Moody's Talks - Inside Economics - Inflation Blues

Episode Date: February 14, 2025

After congratulating the Philadelphia Eagles on their dominant Super Bowl win, the Inside Economics team breaks down the week’s inflation data. Moody’s Analytics colleague Matt Colyar joins to help unpack the details behind January’s hotter-than-hoped-for CPI and then the group discusses whether their outlooks for 2025 have changed. Predictably, this evolves into a discussion about tariffs. Finally, they play the numbers game. Objectively, Marisa’s number was best.Click here to take the most recent Business Confidence SurveyGuest: Matt Colyar - Assistant Director, Moody's AnalyticsHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn 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-host, Chris DeReedies and Mercedee Natali. Hi, guys. Hey, Mark. And we got Matt Collier. Matt, good to see you. You too, Mark. Chris, Morrison. Matt. Matt's always here because this is inflation week. We got the consumer price index, the producer price index. All that adds up to telling us what the consumer expenditure deflator. We'll get into that. But, you know, when it's inflation week, we've got Matt. Matt's all thing inflation. So talk about that. I might play the game here a little bit.

But I guess before we dive in, though, we have to acknowledge the Eagles victory in the Super Bowl, no? Absolutely. Yeah. So you're going to go to the parade tomorrow? What about you, Matt? You're going to pray? I hate to admit it, but no, I'm not going, which is like pretty wild to think about. But there's already been one.

Like, growing up, the idea of missing an Eagles. Super Bowl parade is insane, but logistics, I don't know, pretty tough. Life has changed for you. Life has changed. Yeah. Traffic, the kind of things you think about, I guess. You've grown up, Matt. I know. It is. Yeah. You're getting old. I feel old sometimes. Yeah. Chris, you're not going. I know, I know you. I was not aware of a parade. That is hard to fathom. Is that true? That's true. You're not paying attention to the I'm not paying attention. Wow.

Did you watch the Super Bowl first? What's that? You watched the Super Bowl? Are you putting me on this? I did watch and then I didn't watch all of it. I fell asleep. Well, I'll have to say if you're not an Eagles fan, that game must have been pretty boring, right?

I mean, because it was never close. For an Eagles fan, that was like, couldn't have been better. There was no, there was always tension. I always kept thinking they'd come back. the Kansas City Chiefs would come back, but, you know, just we were leading so, by so much the whole way. So it was really, really pretty cool. It was exciting.

Yeah, pretty cool. And they got a good team. Anyway, we're not here to talk about the Eagles. We're here to talk about the economy and inflation. Matt, do you want to give us the rundown on the CPI, consumer price index? Yeah, for sure. In a word, bad, not a great report. the January consumer price index came out Wednesday and the headline CPI, so the basket of goods,

the government produces puts together to estimate the kind of a price index of the things we spend our money on, it rose 0.5% from December to January. That's above expectations of 0.3%. So not a small miss. That's strong. that lifted the year ago rate from 2.9% in December to 3% in January. Fast this monthly increase since August of 2023. It's also now four months in a row that year over year rate has ticked up. Not the kind of certainly what I didn't expect. I think we'll touch on the underlying components and what's going on there. Right off of that, there's some discussion about seasonal adjustment facts.

factors can get technical there, whether some measurement issues were driving this inflated increase in January. I think there's a story there, probably less so for this figure than core CPI, which we'll get to. But yeah, all in all, bad report. We can put some optimistic spin on it, but it's not what anybody wanted to see. So what you're saying is that usually when you see a report, an economic report, that's kind of out of bounds compared to expectations. And, you know, expectations are based on some

pretty hard work. I know you dig deep into the bowels of all kinds of economic statistics to get a sense of what is going to happen with the CPI. You break it down by component. You use car prices, new car prices, medical care inflation. I mean, you're really digging deep. And for us to miss and for everyone else to miss by this much is it happens you know there's the there's times when that happens but it's unusual usually when it happens it's because there's some kind of measurement problem you know and you know one intuitive measurement potential issue is that this is January in January businesses raise prices typically for the year many of them and getting of course the BLS, the Bureau of Labor Statistics knows this and tries to adjust for it. It's called seasonal

adjustment. But in the wake of the pandemic, because that scrambled the economy, you know, throughout the year, those seasonal adjustment adjustments are much more difficult to do. And it could be that this go around, they just got the seasonal adjustment right. So January is bad, as you say, but it's bad because of measurement issues. If it's because of measurement issues, particularly seasonal adjustment, that doesn't suggest anything about the future. If anything, it means we'll get a report down the road here or two where it surprises on the good side of things because it all balances out. But you're saying what I think you're saying is no.

Maybe if you stretch it, you can see a little bit of what they call residual seasonality, but, you know, it's a stretch. Yeah, I would talk to a little bit. I think there's something there, but it didn't make it, it didn't make an okay report, a bad report, or a good report, a bad report. It's a bad report, and that residual seasonality is on the margins and wouldn't really change anybody's perspective if it's, if it were not the case. So, so it was, on the face of it, it's bad, with, with making this adjustment for the

measurement issues, the residual seasonality that we're calling it, is it still bad or is it okay? or how would you characterize it? I would still characterize it bad just based off of the kind of array of underlying components being... Different shades of bad. It's just not the dark shade. It's a light brown shade of bad.

