Moody's Talks - Inside Economics - Lettuce Discuss Inflation

Episode Date: August 14, 2026

The Inside Economics crew is joined by colleague Matt Colyar to run down the week’s slate of inflation and consumer data. Following the recap and a brief detour about lettuce consumption, each puts forward probabilities that the Fed will cut rates, hike rates, or stay put in the near term. The numbers game leads to a discussion of the series the group would put on their Mount Rushmore – an exercise Mark is completely unfamiliar with and blames on the group’s generational divide.  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 Analytics Follow 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, Marissa Dina Talley, Chris DRED.Reedies. Hi, guys. Hi, Mark. Morning. And we got our old regular favorite, Matt Collier, Matt. Thanks for joining us.

Thanks for having me. Nice to see everybody. It is good to see everyone. We're getting to know each other pretty well. We had a podcast yesterday recorded with David Autor, the professor from MIT. I believe that podcast, it's on AI in the labor market, a really good podcast. That's going to be aired next Tuesday, and here we are on Friday the 14th. But I thought that was a great interview.

What do you think, Chris? Excellent. He's fantastic, just so knowledgeable of the labor market. And clearly, he's getting a lot of thought to AI's impact. You know, I thought it was kind of cute. I don't know if cute's the right word, but he wants to. He wanted to make a point that his PhD was not in economics. Did you notice that?

You wouldn't know. He's like the preeminent labor economist on the planet, right? Yes. I mean, but I think he got his PhD from Harvard in, was it Harvard? I believe so, Harvard in public policy, yeah. Which also comes shining through in the conversation. Yeah. It's really great conversation.

Oh, and just point of interest, that's the first podcast in our AI series. We're going to have a number of different guests talking about different aspects of AI in the economy. And David was the first to participate. And we didn't ask Jenna what her Jenna score was, but I'm guessing it was pretty high. It was a pretty good conversation. But here we are. It was a big week, a lot of data, mostly on inflation, although we got retail sales today as well. This is again Friday, August 14th.

And I thought we'd dive in with all the inflation statistics because that's kind of top of mind and talk a little bit about the market reaction and what the Fed's going to do with all this. And we'll play the game. And then we'll call it a podcast and go enjoy the weekend. So before I turn it over to Matt, Marissa, Chris, anything else you want to add? No, let's get to it. Let's get to it. Okay, very good.

Okay, Matt, where do you want to begin? CPI, PPI. Where do you want to go? Chronologically. Tuesday, we got CPI, Wednesday, PPI. So let's move forward to today. Okay. Is that sound right?

Sounds good to me. Yeah. Do you have the days right, though? I don't think you have the days right. Does he have the days right? Tuesday and Wednesday? It wasn't Wednesday and Thursday? No, Wednesday, Thursday.

Wednesday, right. I don't even have anything. I don't even have anything to blame it on. You're like AI. I got to correct it. I got to, you know, I got to watch you. I got to watch you. That's bad.

That's a bad start. It's been a blur. It's been a blur. It's a pretty bad. Yeah, take every number I say here with a grain of salt. Okay. All right. Well, actually, it raises my stature in the minds of the listener, I think.

That's true. Yeah. Because everyone... How is that possible? How is that possible? Exactly. Okay. All right.

Take two. Okay. Here we go. CPI. CPI. CPI. So Consumer Price Index report for July. First, any data point we get for July prices, we get.

a 0.1% increase from June to July that was unexpected. I would kind of broadly characterize the whole report as relatively uneventful, at the surface. So 0.1% increase in the consumer price index lowers the year-over-year rate from 3.5 to 3.4%. Good frame reference in February before energy prices started rising, we were at 2.4%. So still a healthy margin above where we were, but at least inching down. in the right direction of late. Why is it inching down? Pretty expected to. Gas prices dropped slightly from June to July's level. So average gas prices a little over $4 in June, a little under $4 in July leads to, you know, is the primary driver behind a 1.5% decline in energy prices. And that's how you get pretty soft reading.

Just stop you right there because I got a lot of questions about this because gasoline prices, they came down kind of towards the, we had that at the MOU in the Middle East, got some oil flowing through the strait, oil prices came in, gas prices started to come down a little bit. Then by the end of the month of July, they started rising again, and here they are, you know, in August,

they're back up again. So people are a little confused as to why gas prices actually declined. And I think, correct me if I'm wrong, but the BLS canvases throughout the month, right? And the monthly average is kind of a, the monthly values, the average of the days that they do the canvas throughout the month. Is that right? Exactly right. So we were at 410 at the end of July. We're above four for the first half of August. But if you go back to the first half of July, which is, you know, half of the average used. We were well below that, just given the kind of optimism around the MOU. So take the average of the month. That's how you get a slight decline. And right now, I mean, we're only halfway through the month, but if prices, gas prices kind of stay where they are, when we get the August CPI number, that's going to show an increase in all likelihood. That's right.

Gas prices and energy. Right. In a month where we typically, seasonally, see a slight decline, so that increase will be amplified in a way. I mean, we're not talking about the kind of jumps we saw in spring, but a bigger jump than maybe the raw numbers that you see at the gas station would, would, in terms. Kate. But yes, we're near four. I don't, you know, if you look at futures markets, I don't think there's any realistic expectation that we're going to go anywhere below $4. So pretty confidently at this point, I think we can bank in, we can bake in an increase in CPI for energy and CPI for gasoline prices in August. Got it. Got it. Go ahead. Proceed. Yeah. So I interrupt you

you again, but don't know. No, no. I think that's worth expounding upon food prices. Point one percent increase again closely watched we're seeing a lot more disruptions the geopolitical conflicts that are they're going to push commodity prices grain prices all of that not yet driving prices very high for food not to 2% where they should be food prices still 3% year-over-year food at home the proxy for grocery grocery store prices that fell on the month up 2.7 year over year we got some welcome within the components of food we see a big drop or relatively big drop. 0.7% in meat, poultry, fish.

