Moody's Talks - Inside Economics - Oil, Cows and Taxes

Episode Date: April 10, 2026

The Inside Economics team is joined by Matt Colyar to discuss the week’s loaded economic data slate. First, Matt offers a detailed reaction to March’s hot CPI report – the first inflation data capturing effects from the conflict in the Middle East. Next, the group discusses how each is thinking about their recession probabilities in light of the tenuous ceasefire between the U.S. and Iran and the latest economic data. The group closes, of course, with the numbers game where Mark reveals that he doesn’t file his own taxes, and despite not eating meat, Cris provides an update on how America’s steakhouses are faring amid rising beef costs. Email us at [e-mail] for more info about the Moody's Summit '26 Conference in San Diego 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 Zini, the chief economist of Moody's Analytics, and I'm joined by my two trustee co-host, Marissa Dina Talley, Chris Doree. Hey, guys. Hi, Mark. Hello. Hello. This new. Hey, everyone. Good to see you. Good to see you. And we've also got our colleague Matt Collier. Hey, Matt. How are you? I am good. I'm good. Today is CPI Friday, Consumer Price Index Friday, which is a little unusual. But we've got a lot of data, inflation data to go over. Matt's our man for inflation data. So. Glad you're here, Matt. Yeah, looking forward to it. So before we did kind of dive in, we had a, we all, Chris and I, and Matt, had a great day yesterday. So we were sorry you weren't there. We had a gentic day, so-called agentic day in suburban Philadelphia where a bunch of us got together, Moody's folks, and worked on building agentic tools that we are now using. So, Matt, what was your, what was your tool?

What did you work on? Believe it or not, it was inflation related. Couldn't a guess. Couldn't have guessed. A lot of data aggregation, hey, these are journalists, analysts that I like. If the PC deflator just came out, if the CPI from March just came out, aggregate and give me a very digestible report of what everybody's saying, what's there to look at. And then, of course, like, kind of the data that I'm interested in, like, you know, it's the fastest increase. headline CPI since

2022 or something like that kind of search for those little nuggets that make I think our analysis a little bit more interesting. So trying to streamline that because that's how I spend all my time. So it was a tool to help you get a sense of the consensus

view of what these numbers would be when they're released? The consensus ahead of time, yeah, I can do that, but I'm in this instance. I'm looking more at a reaction. So we have CPI to this, and I can get into granular things that I have in my mind. If I would not have found that the BEA used legal services from CPI rather than PPI or vice versa, last month, as much as I would love to be confident, I wasn't going

to find that as fast as somebody else if you, you know, kind of leverage the rest of the, you know, economic conversation to find that quickly. I want to be aware of that quickly. So how can I do that and kind of cast a wider net? Oh, okay. So what you're saying is in these reports, obviously there's a, there's a, you can go deep into the DNA and there's a lot of things going on that are obvious and you're using this tool you'll be built to go identify those things those things in the DNA that are changing that may have some some implication but very very difficult to figure out certainly difficult to figure

it out quickly that's what exactly not obvious things you know bring them to my attention and uh you know if we have a podcast half an hour after the uh CPI comes out then i should be as prepared as this is the kind of tool that would make me better prepared for that for that conversation. So that's what I had in mind. So did you run it this morning after, because it's now 9, 10 a.m. Eastern, we're 40 minutes after the report. Do you have any nuggets based on your tool? To say yes, it would be setting the bar high. It was a pretty predictable report, not to get ahead of ourselves. So don't expect any deep insights, but just my normal rigor, I would expect. Got it. And Chris, what was your tool? What did you build?

Yeah, so I constructed a recession probability monitoring agent, right? So as we have discussed on this podcast, right, we were certainly coming up with our own probabilities of recession, but then we want to compare those to consensus or what's going on outside of our world. So what this agent does is go out to the prediction markets, first of all. So Cal She and Polymarket and collects the latest market-driven information on recession probabilities. And then it combines that with Wall Street analysts or other forecasters, other banks that are putting out their own predictions of recession, compiles that all into a nice report, creates some averages, and just makes it a very easy way to summarize all that information. Get a sense of the distribution. You know, how far apart are all these predictions?

