to ban crude oil. The administration did a coordinated release of oil from strategic petroleum reserves with other countries across the world. And prices fell all the way back down to around $95 per barrel. And then at that point, market participants started the price in the probability of an EU ban on Russian oil. And prices

went back up to 120. And now they've come back down to about $100. give or take on WTI and Brett. So that the, and there's a few reasons for the recent decline in the price of oil. I think that the main one would be fears of a recession with the market being convinced that the Federal Reserve is going to have to raise interest rates very aggressively to control inflation and that weighing on all commodity prices, including energy. And the second is some uncertainty about how the Europe, European Union will enforce or apply this ban because we've only got data through May,

actual hard, and it's not even that hard, it can be revised, import data. And the EU has, as of May, did not reduce its imports of Russian crude oil. Now, there were some important steps that went into effect in May 15 that applied to energy trading firms like Vitol and Trafigura and so on and so forth. that went in effect in May, and then the EU ban was announced in early June. So we'll have to see how the data evolves over the next couple months, June and July, to get a sense of what is the true impact on global oil supply of the European embargo on Russian crude oil. But market participants are less worried that we're going to be short supply than they were a month ago.

and that that has happened at the same time that the refining industry has responded. So refinery utilization has increased. Crack spreads have fallen. That's the difference between wholesale product prices and oil. So the difference between wholesale gasoline and crude oil, the difference between wholesale number two heating oil and crude oil, those have fallen dramatically. and they are a part of consumer energy prices, which is ultimately what the CPI is measuring.

And I think that there's further momentum for price declines in consumer energy prices in the month of July, given where crack spreads are now. And that is a supply-side response. And, I mean, it's so often the case just broadly across the economy, but especially when it applies to commodities and energy market that the cure for high prices is high prices. We are seeing the supply side respond here to very strong incentives, I would think, to produce as much oil and refine as much oil as possible. Okay. So, you know, what you're saying, a paraphrase, just like I did for Mike and for Jesse, is that anyone who's going to sanction is sanctioned, or at least announced sanctions. and that the EU has announced sanctions, but they really at this point have not implemented them. And it may, this is a risk, obviously, what they decide to do here, but they may decide, given they don't want to see oil prices go skyward here,

they may decide to be slow in implementing any sanctions to make sure there's enough oil supplies out there so that prices don't go skyward. They'll be, they'll calibrate their implementation of the sanctions. And also on top of that, the refiners here in the U.S. have been able to increase utilization, the capacity utilization of the refineries produce more refined product. And so we've got lower oil prices. We've got lower crack spreads. And that means gas prices are starting to come in meaningfully.

We're at five bucks a gallon regular unleaded record a month ago. We're now at 465 nationwide. I think that's, is that what consistent with our Wawa, 465? I think we're pretty close at our local Wawa. Diesel prices, they've come in a little bit. Jet fuel prices have actually come in a lot, you know, relative to the peak. And assuming that we don't,

the EU doesn't start to really crack down on Russian oil and the fact that we are getting more supply because the higher price, to your point about higher price leads to, you know, solves the problem here because it elicits more supply response. Oil prices, gas prices should, at the very least not go higher and may with a little bit a lot go a little bit lower. Is that fair?

Is that fair? Well, yes, I think it's fair. I think that a lot will depend on how the EU will proceed. And if it does crack down hard, how much of that oil is going to find its way into other countries anyways. because as of May, if you look at China plus India plus Turkey, they had increased their importance of Russian crude oil by about 800,000 barrels per day. And that's about the amount that actually the U.S. band that was entering the U.S. along with the U.K., all of that oil

has been rerouted to these other countries. And so the question is, if the EU is forceful, then how forceful will they be? And then how much will ultimately that? Russian oil end up in other countries. So I think that there's a possibility for energy prices, for oil prices to rise from here. But I think that the most likely case is that we do get, you know, just they go sideways for a while. Got it, got it. Hey, Juan, what do you think? Do you agree with this? Do you want to add any color? What do you think? I agree with Chris. I think the main factor behind the recent declining prices is the fear of recession. So that's like more a market response to the sentiment in the market. The second reason I would say if the Russian oil supply