It's been a pressure point in a lot of ways. I have to call out lettuce as though I was very tempted. I'm sure it was somebody else's numbers for the numbers game. Darned. 16.4% decline in lettuce that is likely a demand story. I think people have avoided places associated with lettuce. I've changed my behavior on lettuce. Have you guys changed your behavior?

I don't think I've eaten lettuce at all since this outbreak. I go into the hydroponic lettuce. Have you tried the hydroponic lettuce? Is that available for the public in normal stores? Do you grow that in your garage? Are you saying that's hoity tooty? That's what you're saying? It seems futuristic, yeah.

Yeah, they grow hydroponic, I think, they grow it in water or something. Vertical farming, is that the... It's actually very good. I don't think I'm going back. to romaine lettuce. I just don't like I'm going back. Changed my behavior entirely. What about you, Chris?

I know you're very particular about the food you eat. Yeah, yeah. It was a great advantage. I eat a lot of salad. So my CPI this month actually declined. I went all in. It went all in. I forgot it.

And you feel okay. Feel great. Feel great. That's great. You're looking good. Yeah, you're looking good. Sorry, Matt.

No, no. But that leads us to core. So the core CPI, excluding food, excluding energy, a 0.2% increase on the month. That was in line with consensus expectations. We were a few basis points above that with rounding. It looks like a miss, but I think it was excusable. That comes after no increase in June and the 0.2% rise in July lowered the year-over-year rate from 2.6. to 2.5%.

That's the lowest since February. Core CPI is excluding energy, of course, so we're not seeing the run-up and then a decline. It's just been relatively stable, a little bit higher, and now back down to 2.5. I think looking at core CPI is interesting for a lot of reasons. If you look at, you know,

the expected spillover effects of higher energy costs, so maybe things that aren't, you know, energy-specific, but they use energy are those input costs going to rise and then pass, you know, make their way through to consumers. That really hasn't happened yet. If you look at the six-month moving average for the core CPI, we're at 2.4%. So take the last six months, project that over a year, what would inflation look like using that specific measure? That's the slowest since 2021.

That's a pretty meaningful comparison, I think. And I think if you think about the core CPI's normal margin over the PCE deflator, so the 2% target that the Fed has, core CPI runs about three percentage points, three-tenths of a percentage point above core PCE. So 2.4%. So our current, this is kind of a mouthful, but our current rate, of course, EPA inflation is pretty consistent with the Fed's target. That's unintuitive for a lot of reasons, which I'm happy to dig into. But at least there is a pretty good story. I mean, we'll get to the consumer expenditure deflator, the so-called PCE deflator, which is the measure the Fed has up to this point in time historically used as their measure of inflation, the 2% target, not the CPI, but there is this large gap

between the two. So core CPI, excluding fluid energy, as you say, is up, what, 2.5% year every year through the month of July? Is that right? It is, yeah. Yeah. And we don't, we haven't gotten PCE yet for the month of July, but we've got a pretty good sense of it because it's based on the CPI, and we're going to talk about the producer price index, PPI, shortly. And what do you? you think core PCE is going to be, you know, based on that for the month of July? It's 3.3% in June, and we expect it's 3.3% in July, giving all the input information that you look to. Okay. So, you know, if you look at that in the context of what it means for the Fed and monetary policy and the 2% target, you know, if you looked at the CPI, you'd say, no big deal. We're within spitting, as you say, within, well, at least I'm saying, within spitting distance of the Fed's

target, we're at two and a half, the CPI target would be kind of like 2.3, 2.3% because of historical construction methodology, that kind of thing. But the PCE, core PCE, is at 3.3%, which is not anywhere close to the Fed's target. You know, hair on fire, that's not, doesn't feel very good. So what's going on? Why the gap between the two? It's an interesting gap. And that gap, again, as I mentioned, it's usually the other way. Usually core PC over a long period of time is running a little bit lower on a year-over-year basis. There's a few kind of structural reasons.

Healthcare is measured in the CPI, given a lot more weight relative to the PCE. So if health care inflate, I'm sorry, shelter inflation is given a lot more weight in the CPI relative to the PCE. And then the inverse is true for health care. So if you have different trajectories, as we are seeing, they're not dramatically different, but they're big, important components. Shelters disinflating, that's going to lower the core CPI in a way more dramatically than the PCE deflator. And the opposite is true of healthcare, healthcare inflation's a little bit sturdier of late. And certainly was the case in July.

So that's a part of it. A really big part, though, is the way that financial markets and what's called the portfolio management is measured. So a PCE relies on an input from the PPI, which is almost entirely determined by, equity by financial market performance. So if you see, you know, really strong equity price growth, that's going to lift this measure in the PPI, which then gets input into the PC. And that's totally separate from what's happening in the CPI. There's no, you know, perfect analog there. If you have really strong financial market performance, that gap is going to widen because it is, is, is used in calculations for the PC, not the CPI. But a remedy is incoming because the B.EA...

Just before you go to the remedy, just to repeat them. So you're saying the cost of financial services, you've mentioned, you said portfolio management, but I think it's cost of financial services broadly, that the way that's measured is that it's tied to stock prices, basically. So if the stock market is moving straight north, which it has been, that lifts that measure of inflation, and that affects PPI and that affects by extension the PCE to a greater degree than the CPI. But here we so and everyone kind of recognizes that's kind of dumb, right? You know, inflation is not higher because the stock market's up. So let's fix that. And that's where you're going.

