Moody's Talks - Inside Economics - Inflection Points and Inflation

Episode Date: April 16, 2021

In this episode, we discuss U.S. retail sales and consumer and business confidence. The big topic is inflation, where we debate the drivers and outlook for U.S. inflation over the next several years. We also reveal our favorite leading inflation indicator, including olive oil. 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 your host, Mark Sandy. I'm also joined by two of my colleagues. Ryan Sweet. Ryan is the director of real-time economics. Welcome, Ryan. How are you? We had you a little difficulty getting on the mic here, but are you, how do you sound? Let me hear how you sound. I think we figured out all the technical glitches. Not really because you just froze, but that's okay. You sound good. That's all that counts. And you look good. Now you look good. Yeah, you look good. That's good as Chris. Yeah, Chris looks fabulous. Yeah, he's got a, he's wearing a, and by the way, Chris is the deputy chief economist of Moody's analytics and the other participant in today's conversation. So Chris, do you have external calls today? What's going on? You know, yeah, some calls and also crypto went mainstream.

I saw that. I saw it. Coin boy, coin base, right? Coinbase. Yeah. Yeah, so you're now even wealthier than you were a week ago and then two weeks ago. Congratulations. I could say with straight face, I doubled my crypto wealth, yes. From what to what?

From zero to zero to zero. Okay, well, that's, at least you're not going negative, which is a good thing. There you go. There you go. Yeah. So let me remind the listeners to the way we conduct the podcast. We have three parts. Part one, we go over the economic indicators. The past week, coming week, we each pick our favorite indicator indicators, and we'll do that in just a second.

Then part two is our big topic, and we decided that given all the questions we're getting in the discussion in the popular media, we'd focus on inflation. There's a lot of concern about inflation accelerating and becoming uncomfortably high. And so we're going to talk through that. And then part three is me kind of just tying it all back together and giving you a summary of where we landed and where the disagreements are. So with that, you know, this is our third podcast, but we now have traditions here at Inside Economics. And our tradition is to begin with Mr. Sweet, the director of real-time economics for his favorite indicator the past week or the coming week. Ryan, what are you focused on? 27.5% annualized growth rate.

You want to take you guess what it is? 27.5% annualized. Well, that can't be, is that retail sales? Core retail sales, control, no, that can't be because it was up 10%. So annualized that'd be, you know, that'd be 120% or something. That's not it. 27.5. Chris, you got any ideas what that could be?

I was going to. snicking lumber right away, but I don't think it went up that much. That would be rude if you picked lumber. That's too esoteric. It's got to be, you know, something. I don't know. I think Ryan is reaching or something. Is that right?

Control retail sales, which is on auto retail sales, excluding restaurants, excluding building materials and gasoline. Well, hold it. I went there, but I don't get that because month to month, they were up 6 to 7 percent, weren't they? Correct. For the quarter, in Q1, it was up 27.5 percent at annualized rate. Oh, in the quarter, control retail sales in Q1, the entire quarter, because we saw a decline in February.

So that big number in January, got a weak number, I believe in February, it was weak, maybe it was a decline. And then very strong in March. And so you're saying, for the quarter, annualized, we're up 27.5 cents. Yeah, I kind of went there first, right? I mean, I was sort of in the ballpark. I'd give it to you. Yeah, because my mind went month to month, not quarter to quarter.

You know, that's a little bit of a head fake. Well, March ends the quarter, and that number boosted our high-frequency GDP model from 4.7% to 7.1. I mean, it just shows, like, the stimulus is working. You put a lot of money in people's pockets. They're going to go out and spend it. Exactly. And was there was it strong across the board across all retail categories? Yeah. So if you look at total retail sales, they report for 13 subcategories, every one of them increased.

Which is unusual. Hey, you guys follow the Quatera data. Have I mentioned the Quartera data on inside economics? This is the, Cortera is a firm that Moody's bought just a couple weeks ago or three, maybe maybe three or four weeks ago now. tracks business to business sales. And it's a very good barometer on retail sales, right? Because, you know, a retailer will need to buy from a vendor, whatever it is, they're going to sell to consumers. And we pick that up into the B2B data. And the B2B data, you know, we, we get, you know, right from Quatera's databases. They collect it real time. And it was showing, you know, very clearly, very strong growth in January, very weak, February, actual declines, and then a boom like March.