That works, yeah. Okay. That works for you, Chris, that description? I don't know. I'd like to... Well, now my interest is speak. So where do we miss? What did the market miss?

What were the components? that we're all stronger than expect. Used vehicles. I think use vehicles is interesting for a lot of different reasons. But if you want to make the residual seasonality case, that behavior has changed in the wake of the pandemic, whether that's permanent or whether that's just a near-term behavioral shift, that seasonal factors of previous years aren't catching,

I think we can see some of that in the automotive market. I think that's the strongest case. So used vehicle prices jumped 2%. I have that right. Maybe it's 2.2% they jumped in January and that's strong. And there's a lot of, you know, there's some kind of maybe some strong demand getting ahead of tariffs before vehicle prices start to rise. That's, again, an idiosyncratic effect now that is happening this January that seasonal factors wouldn't capture from last January or January before that. So there is some behavior.

There's an argument there. But about hurricanes or wildfires or. The BLS say that what was going on in California wasn't a dramatic or it didn't have any kind of meaningful impact. I don't know how much confidence I can say that with. I think there's a good argument that cars are destroyed. People have to go buy cars. That's a run up in demand, saying upward price pressures. Probably is some of that going on, but I haven't seen anything that's particularly conclusive or points to that as, you know, why the vehicle market was rising.

talking to our resident guru in the automotive market, Mike Brisson. He's persuaded me that it's more of the getting ahead of tariffs. Dealers know that. Dealers have some interesting things that they're doing. Big drop in incentives this month, which is what dealers do or are able to do when they feel the demand is strong. So what you're saying is people are out buying cars in anticipation of tariffs. They want to get a car before the tariffs.

And the dealers know this. therefore they're pushing up the price? And they don't have to offer as much incentives. That's pushing up the price. Right. So. Yeah. That's fascinating. That's fascinating.

Wouldn't that be more on the new vehicle market than the use field? If people are trying to get ahead of terrorists, they'd be buying new. That would apply to new cars, unless it's a downstream effect where inventory for new cars is being. No, that argument, which was like a very intuitive first step that I'm thinking is, according to Mike is what's happening is there's kind of a compositional shift, which is these higher model new cars aren't actually what's being sold. Dealers are holding on to them. They're more profitable and instead it's the lower. I'm going to really struggle to come up with a car example from a premium model to the lesser model. There's a lot of incentive for the car dealerships that

know or the car dealerships know these tariffs are coming. Prices are increased. They have inventory of those things before the tariffs, before a tariff. are applied and prices have to rise, they hold on to them, they sell them later. Essentially, with the tariff increase, they can apply that and kind of increase margins even more. But right now it's been a shift to selling lower models, cheaper models. So newer vehicle prices, if you look at what's actually being sold, that compositional shift is keeping new vehicle prices relatively flat in the way of the BLS measures. That's slightly conjecture from Mike. I'm laughing because this is my numbing. This is my numbing.

Yeah, to be fair. You know what? Just goes to a big, a broader point. Teriffs, the effects of tariffs are so multifaceted and cross currents and all kinds of things to consider. I mean, just think about what you're saying here, all the different effects this is having on the marketplace already. Amazing. Yeah. And conjecture is, I mean, there's like a lot of inventory data that says that those lower models, even if they're new or being sold.

That's slowing the average sales price. Can I, where you go on and give us any other, any other things that were affected by so-called residual, potentially residuals, where we missed? Just the residual seasonality, I'm going to try to explain it, but I may botch it and you can take a crack at it. But basically, the Bureau of Labor Statistics and other statistical agencies, they have a, it's really a statistical algorithm from decomposing movements in things like prices. or jobs or whatever it is into different components, a cyclical component, a trend component, and a seasonal component. You know, this happens every year and we account for it. So they seasonally adjust based on that kind of algorithm and calculate a seasonally adjusted series.

So stripping out effectively the seasonality and leaving the trend in the cycle in the data. And you do that because you want to get to the underlying trend to get a sense of what's actually happening that's not seasonal. But to calculate residual seasonality, you run that algorithm again on the seasonally adjusted data and you see if it teases out more of a seasonal factor. There's still seasonality in the data after the BLS is seasonally adjusted. That's so-called residual seasonality. Do I get that roughly right? Yeah, that's how I would describe it for sure. Okay. Do you impress by that, Marissa? No? Very. Okay.

Yeah. Thank you. I appreciate. Okay. So what else did we get surprised on? Use vehicle prices? What else? Food was a bit stronger.

So food at home, grocery store prices. So look, 0.5% increase in January. That's not just eggs. It's not just eggs, though. Eggs rose 15.2%, which I think is probably too obvious for somebody for the numbers game. But yeah, for the month from December to January, 15.2% Chris threw his hands up. So that's 53% year over year. A lot of media coverage there.

Outbreak of avian flu, likely everybody's come in contact with that, not the flu, but that story, driving egg. We have egg rationing lines now out here I saw at some Costco's where you have to actually get in a line early to get eggs. And how much do you pay? You pay out like, I don't know, eight bucks for a dozen eggs or something in California? California. Did I read that right? Some outrageous number. Like nationwide, I think it's four bucks something for a dozen eggs. I don't know. I buy like expensive eggs as it is that are normally made box. So I don't even know what they are now. You, there's all kinds of expensive eggs. I mean, you buy the like the premium, the primo. I buy these like organic boys or at in the like buying. You know, the chicken are get a small treatment before they're slaughtered kind of eggs. I got it. Okay. All right.