So the BLS, the Bureau of Labor Statistics, the keeper of the data is now going to make a change in the way it measures the inflation for financial services, prices for financial services. Do I have that right? Almost entirely. The only difference, the BLS is actually not changing the people, who the BLS is. who's producing the CPI and the PPI, but the BEA constructing the PCE, they are making the adaptation moving away from the measure that you just outlined. And instead looking at kind of hourly wages for financial services employees. And that's, you know, as an attempt, if it's a very service, you know, labor concentrated industry hours were, or wages, salaries for for financial

services workers are a better proxy in this assumption for actual inflation for the broader financial services products that consumers are buying, paying for, and are then reflected in the various measures of inflation that we're talking about. So that is a change and it's a change taking place later this year, in fact of September 30th. And it's just for all the stock market performance that we're talking about and how that's been a big driver of the wedge, making this change will have an estimated 10th, perhaps 2 tenths of a percentage point reduction in core PCE year-over-year inflation. It's one of a few adjustments that the BEA is making. I would say probably the most consequential up there with what's happening, a change that's happening to computer software

that's going from a CPI measure to a PPI measure, but both are going to have the combined effect of lowering core PC inflation and narrowing that wedge between. core PCE and core CPI that we're talking about. Oh, okay. So right now, as measured, currently measured, the core PCE is growing 3.3%. We think it's going to grow 3.3% through the month of July. Once these methodological changes had been implemented now,

we'd be closer to 3%. That's not 3.3%. Okay. But still, there's still a gap and you're saying, okay, that goes to all these other things like housing being the principal. It's a much higher weight in the CPI than the PCI. And that's why we're seeing this. Okay.

Okay. But let me ask you, because depending on which measure you're looking at, you get a different kind of perspective on what inflation is. Let's call it underlying inflation. How about that? Underlying inflation. Sure. You know, abstracting from all the measurement issues, all the noise, all the adjustments, you know, all this stuff. we kind of do this with the employment data as well.

What do you think underlying inflation really is? You know, it's not two and a half, it's not three, three. So what is it? I would say, I agree. I would say it's closer to the core CPI's measure, but a little bit higher. So I'd go two seven, two eight would be where I would peg inflation. I think upside risks we can talk about are definitely to closer to three percent or higher.

but the core CPI has been a pretty consistent measure when we've relied on. I don't see an obvious story for much more improvement, but I think it's telling an accurate picture to an extent. Okay, so underlying inflation is kind of just south of 3%. Just around, maybe we'll just say 3%. Would that make sense? That's ambitious. I think that's higher than, and I've changed.

Two months ago, I would have said that's the case. I think the picture has changed on the margins and it's looked better. I think inflation's trajectory looks a little bit lower. And I think some of the pass-through effects from the war just haven't materialized in a way that I think is more than a month's noise. I think we're starting to see a bit of a trend. Okay. Mercer, do you want to weigh in here or anything to add as part of the conversation? I was looking at, and I hope this isn't someone's statistic, but I was looking at Supercore.

Yep. And that's running 2.8% year over year. So, you know, close to what Matt thinks sort of underlying inflation is. This strips out. What is Supercore? Can you just define Super Corps? It's services, less energy services, and less shelter. So it's kind of stripping out these, one, the shelter issue.

that we've talked about a lot, right? It's a slow-moving big part of core CPI that has been trending lower over the past few years. We've been sort of waiting for it to come in. It actually popped up a little bit this past month, but it's not typically whipsod by energy or things that happen, right, on a like sort of exogenous basis month to month, strips out energy. Obviously, we know the story there. So at 2.8%, that's the slowest it's been since March of 2021. So just coming out of the pandemic. And I think it really represents sort of this underlying, you know, what's going on.

Is there any bleed through to what we're seeing like in energy prices to the rest of service inflation? So I have my eye on that as sort of an underlying measure that I like to use. So still too high, but coming in, going in the correct direction, as Matt's alluding to. Is that measure the Supercore CPI as opposed to the Supercore PCE? Okay. That is the CPI. That's right. Because that goes back to that portfolio management thing.

I think SuperCore PC is a little bit higher. That makes sense. So you're saying that's you, in Supercore, I think this was a measure that former Fed Chair Powell put forward at one point, what he's looking at to get to a sense of underlying inflation because it's tied directly to, you know, the labor market and broader cost pressures. And you're saying that is kind of just south of 3% and that's consistent with what Matt's saying

in terms of underlying inflation. And coming in, yeah. And coming in. And moderating, yeah. Chris, anything to add on this? Anything you want to weigh in on? No, I was going to go where Mercer went, that they, you know, keeping eye on those services,

inflation, right? so yeah okay um i was just going to say one other thing what oh um matt the one measure that looks even the best the best when i say best the most shows the lowest rate of inflation is the so-called trimmed mean cpi or trim mean pce uh you want to just describe what that is and what you think of it i mean i think if you look at trimmed mean from the like the the that the Dallas Fed constructs this trim mean. It's kind of in the low twos. It's kind of already consistent with the Fed's target.

And I think didn't the current chair, Warsh, point to this in his testimony, arguing, well, maybe inflation is not the problem we think it is. Right. 2.2% for... 2.2. We're on target. We're on target.

Right. And again, just definitionally, we're lopping off the extremes. So the tail end of both the components that are falling very quickly and the components that are rising pretty quickly. So the design is to get at a kind of underlying inflation, what's actually happening. And there it's 2.2 percent. And certain times that can be a telling statistic, but oftentimes it.

I hate it. I hate it. Come on, man. Say something. Come on. Tell me what you really think. Being diplomatic. It's points in time.

