Moody's Talks - Inside Economics - Inflation Rundown

Episode Date: August 15, 2025

It was a week headlined by crucial inflation data. The Inside Economics crew is joined by colleague Matt Colyar to dig into July’s consumer price index. July’s CPI was unsurprising, but that doesn’t mean it was good. The group discusses why markets might have been too cheery about it and what they think inflation looks like in the coming months (see July’s producer price index). Finally, some loquacious responses to a handful of listener questions. Hosts: 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 Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Chris DeRides and Marissa Dina Talley. Hi, guys. Hi, Mark. Good morning. Good morning. And you're back, Marissa? I am. I'm back. You're back. I mean, are you really back? For the foreseeable future. I'm back. Yeah. Seable future. Well, and you are a forecaster, you know?

That's right. You must be able to foresee a lot. I'm confident in that forecast. that I'm back. Yeah. And good travels? You see much more? Yeah. I had a great, lots of, saw much of this country.

It was really nice. Went to the Pacific Northwest for a week and a half. And then this past time I was gone, I was in New England, doing a kind of New England tour just visiting friends and family. Very cool. It was very nice. Very cool. That sounds like a nice trip.

And we have got Matt Collier, Matt, hey Matt. This is CPI week, PPI week, inflation week. and you always join us on this week. Good to see you. Good to see you, Mark, Chris, Marissa. Have you take your summer vacation yet, Matt? Are you back? No, no vacations here.

No, I'm going to, Marissa, where did you go? I like to sound to that. No vacation. Marcia, did you hear that? No vacation. I did. Yeah. It sounded like a challenge.

Where in New England were you? We're headed to Rhode Island today. I was in Connecticut, Massachusetts, and Maine. Well, it's got good to. Good to have you. And we've hit the big time, guys. We're on a new platform, Riverside. You mean, like the rest of the world was here a long time ago.

We finally caught up. Not early adopters. We'll see how this goes. So far so good. Except Marissa. Marissa's... I don't love it so far. You don't love it so far.

We're five minutes into it. I'll get used to it. Yeah, maybe we'll get Riverside's senior management, you know, to kind of help us out here. Yeah. That would be nice. Okay. I don't know if that's necessary. Not yet, at least.

You don't want Zandi complaining about your platform, that's for sure. Yeah. That would be the worst. Absolutely not. Absolutely not. Well, we've got a lot going on this week on the economic data front. So we're going to cover that CPI, consumer prices, producer prices, inflation writ large. And that obviously has been top of mind and got Matt here to help us out with that.

And we'll get to that in just a minute. Talk a little bit about we've got retail sales this morning. The consumer is key, obviously, to the economic outlook and can talk a little bit about that. But I think the kind of the headline here is the listener questions. You know, we posed on LinkedIn, you know, we asked everyone to send any questions and we've got a boatload. And, Mercy, you've been collecting a lot even before the LinkedIn query. So we've got a bunch of listener questions. I haven't heard any of them yet, but we'll go through those.

We'll play the game. and that'll be good Friday kind of podcast, right? I think that'll be enough. Yeah. And I always threaten this is going to be short, but it never is. It's always an hour in 10 minutes. It's kind of a law of podcast physics. I'm not sure what that's all about, but we'll see how this goes.

Okay, so you want to just dive right in? Let's do it. Let's do it. Okay. All right, Matt, inflation, CPI, PPI. What did you get? What did you read? and how do you read it all

and what does it all mean? That's a great way to set the context. So consumer price index we got on Tuesday, unsurprising report forecasts were all, including ours, on pretty precise about what prices actually looked like. You mean we were accurate is what you're saying? We were accurate, yeah.

I would say this was unusually accurate. I go through components and this is a good week or a good month to pat ourselves on the back. So maybe it's a little bit of predictability. Maybe it's a bit of luck. But either way, came in as expected. 0.2% increase in the consumer price index.

That's a little bit slower than the month before. But the year-over-year rate didn't change at 2.7%. That's unrounded. You look at that a little bit more closely. That's the highest we've had since January. So certainly part of this backtracking of the disinflation that we'd seen previously, certainly going on. within that 0.2% increase in the headline CPI, of course, that includes food and energy.

And energy was a pretty big drag in July, so that shaved off some of the month-to-month change in headline inflation. Food prices were generally flat, although we can look a little bit more closely at that when it comes to the producer price index, but we'll table that. So excluding those two negligible and negative components, food and energy, we look at core CPI And I think that was where, even if it came in as expected, it's consistent with this story that the price pressures are bubbling up, are starting to pick up steam. And it's all, you know, relatively clearly downstream of tariffs. So we've got a 0.3% rise in core CPI, strongest monthly pace since January.

The year-over-year rate jumped from 2.9% to 3.1%. Across the board, you're looking at components. Can I ask me just really quickly before you kind of go even deeper? So the number came in, the CPI number came in, as you say, were we expected. And I think we were consensus, right? I mean, I think the consensus was there. So we can pat ourselves on the back, but collectively, you know, everyone got roughly right. But the markets, the stock market in particular, took off on the number, suggested.

Oh, they felt like the CPI number, the acceleration that we're observing is no big deal, nothing to worry about. It certainly won't be enough to forestall a rate cut by the Federal Reserve when they meet again in September. Were you surprised? I was a little surprised by that kind of reaction. Were you surprised, Matt? I was. And that's exactly how it frame it.

Unsurprising was kind of taken as synonymous with good news, even though the surprise or the prediction that everybody had, the forecast was, is inflation is going to accelerate. rate. And whether that's consistent with the Fed's view, and that means that the September of 25 basis point cut in September is more likely now. I think that's a reasonable argument, but hard for me to square what is a strong monthly growth in core inflation with good news, that maybe the tariffs aren't biting or that businesses are handling this really well. I don't think there's evidence of that. I just think there was evidence that we knew what was coming, and that's kind of what manifests. Chris, were you surprised by the market reaction to that number?

I was surprised, but it seems like the market is in the mode of any news is a reason to go up, right? Right, right. Just a reason to buy. Either you're going to get a Fed cut and that'll reduce things or it's not a problem and profit margins are going to be fine. Right. Right. Okay. So what you're saying is the market feels like it's getting a little overdone.

It's kind of taking on a life of its own Sure feels independent of pretty much everything Except that prices are going up Therefore they will go up because people will Speculate effectively. Yeah, okay We'll come back to that. Okay, so I stopped you You were going to go into a little bit more detail, I think, on the CPI Yeah, so within core CPI components, the big guys that we focus on

Shelter Inflation, not too much headlines there it's been a pretty consistent story of this owner's equivalent rent tenants rent all those prices are rising but rising at a slower and slower clip year-over-year growth coming down kind of you know it's kind of anachronistic to think about where we were in a year ago and say as long as that happened we would get inflation down to where it should be well it is happening but there's of course these cross-currents when it comes to goods prices and goods inflation so that's been a in isolation good story year-over-year growth and shelter continues to you know trend lower and lower Which, by the way, if we go back a year or two ago, we were always, we were hand-wringing.

When are we going to see the impact of the weak rents, the flat rents, show up in the CPI for housing? And here it is. It's here clearly. It feels like the CPI is finally caught up to what happened to rent, has been going on with rents for the past couple, three years. Right. If you just look at the past three months annual, like a three-month annualized moving average. shelters rising at like 2.7 percent, which is exactly, I mean, that's what we were, we're pining for all of 2024 and even 2023.