So what else in food was a surprise other than eggs? It was just across the board? Yeah, they looked because there's some fruit, citrus stuff going on, whether it's weather-related, there was an invasive bacteria that I messed orange citrus crops in Florida earlier later last year. Inflation's hot there, but nothing that you can singularly point to and say, okay, it's eggs and this that are driving food. prices up, kind of broad-based within food. But that explains a little bit more of our missed and acceleration from December's pace. Year over year, still relatively mild for grocery store price. Grocery prices, 1.9%. But that's ticking up. That was close to flat, not long ago. Six-12 months ago. Basically flat. So it's re-accelerating. Okay. Any other product that

surprised you on the upside in terms of the price increase? Energy slightly. It was 1.1%. weaker increase than December, but a little bit stronger than we expected. So that's not a terrible miss, but. Anything surprise you on the positive side came in weaker than anticipated? Health care. So I think there's more and more evidence. And maybe this time last year, mid-20204, it was okay, healthcare. It's slower moving.

It's digesting these input cost increases like nurses, you know, negotiating salaries in a tight labor market, all those things. we're going to take time. So it was a matter of how high is that year-over-year growth rate and health care inflation going to go. I think we can be confident that it's rolled over and it was 3.5, 3.6 at its highest. So medical care services was flat in the month for January.

It's at 2.7% year-over-year, and that's two or three months now that year-year rate declining. It's a big input in the CPI, even bigger in the PCE, and inflationary pressures there look, at least under control. in a way, more sooner or sooner than I would have anticipated. And maybe this gets to the producer price index, the PPI. And we're recording this a day early.

I don't know why. Why did we do it a day early? Because I'm traveling tomorrow. Oh, it's you. I'm in the Eagles parade from California. Yeah, I'm fine to the Eagles parade. I see. Okay.

Got it. Got it. But this morning, was it this morning? PPI came out? Yes. Thursday morning, PPI. and that's like wholesale prices. And that showed some pretty, and you showed them to me in an email,

some pretty substantive declines in various types of health care, physicians, dental offices, hospitals. It looked like if I got it right, pretty much across the board, some actual declines in price. Yeah, across the board, PPI, producer price, healthcare-related indexes that we look at. All of them were down. And if you saw the top line PPI number that came out this morning, and it was also strong, it was 0.4%.

And that follows. And that's December's number was revised upward significantly, certainly surprising. Initially looking at it, it was the first reaction was that this was another bad data point when it comes to inflation. But bond markets, you see investors didn't have that reaction. And instead felt pretty good. It felt you saw 10-year treasury drop. The 10-year-treezer yield dropped 10 basis points.

And that's about what it rose the day before and why, long-winded way of getting there for that exact reason. Those healthcare components are what bleed into the PCE deflator. The Fed's preferred inflation metric. They were all soft. So what that were tens is, yes, the CPI was strong in January, but the inflation measure that the Fed cares the most about actually won't be so hot. This is more of a measurement.

difference between the two, and there's actually some good for the Fed to look at when it comes to inflation. So we have the CPI, the consumer price index, bad. Good. Bad. Yeah. The PPI producer price index comes out today. Not so bad.

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

Still pretty strong. Strong, but you'll see just based off of the base effects that year-over-year rate is what draws a lot of eyes. That's going to fall for both. if those forecasts are right, and they usually are a bunch more accurate because we have so much input data at the time that the PC deflator is released, that's a decline from 2.6 to 2.4% in the headline PC deflator, and 2.8% to 2.6% in the core PCE deflator, which that's what markets digest immediately. That's the kind of good news that we were expecting as these

base effects that I drone on a lot about start to come into effect in 2025. Okay, so on a year-over-year basis, consumer expenditure inflator, the top line is going to be 0.3 on the month, and you said 2.4% year-over-year. And on the core, excluding food and energy, that's 0.3 on the month and 2.6. That's right. And, of course, the target is 2. So, you know, we're still, you know, within, as I've been saying, and when I've said in the past, within spitting distance, but not quite there. Would that be fair characterization? Yeah, okay.

That's right. Okay. I want to now think about the forecast, but before I do, let me just turn to you, Marissa, first and then Chris, anything you want to add on the inflation front, on the inflation statistics. We're going to talk about inflation expectations and, you know, the things. but in terms of the CPI, PPI, and the consumer expenditure inflate, or anything you want to add? I think I noticed, Matt, tell me if I'm wrong, that auto insurance was back up and re-accelerated again, and that was a big something that stood out to me. I think it's up almost 12% just over the year.