So the B2B data is very, very consistent. And the one thing that comes out of the B2B data that just adds to the story is that a lot of the improvement was at small businesses. So for less than 500 employees, you're considered a small business, at least in the kind of the data. And that's where we saw the biggest gains. The big guys had been kind of leading the way, but now the smaller guys are starting to catch up.

So I thought that's pretty interesting. But that's a very good number. 7.1% on GDP. Is that our, is that your, is that, that's a little higher than our forecast for Q1. Maybe we're on the low side now, but given that data. Yeah, I think we're on a little bit of on the low side. We get more source data coming up. But for the most part, I think we're going to have a pretty solid Q1.

Yeah, I mean, the March data was boom like across the board, right? Was there any statistic out there that that wasn't boom like? I mean, everything, vehicle sales, unimplained insurance. claims, the Philly Fed Index. I mean, everything, housing starts. We got that this morning. That was, you know, literally or figuratively through the roof. I mean, anything that wasn't big in March, sort of any statistic that was a lot? I mean, IP, industrial production came in a little soft, but I mean, I think there's some issues with the global semiconductor shortage. So manufacturing, I think overall, I mean, the ISM survey is really strong. You mentioned the regional

Fed Manufacturing surveys. So I think we'll see a big pickup in industrial production going forward. Why disappointed in March is you had a big drop in utility output. And that's, you know, weather-related payback. Yeah, right. But everything's strong. It's remarkable. Remarkable.

I mean, I mean, I don't, I'm hard pressed to think of a month other than perhaps last May when we reopened, right, from the shutdowns. Other than that, I'm hard-pressed. I think of a month and my entire three-year. career that was as strong as March of 2021, just literally boom like. Chris, what's your statistic? What are you looking at? Eighty-six point-five. Okay, I know that. Wait a second. It is the University of Michigan's Consumer Confidence Index. You got it. You got it. Softball. Oh, what are you talking about? That's too easy. Really? Too easy? Yeah. You knew that too, Ryan? Are you telling me you knew that? So what about it?

like, what would you like about it? So at this, you know, usually confidence sentiment, it just reflects what's going on in labor market or broader economy. But I think psychology at a point time like this is important to keep an eye on. I was actually expecting it to be a little bit stronger. And that actually consensus was for it to be a bit stronger than it was. So it's up. It's moving the right direction. But I think it also does suggest that there is a little bit of caution out there in the part of consumers, right? Still have an eye on the pandemic, of course, and J&J vaccines rollout whatnot. So moving the right direction, but there might be some pockets there we need to keep an eye on. Not everyone's feeling the boom times that we're talking

about here. Did you, did you have, okay, I'm going to ask you a statistic, but I'm going into your space, but I'm going to ask you, 3.7 percent. 3.7%. One year, you miss inflation expectations. Exactly. Very good. So that is a pretty big number, right? I mean, that's the high. So this is the University of Michigan survey. They, I think they do 500, they interview 500 folks twice a month. I think that's roughly right. Ask a bunch of questions. And they've been doing this since late 19, in the late 1950s, I believe. And they do have questions regarding inflation expectations. So what is your you, the respondent think inflation is going to be over the next year? That's the one year expectations. And then what was it going to be over the next five years? And the one year jumped to 3.7%. Do you know how when's the last time we were 3.7 percent?

I think you have to go back a long time. I think we were briefly there for a month or two in the wake of the financial crisis, you know, when things were swinging around coming out of that crisis. But this is a, that's a rarefied territory. What about the five-year inflation expectations? What was that? Anyone? Was that 3.1? No.

It was in the twos, I believe it was 2.7 percent, 2.7, which is well above where it was pre-pandemic. If you go back pre-pandemic, it was lower and obviously in the pandemic, much lower. So, you know, even the longer-term five-year inflation expectations are starting to creep higher. I mean, I think you have to go back to 2015 to find a time when there's high. there are today, but not quite as shocking as the one-year inflation expectations, but none of the So I'm not too worried about the one-year inflation expectations. They really track gasoline prices and food prices, and gas prices have gone up, you know, over the last several weeks. So I would, wouldn't be surprised of, you know, this is kind of like the peak that we, we see for the next few

months. Yeah, we'll come back to that when we get to the big topic on inflation. So we'll talk that over in more detail. You want my statistic? Actually, I was going to talk about the, you Umish survey. So that's why I knew so much about it. Oh, okay. You were, you thought, oh my gosh, how does he know so much about that measure? I actually was looking at it pretty carefully earlier today. You know, and just one other broad point about the UMIS survey, it has risen, but it's only back to its long run historical average.