Are they pretty narrow? And, yeah, I can update this in real time. And now it's emailing me. I'll report every Friday morning. in anticipation of the podcast. So just got the report this morning. Okay, what does it say? What's the probability of recession over the next 12 months?

So based on the recession markets around 25, 27 percent. Oh, pretty low. The forecasters, the Wall Street forecasters were at 36 percent. And then Moody's our latest AI model, the one you bring up quite often, that's at 40 percent. So we're not that far apart from the forecasters. Yeah, that fell back a little bit over the last few weeks, right? Because of the employee, I think because of the, largely because the March employment data were positive. We're favorable.

That's right. That's right. Which we talked about last week. Yeah. And isn't there some nuance you were telling me about the prediction markets that it's not the next 12 months, but it's for 2026? Yes. So that's another feature of this report is that everyone has a little bit different definition of recession. So in some cases, in the case of the prediction market specifically, it's a contract, right?

So it has to be a fixed date. So they're looking at recession probability through the end of 2026. So by December 31st, will there be two consecutive quarters of negative annualized GDP growth, right? So it's a very strict formulaic view based on the advanced GDP report. So you have to take that into account when you're comparing these various measures as well. So the report does a nice job of stressing that or identifying that for each one of the different. So would you say Kalshi and a polymarketer saying 25, 30 percent? Is that a corrected probability?

Oh, that's based on the actual. That's raw data, right? So that's what the rate. So, yeah, so you have to adjust that for the fact that of a shorter window than the next 12 months. So if I do that in my mind's eye, I come pretty close to what Wall Street is saying. You probably add another five to 10. Yeah. Yeah.

Yeah. Yeah. Yeah. Got it. Got it. So really, we're at, the model is at 40. We each have our own personal, we can talk about probabilities. We rely on many things, including the model.

The model says 40. The consensus of other Wall Street economists is, what? Is 35? 36. 36. And if I make an adjustment ad hoc in my mind, not AI-driven adjustment to the prediction markets, they're probably pretty close.

35. I would think so. They're probably expert judgment. I should say, there's one other nice feature that I added to the report based on some work Matt was doing, which was it goes out and checks out social media, looks at LinkedIn and blue sky, whatever it can gather. And it summarizes some quotes or key shatter that is coming from an economist. And one of the quotes that picked up was this thing called a vicious cycle index put out by Marks Andy. and reported that as well. Yeah.

I think we talked about that on podcast, didn't we last week? I believe we did. Yeah, we did. Did we? Okay. Yep. Yeah. I think we did.

Nice that it picked it up, though. Yeah, yeah. People like that name, and I will take credit for that name, vicious cycle index. I mean, it's a good one. It's a good one. Because it's obviously catchy. I think a comms person might say it was inflammatory. I don't know.

I'm just speculating, but. you know, catchy. And it's actually very descriptive of what the index is capturing. You know, the fact that when the unemployment rate, labor market slack increases significantly meaningfully in a short period of time, that spooks consumers who then become more cautious in their spending. That causes businesses to pull back even further on their payrolls and you get into this kind of self-reforcing negative cycle, vicious cycle, and that's recession. And that index is, that index is signaling over 50% problems. ability procession at this point, that particular measure. Yeah, cool. Oh, so I saw your dashboard.

You were showing it to me. I saw my name there. So you didn't put it there. The AI put it there. Okay. You're, apparently you're popular on LinkedIn. I don't know. So the AI is no, no, no, no what we're doing. That's pretty cool. Well, I build it. I build another current quarter GDP model. We've got many, but I've built another one just because I've been so, dissatisfied with the recent results. I mean, if you go back to Q4, 2025, everyone's prediction, all the models were saying, including ours, a much stronger GDP growth number than we actually have gotten. And in fact, the fourth quarter of GDP was pretty, with all the revisions coming in, weak, only a half percentage point increase, so very weak. And so I think,

what's going on? And, you know, one of the reasons it was having, the models are having trouble with that Q4-2020-5 was the government shutdown. There was no good way of capturing that. So I build a model to try to capture that. And you know what it's saying for Q-1-2020-6 at this point? So now this is the Q1-2020-6 is the so-called current quarter because we haven't gotten the actual data from BEA yet. We'll get that in a couple weeks.