Some of the personal services and goods seem to be either deflating or not really inflating. I remember when we did, I don't know, when we did that webinar, Mark and Chris, like six or nine months ago, about inflation, and we looked at all these different components within services and personal services were a big part of service sector inflation back then, and that looks like it's coming in a bit more. I see a lot of negatives there just over the month changes, and even the year-over-year changes, and some of those things are down. Things like recreation services, subscriptions, you know, pet care, those kinds of things look like they're coming in relative to where they were. You see, your first point, the insurance, I should have mentioned in my convoluted vehicle description,

there was a 2% increase in motor vehicle insurance of the month. And it's like, again, it's been a hot button topic previously. Okay, vehicle prices have largely stopped increasing after 2022. Why is insurance premiums still going? I think the argument there is noise. I think insurance premiums that inflation has rolled over. Do you get a big jump in January? Okay, it's come after a few months of slower growth.

and I think that's probably the trend. Repairs were a little bit stronger, too, but I think it's the same story. So as far as personal services, that's not like I've spent a ton of time focused on. That's interesting. I mean, there's really demand-driven things

that suggest kind of a pullback by consumers, which is certainly interesting. Chris, anything to add? I just would, I guess, point out that the housing cost growth is stabilized. We did get a little bit of a pickup in hotels, right? So is that a one-time? you know yeah

goals game type of event or is something to be that would persist I don't think so but and the yeah

the lodging away from the hotel prices is volatile it has jumped around a bit but the perhaps the PLS is listening to the podcast because OER the owner's equivalent rent

that we don't like they reweight everything and that actually has a lower weight now very very slightly but it is diminishing as a weighted component in the CPI in terms of its importance, small. But it's, it was adjusted.

So not as important moving forward. Because we're on the Inside Economics podcast, we are not fans of OER. Never have been, never will be. Never will. Yeah. At least it's behaving like you would anticipate or close to. It's moderated. Getting better.

Just in with the week. Yeah. Yeah. Right. Okay. Let's talk about the forecast. And, you know, our baseline forecast, kind of in the middle of the distribution of possible outcomes has been that inflation would continue to moderate and ultimately get back

to the Fed's target. You know, it's taken longer than anticipated to get there, but even in our current baseline, we have it getting there by the next few months, certainly by the spring, you know, get from that 2.4, 2.6 on the top line core down to, really down to two, you know, on a year-over-year basis. I'm beginning to wonder whether that's at all possible now, in part because these numbers are a little stickier than anticipated, but a bunch of other reasons have come to the floor, least of which is this recent increase in inflation expectations. I'm not sure how much weight to put on it, but it does feel like to your discussion we had

previously about the tariffs and the impact on people's behavior in terms of vehicle purchases, it also feels like people are starting to anticipate higher inflation because of the tariffs, and that's starting to show up. You saw it vividly in the University of Michigan survey, and I don't know how much weight to put on it, but because it's affected by people's political prism, Republicans think something very different than the Democrats. But it feels like in some of the other surveys, the Fed, Fed survey, and certainly in the bond market, if you go look at inflation, expectations in terms of what bond investors think that has risen, you know, since it became clear that we were going to have, clearer that we're going to have tariffs and some of the

other policies that might lead to inflation. And if you have higher, if you have higher inflation expectations, or maybe better put fragile inflation expectations, they just feel very sensitive to me to, you know, any news or any actual increase in inflation, that that makes it less likely that we're going to get back to that target, that it's going to be increasingly the case that those expectations are going to be embedded in people's wage demands and how businesses price and how aggressive they are in their pricing. And again, going back to that example of the vehicle industry, the dealerships are already responding to the potential tariffs and able to charge a higher price. It's already having an impact

on pricing. I don't know. What do you guys think? You know, my sense is, we haven't changed the forecast, but my sense is that we may not get back to target here. You know, certainly not in the next year or two as we work through these higher tariffs and other, you know, immigration policy and other things that could potentially lead to higher inflation and higher inflation expectations. Chris, do you have a, what do you think of that? Yeah, no, I certainly agree. I think at least the risks are in that direction, if anything, right, inflation may. come in stronger than what's penciled in our baseline. And I think that's consistent with our kind of evolving view here in terms of the Fed and the number of potential rate cuts, right,

there too. I think the risks are fewer, not more, given that all these factors that could influence inflation. Right. I can't, there are very few that you can point to on the other side that actually would lead to more disinflation. So you would concur that when we sit down and do the forecast for March, we may end up in a different place, that we may not end up back to the Fed's target. In fact, the disinflation, the slowing in inflation that we've enjoyed now for, what, two and a half years, I mean, inflation peaked in the summer of 2022, that that is now over, at least in the near term, in the next year or so.

At least in the near term, again, there's lots of uncertainty here, of course. Yeah. on the policies and whatnot. So things could happen. You could play in a scenario where this inflation does accelerate, but given all the factors that we've identified in terms of policies, it's more likely than not that, yeah, it's going to be stickier inflation. Right.

What do you think, Marissa? What's your perspective on that? Yeah. I think I agree with that. I think the odds are rising that we're not going to get back there. And we may not get two rate cuts this year either. I think markets are now expecting one rate cuts. Is that right?

Yeah. You know, I think you have to think about, okay, well, what are the major sources of inflation now or to this point? So we're still watching shelter, and that looks good, right? That is one of the single largest components in the CPI. It's less of a big component in the PCE, which is what the Fed is looking at. But I think if shelter prices can continue to come in, then we can make some progress there. We have to see how much of this theory about residual seasonality is true. I mean, we'll find that out in a couple months after a couple more CPI readings, I think.