So if you look back to the late 50s, take an average, it's roughly where it's been on average, making its way back, but still certainly well below where it was pre-pendemic. Okay. because you took that, I'm going to roll out my tried and true favorite. And that is the Moody's Analytics Business Survey. This is the weekly survey. I might have talked about this in the first podcast, but I've got all eyes on that. And that jumped last week.

We're going to get another read. I'll get it tomorrow morning. I'll get an email to me. But it jumped to 17%. So that's the diffusion index, the percent of percent of the percent of positive responses to the survey, less negative responses to the survey. That's definitively positive. And that's the, you know, you literally have to go back to early 2020 to find a time when, you know, businesses are as enthusiastic as they are now. And pretty much across the board,

across all the, all the questions. The only question that is still kind of lagging here is demand for office space. That's still firmly negative. But other than that, you know, everything is turning very, very positive on the. So sentiment. is improving here. Okay, I'm going to give one more. This is a quiz. And let's see, let's see if the Crypto King knows this one. Oh, boy. 4,185. What is that? 4,185. I think I got the right number here. Yeah, 4,185. Doesn't ring a bell. S&P 500, baby. Oh, oh. Yeah. Yeah. Man, we're record highs. We're just rip-borne. I mean, all of the data, all of the data, everything we're looking at is saying we're in a boom economy.

Rip-Rorin headed in one direction here. It feels really, really good. The UI claims I mentioned earlier, everything else. But yeah, I can't think of a statistic that doesn't suggest that we're off and running here. So it really does feel very good. Hopefully you can stay here for a while. Okay. Let's move on to part two. And that's the big topic, inflation. And obviously, with all this growth, there's a lot of concern about inflation. So I thought I'd frame it this way. with a little bit of history. So I went back and I looked at inflation as measured by the consumer price index.

We've got that data back to right after World War II and also looked at the growth in the consumer expenditure deflator. That's the excluding food and energy, the core PC, so-called core PCE inflation. That's the measure that the Federal Reserve looks at when trying to gauge the appropriateness of monetary policy. They have a 2% through the business cycle target for the core PCE.

That doesn't go quite as far back in history, but, you know, roughly speaking. So here's the way inflation has behaved. There's really been three broad periods since World War II in our inflation dynamics. The first was in the immediate wake of World War II, say, 50 through the mid-60s, 1965. inflation was below 2% consistently. And think on average per annum was about 1.9% to be precise. Between the mid-60s, and this surprised me a little bit because, you know, we all know about

the inflation in the late 70s and early 80s when Paul Volcker became chairman and tried to wring it out and successfully wrung it out ultimately. But inflation really started to pick up in the mid-60s around the great society and the Vietnam War spending. And that juiced up the economy and really created a lot of wage and price pressures. And there were a lot of colas, cost of living adjustments and contracts. And unionization was greater. And so you saw bigger increases in inflationary pressures.

But between 1965 and 1995, that 30-year period, inflation was almost 5% per annum, 4.9% per annum to be precise. So we went from, you know, kind of sub two, close to two in the 50s. through the mid-60s and through the mid-60s to the mid-90s, we were just under 5% per annum. And the third broad historical period of inflation was since the mid-90s to the current period, so the 25 years, the past 25 years. And inflation has been, again, below 2% on average, to be precise, 1.8% per annum, 1.8% per annum. So, you know, we've had these three broad,

period. So with that as a kind of a backdrop, I think the kind of the question on the table is, are we at some kind of inflection point for inflation? I mean, are we going to see periods of inflation that are back above two, measurably above two, where we headed? So I guess I want to ask you guys, you know, just to kind of frame the discussion going forward, what's your expectation for inflation, say core underlying inflation, core PCE inflation or core CPI inflation over the next five or 10 years. You pick the horizon. But you know, you get what I'm getting at. What do you think if we've been at 1.8% per annum over the last 25 years, what do you think it's going to be over the next five or 10 on average? Chris, you have a view on that? Do you have a forecast?

Yeah, I'd say I think we're going above. It's a longer term. I think we're above 2%. we can get into some of the reasons, but not that much higher. Right. So if you told me 2.2, 2.3%, I'd find that reasonable. Yeah. I do think there's some structural changes here. And, you know, we have grown the money supply. So if we're thinking about longer term effects, I think it's going to be sustained above this 1.8% that we've had historically.