has declined by far less than anticipated by the time the invasion took place. According to the International Energy Agency, Russian supply has declined only by 800,000. barrels per day. Initially, they thought supply was going to go down by three million barrels per day in just one month. So obviously, that's not happening. The deep discount of Russian oil is like everybody is buying Russian oil. Everybody that can, like I saw news today that Saudi Arabia has bought a lot of Russian oil. Really? Yeah. So they are using the Russian because it's a deep discount. It's an arbitrage. play they buy the root yeah they buy roche and oil that for to use for for their power plants so they

have more oil available for exports so explain why there's a discount i mean if the markets are so tight why do they have to sell at a discount because uh there are sanctions in place so it's like that is it has also to do with this new european talking about caping oil prices for Russian oil. So I think what they're trying to do is let's, we're not going to go after India or anybody that wants to buy Russian oil, but we're going to demand that they don't pay as, you know, market price. They have to pay a discounted price.

So the idea is that Russian oil, the supply wouldn't be affected as much, but the money that Russia get from their oil sales are going to be affected by this price cap. So that's what happening. After the invasion, I haven't checked lately, but the discount was like $20,30 per barrel initially. Yeah, the discount on Russian oil. On Russian oil. Let me ask you, I just confused, I'm all of a sudden confusing myself. So the Brent oil price, which is the global price for oil broadly, does that reflect the Russian discount?

No. No, no. It does not. That's what pay, that's why Europeans pay for oil. I see. Okay. So they're actually paying less. We're paying, the U.S. produce refiners are paying more because we're not getting any Russian oil. So we're paying more than European refiners, let's say.

Well, the Europeans are also not getting that Russian oil. So the ones that are taking advantage of the discount are in. China, Saudi Arabia. Okay. So these are countries that are that can afford to, like, go around the sanctions. They are not afraid of getting sanctioned by Europe or the U.S. So they are taking advantage of these discount, but Europe and the U.S. have to pay full price.

So this Brent or WTI, the case of the U.S. So the other thing that will say in terms of the inflation, I kind of disagree a little bit with Chris on the refinery situation in the U.S. I feel like refineries are basically operating at full capacity right now, and refinery capacity has been down almost by 2 million barrels per day in the last two years. So refinery capacity in the U.S. is at the beginning of this year, was 17.1 million barrels per day. that's down from 19, two years ago.

So there is not really room for increasing production of gas. Well, how do you explain the lower crack spreads? Well, the crack spreads went up substantially up to mid-June. They have come down a little bit, but they are still a lot higher that they were by the beginning of the year. So right now, they're almost at $1 per gallon, which is high. Very elevated. It's still very high. Yeah.

So if you look at the declining prices, so gas and diesel prices are increasing more than oil prices that are coming down by less than oil prices in July. So I think that situation is going to continue, like, as prices are going to overperform crude prices. Yeah, Chris, I don't think you would argue, would you disagree? I mean, refining capacity is still very tight, right? I mean, oh, absolutely, yeah. I mean, we went from 88% refining capacity to 94.5%, which is where we're at right now. And so what I was referencing is the decline in the crack spread from June to Delance.

July. So when that July CPI print comes out, you're going to see some relief from energy. Energy is actually going to be deflationary for the first time since the invasion of Ukraine on that July CPI report. Right. Okay. And I, you know, I do think this is the refining capacity of a big deal because one of the threats in my mind is we get a cat five hurricane, blows through the Gulf, wipes out a refiner on the Texas coast for. I don't know, three, four, five, takes it off line, three, four, five, six weeks. We got a big problem at that point, right? I mean, crack spreads, gap out, gas prices go back over $5 a gallon, and I don't know.

It feels like that's enough to push us in, given it. And inventory levels are very low for gasoline and diesel. This keeps going back to Chris's three's point that, yeah, we might make our way through if nothing else goes wrong, but, you know, okay. So if I forecast, say a year from now that the energy CPI is flat, zero contribution to inflation, does that sound about right to you? I mean, it could be lower, but do you think it could be higher, obviously, but, you know, what's the best forecast? Basically flat, Chris? Yeah, I would go flat.

if not price declines. Because there's very, very strong incentive to produce crude oil and to refine crude oil. You know, a lot of it, there's just a lot of uncertainty with respect to what happens to Russian oil supply. And I mean, like, I can construct really bad scenarios where the EU cracks down really hard. Russia can't resell the oil to anybody else. And then OPEC countries have kind of tapped out in terms of their excess capacity. and then we don't go into recession, and then where does the oil supply come from in 2023?