By the way, there's a lesson in that, you know, for the current period. And that is, you know, we all knew or we felt like we knew with a high level of confidence that the consumer price index would ultimately reflect this weakening rents. The owner's equivalent rent, the rent of shelter would moderate. It just because of construction and lags, it just takes time for that to filter through. But we were consistently in the kind of the public conversation was consistently saying, where is it? Why isn't it slowing?

Shouldn't it be slowing? Aren't you guys are all, you're wrong, you economists, you don't have it right, you're missing something, right? Am I right about that? You know? Yeah. Does that feel familiar to you now in the context of what's going on? Of course, obviously, I'm talking about the tariffs and the immigration policy, right? Now, Chris, what do you think?

Yeah, yeah. Do you still advocate for a harmonized CPI? I do. I do. I think, I think, especially in the context of, you know, the long lags and the effects of what's really going on when it shows up in the CPI and the price measure. So, yeah, I would. Harmonized, by the way, would exclude housing costs from the,

inflation measures. And that really is most important for the CPI, the consumer price index, because that has a very large weight in the CPI. Less important for the PCE deflator, but, you know, certainly for the CPI. Yeah. Okay. All right. Sorry, I stopped you, Matt. Yeah. And to kind of doubly, more evidence of how shelter has reduced as a concern. I haven't tracked harmonized CPI in about two or three months. Yeah, I've stopped. I had to think about what that way. I'm glad you didn't ask. Yeah. I think the BLS stopped publishing it, didn't they? They've had some issues in terms of...

Of course, this is before... This is well before this mess that we're observing the Bureau of Labor Statistics, right? Yeah, okay. A couple other major components worth touching vehicles, global supply chains, or it's always an interesting component to look at, but especially now with high tariffs, a lot of, you know, whip-salling in demand

in the automotive industry. So what do we get there? We got a basically flat, no change in new vehicles. CPI. So that comes after a stretch, a pretty consistent stretch of lower and lower vehicle prices. So kind of contradicts or it runs contrary to the expectation the tariffs is going to push up new vehicle prices. We can get into the underlying dynamics there about why that might be and why that might not continue or why it's very unlikely to continue that we're going to start to see price increases coming. Do you expect price increases coming? I think that's impossible.

Not to be the case. We're 0.4% year-over-year growth in new vehicle prices, but we have, you know, the major car exporting countries in the world are getting slapped with, you know, 15% kind of a floor tariff. Of course, not all cars are imported, but a lot of inputs to cars made domestically are imported. So that's something we expect in the next couple months.

I would say July really looks like an inflection point. So you have these small, you know, incremental declines throughout 2025. And then July, we get flat growth. Now we have the, you know, used to word durability or reliability of these trade agreements lightly, but you have something written down to say, I assume they're written down, to say that there is a 15% tariff incoming for Japanese cars. Yeah, whether it's in crayon or in tweets, I don't know, but the, there's kind of this green light for, in my expectation and talking with, you know, Mike Briston or auto guy, you know, that's clarity.

And you're not going to see big companies that are kind of hoping these tariffs go away. But can I ask, though, we know the, for example, the Japanese automakers, they appear to have eaten it at least so far, meaning they have not, they've cut their price that they're charging, you know, for the cars they're sending over here to offset the effects of the tariffs. So they're eating the higher tariffs. And that's a poster child for foreign producers bearing some of the brunt of the tariffs. So are you expecting that to change as we move forward? The Bank of Japan released the latest, and it's really clear and interesting data point that they have. It's cars going everywhere else and cars going to North America. And like you said, there's this discount they're being sold out.

We got the latest data point for July earlier this week. That trade agreement between the Japanese and U.S. governments came July. 21st, second, third, ish. These prices are average throughout the month. So it's always probably going to be too early to see much. We see a little bit of an increase, but that index, that deflator, the discount, if you will, that these Japanese automakers are selling when they sell to, they're charging when they sell to American dealerships, wholesalers, ticked up a little bit, but nothing dramatic. I would say August is going to be a month that we should watch closely for, as they can say, okay, South Korean car manufacturers are

getting 15%, we're getting 15%. There's no reason to continue selling effectively at a loss. These are low-cost, high-volume vehicles with small margins. They were not able to continue selling at that discount for any prolonged period of time. So the expectation is that price comes up. Just so I understand, in the most recent data, you're saying the discount that the Japanese automakers are providing, that got smaller, a little bit smaller. A very little bit smaller. Okay, okay. Say that, Chris? Marginally. Marginally. And you're saying, is you expect that discount to start fading away here as we move forward.

Yeah, I think over time it's going to look like a V, a pretty sharp V. For a period of time, we dropped prices, sold into discount, and then it came back. And I think July was a month of an incremental marginal increase. Okay. Okay. Okay. All right. Feel free to go ahead. Yeah. So used vehicles, we saw an increase there, 0.5%. still consistent with mild price pressures there for an industry that we should not expect mild price pressures to continue. So I think that's a really key component for the next half of this year. October is your new model year primarily, not for every manufacturer, but that's when the

2026 models hit. By the way, that's what I've heard that they're going to use the model year change, the automakers, even the foreign automakers, that's when we'll see the pricing, the pass through, because they're waiting for that model changeover to make that change. That's what I've heard from the Japanese automakers. That seems very intuitive that that's when you start to embed these cost increases. So I think it still comes on a staggered amount. And of course, the BLS knows that October is typically a new year.

So seasonal effects catch some of that. But the expectation is that this is a 15% tariff. If you use that as a floor, Section 232 is 25% tariff for non, for cars coming from countries that we don't have a trade agreement with. So it's going to be above and beyond that new model increase. that seasonal factors capture. So that'll be really interesting to watch. But I think it comes, I think we see just strong growth over the next, you know, at least half of this year. Healthcare was another interesting one and frankly, I don't have a

terrific understanding of what's driving strong growth there of late. But health care, medical care services, 0.7% increase on the month. That follows 0.5% increase the month before. Isn't that just labor costs? I mean, that's my take on it. It's labor intensive and that seems like it's been a long running story because even after the supply chain crunch and all these prices went up, it was okay, health care is going to be slow. But we thought that was generally a 2024, early 2025 story. So it seems a little bit more persistent. And if it continues, I would say that's likely to go even higher than we thought. But that certainly seems like the most plausible.

Given the contracting process, you know, in the healthcare industry, just takes time, you know, for that. Again, you know, another example of it. You know it's coming. It just takes time because of the frictions that are involved. Is that it? Is that an immigration story? Oh, yeah. Well, I don't know.

In the healthcare sector, do you think it's a restrictive immigration story, Matt? I'm only going off of evidence or estimates that I've seen. Constructions at the top. Agricultural second in terms of reliance on immigrant labor and health care is in the next tier, I believe. So it seems plausible, but I have, yeah. So that's the general story. The only other interesting thing I take away from the report is we're thinking about all these tariff upward pressures, but we've also long thought about the hit to consumer demand and the disinflationary effect of tariffs in the other way.