So over the next five, maybe even 10 years per annum inflation will be 2, 2, 2, 2.3, say, say 2, 2, 2.3, say 2,000. Yeah. Yeah. Okay. All right. And so that would be more a feature than a bug, right? I mean, that's kind of sort of what the point we want. Yeah, that's what we've been trying to get, right?

So that's a pretty sanguine kind of view on inflation, the inflation outlaw. Yeah. Okay. Ryan, do you have a different view? I think we're below two over the next five years on average. On average. So we're still stuck in the low inflation world that we've been in. Yeah, more of the view, like the proofs got to be in the pudding.

I mean, we had a 10-year expansion last time. You know, we got the unemployment rate south of 4%. We grew the money supply, you know, last expansion. We still didn't generate 2% inflation. So I think there's some structural things that aren't going to go away over the next few years that will continue to weigh on inflation. Okay. So Chris's forecast, two and a quarter percent per annum, is our baseline forecast. That's kind of what's in our numbers. If you go look at our numbers, if you're, you know, client, you go look at their data, our numbers, it's two, you know, two, two, three, something like that over the next five to ten years. Ryan is taking the low side of this. So the low case. So, you know, if you're looking at our scenarios, he's looking at the downside scenarios.

And that's two. Yeah, in our scenario of nomenclature, no one else knows that, but the crypto king and in some of our big banking clients. I'm going to take the, you know, I believe the baseline. Don't get me wrong. I mean, you know, I think that's, I think your sanguine view is the right view. You know, if I, as a prudent planner, I would use that as my forecast in my planning. But I think the risks are skewed to much higher rates of inflation that, you know, we could see two and a half percent per end. which would mean, you know, you would see periods, years where you could be closer to three, maybe even above three, you know, something like that. Okay, so let's explore, so let's take that as our kind of the frame here. Chris is kind of, you know, usually he's a risk taker, but this time he's going for the, you know, the middle of the road forecast. Ryan's on the low side, I'm on the high side. Now, when we think about inflation, you know, the thing that I find so interesting about

inflation and understanding the dynamics of inflation and the forecast of inflation, the modeling of inflation, is there's just many different ways of doing it, right? There's many ways of thinking about it and modeling about it. So, for example, you know, you could be kind of a, you know, kind of a broad 30,000-foot macro view. Like, oh, we're generating, the fed's providing all this liquidity, money supply is, you know, busting out all over. everyone's got cash in their bank accounts.

Historically, you know, you got a lot of liquidity, so-called liquidity in cash, you know, M2 is rising very quickly. That ultimately results in, you know, higher rates of inflation. Another macro perspective would be kind of, you know, that the one I just describes is kind of more of a monitor, so-called monitorist perspective. That's a little bit on the outs today, but, you know, at some points in time was a very popular way you're thinking about inflation. Another kind of fundamental perspective is, you know, kind of looking at what's going

on the labor market in wage growth and productivity and, you know, what that means for underlying costs of doing for businesses, business costs. And so in labor is the key input for, you know, service-based economy. And if wage growth is rising strongly, productivity growth is weak, then you're going to get, you know, lower rates, you're going to get lower rates of cost growth and so businesses don't have the pressure to raise prices. That's kind of another view. That's kind of mixed in with the so-called Phillips Curve View, which maybe one of you guys can explain to the reader if you've adopted that view. In a third approach is kind of a bottoms up approach, which is not as popular, but it's kind of sort of interesting, which I'd like to talk about

a little bit in a few minutes, and that is kind of build up inflation from all of its components because, you know, we're buying gas, we're buying food, we're buying housing, we're buying health care, we're buying transportation services. And, you know, each of them have their own kind of price dynamics, they're idiosyncratic, and you kind of have a view of inflation across those different sectors, and you kind of add it up to overall inflation. So that's kind of the different ways. And there may be other way, and I'm sure there are other ways, and maybe you guys are thinking about it in other ways.

But is that, so I'm going to turn to you, Ryan, in your forecast. Is one of the frames I just laid out kind of what you're using to get to this view that inflation is going to be on the low side, that we're not going to break out of this low inflation world that we've been stuck in over the past quarter century. How are you thinking about the inflation dynamics? And how do you get to that low forecast? So I take two approaches. I go bottom up to capture some of those idiosyncratic factors that you mentioned. But then I also go top down, like looking at the key fundamentals for inflation. And I think one thing that is often lost in the discussion is demographics. And we have an aging population. And the work we've done has shown that

as the share of the population 65 years and older increases, that's actually disinflationary. And so these demographic changes aren't going to happen overnight. So that's why I think over the next five years, we're stuck in this low inflation environment. Okay. So, but explain that. What's the intuition by why an aging population would lead to depressed, persistently depressed rates of inflation? What's the, connect the dots for me.