Like, I can construct that scenario very easily. But, yeah, I think that the most likely scenario is probably for energy prices a year from now to be consumer energy prices, to be close to where they are right now. Okay. All right, fair enough. Okay, good. Thank you for that. Let's move on to Rents, CPI for Housing Services.

And, hey, Chris, I'm going to call on you. you're really good at this. Explain to me how we measure the CPI for housing services. It feels, well, I know it's quite complicated, and this feels a little weird compared to everything else in the CPI. Do you want to discuss that for a little bit and what it means for inflation right now for housing? Yeah, sure. I'll try to give you an abbreviated version. It is quite complex, so we can be here all day. Essentially, well, housing is a bit different than other goods in the economy, in the CPI, in that a house has both consumption and investment value. The objective of the CPI, by we construct a consumer price index, is to price the changes in the consumption value of the goods and services that consumers are

purchasing, right? So ideally, we want to ignore or abstract the investment component of housing and focus just on the consumption component. So there's this concept of the consumption value of housing that the BLS has come up with, which essentially looks at rents, first of all. So for renters, it's pretty easy, right? If you're renting a house, the price change for you in terms of the housing services you're consuming is the rent change itself. I don't think there's any dispute or any real question if you're thinking about someone who's renting. The deeper question is for those households that own their property, so the owner occupied properties, right? They're not paying a formal rental payment every month. So how do you capture the value or the inherent price

of their homes? And the Bias has actually gone back and forth on a couple of a couple different methodologies. So originally prior to 1983, they actually used a user cost concept. It said, hey, if you're, if you own your home, you have to pay mortgage, mortgage, so there's mortgage interest expense, there's property taxes, there's maintenance, other expenses that you have. We can simply look at those and measure the change in those on a year over year or month or a month basis, and that can proxy as the change in the housing service. right? So that was fine for a while, except that right around the early 1980s, of course, there were a lot of new mortgage products that came online. So adjustable rate mortgages became

more popular. So that impacted their methodology. Prior to the early 80s, you had the FHA controlling much of the mortgage market, so things were fairly homogenous and standardized. So you could look at those user costs and get a pretty decent approximation. what housing prices were looking like, our service prices were looking like. But as we got those new products, mortgage products, and as the FHA lost some of its market share, things got much more complicated. So to BEL switched over to a method that involves this concept of owner equivalent rent, where essentially they will look at homeowners and try to approximate what the homeowners would be paying in rent if they didn't own the homes outright. And they do that by essentially

surveying the broader rental market. They look at about 50,000 properties in their survey. They collect data on those rents and then they normalize or standardized those rental values by excluding utilities and trying to account for quality adjustments just as they do with all the other prices. And then separately, they conduct a survey of homeowners to get an understanding of what homeowners believe is the value that they could rent their homes out for. And they use that survey in order to calculate the weights that they use in the CPI itself. So the 23, 24% weight that is attached to owners equivalent rent comes from this separate survey.

So it's a bit convoluted, as you can gather here. But the idea, again, fundamentally, is to try to approximate the value of the housing service itself and abstract that from the appreciation in home values, which are investment or capital assets. Here's this thing that I find interesting, if I've got it right. Yeah. So, you know, food prices rise 10%. That means for the typical American household, they're shelling out 10% more to buy food. I mean, it's coming out of my checking account. I got to, or it's going on my card.

I got to shell out this cash. For housing, for homeowners equivalent, right, for people own their own home, which is 25% of the CPI index, a big chunk of the index. That's not true, right? Because most homeowners, their monthly payment, mortgage payment doesn't change month the month. They have a 30-year fixed rate loan or a 15-year fixed rate loan, where they have no mortgage at all.

In fact, people don't realize this, but a lot of people don't have a mortgage. You know, they're older, they paid down their mortgage. They never had. They paid with cash, whatever. So for them, the increase in consumer prices for housing services doesn't reflect an increase in their cash outlays, you know, how much they have to spend each month, and therefore no impact on their ability to buy other stuff on their purchasing power. Right?