You know, the thing with food is tricky because a lot of that is just being driven by various viruses and shortages and weather. and that is very difficult to predict. So, yeah, I mean, I do think that tariffs represent the biggest threat here to getting inflation further under control. We now have tariffs on steel and aluminum imports, broad-based. We don't know what's going to happen with Mexico and China. Excuse me, Mexico and Canada. That has the potential, especially with Canada,

has the potential to raise housing prices even more. a lot of Canadian lumber and other inputs, a lot of metals from Canada. So the risks are certainly on the upside. I mean, I think there is a greater and greater chance that we don't get back there. Yeah. We're far enough away. It seems like we were right there. And I think we're far enough away that it's possible we don't get to 2% by the end of the year.

Yeah. Yeah. And on tariffs, it feels obviously a boatload of uncertainty here. I mean, who knows how the president's going to play this. But it does feel like he's more serious about broad-based tariffs, doesn't he? I mean, we're now, today, the news is around reciprocal tariffs. So, you know, if a country has a higher tariff rate than we do, then we raise our tariff to be consistent with that. Which, you know, our tariff rate is low.

So that would suggest tariffs rates are going to go up on lots of different countries and lots of different products. here in the not too distant future. It feels like at least directionally, it goes to, if not universal tariffs, you know, across the board tariffs, pretty clearly in that direction, doesn't it? It feels that way. Chris, what do you think? Yeah, you agree with that? Okay. Chris, what are you? Certainly, I don't know if the plan calls for matching lower tariffs. Is that a, to understand, a country has a lower tariff? We match it. Oh, that's a great point. Is there, oh, that's so, It can't be too many of that, but that's interesting. I'm curious.

I haven't heard anything along those lines. Oh, that is, that's a, that's a, it took me a second to understand what you were saying. Yeah, that's pretty funny. Well, you know, the president argues, I'm just curious how you would respond to this, that it's just fair. Look, the other countries are charging us a higher tariff. Some of them are, there's developing countries, but there's also developed economies, like the Europeans, I think, I think our effective tariff rate is,

It's three percent-ish. Theirs is, I'm making this up, but five-percent-ish. So it's not apples, it's not widely off, but it's still, you know, they're still a little bit higher. How do you respond to that, that logic, that argument? Or how do you think about it? That's just fair. It's just plain fair. That, you know, we should have reciprocal tariffs.

I mean, on the surface, it sounds somewhat logical, but there are, you know, there are, there, it goes to the comparative advantage of the different countries, right? we may not be exporting or importing the same good, right? We're competing in different markets, right? So, yeah, maybe we, I think we, I think of this is right, we import more from Europe in terms of goods, but we actually export more in terms of services. Right. So what does it mean to tariff the products or the services equally?

Does that, I don't see how that, you know, is optimal or certainly is enhancing the trade, if you will. So, right. I think it's, I think it's a, I think at the core there's a legitimate argument, right? If there are vast differences in trade practices, tariff practices, if there's dumping, right, there's, there are clearly cases where, you know, it's certainly justified. But I don't know. I find, I think those are few and far between when it comes to Europe. I think there are certainly greater grievances as we think about China and some of the imbalances there.

Yeah. I mean, I think it's easy to say it's like incredibly difficult to actually measure. I mean, because there's so many different ways that countries affect and restrict trade beyond tariffs. There's tax subsidies. Think about the Inflation Reduction Act tax subsidies that are made in America. There's non-tariff trade restrictions. There's the movements in the currency. I mean, there's a gazillion different elements to the calculation. of is it is the tariff fair or not fair i mean that's why we had the world trade organization to adjudicate those things because that's a difficult question and does just to say oh they they three we're three percent or one percent by the way as you point out these may not be the same products at all because you know a likelihood they're not there's all kinds of differences between the two uh just to say that i mean it's just easy to say intuitive to many people but I'd say a complete mess to try to implement. Complete mess.

Anyway, Matt, I want to give you a shot at the question about whether we're going to get back to target here on inflation anytime in the near future. What do you think? I wouldn't call myself a convert, but I have, the past few months I've said, okay, shelters move in the right direction. I understand goods prices are going to go up a little bit. We can live with that. It's a little bit of a mismatch on timing, but we'll get there. But I'm just surprised, just that it's, you know, inflation expectations manifesting as higher goods prices already to the extent that that's happening. Yeah, I could see that I've maybe underestimated goods inflation and it's going to be a little bit more elusive to get to that 2% is going to be more elusive than I previously anticipated.

I still feel relatively okay that shelter is coming down. Yeah, I think the car example is a good one. We can saw some of it in Q4 GDP data. the behavioral changes are maybe underway since the election. And yeah, those are inflation areas as a lot of the policy proposals that the campaign put out were determined to be. Right. Yeah, just to restate a point, because I'm not sure I said it explicitly, clearly enough, you know, you've got this view that tariffs are a one-off increase in prices. You know, just a one-off pop to inflation.