How do you get there? So if you look back at periods where we had high inflation, the population would young. So people have younger people have a higher marginal propensity to consume. And that gets the amount of money in the economy moving around a lot more quickly. As people get older, you know, their marginal dependency to consume isn't as high as it was when they're younger. And I think you're starting to see that in the velocity of money. That velocity of money is just cratered. So money is not changing hands. And that is preventing inflation from accelerating. And the velocity of money isn't mean reverting. So I don't think that's going to change, you know, this year or next or even

over the next five years. So I think that's why inflation is going to be stuck in the slowly. Oh, see, I thought you were going to say, Chris, did you want to say something about that? I was going to say, is that a growth story, though? Or is that the underlying factor here? You have an older population. Productivity isn't as strong. Yeah. And I think the Fills curve is, I mean, it's not dead, but it's definitely not doing well. It's not, you know, thriving. So I think when you add it all up. I mean, the last 25 years, we haven't had bouts of inflation above 2% persistently. So in a betting world, I'm going to bet that the last 20, 25 years continues. Okay. So I'd say you have an eclectic model of inflation dynamics. And that includes this kind of

bottom up analysis, you know, components of inflation, which I'm going to ask you about in just a second. And also this kind of top down kind of macro view. You mentioned demographics. but that ultimately affects inflation through kind of growth because, you know, you've got an older economy. You mentioned marginal prices you consume, people save more. That means less consumption, less risk-taking perhaps, and therefore less growth, all else being equal. Also, and Chris kind of mentioned it too, and I thought that's where you were going to go, that we've done a lot of research linking aging population to productivity growth.

And so if you have an aging population, a lot of boomers in their 50s and 60s, that weighs on productivity. If you have less productivity, then all those, well, actually, that would raise rates of inflation, wouldn't it? That wouldn't lower rates of inflation. Yeah, right? Because that would raise the unit labor costs and the cost of labor. It would be just the opposite. So that doesn't quite fit with your theory. Well, wouldn't, well, depends.

Weak productivity impacts wages. And if, you know, wages are growing more slowly. then that's going to be disinflationary. Oh, yeah, but, okay. But usually, you know, you think about wage, you know, it's the unit labor costs, wage growth relative to productivity growth, but you're saying wage growth is going to be even weaker

than the weak productivity growth because of the demographics. Correct. Or I'm up getting. Okay, all right. So, how would you then characterize the Amazon effect, right? It might gut is the Amazon effect is pretty small. you know, we're talking, you know, tens of a percentage point that it's shaving off annual inflation. We're not talking percentage points. So I don't know. I don't think the Amazon effect is an enormous

driver of why we can't get 2% inflation. But also that was to suggest that, you know, it's faster or stronger productivity growth in the retail industry. And right, that's putting downward pressure on pricing. Yeah, that's a good point. It's a good point. Right. So productivity dynamic, I think, is complex. It depends. It cuts both ways you're saying. Yeah, that's right. A lot of different ways.

Okay. That's a good point. So on the bottoms up, I, you know, one thing that I've heard, and this goes to your kind of low inflation perspective on things, is that health care inflation, which is obviously a key part of, particularly the consumer expenditure inflator, just because of the weighting and the way the composition of it, it's a much bigger part of the PCE deflator than it is of the CPI, because CPI is out-of-pocket expenses. And, you know, most of us pay medical expenditures

through insurance and other, you know, not through out-of-pocket. I've heard that that's going to be very depressed going forward because of policy. Is that correct? And can you just shed some light on that? So healthcare costs have been measured through the PC deflator for healthcare was up in February,

a little bit over 3% year over year, and that's stronger than the 1.6% that we had averaged in the prior 10 years. The reason behind that is there was an increase in reimbursement rates from 3.75%. That's temporary. That increase expires at the end of the year. Therefore, you're going to see health care disinflation. It's going to start to slow the second half of this year into early next year. And then also we have the Affordable Care Act still exerting downward pressure on on healthcare costs. Great. So how long is that going to be a weight on inflation? Do you have a sense of that? Is it a one year thing or three year thing or five year thing? What is that?