Is that right? That's true. I guess I would explain that as just in some sense, there are different weights, right? The CPI is this general aggregate measure. There's actually no one that actually consume, no household actually consumes the goods and services in the CPI index with the weights that are assigned, right? It's this aggregation, right? So, yeah, you could certainly have a different measure of inflation for the,

homeowner that owns their property outright than the renter. So there's that aspect that all inflation is personalized. So the weights may differ. But I think there's also more a conceptual question in terms of what you're trying to measure, right? The fact that you own your home and you're not paying a, making a payment every month, an explicit payment every month, right, That doesn't mean that there's no value to the housing services that you have consumed that month, right? So it depends on what we're trying to. Yeah, no, no, I hear you. It's just that we often, like Ryan has this great statistic.

You know, for the typical American household, they have to shell out $496, is that right, per month more. $193. $493 more a month in the month of June to buy the same goods and services that they bought last year because of the 9.1% CPI inflation. That isn't exactly true, right? Because for the homeowners, they're not shelling out any more than they did a year ago. In fact, Ryan, I think we might want to calculate that. That would be kind of cool, actually.

We can do that. Because we use the CPI to calculate, quote unquote, real income. That's the purchasing power of the consumer. and we're probably overstating the hit to purchasing power from using the CPI because of this, this, this, the way we're measuring things on housing. Is that fair to say? I think it depends. There's still an opportunity cost, right?

But it's not cash coming out of the bank, you know, right? No, it's not cash coming out of the bank, but you can, you can generate all sorts of example, right? So if a person owns their house and suddenly they move, right? Yeah, of course. Now they have a pain. Yeah, yeah. Right.

You make a good point. I just find that it's a really fascinating question. Interesting. But actually, most importantly, what's going on? I mean, rents or market rents, forget about the CPI. Market rents have been rise in double digit year over year everywhere. And now it's bleeding into the CPI measure and adding to overall inflation. So, you know, what's why?

What's going on in? Where are we headed? Yeah, that's right. The impact of rising rents takes time or enters the CPI with a leg, because again, the survey that the Bios conducts is of all current rental properties, right, given that leases typically are a year or more, even though the rent on new properties or new leases may be increasing, it takes some time for that to bleed in to the prices that all households are facing. So house prices have been. been rising through some research that I and others have conducted, it takes about five, six

quarters for house price increases to translate into rental increases. So we're in for sustained rental increases in the CPI for a while here, probably until this time next year. This month, rental payments rose by 0.8%. Right. So that's up from the 0.6% last month. So you still have the effects of the rises in housing prices and the amount of demand that's out there for rentals persisting, and that is having an effect. So I expect that to continue to contribute to CPI over the next year, probably adding a point, point a half each month. Got it.

Okay. So no reliefs there any time in the near future, certainly not by this time next year. Yeah. No. So even if we go into recession, again, because of the lags in the conclusion. Stop with that recession talk, please. We mean, the lags are going to continue to persist for a while. Okay.

Here's what I want to do because this has already been, it's been a very informative podcast, but it's getting a little long in the tooth. I mean, I'm not sure people can, because we're going into the DNA here. Yeah. So let's do this. I want to eat. I want you, Chris, you, Ryan, and then I will give a. forecast for top line CPI inflation.

We're at 9-1 in June. What are we going to be in December of this year? What are we going to be in December of 2023? And when are we going to get back to the Fed's inflation target, which, as we've talked about, is 2.5% top part of the range for the CPI. And then after we're done that, let's go play the game. And the game, here I'm going to mix it up a little bit because we got a lot of folks on the call.

I'm going to pick on, does everyone have a statistic? Do you all guys, everyone have a statistic? I think we might use mics already. I'm not sure. But I might call on you and see if you got a statistic for the game. Is that okay? That's fine. You up for it?

I know you're up for it, Ryan. I'm always off for it. All right. It's a highlight of my week. I see Chris is like deer, you know, deer's in the headlights. Are you okay playing the game, Chris? Oh, yeah. Oh, yeah.