You know, the tariff goes into place. It gets into the retail, the retailer jacks up the price of the product to compensate for the tariff, the consumer pays it, and that's the end of the story. That may be the case back in 2018-19, and it wasn't because I think there was some pass-through, but more so back then because inflation expectations were very, very different than they are today. If you go back then, no one even, what inflate, what is inflation exactly? No one even knew what that meant because inflation had been so low for so long, well below the Federal Reserve's target. It was suboptimal. The Fed had been fighting for, well, since the financial

crisis, get inflation back up. Inflation expectations were dead as a doornail. They were just, they're not, you know, people didn't react. This go around, it just feels like inflate, people's, you know, they're Uber sensitive to inflation. Any sign, the price is going up for anything, you know, their inflation expectations are jumping and they're going to ask for higher wages and businesses are going to jack up prices because their expectations are rising that they're going to have to pay more for everything. So if you're in that kind of a world, a world with more sensitive and higher inflation expectations, you get more pass through. You know, you get more pass through. And here's the other thing. If you have tariffs that are

very narrow, narrow like the tariffs that President Trump imposed in his first term on China, you know, that's, that's one thing. But if you impose it across lots of different countries and products, that's a totally, you know, different thing in terms of, you know, what it means for retaliation, what it means for what it means for business investment decisions and hiring decisions. It's a whole different ballgame, I think, in terms of inflation. So this argument that, you know, this is one off. I don't, I, you know, maybe, but I'm, I'm, I'm,

I'm going to have the mind that, you know, that's not going to be the case here. This is going to, this could potentially set off, you know, a chain of, of reactions that means that inflation is going to be, you know, higher and more sustained as a result of the tariffs. Does that, does that resonate with? Marisa, does that resonate with that argument resonate with you? Yeah, I think it's totally different from his first term. I think we're in a, we're in a different environment and the tariffs seem to be way more broad-based than they were back then when they were very specific. Yeah, I, I agree.

Are you going to change the forecast? Are you thinking about changing the outlook for the Fed? What the Fed's going to do? We have two cuts toward the end of the year. Are you sticking with that? Well, I'm very close to concluding that we need to raise our inflation forecast here. You know, because even we've been, we have assumed some. significant increase in tariffs in 2025, but I'm beginning to think that this may end up

being more of a problem in terms of inflation. Not percentage points difference, but tens of basis point different. But I'm not, there's also going to be growth effects. This is going to hurt the economy. And that's going to show up by the end of the year, I think, in manufacturing, in agriculture, transportation, distribution, retailing. It's going to show up. And so you're going to get towards the end of the year and the Fed's going to say, oh, what am, what, you know, this doesn't feel very good.

But I think the growth effects, and I haven't made up my mind. I'm just talking, thinking, thinking out loud that, you know, the growth effects by the near will still outweigh the inflation effects. Even though inflation is higher, the growth effects will still be more pronounced than when the day and the Fed still begins to cut interest rates. And I still am of the mind that the so-called equilibrium rate, we talked about this a couple podcasts ago, the kind of the R-star, the rate, the federal funds rate, the rate, the Fed controls that neither supporting or restraining economic growth is elevated, but is coming in and will be meaningfully lower by the end of the year, so giving the Fed more room to ease. So I'm much more confident in inflation is going to be higher than what we have in the baseline,

but I'm not nearly as confident with regard to a shift in Fed policy, you know, at this point. And that gets to another set of concerns around inflation, and that is the economy's potential growth rate, which goes to the equilibrium rate, is slowing. It's going to slow, right? I mean, we've had this very kind of exceptional period over the last couple, three years, where the economy's potential growth, that rate of growth, which is consistent with stable unemployment and inflation, has accelerated. And that goes to labor force growth.

That goes to all the immigration that has come into the country, immigrants that come into the country. You know, that has put a lot of pressure on communities across the board. But one of the benefits of that is it's increased labor supply and employment. Those immigrants that came, many of them, most of them applied for work, or through they got it within nine, 12 months, and they went to work, and that took a lot of pressure off labor markets. And, of course, you had a surge, my piece you're showing a word, but a strong period of

productivity growth for lots of different reasons we've discussed. So when you're in that environment of strong potential growth, that really eases the pressure on inflation, and that's been really critical to the disinflation that we've enjoyed. So if you buy into that story, then you think, oh, no, the economy's potential growth rate is kind of slow here. It already is. You know, we can see it in the immigration statistics. There's a lot fewer immigrants coming across the border, and there will be a lot fewer than that in the not too distant future, given immigration policy. And that's going to hurt labor supply and potential growth.

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

Now, will AI pay off here and we'll get some productivity gains? Not in the next six months, I don't think. No. Yeah. Is that your hope? hope you're pulling out the AI rabbit technology well the productivity has to come from somewhere right so you got some small businesses so small business informations were still high last year so you know you see i put chris in a very awkward position because he's a oh you're you're the

productivity bull yes oh so you're defending your i didn't put you you're defending your productivity story i got it got it yeah but is it enough even if that maintains uh even if the growth accelerates a bit, is that enough to offset the labor force drag that you're talking about, right? That's a legitimate question. And you can be a productivity bull longer run, but in the near term. Yeah, yeah, exactly. And I am, right? So, yeah. I mean, in near term, I mean, it is slowing. We've seen it in the last years. Yes. Yes. And, you know, we have been arguing one reason for the pickup and productivity growth back a year two or three ago was all the folks that quit and took on other jobs that were better suited to the years. And we're better suited to the years. And

there's skills and that's a one-time pop that goes away. And it feels like we're on the other side of that pop right now. Right. So you could have a lull in productivity growth, even though you could be like I am, a productivity bull longer run. Yes. That's right. Okay.