Before the Affordable Care Act part? Well, just the health care inflation being depressed and weighing on overall CPI, overall inflation. I think it's a one to two year phenomenon. Two year effect. Okay. All right. So Chris, let me turn to you. You're kind of, you know, down the middle of the road here. And so how are what is, you know, I, you know, I, kind of laid out a framework for thinking about inflation dynamics. First of all, I guess, does it, do you buy into that framework, or are you thinking about it differently? And how do you use that to come up with your forecast? Oh, it's a good framework. You're right. There are a lot of different theories and considerations here, not only in terms of not only in terms of the theory, but even how we're measuring it, right? And what exactly is inflation and which aspects of inflation we focused on. So like Ryan, I do combine a couple of

different theories or coupled together with a few different theories here. So I think first and foremost, there is the rebound though, right? So I'm subscribing to a demand pull type of theory here, right? We're expanding, we're growing, right? We're kicking into gear here and that's going to generate additional inflationary pressure. And then at the same time, though, why I don't have, why don't believe that inflation is going to revert to the most recent trends is that I believe that from the monetarist side that you mentioned, I think that there's a change in the policies going forward, that the Fed has committed to this policy that's going to sustain inflation at a higher level. It's going to be built into the expectations going forward. And therefore, we're going to see inflation above that

1.8 percent level. So the Fed is going to get what it wants. I mean, you know, the Fed's not the European Central Bank or the Bank of Japan who've been struggling to get inflation up for a long time. The Fed is the Fed, and the Fed says, I'm getting inflation above target. We can count on that happening. I seem committed to it, right? They're got all the policy lovers. Yeah, it makes a lot of sense to me. So here's my sense of why inflation may end up being higher than the kind of the baseline view,

the kind of the consensus view. And it does go to the fundamentals, the labor market, and demographics. you know, as well. I think the labor market, you know, right now there's a lot of slack, but we got a boatload of growth coming here. We just talked about the data. I mean, we're booming. So I think, you know, 18, 24 months down the road, we're going to absorb all that slack in the labor market. And we're going to have a very, very tight labor market. And when I say tight, I mean unemployment that's, you know, well into the threes, labor force participation that's, you know, kind of back pre-pandemic.

if you're close to the data, 63% was the pre-pandemic peak. We're at 61.5. I think we get most, we get all that back. Employment to population, you know, back for prime age workers, kind of the benchmark there for the strong labor market is about 80%. I think we're going to blow right through that. And I think the so-called Phillips curve, that's the relationship of what's going on in the labor market

and what it means for wage growth and ultimately for inflation, because, again, labor is the key input to most business operations. is alive and well. I mean, it's flatter. The relationship is different than it was historically because shifts in inflation expectations, and I won't go into that because we don't have time. But, you know, I'm not arguing that it's immutable, this relationship between the tightness and the labor market and wage growth and inflation, but it's still alive and kicking, and I think that's going to become obvious. I mentioned demographics because, you know, the working age population is slowed quite dramatically because of the aging of the population

and slower immigration. And if we don't allow for more immigrants to come into the country relatively soon, you know, certainly when we're on the other side of full employment a couple of years down the road, then working a population could actually start to decline. You know, it is declining in other parts of the world, by the way. You know, declining in China, for example. So, and not China is just a poster job, but, you know, Germany and German working age population is declining. So the labor market, I think, of the next 10 years is going to be extraordinarily

fairly tight. You know, it feels weird for me to say that, given the year we've been through and 15% unemployment a year ago and 6% unemployment now. But I think this labor market is going to be very, very tight, and we are going to see labor costs rise, wage cost rise. Productivity, growth, I think it could improve, but I don't think is going to keep up. I think businesses are going to be, you know, forced to raise prices more aggressively. I'm going to throw in two other reasons, pandemic related, and these are more speculative. I, you know, I, of course, I make a living speculating. So, you know, that's what I do for a living.

But some of my speculation is high order speculation. I'm less confident in it. And here's, this is more high, high order speculation. But I think that the pandemic is going to have long, it's going to be longer lasting impact on the global economy and on inflation than people expect. Because these global supply chain problems, the shortages that we're observing, in different markets, I don't think those are going to be solved quickly, particularly in the emerging world, because the pandemic is not going away fast. You know, it's going to, you know,

we're here in the U.S. could be on the other side of this thing this summer, but the rest of the world could be, you know, the developer could be another year, a year and a half. The emerging world could be three or four years from now. And I think that's going to continue to complicate things. So I think these kind of, you know, spikes we're seeing in things like lumber and so forth them so, you know, lumber, I can go on and on, the price spikes. I think they're going to become, they're not going to be as temporary as people think, they're going to be more endemic. And as a result, that's going to get more likely to get embedded into the kind of the waste price dynamics, you know, when the labor market really does tighten, you know, 18 to 24 months down the road.