Hotels is really interesting. So you're at another drop in July, 1% decline. That falls 2.9% decline the month before. It is pretty volatile month a month, but you're at a year-over-year drop that's excluding COVID, sharper or bigger drop than any period since 2010. And that's not typically, you know, time that people are thinking about is a strong consumer in America. So there seems to be a real pullback. And a lot of that's international travel, but even domestic travel, there's evidence that people

are pulling back and going to hotels less. And then they're forced these hotel chains are forced to drop prices. So I think that's really interesting. It's providing a little. bit of a offset for some of these other price increases, but neither one of them really speaks or supports a growing economy. Okay, so let me ask you the kind of the bottom line question. I mean, the question I'm getting is, are the tariffs in immigration policy, the restrictive immigration policy impacting inflation? And is it impacting it in the way we anticipated or is it taking

longer to show up in the data? Taking that even further, does that mean that tariff effects, the immigration effects will not be as on inflation will not be as significant as we thought. So that's a mouthful. What do you think, Matt? I don't think that's, I think that's an optimistic view, but I think the evidence is that that's not what's happening. I think we're seeing staggered effects. I think the inventory drawdown. So I knew these tariffs were coming. Let me buy a bunch of stuff. That's ongoing, but getting smaller and smaller every day. I think the clarity that's come from trade agreements is another reason for, you know, big manufacturers, producers of stuff that is now being tariff to pass through these price increases because they really don't have a choice.

So looking at all that and looking at underlying components, it's happening. It's just happening at a clip. It's not going to be one month where prices jump four, five percent. Increase in core CPI this month on an annualized basis would be consistent with where we think inflation peaks next year. So it is ongoing. It's just the matter of not comparing it to 9% year-over-year growth in 2022. It's just this is re-acceloration and inflation.

that's going to make, you know, things cost more. People are going to be able to forward less stuff. And we see it with stuff that's import-intensive. It's pretty consistent. Yeah, Marissa, I haven't brought, let me bring you into the conversation. What do you think with regard to those broad questions about terrorist immigration and inflation? How are you thinking about it? I agree.

I think it is showing up in the data. But there's other stuff going on in the data. So you have to part. sit out. I mean, back to your comment about how markets reacted to the CPI report, what I thought was interesting was the various ways it was described by different news outlets. Some said, oh, inflation, no signs of inflation picking up. Inflation is steady, right? Others said, inflation is picking up. Tariffs are coming through, right? So it can be interpreted in many different ways, as things often are by the media. But it's certainly there in the data, but you have to

kind of understand how to look for it, right? And I think certainly you're seeing it in certain sectors and certain segments of goods. And when we put it together with other indicators, whether they're labor market indicators, to look for the effective immigration policy or things like retail sales, which we got today, you can see that this is having an impact on the way people are spending. Yeah, I'd agree with that. It's a belated fact, but allow me to interject some data uncertainty here. Matt, maybe can refresh us on what fraction of the CDI is now being calculated on an imputed basis.

Yeah, that's a great point. So the share of things that the BLS needs to assume because they didn't get out and measure explicitly a price for something is typically around 10, 12% over the past decade or as long as this series has been available, that series. In the past few months, it's settled near a third. So 32% in July, that's down slightly from 35% in June, but it seems like at least right now, that's kind of a plateaued point where a lot of assumptions are being made. That doesn't mean things are going to look one way or the other. It's that they're going to look in both ways. I mean, that's just a higher standard error. there's there's less reliability on an estimate so that's difficult to to square with a

conclusion but it needs to be taken with a grain of salt i guess is the in just to refresh everyone's uh understanding why has the imputation increase percent of imputations increased generally the the clearest the explanation is there's a hiring freeze it's not that bLS people at the bureau at the bLS so the federal government yeah so the large hiring freeze is bLS is not immune to that. And you have the normal flow of retirements, then they're not being replaced. And you have fewer and fewer staff to go out and do the stuff that would be normal procedures for a big report like this. And that's crimping their ability for an accurate estimate. Chris, I'm sorry, go ahead.

I was going to ask, do you have any insight into which broad products or services are being imputed versus measured? Is there any detail around that? They seem, and the responses I've gotten, you're not going to say, it's less clearly, hey, we're not getting out to as many department stores and watching and checking, you know, changes in denim or something like that. It's we're not getting to Buffalo as much. So what does that mean? And so you're getting, and these are bottom up estimates. So you're cutting out some of the geographic coverage more than they're saying, you know, we don't know what cars are costing. So we're just, you know, winging it or something. So it's more of a geographic story. So that makes it a little bit difficult to make the durable goods. Is this a tariff? Are these are goods that are tariffed being? estimated more and that would potentially understate inflation. But I don't think there's a good reason to come to that conclusion right now. That could definitely skew though, right? Because we know they're pretty strong, persistent differences across. Especially Buffalo. I mean, I mean, really,

you're not going to Buffalo? Are you kidding me? Right. You're really, you're really biasing the CPI. You know, brist and himself, you know, the way he spends, you know? That's our colleague who lives in Buffalo. Yeah, the Barado guy, as Matt put it. Yeah. Yeah. Anyway, I should say we have a, because of the data issues that have cropped up here, in addition to obviously what we just talked about, the firing of the former BLS commissioner

and the appointment of a new one, we are, have, we have our own research initiative now to try to construct our own estimates of some of these data because I'm not trying to, sure how much we can trust the data going forward. Was it trust but verify? I can't remember what it was. That's what we're going to do. It's a Reaganism. That's a Reaganism.

That's what he said, right? Trust but verify. Right. Yeah. So I think that applies here. And actually on prices, that's one place where we may have a good chance of really contributing because you can go out and get the prices. And so we're going to give that a shot.

and, you know, try to supplement some of the data we're getting from government sources just because, well, just because of, you know, what's going on. We'll send Mike Brisson to the grocery store. Yeah. We should just survey him, you know? Right? We should just survey him. Between Mike and Justin Begley, who's also a buffaloian, we should, we should, that would be a good comparative advantage for us. We can have Buffalo well covered.

Buffaloian? Is that a word? Buffalo? I like that. Yeah. Yeah. Yeah, but Justin doesn't live in Buffalo. Yeah, he's a talented.

He's a halfian now. Yeah. Yeah. But he goes back a good amount. I'm sure we could do him, get him to split his time. He can do that in his free time. Maybe we should offer Justin and Matt and Mike up to the BLS. You know, maybe say, hey, we'll help you, you know, so you don't need to go visit Buffalo.

You can have, you can interview these two guys, you know. They can be interns because they won't be getting paid. The way that BLS is going, that might really work for them. I don't know. Yeah. A voluntary organization. Okay. All right.

All right. All right. Well, talking about, you know, the imprints of tariffs and immigration on the, on the inflation numbers, Matt, the PPI, the producer price index, you know, what the heck? Yeah, I thought it was a typo when I first loaded the report. It was 0.9%, which is also, you know, bigger swings in producer prices. So what producers, American firms are buying stuff, the inputs they use in their operations. It's a little bit more higher movements than the consumer price index. But a 0.9% increase from June to July, us consensus. We were about 0.2%.

So way, way under. The underlying factors are really interesting here. Whereas we had a decline in energy prices for the consumer price index. Energy was actually a bit of a boost to producer prices. But that I think should not, you know, even if you have, you. fluid energy and you start to look, you know, underneath the hood. It's a pretty concerning report. So that 0.9% increased the final demand, PPI, which is kind of the standard everybody refers to from 2.4% in June to 3.3% July. Food prices took a big jump. And behind that,

we see vegetables in particular, about 38, 39% higher. Terrace on tomatoes from Mexico or something? What's that? I think that's a reasonable expectation. You have a lot of stuff coming from. What's that correct? agricultural costs. Immigration again. Immigration again. Oh, yeah, right. Immigration again.

That makes sense. Could be both. Could be both, right. Sorry, Matt. No, I think that's a really good call for what could be driving up farm prices and agricultural products. We see meat and veal. A lot of that, again, I know Brazil is a big exporter of beef.