2.9%. 2.9%. Yeah. So that's a bounce, right? You know, because of the government's shutdown, on depressed Q4, you get it back in Q1. So you really have to take an average of the two. So say take 2.9 plus 0.5, 3.4.

That's pretty weak, actually. That's pretty weak. That's not that, you know, I don't feel good about that. You know, I feel pretty uncomfortable about that. Because the shutdown probably took about a point off of Q4 GDP, right? So. According to the A, yeah. Economic analysis, yeah.

So, okay. All right, well, let's turn to the news of this morning of this week, the inflation statistics, consumer price index CPI for the month of March came out today. It feels like BLS and everyone's, all the statistical agencies are starting to catch up, finally, given the delays created by the government shutdown back last October, but they're catching up. You know, we got the consumer expenditure deflator, PCE, which obviously is the measure of the Fed uses for setting. It's 2% rate interest rate target this week. So, Matt, let me turn it to you. I don't know how you want to tackle this, but, you know, what's going on? I mean, in my sense, there's a bunch of broader themes here. Obviously, the war is having an impact. The terrorists are having an impact. You know, AI might be having an impact.

But I'll let you kind of leap the way here, however you want to frame this. Yeah, so this is the second month in a row we've had both the PCE, the Fed's preferred inflation measure that you mentioned and the CPI come out in the same week. They're on a different timeline. So the PC deflator data we have for February and the CPI we now have for March. I'll start with March. We can go reverse chronological. We got CPI data consumer price index for March this morning. That's a month. And unlike the jobs report where there's a reference week where the BLS compares one specific week to the same week the month before. With prices, it's an average over the month. So the effects of the war in the Middle East on gas prices was expected to be evident, and it definitely

was. So 0.87% increase in the headline CPI from February to March. So rounded the 0.9, that's where we were. That's where consensus generally was just knowing what we know about retail gasoline prices. They go from under $3 to $4 per gallon throughout the month. It's a little higher than that now. So that's a big driver. I was just looking at the AAA. It's a $4.50. still pretty elevated despite the ceasefire and the fact that oil prices have come in, we're $4.15 nationwide. So that still feels a little elevated. Yeah, and I'm not sure what that reaction looks like. I mean, they rise very quickly, and you're starting to see, okay, now if we do see oil prices come down a bit from $110 per barrel to 90,

how quickly are we going to see the gas stations respond to that? And does it, you know, is there a little bit of a buffer? But expectation is it's not going to be as quick of a decline. as we saw a run-up in the past month. But that was the main force. That was the driver behind the big increase in headline CPI. We go from 2.4% year-over-year in February to now 3.3%. That still includes this downward bias that I have been banging on about for several months now. That was from the shutdown, what the government had to do because of missing data because of the shutdown.

that goes away next month and is going to be rectified in a way that I think is, again, just like what they did before, defensible. It's certainly transparent, but we are going to see some upward pressure, which we can talk about next month when it comes to year-over-year rates. How much is that going to add, do you think, to year-over-year CPI? So you're referring to the government shutdown. They collect any data that's created some biases, downward biases in the measure of CPA up until this month.