It's okay. It's if what you're chopping off is extremely. extremely important. If you're chopping off a much of marginal components that don't matter and it's less noisy, I think you can tell a story. But if you're taking off things that matter immensely, like gas and what people actually use to think about their own financial situation, it's not helpful when it's a matter of convenience, which I think is why it was held out a few months ago. Well, I say two things why I hate it. One is if you're lopping off the tails, all you're left with basically is housing. So why don't you just give me the measure?

Because shelter in the CPI is, what, almost a third of the CPI and like 40, 45% of the core CPI. So you're only left with housing, which I'm not even sure it should be in the CPI, but that's a whole other kind of conversation. So, I mean, I just find it, you know, difficult to use. The other thing is fundamentally, the reason why inflation is as high as it is is because of these supply shocks, right? the tariffs, immigration, restrictive,

highly restrictive immigration policy, the war in Iran. And so that's going to lead to jumps and prices for things on the tail. But that can't, you can't dismiss those things.

Those things are, that's real inflation. And, you know, certainly from the prism of the American consumer, the American household, they're really important. These are things that they need.

People need. You need gas. You need food. You need clothing. the things that are being juiced. So it just feels like a kind of a real slight of hand to go down the term mean, but no? Yeah.

No, I agree. And I think if you want to cut things off and it was what we were doing a few years ago, not religiously, but as a respectable point of reference, was to cut off imputed value. So some people don't actually pay a fee on the home that they own, but we need the government needs a measure to estimate that.

That's why you mentioned a minute ago, whether you aren't even sure if housing should be in the CPI. Like, I think SuperCore was, created for that reason because what inflation measures were capturing were something that isn't actually observed and a price that anybody's paying because owner's equivalent rent was very high. I mean, you bring up another, sorry, yeah, you bring up another good point.

There's another measure called the market-based measure of inflation, right? This excludes all those imputed prices like portfolio management. We're not directly observing a price or just imputing it. The BLS is imputing it. Do you know what inflation is based on the market-based CPA? The market-based PCE is, I mean, the harmonized version you would remove entirely. I haven't looked at that for the CPI, but the market-based PCE, which removes, because they have a imputed housing, even if it's way, right, right. It's still, it's an imputed housing measure in the PCE, and that's a little bit lower.

It's like 3-1, unless I checked for June. Okay, not that much different. No, and that's because Shelter really isn't that big of us, and that's your biggest imputed value. That's not, it's not a huge source of inflation. anymore, which is also a reason to think that the disinflation for course, EPA is not clearly going to March lower. I don't think we're going to see we're at two and a half, we're getting pretty stable increases month-a-month in shelter inflation, and I don't think it's going to shift any lower, and there's no real disinflation in tow anymore is what I would argue. Okay, so taking this

all together, we're underlying inflation just south of three. The target is two. Where are we headed here? I mean, are we, assuming these supply shocks continue to fade to the background, which is a big assumption, obviously a very, very big assumption in the context of what's going on in the war, but just assuming that oil prices kind of hover where they are for a while, what do you think? Inflation is going to start coming in here in a meaningful way and head back to Target. What do you, what's your expectation?

I think by the end of this year, we're about where we are with Corps. at 2.5 core CPI, and I think headline CPI is probably three and a half. Our August forecast put the peak for core CPI, which I think is the most important to watch now, or Corp PC, but to watch those measures just for direction of travel. Core CPI, our peak is early next year at about 2.8, so a little bit more.

I think that's sound. More pass-through. I think there's more pass-through. I think if you look at, you know, under the hood at some of the PPI components, we can talk more about. businesses are paying higher prices in a way that has not reached consumers. I see.

I see. Good arguments to say that that won't be passed through just based off of where those price increases are coming from. But some of it will. And I think that's how you get a 25 to 28 or 27 at least. So, no, I don't see much more improvement. Headline CPI, we're at 3.3, 34, 35, I think, hard to see a decline without sustained improvement in the Middle East.

If anything, the upside risk is that we drift closer to 4%. if gas prices stay four and a quarter just based off of refining capacity staying offline and disruptions through the straight. So I wouldn't expect much more improvement though I don't think we see

a dramatic reacceleration or any kind of in the pipeline pass through to core CPI. I've become more and more convinced that that's not happening in any kind of dramatic way. Would you agree with a statement that by

if not by this time next year certainly by the end of next year the end of 2027, assuming no more supply shocks. Again, you know, obviously a big assumption in the context of everything. But that's our baseline. We're not forecasting another supply shock here. And that the Iran work continues to be less of an issue because oil prices, they're high. Gas prices are high, but they're going to kind of remain roughly where they are and come in to hopefully to some degree as we move forward. Big assumptions, but you make those assumptions. no change in that policy, that's also our baseline,

that inflation will be back to something we all feel more comfortable about a year from now, and if not a year from now, by the end of next year. Would you agree with that statement? Yeah, I think that's reasonable. I think you're going to see just Labor Mark continue to see a little bit more slack there, weaker consumer spending, some demand pressure on prices. I think that's trending in a way that is going to relieve some inflationary pressure. So that's what I would outline.

I would say the higher end of comfortable. But yeah, I think that's a reasonable trajectory. Okay. Marissa, would you take on bridge with that or is that kind of? No, I think that's in line with what I expect. Okay. And Chris? Yeah, same.

Yeah. Okay. That's where my mind is. Okay. Anything else on the inflation data that you want to call out, Matt, CPI, PPI. Just the headline. PPI was flat on the month. Last month was negative, you know, it was 0.3% decline.