Coffee? Wasn't coffee? Coffee is a huge one. Roasted coffee prices are 30% higher right now than they were. year ago. And that's terrorist, right? Isn't that terrace? It's almost all this. 14% of it is just in the past three or four months. Right. So beef and veal moving the same direction, 10% in the past few months. Fruit prices are, would be subject to some of the same labor constraints that Chris mentions there. It's been pretty tame, but I don't think there's

a reasonable expectation that that's, that they're going to be immune from higher cost. Other components, home electronic equipment, jump 5%. A lot of that's coming across the Pacific. These are made in Asian countries, a lot of Chinese components. That's a major increase household appliances. We're starting to get back to this is the highest year-over-year rate since this supply chain crunch. So 2020, 2023 is we're hitting kind of those superlatives.

Really interesting that we're not just talking about goods here. We're looking at a big jump in services prices, but looking at, you know, what's underlying there is this component trade services, which is essentially looking at wholesalers and retailers, the margins. So what they're buying for, then they're buying a component and then they're selling that component, what that margin is. So it's can kind of proxy a profit margin, but there's a lot more that would indicate that that goes into that that suggests it's not just, you know, then padding their margins. But it is functionally saying are American producers taking these prices on the chin, or are they, hey, my costs are going

up, so I'm going to pass that along. So the movements there are really interesting. And we got a 2% increase in July. And that's, again, it's a relatively unintuitive measure. But that's probably the most informing data point in July's PPI report is that that margin is not shrinking. If it were shrinking, that would be, hey, higher costs. We're getting those Mexican tomatoes. And they cost a lot more for us, but we're not going to pass that on to consumers.

because it rose. Did we see any compression in the margin in previous months? There was about three months ago. There was a big drop that then the next month, so that was a potential argument that firms are taking this, eating higher tariffs. And now they're getting clarity around the tariffs and they're saying, hey, now I know where these tariffs are going to land. I'm going to restore, I'm going to start passing through these price.

The tariff cost increases to my customer, restore my market. margin. That would be a narrative. That's that's kind of roughly consistent with the data. But even that big drop was revised away, still negative, but like it went from a negative 1.4% and the talk was, okay, wholesalers are taking these tariffs on the chin. And then the next month, it was negative.3. So okay, not that much. And then since then it's been a story of expanding margins, which is they're keeping, they're not widening their margins as much as they're seeing higher price increases and in protecting their margins is probably the clearest way to think about that.

But you take, kind of your takeaway here is that this argument that businesses are going to eat these tariff increases, at least on a sustained basis, that's not consistent with what you're observing here in this data. No, you would see those contractions would be the countervailing narrative. Okay. So let me ask a PPI producer price index. You know, the way I've thought about that simplistically is that's what businesses kind of charge each other, you know, for components, as you say, and other inputs. And that is a bit of a leading indicator for consumer prices. So, you know, businesses price for the different things that they need, then they use that to determine what price, along with their margin, what price they need to charge to consumers. So if producer prices go up 0.9% this month, that doesn't augur well for CPI next

month or the month after or the month after that. Is that simplistic way of thinking about it, an accurate way of thinking about it? I think it is. I mean, that's how this should be evaluated. Okay. All right. Okay. Okay.

So you add this into the mix, CPI, PPI, again, just reinforces your view that, you know, the tariff and immigration effects are, they're here, they're showing up in the data and they'll become more pronounced in the months ahead. Yeah, clearly. All right. Marissa, Chris, Marissa, any pushback there? Is that your view? No. You got it. Okay.

And Chris, same deal. Yep. Okay. And I should point out, you know, we have not changed our forecast with regard to inflation. I mean, if you look at our CPI, the CPI, I haven't looked at the PPI forecast, but the CPI forecast, the PCE deflator forecast. And we'll get that to that in a second. That's the consumer expenditure deflator measure of inflation. That's the measure the Fed uses when setting its interest rate policy, that, you know, what we've been expecting in that forecast is about the same as what we were expecting.

month, what we were expecting three months ago, when the tariffs really got jacked up. So nothing's really changed. Okay. So what does this all mean for that PCE deflator, Matt? So I know the CPI numbers, the PPI numbers are used as inputs into the calculation the BLS makes to calculate PCE, again, the consumer expenditure deflator. What are you now expecting that to be the PCE deflator for the month of July when we get that? I guess next week. I mean, it's a week after.

Two weeks? Yeah, the following weeks. The headline PC deflator is expected to rise 0.19%, so round it up to 0.2. That'll keep the year-over-year rate at 2.6. Core PCE, 0.28%. That follows 0.26, both are going to be rounded up to 0.3 in June, and that will lift the year ago rate from 2.8 to 2.9. And I have to say, after I initially looked at the PPI, I thought, okay, this isn't a typo.

Wow, this is really going to drive strong PC, depending on which components here are getting mapped over to the Pee. And the story there is the components that are within a PPI report that are used in the PC deflator were relatively mild, so you don't get this really strong jump in the PCE that was potential. It's kind of determined by which components in the PPI drove that headline increase. So, you know, that's a lot of, you know, kind of methodological talk, but in general, it'll look pretty similar to the Consumer Price Index report where you see core inflation picking up and year-over-year growth. getting further away from the Fed's target. So Core PCE up point, rounded, rounded point three on the month, 2.9% year over year. And of course, that 2.9% we often think of that in the context of the Fed's 2% inflation target because they're targeting, you know, that core PCE deflator.

Okay, so we're on, we're definitely, inflation is uncomfortable. The way I kind of characterize, why we characterize that would be that's uncomfortably high inflation, 2.9 versus 2. 2 is deemed to be comfortable and appropriate. We're at 2.9, so almost a point higher. That's uncomfortably high. And the direction of travel is

auspicious, moving in the wrong direction. It's going up. And that's what we should expect to see continue through the remainder of the year into next. Anyone disagree with that? That's our forecast. Anyone disagree with that? No. Okay. All right. Anything else on this, anything else that

you know, you want to bring call out, Matt, on the, on the inflation front? No. I think that was a good synops. I guess the only thing I'd say is, you know, we've all been focused on tariffs. I think we also need to, and Chris has made this point implicitly, we've got us a focus on the effects of immigration, the restrictive immigration policy, which it feels like that's going to intensify because in the big, beautiful bill, there's a lot of money for border security, wasn't there? I mean, that feels like that's going to intensify here.

By the way, I had a piece in the Washington Post op-ed on this issue. So in case you missed it, guys, you might want to take a look at that. It was a pretty good piece. Okay. That's the inflation data on the growth side of this. I mean, obviously, we're concerned about inflation created by the tariffs and immigration policy, but both those policies also have implications for growth. They weigh on economic growth.

I guess the, correct me if I'm wrong, Marissa, the key statistic that came out this week was today's numbers on retail sales. Is that right? And what did the retail sales numbers say? Yeah, that's right. Retail sales for the month of July came out today. So it showed that total retail sales and food services rose half a percentage point between June and July.

that follows a 0.9 percentage point increase in June. If you take out autos and gas, which tend to be volatile from month to month, retail sales in July were up 0.2% following a 0.8% increase in June, which implies and is the case that much of the growth this past month, July, came from auto sales. We saw a pretty substantial pop in motor vehicle sales. And that was the second month in a row. We've seen strong motor vehicle sales. Across the rest of the major categories, it was kind of mixed, but we do see weakness, interestingly, in some things like restaurants.