I'm trying to come up with me. Not you. The other Chris. You, I know, yeah. The other Chris. Can you play? the game or you're not prepared? No, I can play the game.

Okay, fine. All right, we're going to play the game. And then we weren't going to play the game. I know. Well, I changed my mind. I'm a lot of doing that. Yeah, mixing it up a little bit. Okay, so, all right.

Ryan, what is the forecast for top line CPI inflation here? What do you think? End of this year will be close to 6%. And then December of 20,000. 23. Yep. This is under the assumption, no recession. No recession.

No recession. It will be down to 3%. Three. And when do we get back to the Fed's target? First half of 2024. First half, that's right. Okay, that's fair enough. That's a little bit ambiguous, but we'll go with it.

All right. March 13th at 4 p.m. Okay, that's much better. Very good. There you go. Okay, so 9-1 in June of this year, 6 December of 2022, 3, December of 2020, and March, we'll back to 2.5%. Okay. Chris? So this is uncanny.

6% end of the year was my prediction as well. And then I had 2.75% end of December. Two decimals. That is quite precise. That's all on confidence. You said I had. I mean, do you actually, you have a forecast? No, no.

That's what I wrote down. Oh, you wrote down? Okay, all right. And then when do we get back to two and a half, man? I like March. I put down April. Oh, you put down April? Around that time period.

Man. Okay. Well, we're in sync. Okay. Mine is actually a little higher. 7% is December of this year 3.5%

by the end of 2023 and we don't get to 2.5 until May of 24. But, you know, having said that, it feels like we could see a period of actual decline and then it comes back up again or something

because of the swings and energy prices are related. Okay, but we're all. all, well, we're all roughly the same and we're all going to be wrong, it feels like, probably. Yeah, hopefully not. That's the baseline outlook, though. Okay, very good. You know, one thing we didn't talk about, and I don't know, we have time to really belabor it, but the other reason I'm more, I feel reasonably confident that inflation is going to get back down in that kind of trajectory is inflation expectations.

you know, what people think inflation is going to be in the future. And that's key, actually, to where we're headed here going forward. And at least in the measures of inflation expectations to come out of the bond market, they seem to come right back into the Fed's target if you look out a little further. And here's the other thing. I just want to maybe I'll just throw it out there. It's related to expectations, get any feedback that you have. my sense is that and this is just talking to people and then you know obviously I've seen

I remember you guys don't remember the high inflation of the 70s and 80s I remember that right because that was kind of my formative years in in school when I was learning economics and back then the psychology was as I recall this is you know my family psychology you know we need to buy it now because if we don't buy it now it's going to cost us more in three months and six months, right? So we would actually buy forward because we were fearful that we would have to pay more just a few months later. That's not the psychology I think people have today, right? That I'm not going to buy now because I think it's going to be priced lower in the future.

Take a vehicle. You know, most people aren't going to buy a vehicle. I don't think if they don't have to today, right, Mike? Because I think most people think they're going to, because it doesn't make sense. that use vehicle prices are high as they are. Would you agree with that? Not exactly. I think people don't think prices are going to come down right away,

and if you need a car right now, you need a car. Yeah, yeah. But if I have a time, I'm not going to buy it now if I need it next year. Yeah, okay. All right. Chris and Ryan, you've generally the same view on inflation expectations? And how they... Okay, all right.

Yeah. I mean, the only thing where people are buying now, even with prices right is housing that's the only area oh i even there i don't that's uh change yeah that's changing yeah well because of mortgage yeah but not around not around us in philadelphia i think i think i well i think the smart money's already decided to go on the sidelines the investors they yeah yeah i think the new homes definitely oh new homes absolutely yeah yeah new the builders are discounting very aggressively already yeah okay all right okay very good let's play the game Game is we come up with a statistic.

The best statistic is one, and the rest of us try to figure that out through questioning and deductive reasoning and cajoling the person with the statistic. Best statistic is one that is not so easy that we all get it too quickly, not so hard that we never get it. Obviously, it's related to the topic at hand, which is inflation. That would be a bonus. So with that, let me start with Ryan. Ryan, because Ryan's the maven at this and let him leave the way. Go ahead. Give us your numbers.