That got revised up a little bit. So, you know, noteworthy, but, but in general, pretty weak month, mostly given energy prices. Pardon? The month of July. You understand? A month of July, yeah, yeah. So, so, you know, pretty flat, mostly due to energy. If you look out of the hood, there is some inflationary pressures that you can't find

an analog for in the CPI, so a little bit of cost pressures for businesses, which I think are interesting, but in general, a pretty lukewarm report. Yeah, got it. Okay. Hey, Chris, market reaction, not much, right? I mean, because it's all pretty consistent with expectations. Yeah, not much in the stock market. If you want to talk about Fed policy, that did change.

Oh, it did. Yeah, the odds of a rate hike in September came in. They were about 50%, you know, 50%, 50%, 50%. about a month ago and now they're at 30%, right? So fairly sizable move there in terms of what markets are expecting. If you look a little further out, markets are still expecting pretty, are placing pretty significant odds that we will get at least one hike through December. That's at about 62%.

Right. So that's still there. But even that came in. It was about 75% or 80% a month ago. So market is gradually moving in this direction. but still is the predominance of expectation is that we will see at least one hike by the end of the year and certainly by March of next year. So you said a month ago we were over 50 percent probability.

The futures market for Fed funds was pricing in a rate increase at the September meeting, the upcoming. Correct. That's right. So we got the jobs numbers last Friday. We got the CPI, PPI data this week. Yes. And on the other side of all of that, because the job numbers were weak as well,

that's right now we're down to 30% probability for September. Correct. Correct. Got it. What about, and you said looking forward, the markets are still pricing in at least one rate increase, maybe two through early next year, say, I think March of 2027. Has that come in as well? It has.

It has. Yeah, if we look at not as much, though, in terms of at least one hike, right? Perhaps, you know, the market was also, there were a number of participants thinking three, maybe even four hikes, right? That has certainly come in. So that tails has come in. So not either one or two seems to be the mode here. Right, right. Okay.

So, so the markets are still, have a high probability. Let's go out to March of 2027. Because that kind of encompasses when markets are thinking the Fed would be tightening policy. And after that, it becomes a little difficult, more difficult because there's no liquidity in the futures market, hard to really conclude anything. By what's the probability from the market's perspective of a rate increase, at least one rate increase by March of next year? So, 75% chance. 75% chance. Yeah, 40% chance it'll be one hike.

Okay, 75% chance we're going to get a rate increase by next March. Is there any probability of a rate cut? No, no probability. Zero. Zero. Zero. Which is interesting, yeah. Yeah.

So a 25% probability of no change in policy, you know, through this time next year. Right. Yeah. Okay. All right. So let me ask you, Chris, what do you think the probabilities are here? Our baseline is no change. But what do you think the probability is of a rate cut between now and?

in March of next year, no change in policy in a rate increase by next March. What do you think it is? Yeah, so I'm counter to the market here. I have a lot more. I have probability, a 35% chance that we will actually get a cut by March of next year. Oh, wow. Yeah. And that, so that's, that's really a, a view on the economic outlook, right? That cut would come because the market, because the economy is weaker. labor market is certainly one of the main signals I'm following there that weak labor report last week certainly colored my views here and then I put a 40% chance of no change and 25% chance of an actual hike. Okay, so just to put this into relief, the market's saying 75% probability of a rate hike by March of next year, you're saying 25% probability.

Yes. The market's saying no chance, zero probability. We're pretty sure no rate cut by March the next year. saying 35% probability. Yep. Yeah. I mean, does that 35? I'm worried. Huh? I'm worried. You're worried about the economy, the job market, the economy. That's, that's the major factor, yes. Okay. Okay. That feels like you would get a rate cut if you got a recession, meaning you start losing jobs or and or you have some kind of financial event crisis. So is that,

is that right? Is that what you're thinking? Yeah. Yeah, we are losing jobs. So question is to continue. Okay. And I think there's a reasonable chance that it will. There are signs that there's weakness. It's not my base case. Let me just make sure that's clear. But your base case is still no change. You're consistent with our base case. The Moody's base case you're saying, okay, I'm on board with that, but the risks are skewed to the downside, not to the upside. That's what I'm seeing. Yeah. Right. Any other reason for that? I mean, that kind of perspective. I mean, I guess it goes back to our inflation forecast, in part, you think that's going to come in in a reasonably graceful way between now and March, a weaker economy, potentially weaker economy. Anything else?

I am certainly nervous about the stock market, AI trades in particular. The more I read about it, the more I see. I'm worried about the overvaluation, potentially getting unwound pretty quickly here. the costs of AI are rising for the data centers and the hyperscalers. The revenues I don't see as keeping up, given all the competition they're receiving from cheaper models. So I'm worried there's going to be some type of a shakeout here that has also some negative wealth effects. Got it.

Got it. Hey, you know, one reason there might be a difference between you in the market. Just I want to make sure that this isn't the reason. is this what the Fed will do and what the Fed should do. The Fed will do. That's what the markets are saying, right? They're saying this is what we think. We're agnostic about whether this is the right thing to do or the wrong thing to do.

But we're listening to all these Fed governors. We saw the dissents, the three dissents from the last meeting where those dissenters wanted to raise interest rates. there just seems to be a kind of a ground swell of thinking that among Fed members, not Kevin Warsh, not the chair per se, but a lot of the other members that we want to rate increase. Are you, is your probability distribution based on what they will do or what they should do? Good question. It's probably, yeah, it's hard to abstract. So it's probably more, it's probably lean toward more to what they should do.