So food service, drinking places, sales fell. We saw declines in building material stores and electronics and appliances. And we know, you know, Matt has said both of those categories have shown some increase or some evidence that prices are rising. There may be some tariff pass through in those categories. And then elsewhere things were mixed. So like clothes stores, sporting goods stores, and especially online retailers. So internet sales were okay. They were pretty robust. but this was really very much juiced up by auto sales this past month. And if you take up kind of a broader view of retail,

that sounds kind of like a good picture, relatively right? But if you take a broader view of retail sales and you look just since the start of this year, retail sales are up 2.1% on an annualized pace. And that is about a third of the pace that retail sales were growing if you compare it to the seven months of last year. So they've slowed quite significantly this year. Can you see that again? Despite the vagaries of the up and down. Can you say that one more time? Yeah. So over the first, over the first seven months, so kind of year to date retail sales are up 2.1 percent. This year. They're up 2.1. This year. Okay. Two point one. Annualized?

Yes. Annualized. Okay. Yeah. And that's about a third of the pace of what they were growing at last year. Wow. Yeah. So we've definitely seen a weakness so far this year when you compare it to, you know, what we were looking at. And that's nominal. That's before you can. And this is nominal. That's right. So this is not, this is not being, you know, discounted by the rate of inflation. That's right. So in my mind's eye, if I've grew, if it's 2.1% annualized for seven months of the year, inflation, goods inflation has been at least that,

probably more than that, right? Probably more than that, right. And that would suggest that so-called real retail sales, you know, the real spending after inflation is actually negative in the first of the, yeah. Huh.

That's a good statistic. That would have been a great game, statistics for the game. I'm just saying. Would have been. That's a good one. Really good. Okay.

So what's your kind of, bottom line takeaway from all that, that, you know, the consumer is, well, I won't put words in your mouth. What's your takeaway? Yeah, I mean, I think there's, so I think there's some evidence here that consumers are still kind of trying to get ahead of, trying to get ahead of expected price increases. You see that in the vehicle segment, right? We saw that earlier this year where there was, in the first couple months of the year, there was a lot of buying of cars with the expectation that tariffs were going to be pretty substantial. And I think over the past couple months, we're seeing that again. We're seeing it with the electrical vehicle tax credit, the $7,500 tax credit expires in the end of September.

And there's some data to show that people are buying electrical vehicles to take advantage of that tax credit now before it's gone. I have friends that just bought an EV this past weekend. Because of the credit? Specifically because of that timing. Yeah. To do it. before the tax credit expires. So I think there's still some wonkiness in the data and the way people are spending to try to get ahead of tariffs. Interesting. Matt, I know you watch this data, too. You watch all the data very carefully. Any comments on the retail sales numbers? Yeah, the inflation adjustment part is really interesting to get a sense of where people actually

do you have a precise number or do you have a precise estimate of? I mean, I look at real personal spending and it's flat for the year. Flat for the year, yeah. Compared to late 2024. The goods inflation, so-called that go into the retail sales, for the goods that go into retail sales, do you have any sense of what that inflation has been

year to date? No, I don't. I think it's produced. I just haven't talked that. Yeah, I'd be very curious. Okay. Sorry. Go ahead.

Yeah, it's the consumer pullback. It's almost perplexing a little bit because still is a low unemployment rate, but is it really these concerns about where tariffs are headed? and all of this growth uncertainty is that where people are preemptively just spending less? I think that's the conclusion that's most probable, even if it seems, yeah, it seems like a strong psychological effect, especially after we had a period where consumers were saying a lot of bad stuff.

The job market's weak, Matt. The job market's not good, right? We know that, right? I mean, job market is pretty much come to a standstill. I mean, I know it's not because of layoffs, but there's no hiring. So people sense that, don't they? it seems undeniable that's what they sense but I would have attributed lost income to being needed to okay people are losing their income now I'm not going to spend not hey I might lose my income that

that pass through or that channel seems stronger than uh and then I think fundamental I mean what I would have guessed especially because consumers have been really negative for a long time and they've just continued to spend now they're negative and they're not spending and I think there's good reason for that and I think it's the factors behind why they're so negative have changed and that's an important different difference. But yeah. Well, that doesn't all go well. I know I've made this point in previous podcast, but, you know, so far at least, you know, real incomes have kind of held up, but that feels like that's going to come under some real pressure here as these price increases due to the tariffs and immigration policy start to flow through unless wage growth accelerates,

we're going to start to see, you know, some pressure on real incomes and then spending, you know, that to your point to the impact on spending. Chris, how do you, how do you, how do you, how do you interpret the, to Matt's, you know, point about why, we've seen this pretty, not pretty, we have seen this clear plateauing, flattening out of consumer spending, real consumer spending. It's gone nowhere, you know, since the beginning of the year. After growing steadily and, I'd say even strongly in the years after the pandemic, what do you, what, is it just psychological? Is it people that are just nervous? I mean, what's going on?

What do you think what's fundamentally behind that? No, I think there are some real drivers here. People are sensing weakness. And in particular, right, it's the upper end of the households, upper income households that are really flattening out their spending and having the biggest effect. If you will, so I think there's certainly some of that going on. You know, there's also, it seems like, to Mercer's point,

there's a lot of this eye of the beholder effect going on here when it comes to the investor. community looking at this data and, you know, to say, oh, well, it's not as bad as it could have been or what consensus might have been. The retail sales are still growing. So, you know, I think there's just some mixed signals here in terms of which specific segment of the economy we're looking at, whether it's high versus low-income consumers or investors or just a lot of signals here.

And the tariffs just change all the timing and make it very difficult to get a clear read on what's going on. Okay, well, from my perspective, bottom line, it's clear that inflation is picking up and growth is slowing. And that's directionally stagflation. You know, we're going in the wrong direction here. And the fingerprints of the tariffs and the immigration policy are all over the economy's performance. Yeah. You would agree? Yes. Yeah. Okay. All right. Okay, we've got two ways to go here if we're going to keep this podcast at a reasonable length because Matt was prattling on to no end. I think he was even showing off a little bit, don't you think? Pretty granular understanding of that whole margin thing with the PPI. I thought it's pretty impressive.

It's very impressive. I'm impressed too, actually. Yeah. And that's the way it should be. That's the way it should be. Should we play the game or should we just go right to let's just go right to listener questions. We'll play the game next week. How about that? Does that sound okay? Okay.

Solid number. Did you really? All right. Let's play one round of the game. Let's play one round of the game for Matt. Okay, Matt. You're on now, baby. Are you just making that up?

You were just making that. I do have a good one. This is also a good time for you guys humor. It is my birthday, too. So this is you guys to be actually nice to me. Oh, yeah. Oh, wow. Oh, happy birthday, Matt.

You guys don't know that? It's not in your Outlook calendars? I didn't know. I don't even have my birthday in my Outlook calendar. What are you talking about? I was joking. Nobody should have that. All right.

You look like your, how old does Matt look? Gosh, no way. A lot younger than me. Let's put it that way. Yeah. Anyway, okay, let's play one round in the game for Matt's birthday president. I appreciate. I appreciate you guys.

So this is got to, this is, you know, you're giving us a stat that, uh, that isn't so easy. We get it right away. One that's not so hard we never get it. And, you know, I'm guessing it's got to do with inflation, but we'll see. So go ahead, Matt. What's your stat? 0.25%. Is it inflation related?