All right. But you see, you get my point here, though, right? I mean, broadly speaking, we got really lucky in this period of high inflation because of this surge in the supply side of the economy. The supply side of the economy, which got crushed by the pandemic in the Russian war, revived and then some because of the surge in immigration and the factors that drove that surge in productivity growth. And that came at an incredibly fortuitous time when the economy was definitely overheating.

Inflation was an issue, and the Fed was jacking up interest rates. But because of the improvement in the supply side of the economy and the improvement in potential growth, they didn't have to raise interest rates as much as they might otherwise would have. And maybe that was one of the reasons why we didn't suffer an economic downturn when everything said that we should have. We actually got lucky in some respect. But now we're on the other side of that luck. We are definitely, and some of it's by design. You know, that goes to immigration policy.

Some of it's just, you know, part of the dynamics that are play out with regard to productivity growth. But, you know, if you go from this rule of the supply side helping you out to an environment where it's not, That's another reason to think, oh, my gosh, inflation could be more of an issue here than I'm thinking. Matt, what do you think of that argument? I think it's a sound argument. We'll say, I mean, I don't know what your time frame is. I know what the current baseline looks like, but are you adjusting when you think we really, is it nearer term that you expect inflation to start picking up? And is that an inflection point in Q1 instead of Q3?

Yeah, I don't know. I got to think about that. I mean, the thing that really I found fascinating was your vehicle story. The dealerships, that is a fascinating story. I got to talk to Brisson about that. I got to make sure. Yeah, he'll articulate it better than I did. Well, and I never disagree with Brisson.

Brisson is always, I mean, he's just, the guy's a god when it comes to vehicles, you know, somehow, some way. But I'm going to talk to him. Mercer, what do you think? Eye into it? I mean, I think most of what you laid out is mathematical. We know that immigration. is going to, it already has slowed significantly, right, from where it was back in 21, 22. And looking at our, I was looking at our forecast yesterday. I mean, we have net international

immigration lower than it was during President Trump's first term. I mean, we're talking very low levels of immigration. That is a huge shift to go from three million people coming into the country a couple years ago to less than 500,000. you know, over the course of the next couple of years. So just mathematically speaking, we're going to have a labor force that is depleted on that front. We're not going to have the supply. And then, yeah, I mean, I don't know what's going to happen with AI. I can't be as bullish as Chris. He has to defend his position here. I mean, I think it's probably too soon right now to be seeing massive benefits from that.

I think it'll be interesting to see, too, what happens with, we're going to have a lot of unemployed federal government workers potentially hitting the job market here. And it'll be interesting to see what the composition, what happens with those people? Will people truly retire or are people going to be entering into the private sector? You know, what does that mean for productivity? What does it mean for the unemployment rate?

I'm not quite sure yet. I don't think we know the full extent of the numbers that we're talking about here. But they could be significant, and that might be so much too. Yeah, a lot of cross currents. Okay, well, stay tuned. We've got a few more weeks before we have to put pen to paper and produce our March forecast. So we've got to think about this more deeply, but I'm coming to the mind that

inflation is going to be higher for longer than originally thought for all these dynamic because of all these dynamics. Let's play the game. And we're going to end with the game. We before a stat. The rest of the group tries to figure that out through questions, deductive reasoning, clues. The best stat is one that's not so easy. We get it immediately.

One that's not so hard. We never get it. And if it's apropos to the topic at hand, inflation, anything inflation related, all the better. It doesn't have to be, though. Marissa, you're up as tradition. Okay. My number is 100. 100.

Ooh. That's a nice round number, 100. Is it related to inflation? Not directly. Is it a commodity price? No. Directly. Is it an index?

It is an index value. It is an index value. Okay. Base period for an index? Yes. Yes, that's right. Some index is at it's, is that a hundred? Yes.

NFIB? Yes. Yeah, it's in the NFIB. Oh, yeah. That was 102, right? Or the headline. The plans to raise prices, price related, I assume. Well, it's in the NFI, National Federation of Independent Business, the Small Business Survey.

Yeah. I just saw Dunkleburg yesterday. He's the keeper of the data from the beginning of time. And I don't know which component, which component is it. Okay, this is the NFIB's. uncertainty index. Oh, certainty. Ah, okay.

Right. It's for the month of January. And this is the third highest reading on uncertainty ever in the history of the index going back to 1986. Wow. The previous two, the index readings that were higher were in September and October of last year, so right before the election. And the uncertainty jumped from 86 in December to 100.

in January. Huh. The way to calculate this is the number of people that say that they don't know or they're uncertain about the answers to these questions about the future. Like, will the economy get better or will prices rise and these kinds of things? So it's just representative of, I think, what we've been talking about, how up in the air, everything is. And these are small businesses that are trying to plan.

their operations and they're very uncertain about what the economy is going to look like a year from now. You're going to say that index tends to have more of a Republican slant. Yeah. That's right. So this is even, you know, it's meaningful. More meaningful. Yeah.

Because it's very, you know, all these surveys, people are looking at it through their prism. You see the U-MIS survey. Yeah. You see, it've always seen an NFIB survey. It's very politically dominated. And it's, things are great when you have Republican in office. Things are terrible when the Democrats in office. So I've always discounted it.

But the fact that this, even this Republican dominated index is saying, you said there was two other times in history, which were the two other times did you say? September and October of last year. Oh, going to the election? Yeah, right before the election. But it plummeted after the election result. Okay. Well, after the election results.