This is going to be more of a persistent problem. It's not going away. And by the way, the China-U.S. relationship on trade is not helpful in this regard. Finally, and this is very high-level speculation. We have to look into this more, more carefully, is I do think the pandemic has concentrated market share in the hands of fewer and fewer companies across a wide array of industries. Retail is the obvious example. It wiped out all these mom and pop retailers, even mid-sized publicly traded retailers are flat on their back. And so the big guys, and you know who I'm talking about, they have real market power. And as a business person, I know if you have market power, you know, you use it. And that means higher prices. So I think that's,

That's not just retail. That's in a lot of different markets. So I think the, and finally I have one thing. One final thing I'll say is on the Fed, I think the Fed will get, it wants inflation above target, above two. It's going to get it. But to, you know, then gracefully land the so-called plane on the tarmac, you know, navigate raise interest rates in a graceful way to, you know, get inflation, you know,

to not rise more than expected to keep inflation expectations, but from becoming untethered. I think that's going to be tough. you know, to actually pull off in a graceful way. So I think if I were betting man and I had to, you know, choose one direction or the other on the, on the baseline, I go for the higher rates of inflation. Did I convince you, Ryan? What do you think? No. I knew it. Yeah. He's tough to convince. Oh, he's steadfast. He's steadfast. No, when the fact change, I gave you a lie, I gave you a mouthful. Pick, pick the one thing, the one thing I just said that you, take most exception to?

Only one? Yeah, only, yeah, well, we're not out of time. Hitching the inflation forecast to the Phillips curve is dangerous. I believe that it's alive, but it is barely. I mean, the slope is flat as a pancake. And I mean, we saw last time, in the late last expansion, we had an unemployment rate below in the low for mid threes, and we weren't generating a ton of inflation.

Yeah. Okay. That's a reason why I think the curve is kinked. You know, it's flat until it's not flat and, you know, very possibly sloped. And I'm not sure where that kink occurs, but we'll see. And I think this calls for a bet, you know, a dollar bet. So yeah, we're going to be back here on this podcast five years from now. You'll be sick and tired of us by then. But five years from now, someone write this down. Chris is at two and a quarter percent per annum over the next five years. Ryan is at 1.5 percent per annum over the next five years. Ryan is at 1.5 percent. percent per annum no one point one point eight percent per annum over the next five years and i'm at two point five percent to make it round they say he's at one point seven we're okay with one point seven five percent five okay dollar bet christ sounds like you should be the uh dollar bet sounds like you should be the crypto king mark yeah i know you know if you're working on it's inflation yeah hey okay very quickly What is your favorite leading inflation indicator?

What are you looking at to gauge where inflation is headed in the very near term? You know, I got mine, but what do you guys? Do you have one? How about you go first? I don't want to steal yours. Oh, that's the very kind of you, Ryan, very, very thoughtful. Copper. Parcasm is the lowest form of humor.

Copper prices, copper prices, copper price. Isn't that the metal that has a PhD? I think that's the, Dr. Copper. Dr. Copper. It's at four bucks. I think I always get confused. I think it's four bucks a pound. That's extraordinarily high.

It's about as high as it has gotten historically. It got as low as two. It gets as low as two. Got as low as below two, I think, in the teeth of the pandemic, in the teeth of the financial crisis. Typical average is three, but anything above four,

that is, you know, that's saying rip, rip, roar, and growth and inflationary pressures are developing. But what about you guys? What's your favorite? So for me, inflation's in the eye of the polder, right? So from a personal level, right?

Yeah. Kind of make your own basket of goods. So for me, it's olive oil. I've been following olive oil futures, up 40% over the last year. Chris is a card-carrying Italian from where are you from in the middle of Italy somewhere? Beautiful country. Yeah, there you go. So.

Okay, so what's going on with the olive oil? It's like very expensive. Rip-roaring, 40%? Really? Oh, last year. They've got some production issues too, though. So there's that one, and then I follow coffee. Coffee's flat, though, right?

So the two loves. Why? What's that? Good weather. Why is it flat? You don't know? I don't know. I don't know.