And, yeah, it is. It's not, it's not a CPI in the CPI. It's not. It's not in the P. No. It's not in the consumer expenditure deflator. No. Is it related to inflation expectations? Ah. No, no. No. But it is related to inflation. 0.25% came out this morning. Import prices. Oh, there you go, getting there. So now it's just a transformation. What did you say? For the sake of getting to import prices. He said import prices. So for the sake of getting to the, uh, uh, uh, uh, listener questions. 0.25% is the change in import prices X petroleum since the beginning of this year.

That's not that sexy by itself. But if foreign companies, just based off the arithmetic of how these import price indexes are calculated, if foreign companies were doing what we said the Japanese were doing at scale, you would see the falling import price index because these are separate tariffs are separate from how these prices are calculated. So it's flat, it's up a little bit. what that means is that foreign companies, to any large macro degree, are not eating these costs and selling at a discount so that when the domestic firm cuts the check to customs, they're all kind of made whole and then prices go on as they were with the balance sheet hit going to the foreign exporting companies. Yeah, so it's more of a matter and you link that with what we said about wholesaler's margins.

It's kind of only one place left. If foreign companies aren't eating it, domestic firms aren't taking it on the chin to the extent if they ever work. to they were to some degree. We're getting all this tariff revenue, allegedly, from the Treasury, so it's going somewhere. Allegedly. Man, you're such a cynic. Allegedly.

I wasn't always. I wasn't always. But, yeah, the... What does that mean? Allegedly, I would have never... Never mind. Never mind. He's become muted in this old age.

I am. So, yeah, the consumer... Your point is we're collecting tariff revenue. So an American company or consumer has to be paying it, right, by definition. If these other two places are not absorbing it, yes. I'm not a conspiracist, by the way. I was just throwing it out there. But can I ask, how old are you?

58. You're 58? No, I'm a, you look great. I am a square number today, 36. Oh, congratulations. Yeah. 36. I wish I can't remember 36.

That was too long ago for me. Yeah. 36. Yeah. You're a young father. Yeah. That's what, that's what 36 points. Yeah.

Good times. Those are really good times. Okay. Let's, hey, Marissa, we got a ton of questions. We do. Let's go to the cues. What do you got? Okay.

I have so many. I like this one. All right. What is your take on which economic risks are getting more attention than they deserve right now, and which ones are flying under the radar but could shape the economy for years to come? Oh, that's a really good question. This is from Cameron Solomon. These are from LinkedIn, by the way. So which risks are getting too much attention, which risks are underappreciated? you know, I'm sure I mean, I mean, this is one of those questions while I'm running, I'm going to be cogitating over and I'll come up with a much better answer.

But on on which are getting more attention, it's the so-called geopolitical risks. You know, I think they tend to get more attention than is appropriate in the context of what it actually means for the dollars and cents of the economy here in the United States. Not that they're not important and not that they don't, you know, when I'm saying that, I mean, Russia, Ukraine, what's going on with Gaza, you know, concerns about North Korea, you know, those kinds of things, those geopolitical risks that get a lot of headlines. They, and they could certainly metastasize into something that's, you know, a big deal. So I'm not saying they should not be on the radar screen. We should be thinking about them, running scenarios to prepare for the possibility that they boil over. but for the most part, generally, they're tail risks. You know, they're on the tail, and they don't have any kind of meaningful impact on what's going on here in our economy. And the links here are, you know, very tenuous and hard to identify.

In the case of, you know, what's going on in the Middle East, you know, of course it would be oil prices, but even there, it's pretty much of a stretch when we're thinking about, you know, Israel bombing Iran's nuclear facilities or, again, what's going on in Gaza, that kind of thing. So I tend to think that geopolitical risk is overstated as a risk, at least, again, you know, in the near term. With regard to what's underappreciated, I think it's more about the risks that these policies that we've been talking about pose to long-term economic growth. We're all focused on now, you know, what happened, you know, this month. this week today, you know, the stock market, the bond market. But these policies, you know, if they stick around for any length of time, they're going to have very significant corrosive effects on the economy's long-term growth prospects. And I think you can see that in the context of Brexit. Brexit was 2016, and you just take a look at a graph of UK, British GDP, and you can

clearly see an inflection point around Brexit. The, you know, the slope of the line representing UK GDP is now lower post-Brexit than it was before. And I think that's the kind of thing, you know, we face here that, you know, with these kinds of policies, our long-term growth prospects are diminished. And I think that's underappreciated, you know, because it's natural because we're just focused on the here and now. I don't know, Chris, a tough question. How would you answer it? It is a tough question. At least the first part I found tougher.

But I'd agree with you in terms of the geopolitical risks as being overstated. I guess in terms of underappreciated, for me, it's institutional erosion. Whether it's the Fed, Independence, or other institutions, I think there's a real long-run corrosive effect that, yeah, investors certainly are not really. paying attention to to any significant degree, but yeah, yeah. To really harm us in the end. Totally agree with that. That's a great one. Mercer, do you have a view on that question?

Yeah. I think I agree with you on the overstated risk to the U.S. economy, direct to the U.S. economy. I think with the underrated risks, I agree that some of the policies that are being, put into place right now could have very detrimental long-term impacts. And in particular, I'm thinking about sort of the gutting of science and research, the policies that are dissuading foreign students from coming to work and study here. I worry about what that means

for our longer run, you know, human capital in this country. I worry about what it might mean for things like preventing the next pandemic, things like that. I think these have really potentially dire consequences further down the road. You know, I just want to throw one other thing out there with regard to the question about what's over the risk that's overstated. I'm stretching here a little bit and, you know, maybe overstepping, and I might change my mind. Let's put it that way. Is AI's impact on jobs? I think. The more I live the AI, and we are living AI, you know, we're using it, the more I'm coming to the conclusion that, no, this isn't going to reduce jobs. We'll raise productivity growth, no doubt

about that, because the quality of what we're producing is definitely on the rise because of AI, which means that, you know, effectively real output is increasing. Therefore, even with the same labor hours, you know, you're getting more productivity. But I'm not at a lot of I'm increasingly the view that this AI technology is not going to significantly reduce jobs, employment. So that concern is, if you have it, again, I can change my, I reserve the right to change my mind as I think about this more and we do more research. But I don't know, Matt, what do you think? Do you have a view on that? then the inverse of that is you think maybe we're underestimating a stock market sell-off because

if AI doesn't hit all of those stratospheric expectations, then the S&P is going to fall pretty strong. Well, I don't know. Is that right? Because we're still going to get the productivity gains, right? We're still going to get, although I guess I have to think about that, right? Because I'm arguing higher quality. I don't know if that benefits the companies in terms of earnings, right?

which is what ultimately matters for the equity market. So that's a good question. I think about that. I know, Chris, you're kind of on my page when it comes to this, right? Yes. I, I totally disagree with you. Totally disagree. Okay.

Totally. Oh, wait, baby. I'm ready for that. Yeah. And I wasn't even going to call on you. And I, boy, what am I said? I know. That's why I jumped in.

Yeah, there you go. Okay. Fire away. I think it's going to have. I do. I think it's going to have a massive impact on the labor market. I just don't think it's going to be this year, next year, but I think eventually it will. And I think it's going to be more of a displacement or a reshuffling, right? I think a lot of people are going, I think a lot of jobs may disappear or change. I'm not just to be, I'm saying the number of jobs, not the kind of job. You're saying the net number of jobs. You're saying the net number. A net number, yeah. Yeah.

Yeah. Yeah. Okay. I mean, I think there's going to be all kinds of churn. Yeah, for sure. Yeah, yeah. But I do think there's going to be a seismic shift in the labor market.