And now here we are in January. think all of this back and forth and vacillated on tariffs and policy, right? And then it spiked up again. And how long is that, is that that that goes all the way back to the beginning of the, of the survey? I guess it does. Yeah. Wow. Okay, I got to look at that. That's so cool. That's so interesting. And I tell you another really interesting thing I found in the NFIB is that, that I never really looked at before. But they have to break out these, the optimism index into their hard components. and their soft components. And the hard things are things that are measurable,

like how many job openings do you have and your inventory level, right? The soft is all this expectations and how do you feel about the economy? And remember that this index surged, right, after the election, just in terms of the overall index. But that surge is purely because of these soft things, right?

None of the hard index components really moved at all. it's all these expectations and how people are feeling that explains the increase in the index. It's not actual. Well, that's so, Matt knows that because he does that for the purchasing manager surveys. Yeah, but we found it for both. You can back into the ISM index, and it's like hard data that tracks government, you know, hard components that track government data, like historically.

And then you can just look at like the softer stuff and it's amazing how much of a deviation. It's just kind of cones out. It wasn't always the case. But the NFIB one, there's a political salience to that that's like, which makes the January uncertainty thing really interesting. I didn't know that. Yeah, very interesting. Is that in the date of a fay, Marissa, the series?

If not, can you send them to me? Yes, they are. Okay. I'll go find them. Yeah. That's very cool. That's a great statistic. Hey, Matt, you're up.

Mercer's is better than mine. 0.3%. It seems like everything. in that CPI survey was zero point. That's the trick. And monthly rent growth. Or is it equivalent? No. Or is it a clival rent?

No, more. More. Is it the CISIS is a super core? No, but it is an amalgam. Agregate, sub aggregate index within the CPI. Is it minus shelter? No, that would be higher. Not quite much, but yeah, no.

It's not that. Okay. So some aggregate in this consumer price index, CPI, the percent change on a month-to-month basis. Don't overthink it. Well, you're not going to say it's core CPI, are you? Well, it's not core. A step further. Yeah, right.

Core X. Core X. I don't know. Pick something out there. Core-X. Core goods. It's core goods. It's core goods.

The largest, fastest increase since May of 23 goes to what we're saying. This, you know, tariffs don't get applied to services. They're going to be on goods. Are we seeing some preempting some early purchasing on stuff within core goods as vehicles? So kind of unsurprising there. I referenced GDP data earlier, Q4, we had almost a percentage point added to growth from durable goods consumption, which was surprising.

It's a little, if it's happening, I think these are early indications that people are lifting their expectations for inflation and also acting upon that and trying to get ahead of price increases. Great. Very cool. Okay, let's do one more. Chris, you're up. What's your stat?

$4.77. That sounds like a dozen price of a dozen eggs. I think it's higher at my local supermarket. No, I think, oh, it varies a lot by across the country. I didn't know that. I guess the avian flu affects pricing in different consequences. So that's not what it is. So it's a price.

The price of gas. Is Wawa, sell this item? Yeah, is Wawa sell this item. Wawa does not sell this item. It's not copper, is it? It is.

It's copper. It's a throwback. Wow. Is it that high? It's that high. Wow. It was $4 at the start of the year. It's $4.70.

Yeah. What's going on there? You tell me. It sounds like. It's, you know, that's our Dr. Copper. All things clear. Growth is, uh, growth is, uh, growth is strong. Yeah.

I mean, is the counter. What's that? What's that? It's the counter. Uh, well, we're in a commodity price cycle and all commodities are dry. Are going up, okay. Going up, you know, it's a reflection. I don't, that's interesting. I, yeah.

Old hit an all time high earlier in the week. What did? Old prices. coal, you said? Gold. Gold. Gold. Oh, gold.

Gold. Gold. As you can tell, I don't know any gold. We had a great question about gold. I won't go into it, but we were on, Chris and I were on a call with a bunch of risk officers, and they brought up gold prices in the Fed's ownership and the price. But we're going to come back. We'll come back.

Yeah. Yeah. podcast. Oh, so it's historically, we thought of, Copper above four is strong economy, strong global economy. Yeah, that could- That's a demand for construction manufacturing. Yeah, I mean, it's strong.

Right now, the growth is strong, right? So it would be consistent with that, right? You mean, if you look at growth, if you look at our survey, business survey, when I would ask folks, if you please contribute to the survey, the weekly survey, It's also strong and consistent with a global economy that's growing above its potential, and that would be consistent with copper prices at $4.74, $80, I think. So maybe that's what it's reflecting. But interesting.

Has Trump tweeted at the Chilean president today about tariffs? Wouldn't that be where most copper comes from? Yes, indeed. Yeah. I think. Yeah. It does. Yeah.

It's huge. Yeah. I don't know. I don't know how up to date Chris's prices are. Yeah. No, they're real time. Real time. Okay.

We call them real time Chris. Ooh, I like the sound of that. Real time Chris. Okay. I think that you should be on your LinkedIn page. Real time, Chris. It's good. Real time.

Yeah. No, you don't like it. Real time with Chris? He's turning into it. That's good. Seems to be taken. Yeah. Anyway, we got to call it

podcast. This was, this was fun. Very good, very informative. You could see how we think out loud, thinking out loud about what's going on. Hopefully you found it of some value and we'll talk to you next week. Take care now.