Minus 61%. I know what that is. There is no way. No. I do indeed know what that. Oh, wait. Did you have another presentation with? I know what that is.

And I want multiple cowbells when I tell you what that is. Multiple. Multiple. I want you to get out of cowbell right now. All right. I got a remember. I want a cowbell ring. I hear it.

Yeah, okay. Chris, where's your cowbell, man? All right. Are you ready? Ring it for me? And I didn't mean the answer yet. I'm so confident in this. Mine 61, that is the percent of small business to say the economy is not going to,

it's going to suck six months from now. Should I use that word? That was a bad word. Now, it's fine. It's fine. Okay. Are I right? You're right.

Yeah, very good. Yeah, okay, there we go. There we go. Very good. Yeah. And I, you know, Jesse, what do you think of that? Are you impressed by that or what? Does that make you think any better?

Don't do it, Jesse. Don't feed into it. I don't know. Zoom box is going to have to get bigger and bigger. Yeah, I'm thinking least of the cowball now. I mean, you got it on the first try and it was barely a ring. I mean, do you have an over a year? Do you have an air horde and post-production we can add?

For Mark getting that on the first try. Very good. I love Jesse. Did you look at this? Historically, when it's minus 20% more than a recession, it's minus 61%. Far and away record low, right? By far. So if you look at what it was around, the great recession, early 1990s, the early 2000s,

1990s, this thing is by. far, they're very, very pessimistic. And I mean, you make the point all the time that a recession is a loss of faith. Yeah, loss of faith. Of course, we do know that sentiment, it's, it's, correct me after I'm wrong, but that small business survey tends to be very conservative, Republican-dominated response. Particularly that question. You're exactly right. So we've looked at it, you know, at least historically, when there's a Democrat in your office, it understates economic activity. When there's a Republican, their expectations overstate future economic activity. But if you, I was working on this, if you adjust it, it's still, you know, beyond that 20%

threshold. Yeah. Okay. So businesses are pretty pessimistic and you may start to see signs of that showing up in jobless claims in industrial production. Yeah. Yeah. All right, Mr. Lafacchus, you're up. What's your statistic? Hey, my statistic is 12 million. 12 million Energy related Energy related, yes barrels You're getting close

So the unit is The unit is million barrels per day 12 million barrels per day European related No, it's a U.S. related statistic Okay Is that what's inventory? It's not an inventory. It's not related to oil inventories. It's not an inventory

figure. Oh, that was pretty evasive. It is oil related. It's oil related, but not related to oil inventories. Correct. Oh, correct. Okay. 12 million barrels a day. Well, we consume 19 million barrels a day, or a little over 19.5 million barrels a day. Is that, Is this what's left in the SPR? No, it's a lot more than that. Yeah. That's about, it's like 600 million barrels. 600 million, yeah. That's a lot of per day. No, no, not barrels. Oh, I was wondering if you adjusted. Oh, and I know they're pulling out one million barrels a day from the SPR, right? Because that's what the refiners can actually process. Hmm, that's interesting.

12 million barrels a day. Is it related to demand in some way? Not really. Okay. All right. Production. Yes. Okay.

It is. I was not to say we're going to need to pull a lifeline here and get Juan Pablo. Yeah, right. You mean, that's what the, that's actual crude that we're producing. 12 million? Oh, it's not the refined product. That includes the refined product gets us up to closer to. We had this conversation before, I know. Yes. Yeah. It's crude oil production. Crude oil. And Chris, correct me if I'm wrong, but in Juan Pablo, the number of rigs continues to rise slowly, the number of rigs that are out there in the fracking field. Is that right? Yes. Yeah. There was a very interesting statistic.

that I saw in the latest Dallas survey, like 95% of oil executives say that they are facing shortages, like labor, equipment. So that's kind of holding them down. Yeah, yeah. It's increasing, but actually the trajectory looks a little slow, relative to the local norms. Yeah, very slow. Yeah. Okay.