And I think you're already kind of seeing a bit when you look at hiring right now, especially for kind of entry level right out of college, right out of high school type jobs, that many of which can be automated. I think that that's partially an explanation. for why some companies are not hiring a lot of entry-level people right now. I think there's a real shift underway to try to do some of the sort of more rote tasks using AI. I think it's subtle because it's probably not massive enough right now.

But I don't know. I think it is a big risk. For net job loss, people are you going to have a higher unemployment as a result? So our forecast, we've got improvement in GDP and output in productivity growth. But if you look at the number of jobs and what it means for unemployment, really stable. It's kind of a wash. It's kind of a wash. I lose jobs over here.

I gain jobs over here. Net net. I mean, reduction in labor hours, maybe. I don't know. I think even that's a stretch. you know, so, but that's kind of what I'm saying. Not that, because, you know, kind of the strong view of many is the net number of jobs is going to be meaningfully, millions of people lower, millions of workers lower, you know, a decade from now than exists today because of, because of AI. Mm-hmm.

Yeah. Okay. Yeah. Yes. I think it's going to be massively impactful to the labor market, but I think on net it is going to also create a lot of jobs. You're right. Yeah. Okay. That's going to occur in phases, right? There's going to be that cost-cutting approach first. How can we use this technology to produce the same output but with fewer people? But then as soon as we get that, we're going to say, oh, what else can we do with this?

How can we actually leverage it in a way that is not just replacement? It's actually, you know, opening up. and a whole new avenue or industry that we haven't even thought of before. At least that's how we've, if you look at previous tech cycles, that's what happens, right? Yeah, it could be actually that it's a nothing burger, nothing, nothing, nothing. We have recession. And that's when companies say, oh, okay, now I'm going to adopt this new technology wholesale. And you actually see a level step down. And that comes back, but, you know, as part of the recession, you see kind of this purging of labor.

Well, fortunately, we've got, I'd ask Jared Franz. He's the chief economist of Capital Group, you know, the major investment house. He's done a lot of work in this area to come on in the not-tidistant future to talk about it. He's done a lot of work in this research. I think he's pretty – I don't want to front run, but I think he's more pessimistic about this in terms of what it means for jobs. So I'll make for an interesting conversation, you know. So anyway, okay. See how we took that question and we're just right with it.

Ten minutes later. This is why we don't get through many questions. Because each question takes half and a way. But that was a really good one. Anyway, you want to ask another one? Sure. Here's one. Housing is clearly in a recession.

If the rest of the economy is still doing well, what tools does the Fed or the administration have to bring down mortgage rates quicker while leaving the short-term Fed funds rate where it is or bring it down slowly? Well, Chris, that's kind of right down strike zone, right? Yeah, yeah.

What Fed does the tool at, right? They could engage in purchasing MBS securities, right? Mortgage securities. Mortgage-backed securities. Yeah, mortgage-back securities. I would certainly put downward pressure on rates. QE. Go back to QE. Quantitative. You could.

They probably won't, but that certainly would be an option. It's more on, and the Fed has always said, look, we're not in the business. This is not really our part of the economy to manage. This is more on the federal government side in terms of getting your budget in order, reducing deficits or reducing debt right to bring in longer term rates, and then certainly attacking the supply problem. That's really where, at least in our view, much of the work could be done to, you know, get house prices at least to slow down.

And if not, interest rates, that would certainly provide some, additional affordability to homeowners. I guess there's also the regulatory aspect of this, right? The Fed has significant influence, at least right now. That may change, but right now at least it has significant regulatory authority. But I think isn't there, and so they could adjust capital rules to make it more advantageous for banks. whom they regulate to hold on to mortgage assets and MBS and mortgage loans.

And that would help improve availability and cost of mortgage credit, I assume. That's more circuitous. I mean, the QE is direct. I'm going to go out and buy. And mortgage securities, that directly brings down interest rates for more, brings down mortgage rates. So that would be their direct way of doing it. But the regulatory changes could, could,

also work in that direction, but that would be much more circuitous and take more time. That's a possibility as well. But I guess that begs the question, do we, you know, I guess we do, mortgage rates are elevated and they are part of the problem, especially on the existing home side in terms of home sales and the interest rate lock that's weighing on home sales. But you're kind of saying, Chris, the more fundamental issue is just, you know, more supply, more new housing supply. That's right. supply. That's right. We do know that the spreads are.

I can't do anything on that. Yeah. Right. Go ahead. Sorry, Chris. I was going to say mortgage spreads are still quite wide, right? Yeah. The difference between the, right?

The interest rate on a mortgage, a 30-year mortgage and the 10-year treasury. And we have, we've attributed that to different players on this podcast. One of them is the, I think, the reduction in investor demand, just foreign investors pulling back, other investors pulling back. and that has caused some of the widening. We also have some interest rate volatility out there that investors need to price for. So just a more stable, steady economy should bring those spreads in and bring the mortgage rate in as well. I wonder on the other side of the next Fed chair and this push for lower rates.

And clearly there's been a lot of interest in policy circles in Washington about getting mortgage rates down to address the interest. right lock, you know, I wonder if we might not see the Fed actually QE and go buy mortgage securities. That goes back to your institutional erosion, I think, but, you know, that's, that feels like a, like that's a, that's a direct way to get mortgage rates down if you want to get mortgage rates down, right? Sure. Yeah.

At least for a time. At least for a time. And then I guess you'd also have to start buying more treasuries as well, because, you know, investors might get spooked. And you want the longer term. Oh, interesting point. That may not work. I'd have to go all of it.

It might spook investors to say, oh, what the heck's going on here? These guys aren't, whoever's managing monetary policy isn't focused on low and stable inflation. They're not focused on. Therefore, I'm going to sell treasury securities. Thus, if I'm at the Fed, I got to start buying those two. I'm going to, we're in the financial repression world at the, point. Yes. Yes. Yeah. Interesting. Okay. Another great, very good question. I take another couple. You want to, Marissa, you're far away? So here's one that's sort of emblematic of a lot of the questions. There's a lot of

questions around data quality, just given what's happened in the past few weeks with the BLS commissioner, right? So here's one question. If the new BLS commissioner is successful in pausing production of CES estimates, because he has suggested in the past that BLS should not be putting out data that gets revised, right? That they should basically put out one jobs report three months after the month it's collected. So if that happens, what indicators will you be looking to for a timely signal of how the labor market's doing in its place? Yeah, this is what we're contemplating. This is a tough one. I mean, I think what happens, and just to make clear to everyone out there, you know, we're talking about the monthly jobs report and CES is the payroll employment.

That's where payroll employment comes from. And that's obviously the headline number, you know, in that the jobs report. And it's very timely, comes out the first Friday every month for the previous month. And so it's the best, most timely read on what's going on in the economy. And payroll employment is the single best coincidental. an indicator of economic activity. So even though when it's first released, we only have 65, 70% response rate, and that's why you get revisions when you get subsequent responders in subsequent months.

There's a lot of information, really important information in that first release. So not releasing that on a timely way is a massive, massive error, massive, you know, because it makes it complicated for the Fed to conduct policy, for businesses do what they need to do, makes it creates more uncertainty, which means that businesses are going to be more cautious than hiring investment. It's just a, you know, I couldn't think of a worse policy mistake than doing that. In fact, you should be doing just the opposite. You should be providing greater funding for the BLS so that they can do even a better job in making it easy for businesses to respond to the survey.

so we get higher response rates. And clearly go out and try to understand why response rates are down and what needs to be done to improve them around cyber or privacy or whatever it is. You know, we should be spending more taxpayer dollars and trying to improve it, not, you know, just shutting it down for three months and wait for that data to be released. And by the way, when you say revisions, the data gets revised again anyway. when you get the benchmark revisions. You know, so what are you going to wait another year before you release the data? You know, come on. It's just a really, I've got stronger words to say than bad, but it's bad.