What they should do, right? Yeah. I think the market, perhaps rightly so, is viewing the words of the Fed, governors, putting a lot of stock on that. The mandate seems to be all focused on inflation now. And so if that's the case and employment doesn't matter, then, you know, that certainly would skew towards more weight on hiking, given the inflation picture that we have. Got it, got it. Hey, Marcia, where do you stand on this? Chris is kind of taking a non-consensus perspective on this.

Are you similarly situated in your thinking? Yeah, I definitely have a non-consensus perspective vis-à-vis the markets, I think. I think there's probably a 25% chance that they cut through March. And I'm just thinking about that kind of like Chris is just sort of in my recession, probability. That's sort of where I think the probability of recession is over the next six to nine months, right? So the only real reason I see them cutting is if the economy weakens sufficiently to make them nervous that the odds of recession are sufficiently high. So that means continuously weakening labor market. I think inflation will come in.

It is coming in. So it assumes that continues and inflation isn't going going in the opposite direction. And there could be other reasons that were close to recession. I mean, Chris called out, you know, the equity markets. Maybe we get a big drop in the equity markets and pull back in consumer spending, pull back in the job market. I think there's probably a 30% increase, 30% odds that they hike over that time period. So I'm more on the hike side than I am on the cut side.

but, you know, pretty equal, right? Not a big difference there for my bookends. Yeah, that makes sense. So what you're saying, you said 25% probability of a cut. You're saying basically that's kind of my probability of recession. Because this is a nine-month period. And if I said over the next 12 months, you'd say probability of recession is 30% or so I'm making that up that up. But something along those lines.

Yeah, that makes sense to me. And in that, the other things are thrown into the mix is we may not have a recession, but we could have what I call the financial event. You're saying an equity market correction would certainly qualify. But, you know, there could be, you know, like we had a banking crisis back in 2023. Something comes along that we're just not tuned to at this point, sell off in the bond market or something, you know. Right. To make them sufficiently worried that this could lead to, if it's not a recession, it would lead to a recession.

Could lead to a recession. Quickly. Or there's some kind of liquidity event, you know, some, the risk off environment, results in problems in money markets, and that would be the catalyst for some kind of shift in policy to the downside, a cut in rates. Yeah, that makes sense. Okay, Matt, what do you think? Where are you in this probability distribution game?

Closer to the futures markets, I think the hurdle to clear to justify rate cuts is hard for me to imagine when we're still 200,000 jobless claims each week. That's been consistent and that's not a particularly noisy metric, but it's a good indication of, you know, if there really is mass layoffs, it really is going to be a pullback in consumer spending. It has to have, it has to come after a reduction in income. That hasn't happened. Big decline in July of jobs numbers. I listen to your guys' podcast. You are persuasive. Chris is persuasive today with his enthusiasm. He called the podcast the other day, excellent, which also seemed to call me out of character that was very effusive. What's he talking about? When you asked him how the podcast was earlier this week, Chris described it as excellent, which I thought was more effusive than he normally is. Which podcast? Oh, you mean David Alter.

Yeah, yeah, yeah. It was excellent. It was excellent, but usually, I don't doubt it. But it was a really strong endorsement. And now he's convinced me a little bit that the economy is weaker. But I'm less worried about the job market. I think July's decline was noisy, the local government thing. I will see what job growth looks like in a couple months.

Nobody's filing jobless claims. Consumer spending is retail sales today. It was not good. Yeah, yeah, while we're on the topic, retail sales, I mean, that came out today. That was pretty punk, wasn't it? It was, yeah. And it wasn't, you know, it's not gas. If you told me it was negative 0.6, which is what it was, I would say, okay, gas declined,

but excluding gas, it was just weak. Same thing. Non-store retail. It's really weak. I guess Amazon had a prime day, and that might be messing with the data. little bit, the timing of the data. But, you know, we've been looking at other data sources. And they all been kind of flashing pretty significant weakness in July coming into August. So I don't know. But I don't want to read too much into it. But it's something to take note of.

For sure. So that's a long preamble. I would say 10% chance that we see a rate hike. I think it's much more likely that we stay where we are. The Fed stays where they are. 10%? 10% on a rate cut. Yeah. And much more likely between a rate hike or. or the Fed, you know, staying put, which is our baseline. Okay, but you're not, you're not, you're still much lower than the market expectation for a rate increase, but it's much higher than Chris and higher than Marissa. Yeah, I think that's right. Yeah. Okay.

All right. Yeah, I think our baseline's dead on. I don't think they're going to cut rates. And that's what they will do and what they should do because they have to thread this needle between inflation that's still on the high side and, you know, know, as you said, there's going to be some additional pass-through. We don't really know, you know, if inflation is going to come in like we expect, but it feels like it's on track. The other thing I'd say that kind of helps out on an inflation front, feels like inflation expectations are pretty well anchored. I mean, if you look at the bond market measures, break-evens, you know, across the duration, you know, one year all the way out to 30-year, they're kind of nailed down pretty tightly to the Fed's inflation target. And I don't think you raise interest rates unless you see inflation expectations really become, you know, meaningfully unanchored. And I don't see that.

I don't think they cut rates, though, unless things really was inflation above target, unless things really start going off the rails. And that would have to be a recession or some kind of major financial event, which I think is consistent with, you know, a 25, 30 percent probability because that's where I'd put recession. concession odds, you know, given the labor market. So kind of consistent with kind of where I think Marissa is, you know, kind of in the same ballpark. But I think, I think bottom line, and I think we're all saying this, is we're pretty comfortable with our baseline expectation of no rate, increased no rate cut. The Fed's going to hold the line, which is non-consensus, which is non-consensus. Yeah. Okay. All right. Anything else on that? Anything else you want to put forward on the inflation? We've got the game to play, and I thought we'd end the podcast on the game, if that's okay with everybody.