Well, it's quite volatile. So it's way down and it's come back up. Right. On a more serious, gas, I would say, gas prices are if you're trying to look at it. Okay, now you're talking too much. Okay, you're talking too much. Calm down. I'll stop.

Calm down. I'm going through my whole basket. I know. I know you're going to go through your whole shopping cart grocery list. Yeah. What about you, Ryan?

And don't say diapers. I was about to say diapers as a joke. Oh, hey, that's my basket of goods. My cart is diapers. I remember those days. Yeah, fondly, by the way. For near term, like the next six months,

I think the NFIB survey, they have a question about the percent of businesses that are planning on raising prices, it has a very strong correlation with growth in the CPI, and there's a causal relationship there, and the causation runs one way. So I think that's a very good near-term indicator of inflation. And it suggests that we are going to get this transitory, you know, bout of inflation over the next six months. Yeah. You said near-term, did you have a long-term one or that you had in mind or just money supply, M-2. Oh, M-2. That's his. That's not mine.

No, do not tie my name to the M2 money supply. We need to retire this thing. You're all about crypto. He's all about M2. All about M2. The curve. Yeah, okay. Well, we do have inflation tracker on EV, don't we?

Don't we have an inflation tracker on EB? Or we should have an inflation. We should. Yeah, we can add one. Let's add that. We've talked about it. Yeah, let's add it. I got a spreadsheet for you.

I've got my own tracker, you know, because I can't wait for you anymore. I got to keep going here. So I'm going to give you, give you my spreadsheet. All right, I'm going to tie it all up. You know, the thing about inflation is I've got this kind of image in my mind that, you know, the world has been struggling to stay out of the big, big black hole of low inflation, disinflation, deflation. And some parts of the world have actually are all the way in, you know, Europe, Japan, they, you know, their inflation rates. Japan's are close to zero. Europe is closer to 1%, if they're lucky.

And they've been fighting like mad to break away. And in the U.S., we've done a little bit better job. And I mean, our core inflation has been sub two, but it's been, you know, within striking distance of two, you know, over the past decade or so. But we've been struggling like crazy to break away from that black hole. And it feels like to me the pandemic is the supercharger to get away from it. If there's any good that comes out of this is that, you know, we've just slapped on our backs,

you know, monetary policy accelerator. We've got the Fed, you know, focused like a laser beam on getting us the hell out of away from this big black hole. And we got fiscal policy, you know, same deal, American Rescue Plan. We got the bill back, better agenda coming down the road, just a lot of support. And we're going to bust away, you know, from this big black hole. And the question is, you know, what happens? happens after that? Do we blast into the other parts of the universe where inflation becomes an issue

again? Or is the supercharged economy, you know, not too supercharged that we can kind of, you know, slow things down when we need to when we're coming into full employment and, you know, the labor market's getting really tight and we can kind of throttle back. And, you know, I use the metaphor of a plane, but think about the rocket ship, you know, the rocket ship, the, you know, the SpaceX rocket ship come landing back on that tarmac. I don't think I call it a tarmac, a space pad or a rocket pad, you know, sitting in Melbourne, Florida or something. And, you know, my, so you can think about the three of our views as Ryan thinks we're not

getting away from that black hole. We're still going to be stuck in the orbit of that black hole, struggling to pull away. Chris thinks we are going to get that, be able to land that spaceship right on the, on the pad. No problem. And I'm saying, ah, I don't know. It feels like we could break into that netherworld. You know, it feels a little uncomfortable to me. It's going to be, take a little bit of luck and some really death policymaking,

not to get some inflation that we're a little bit uncomfortable with. But, you know, inflation is a tough one for economists. It's everything economics is kind of mysterious. Hopefully we break down the mystery a little bit for you. But I'll have to say inflation dynamics are particularly mysterious. That big black hole metaphor, I think, you know, kind of puts that into relief. Okay. With that, I encourage you to give us a rating.

Do you like us? Tell us. We need it. You know, we're really trying to build up our listenership here. And we want you to rate us. We want you to subscribe and rate us. So please do that. And I will say, I am getting a little tired of these two guys.

Just a little bit, I'll have to say. We're going in some guests. These guys aren't going anywhere, you know, but I think we're going to bring in a guest or two because I think the next thing we're going to talk about it is interest rates, which kind of dovetails with inflation. And I think we'll bring in one of my favorite economists who used to work for us many years ago and get him on the air as well, get his views. And we'll be back next week.

Thank you.