You know, it's a bad idea. But having said that if that's the world we live in, you know, I do think what happens is we start relying on private data sources, which, by the way, you know, could show a worse economy than the BLS. You know, when I say a private data source, ADP, the payroll processor, you know, the human resource company that we used to work with closely for many years, we produced that number, and they still produce it. And actually, you know, they made a change, which I think was entirely appropriate.

Instead of trying to estimate the BLS number, which is what we were tasked to do when we were doing it, they produce another number, just a separate number. I mean, they've got a very large number of employers that, you know, you know, you know, are contributing, that are their clients and are contributing that, that are providing that data that can be used to estimate what's going on in the job market. And, you know, I think ADP will become the de facto source, you know. And in fact, right now, the ADP publishes its data on the Wednesday, you know, prior to the Friday jobs numbers that are really. So, you know, we're going to continue to be very timely, very, very valuable data. I think, this is in my mind's eye.

I may have it wrong, but I think if you look at the ADP estimates for monthly payroll jobs over the past year or so, it's actually very consistent with the BLS numbers. So, you know, BLS stops, then all we're going to do is go to ADP. And, you know, ADP is, you know, as I said, it's not going to stop if the economy's going south into recession, we start losing jobs. ADP is going to be saying that. and it's not going to be discounted because the government's not releasing the data, but ADP is. So I'm not sure what it buys you when you decided to go down that path.

Well, of course, we'll also look at other measures, other indicators more intensively, well, the unemployment insurance claims, although that's a BLS statistic. Will they change the release of the BLS numbers if it starts showing that UI claims are starting to rise? And that's, you know, that's a good window into layoffs. You know, there's other placement firms that provide data on unfilled positions, and we'll start looking at that more carefully. And going back to my original point, we have an initiative, research initiative to come up with alternative data sources.

We're going to focus on prices first, but we're also going to focus on jobs and see if we can't figure out ways to, you know, provide some information here that might be left in the void created by the BLS, not publishing the number. But hopefully that doesn't, we don't, they decide not. to do that. That, again, would be, Matt, what did I say? Bad idea, a really bad idea. I don't know. I've got my soapbox a little bit, but I think it's appropriate. Marissa, your labor economist, what do you think? What would you say? Yeah, the thing about ADP is ADP, part of that is model-based that uses the BLS payroll data in it. So if that is lagged, right, then that actually affects the

ADP number in a way too. That's benchmark, though. Isn't it to the benchmark? Yeah, but they'd have to, they'd have to change their methodology somewhat if that happened as well. You know, they'd have to, I guess, go to just a pure account of their own payroll data. No, no, but don't they do, and I don't know the methodology well enough, but my understanding is they bench their data ultimately to the benchmark estimate.

So, you know, if the BLS continues to release the benchmark estimate on time, I don't think it necessarily means ADP has to change its methodology. Okay. Maybe that's true. I thought there was some model. We should find out, though. We should find out. Yeah.

The payroll data. We should get prepared for this possibility, for sure. Yeah. Yeah. And like you said, the UI claims, which is not a BLS statistic markets from the employment training administration, which is part of the Department of Labor, which is under pressure. Right. And just to go back to what you were saying about funding the BLS properly,

you know, I was looking at their budget and their headcount. And they have not had an increase in their budget in 15 years. I mean, it has been basically flat at a time when it's become increasingly harder to collect data from survey participants. So, you know, if you want higher quality data, you have. to actually put some money behind that and come up with ways to modernize these surveys, which is one of the stated goals of the administration in replacing the BLS commissioners to modernize survey collection. But you need the funds and the resources and the people to be able to do that. Anything else? Chris or Matt, you want to weigh in on that question?

A bit of a pivot, but I've come across some interesting stuff. Like, how is Congress going to respond if they can't if they're flying blind to if there were a recession and there needed to be you know stimulative legislation or you know stabilizers for the unemployment right i mean like all that kind of stuff that a recession usually kicks off um is that going to become kind of a loyalty i mean kind of you know to to acknowledge that would be like a tacit admission that data is wrong i mean so that that that just seems like a kind of uh obstacle that we could be looking at in in you know not so distant the future that, yeah, we'll make a bad economic situation worse. So, yeah, not good.

One more. Let's do one. Oh, Chris, did you say want to say something? I was going to say that I'd add that the biggest risk here I see is the Fed, right? The Fed not having information. Right. Timely information, they're going to make a decision. It's probably going to be, you know, faulty.

So there's certainly a risk there that there's some policy misstep. We get our monetary policy wrong because of the lags. or the incomplete information that we have even from a private source like ADP. Okay, one more question, Marissa. Okay, we've answered quite a bit, and I think we've answered like many indirectly, too. Okay. Okay. Here's one.

There seems to be two schools of thought on the state of the economy. One, inflation is on our doorstep, or it's already advancing too much, or two, the economy. super cut rates. Pieces of both seem to be evident. Can you reconcile this and share what would be a rational approach by the Fed in terms of next steps and possible consequences? Chris, you want to go first? I mean, I can take it. Go ahead. Go ahead. You go first. Yeah, I guess as we've been saying throughout the podcast, there are kind of different lenses that people look at when they look at the economy and different sources of news can translate the same data point in a very positive or negative way. So I think that can explain some of the differing

views here. Also depends if you're looking backward or you're looking forward. A lot of the data that we collect, of course, is more backward looking, where we get a job market report that's telling us about last month or, you know, we learn about GDP a quarter ago. So yeah, maybe we get some updated information about where we've been, but that doesn't really tell us where we're headed. I think when we talk about tariffs, at least the argument we've been making is that, you know, there are lags in this process. There's a lot of uncertainty that's been going on when it comes to policy. And therefore, we're seeing, we believe more of the tariff effects are still ahead of us than behind us, right, in terms of the actual impact on prices. So that's how I square

that circle in terms of the differing views. If you don't account for the lags, if you're just looking at the data as it comes out today, then you may not get the full picture or you may get a different picture relative to where the economy actually be heading in the future. And I think that's what we actually really do care about. Is the forecast, the outlook. Is the forecast, right? The past is important just to the extent that it can help us predict the future. Yeah, good. Okay. Well, I'm not going to weigh in there. I think you covered it. Anything else because we're now really amazingly long in the tooth in terms of this podcast. I don't know how that happened.

I just looked at the clock. I kind of missed that. But we should call this a podcast unless anyone has anything else they'd like to say. No? No. Happy birthday, Matt. Happy birthday, Matt. Yeah.

Can we sing to him? I appreciate it. We'll do it at dinner. We can do it at dinner tonight. We'll do it then. We're not having dinner. Again, that's a joke. You guys are making me feel.

We weren't invited. Right. I think you guys would have laughed quickly. Never mind. All right. Do you get like chocolate cake? What do you get for your birthday? We're going to Rhode Island.

We got to knock off states that I've never been to. My wife knows that. So we got a trip to Rhode Island. We'll have a lobster roll. Yeah, that'll be good. They're tasty. Okay. Well, with that, dear listener, we're going to call this a podcast.

Take care now and we'll talk to you next week.