But before we move on, anything else, Matt, on the inflation front that you want to call out? We covered it. I think that covers it. Okay. All right. Let's play the game, the stats game. We each put forward a stat. The rest of the group tries to figure that out with clues, deductive reasoning questions.

The best stats, one that is not so hard. We never get it. one that's not so easy. Oh, wait, I got the, I said it so many times, one that's not so easy, we get it right away, one that's not so hard that we never get it. And if it's apropos to the topic at hand, boy, that was, that was pretty bad. I've said that for five years in a row. I don't think I watched it as bad. But you get the, you get the gist. Anyway, we always begin with Marissa. Marissa, what's your stat? My stat is 32 percent, plus 32 percent. inflation related?

Yes, it's inflation related. Chris, you leave the way. You rarely leave the way. You lead the way. So in today's report? In the CPI report? Sorry, in the CPI reports, not today. It's CPI, yeah.

C.P.R.I. Okay. Is it an item in the CPI report? It is a special aggregate. Oh. Up 32 people. We've never really talked about before. and I just found it.

Really? Wow. Does anyone talk about it? I haven't heard anyone talk about it. Oh, it's a secret gem. Special aggregate. Is it up 32% month over month? No.

Year over year. No. Oh. Longer time horizon. Okay. Oh, up 32% since the pandemic? Yes. Oh.

So in the last seven years, this price measure is up by a third. Mm-hmm. Roughly him. Okay. Matt, you know this data better than anybody. What do you think? Not as sharp in my pre-pandemic growth rate. Is post-pandemic?

Post-pandemic. I'm sorry. Yeah. Oh. Is it on the service side, Marissa? No. Is it on the good side? Yeah.

Ooh. So is it related to food? Mm-hmm. Is it food and energy? No. No. Is it just food? It's just food, yeah.

Just food. Specific category of food. Fast food. No. Meets. Nope. Fresh vegetables and fruit. Closer?

Oh. I, we can. I give up. I'll tell you why I picked it. Maybe that will help. I picked it because I think it encompasses a lot of the effects of policy that we've seen in the past. Teriffs? Related tariffs?

Not really. Oh, not really. No. Policy. Huh. I know another related statistic. You want to. But you're related to what?

The thing you don't know. The thing you haven't figured out yet. This is a sidebar as we're all cogitating around what you said. I believe, because I looked at this on the Consumer Expenditure Survey from the Bureau of Labor Statistics, you can see how much people spend on different things. The average dollar amount spent on fresh vegetables and fruit is just about $400. That's the typical household. In a year, spent about $400 on fresh fruit vegetables.

Do you find that impressive that I know that? Yes, it seems low to me. It seems very low. Yeah. It seems low. Yeah. Really? Yeah.

Well, you guys are veggie vegetarians. You're like, you know, you're like, that's a monthly bill. You forage. It's like my daughter. She forages. Yeah. You're out looking for truffles or something. That's Chris.

That's not me. Don't. That's Mark to that car. That's Martin, remember? Oh, that's right. It's hydroponic lettuce. Oh, that's right. That's right.

My hydroponic lettuce. All right, back to your statistic. You give up? Damn, I hate to give up on this. Juices. Go ahead. What is it? It is domestically produced farm food.

Whoa. Now, that is interesting. Yeah, did you know that that's a line item in this? No. I had no idea. Oh, that's interesting. And if you compare that to, so it's up 32% since 2020. If you compare it to total food, total foods up like 27.5%.

So a bit higher, it's about 5% higher over that time period. And I think it reflects obviously energy price. All food production will reflect energy prices because it's shipped around the country and trucks, right? But it's also going to reflect immigration policy. if it's domestically produced farm food. And it was up like a little over 2% month over month. If you look at how it's running in the past, say, couple years,

it looks benign, but it's actually pretty elevated relative to history if you go back prior to the pandemic. So I think it kind of encapsulates a lot of different things going on right now. So I think it's something we should watch. It's a potential gauge of labor costs in the actual. agriculture sector too. So domestically produced food and that would. Farm food.

Yeah. Farm food. So does that include meat then? I think it does. Yeah. I think it does. Okay. Oh, interesting.

Does it include the hydroponic lettuce though? It probably has the wrong weight. USA and it is. It's not on a farm. It's like in a factory. Anyway. It's not a farm. Might be in a factory.

Yeah. Right. I wonder, we should learn a little bit more about this. Hydroponic lettuce. That was a good one. That was really good. So what, wait, you spent your time kind of looking at those special aggregates down there. I was looking for something different, you know?

Something different, yeah. Yeah. I really appreciate the energy and the effort. Thank you. That was very good. Okay, Matt, you're up, man. I have a feeling Matt's going to give us a bummer of a stat. Don't do it, Matt.

Oh, you've got a good intuition. I should not have said the lettuce thing earlier. I blew it. I got nothing. I knew that, though. Yeah, I knew that one. I was okay to give it up because I figured, yeah, everybody knew it. Yeah.

Okay. Let's, yeah, I can come up with one. Negative 2.2. Negative 2.2. Percent? Is that a percent? Percentage, yeah. Percent.

You're over year? You over a year? No. Month over a month. Yeah. Is it energy related? Did we establish it as a price? Did we establish that?

Oh, yeah, we didn't. Is it a price? It's not a price. I think about other stuff. Okay. Hey, I'm well-rounded. Is it inflation related at all? Oh, I know what it is, Matt.

I know what it is. It's in the retail sales report, and it's online retail store. Yeah. Yeah, yeah, yeah, yeah. Wow. That's good. Okay.

Nice. Well done. That was good. And you got me off the hook. You got me off the hook. There you go. This is my Cal bell. Yeah.