Okay. Good statistics. Do you think that's the barrier versus regulation? Yeah. So, like, I don't know. I could have picked like the crack spread because I think it was, it's very interesting, like the diesel crack spread. It was over $100 per barrel of oil. And now it's fallen to around 40 for for diesel, which is significant and has implications for like July inflation. But we already talked about that. I think what's interesting, though, and the direction. that I wanted to lead us down is like the idea of our U.S. producer is going to respond to the very strong price incentives they have. And that 12 million barrels per day of production, that's in the weekend in July 8th. That's up from only 11.8 million barrels per day at the end of last year in the weekend in December 31st. So despite, you know, the, the rig count has progressively increased, the low-hanging fruit in the shale patches has already been picked. And so you have to

incrementally drill more to achieve the same level of production that you would have maybe four or five years ago. But I do think that we're reaching a point where, you know, U.S. oil production will start to respond in a meaningful way to the high-price environment that we have. Got it. Got it. Very helpful. Okay. Chris DeReedy's, what's your statistic? Okay, I'm going with a fun one to lighten things up here. $199.2. $199. Well, I'll make it even more direct.

$199 and $0.99 and $0.299? $0.20. All right. Is that how much more a month people are spending on their gas bills than a year ago? Nope. Nope. Wow, that'd be a lot. Probably pretty close, right?

I would think that's pretty close. Probably. Maybe. Yeah. actually is this related to your trip 20 cents this is related to your vacation these are always about me so uh so directly it's is is it the increase in spending due to some form of inflation no no no okay all right is it something to do with inflation it prices it's prices yeah prices so what's worth $199 and 20 cents

Chris's shirt. Chris is what? His new shirt. His new shirt. Yeah, he wears those. I think I said howdy duty shirts, right? They're kind of like a howdy duty. All right.

This is commodity price, Chris? It is. Oh. The coffee? It is. You got it. Oh, where do you go, Chris. Chris Lafackas.

Yeah. Where's the cowbell? That's right here. I thought it was pretty good. There you go. Okay. So explain that, Chris, Duretis. So that coffee prices are actually falling.

They're down 13%. So that bodes well for the future CPI print. Roasted coffee was actually up last month, right? So presumably those little coffee futures will bleed in. So I thought that was. Yeah, pretty cool. That's like Chris is in such a good mood. At least something's falling in price.

Yeah. Yeah, there you go. That's why Chris is smiling. It's not his vacation. It's that coffee prices are coming down. You know, I don't know about hazelnuts, but a coffee. Hazlet on espresso. Oh, hazelnut is always worth the price you pay.

I get a hazelnut latte right here. There you go. But my finished consumer price went out by 48%. I was just telling these guys before we started recording, all of a sudden, I was telling my wife how cheap it was compared to Starbucks, and the next day it went up 48%. Oh, geez. That's great.

That's a good story. All right. Okay, we got to end this thing. But you don't have one? What's that? I do, but I really, I mean,

this is really, I don't know, this has been going on for a while. So I do want to say, and I've got a good one, but I'll save it for next week. It's still be relevant. Quickly,

odds of recession, next 12 months net 24. Chris Dereides, what are they? What's yours? And have they changed? I have changed. 50,

50 and 65. Oh, no. Yours had to change. Who's you? Yours. Why? Because of the yield curve? Yeah, your favorite.

You count this. I've changed yet. I'm not quite yet. I need another week. I've been 40 and basically even odds. So 40% next year, basically even odds. But you're right.

I'm getting a little uncomfortable because of the yield curve. But we'll come back to that next week. And you, Ryan? haven't changed, well, 65.3. I'm nudging really close. One year, 65, and you're actually lower over a two-year-old right. Yeah, because if it's going to happen, it's going to happen next 12 months.

Yeah, that's interesting. We can, yeah, Chris, you missed it last week. We discussed that, but we'll come. So yours is incremental? I thought we were within 12, within 24. Oh. Oh, I see where you're saying. Oh, maybe I have to...

Oh, no. Doing everything wrong. Well, actually, yeah, we'll have to, we'll have to define it more clearly next to. Yes, yes. Define terms. Yeah, actually, actually a good point. Okay, so we're going to call it a podcast. So, again, Chris, what's your Twitter handle?

Middle-A econ. And what's yours, Ryan? That real-time underscore econ. And, of course, mine's at Mark Zandi, at Mark Zandi. at Marksandy. With that, we're going to call this a podcast. I hope you found it of some interest and value and we'll talk to you next week. Take care now.