Yeah. Okay. You want to explain? The decline, the big decline retail sales on the month, 0.6% is a bad headline. And then it's the first thought should be is that gas. Okay, it's not gas. What's happening underneath the hood are consumers pulling back, as Mark you alluded to. There's other metrics that are kind of saying that July is a pretty soft month. And there's a lot of different reasons why. Non-store retailers, not going to be affected by energy prices, but it is affected by Amazon Prime Day. So there is some, some, some, some, some, weirdness there, but a pretty sharp pullback and in general a bad consumer data point released this morning. Whether it's noise and whether it doesn't look so bad in a few months, I think we'll see. But yeah, not a great story, especially. You pair that with weak job growth in the month. Yeah. You know, I mentioned we started looking at alternative sources. The one source is Bloomberg's second measure spending. Chris, that has been, we've been looking, that's weekly data lagged a week. But that's been pretty weak, hasn't?

Very weak, yes. Yeah. So directly consistent with the number it came out. Now, some of it might be World Cup, right? Couldn't it be? I mean, because the weakness was kind of on the starting kind of mid-July, kind of early mid-July, kind of on the backside of all the World Cup. So maybe, but something to watch, you know, very carefully.

Okay, let's do one more. Chris, you have a stat? Sure. 99.8. Isn't that body temperature? What is that? Chris's current body temperature. What is, it's like 98. That would be a fever.

986, 98.6, yeah. I'm healthy. I never get, I never have a temperature. So that's my excuse. Oh, it's not your body temperature is what you're. You've excluded that from the statistic. It's not body. temperature. It's not an FM radio station. It's an index value.

That's where I was going. Index value of something? Yes. Is it? NFIB? Yes. Optimism index. That came out all the way back on Monday.

So it seems like, you know, a year ago. But it was up a lot. It's the highest level since August of last year. Explain, though, what it is? What are we looking at? NFIB. National Federation of Independent businesses. So there are small businesses that get surveyed.

by the NFIB organization and they put together this optimism index, which looks at, they ask a variety of questions and get a sense of how small businesses are feeling about the economy and their business prospects going forward. And 99.8, like I said, is high. It's the highest since last August. So at least small businesses are moving in a more positive direction. So kind of offsetting some of my, my pessimism. And what I found interesting, if you dig in the details a little bit, Their plans to hire actually rose, and their plans to invest actually rose. And the concerns about inflation actually fell a bit. And they're a smaller share actually planning to pass through higher prices at this point.

So again, take it for what it's worth. But it seems like the small businesses at least are feeling a little bit more optimistic at the moment. Hmm. 99.8, you said? Yes, that's right. And what's kind of average typical? Do you know? I think it's 98 or something, so it's a little bit of a lot.

A little higher than average. That sounds a little weird, doesn't it? Compared to all the other sentiment measures, I just find that. Well, I guess it's consistent with the ISM surveys, the supply managers. They're been more upbeat, more optimistic. Yeah, that's why I brought it up. Yeah. These small businesses are.

Right, right, right. If we ever do the Mount Rushmore of data series we don't like, I would pick NFIP. Not to poo-poo Chris's statistic. Did you say Mount Rushmore? Yeah, like you're, what was the, yeah. Like you pick your favorite series that you hate or your least favorite series? Didn't you talk about?

What about? What was he talking about? I never heard that term like, who's your Mount Rushmore of Fed chairs? Like you would say, I love, you know, Powell and Volker. What is that a Generation Y thing? or something? Mount Rushmore? I think, yeah, maybe, but I'm

millennial, but I don't know, I don't know, I thought it was pretty common, but, uh, you're, you're a millennial, aren't you Matt, millennial? I am, Melissa, do you know what I'm talking about? I do know what you're talking about. Well, she's a millennial too.

I'm not a millennial. No, no. What are you? Gen X? You're Gen X? Oh, okay. All right. Am I the only boomer?

Am I the boomer? You are the only booburn? You don't, Chris? Okay. I don't know. Oh, yeah. So you're Mount Rushmore. Oh, so you're saying, what you're saying to Chris is that was a bad stat is what you're saying.

Yes, that's what he said. That's what he's saying. It's a bad survey. In a kind of a generation wide way. Passive aggressive way. Right, right. This is a generational warfare. You moron, you picked a bad stat.

You told me anything. We had that conversation a few weeks ago about the data series that we, don't like. And Mark, you had said you hate the University of Michigan, right? Yeah. And the New York Fed. No, I said. Yeah. Oh, yeah. And Matt is saying he's putting the NFIB survey on the list. I got it. See, now the, the, what are you mercil or you're generally? Oh, the, the XER has to interpret the wire to the boomer. That's what's going on. That's this is actually what our whole society is all about. The X are sitting there trying to tell the boomer what the wires and the zeters are thinking, right?

I'm glad I can be of service. Somebody's got to be translating. That's good. Hey, by the way, before we end, does everyone notice Marissa's venue looks unusually bright? I mean, look at that. I mean, actually, I want to be there. It looks so inviting, right?

It's actually extremely overcast. There is no sunshine whatsoever, but yet I look brighter on camera. Yeah, it looks great. I don't know. Bottle that. That looks really good. I can't be done. All right.

All right. Everyone go to YouTube now, right? Check out Marissa's background. Yeah, I know. Go to YouTube. And check out David Otter next Tuesday when we released that podcast. Okay. Anything else, guys, before we call this one a podcast?

Matt, nothing. Marissa nothing, Chris nothing? I think so. Okay. All right. Well, with that, we're going to call this to your listener a podcast. I hope you enjoyed it. We'll talk to you next week.

Take care now.