Next month, they kind of fall out because of the... changes you alluded to the BLS is going to put in place. How much is that by itself all else equal going to add to year-over-year CPI inflation in the law? About 25 basis points to year-over-year growth. So another way to put it, we're at 3.26 unrounded and headline inflation right now. If that fix happened today in March instead of April, we would be looking at 3.5, maybe 3.6% year-over-year headline inflation. it would have been less than that without the big shock

from the gas prices, from oil prices. But yeah, that's a downward bias that we're expecting to go away. So next month, even if oil prices, as we were talking about, come down a bit, we're not going to see any relief next month in year-over-year rates

for headline CPI or core CPI because of that. If anything, we're going to probably go north of 3.5%. Do you think it's fair to say, you know, here we are, this is April 10th, so there's still more

a lot of more in the month to go, and who knows what's going to happen with the ceasefire where all prices go. But say if oil prices kind of hang somewhere around $100 a barrel, $9,500 a barrel for a while here, at least for the next couple of weeks, because the ceasefire feels pretty tentative, and I would expect oil traders are priced in a pretty significant risk premium. So let's just assume that. If that's the case, then gas is going to settle in the U.S., in the gasoline price for a gallon regular oil, it's probably going to settle in somewhere.

just south of four bucks. You know, as you said, it's coming in slowly. This goes to the old adage. Prices rise like a rocket that come in like a feather because it takes time for competitive pressures to bring in, you know, prices. If that's the case, my thinking is that we've seen some of the pass-through of the higher gas prices in the CPI in March, but not all of it. So there will still be another pretty substantive increase in,

the CPI because of gasoline, just simply gasoline in April. Does that sound right to you? Yeah, I think that's a good argument. If you're looking for the secondary effects of higher gas prices in March, airline fares, big jump, jet fuel prices really high, airlines are going to react quickly to that

as a huge input cost for them. So 2.7% rise in airline. That makes sense. More of a lagged effect is when we think about kind of the secondary products that have been held up over the past month. So that's a fertilizer. I mean, diesel fuel is an oil story. That's a huge input to the agriculture sector. And those food inflation wasn't expected to be hot in March. It was flat. That's the kind of thing that even if we get the ceasefire to hold, we see gas prices come down a bit. There's been a shock there that's going

to work its way through to consumers. So we're going to see more of that pressure to food to other transportation services like airline fares and things that have kind of immediate. effect or immediate impact of higher energy prices and then it's further and further than that from there. So just to reinforce the point, you know, even if you assume, and we are assuming that the ceasefire, you know, kind of roughly holds. It's not going to be graceful, but it's going to be sufficient to ensure that we've already seen the peak in oil prices that are going to hang here around 100 bucks, maybe a little lower,

and then start moderating towards the end of the year, settle in around 80 bucks a barrel by the end of the year, which is about $20, $15, $20,000, above where it was before the war started. That goes to risk premium. That goes to insurance costs. That goes to, you know, there's a lot of infrastructure that's been damaged, that's offline. So production is going to be a lot of different things going on there. If that's kind of the path forward for oil prices, the point is that there's still a lot more pass-through coming from the run-up in oil prices that's already occurred and will occur. Is that fair to say?

Yeah, absolutely. Yeah. So you're just saying it's in gas, but gas is going to go up even more in April. You said it's in airfare. That probably will continue to rise in April, maybe even longer. You mentioned diesel prices, and that affects everything that's put on a truck, including groceries and Amazon packages. That's going to flow through for a while.

And then, of course, it affects the cost of everything, fertilizer and agricultural production, anything that's manufactured, required, and that takes even longer time. So the pass-through of the war effects on inflation, this isn't one-off in a sense that it's not one month. This is maybe through the end of the year. Yeah, I think that's very reasonable. And you can even expand that circle to anything that's transported and moving around. I mean, those are higher input costs that businesses didn't anticipate that'll need to be passed through in some fashion to consumers. So I think you look at March's report, and I can jump ahead to core CPI only rising 0.2%.

Core CPI excludes energy. Oil prices immediately aren't going to have that effect yet. But what we're going to see is that pass-through effect. Start to lift core CPI. You're going to see an acceleration there as it starts to get into other products that aren't directly energy, tied to energy prices, but use energy. And we'll see instead of a 0.9% increase in headline CPI, you'll see some moderation there as the big jump is out of the way. Peak gas prices are behind us. And we'll just see 0.3.4% increases in core CPA.

as that pass-through effect happens in the coming months. And that's consistent with our forecast and pretty intuitive. Was there any aspect of the report where you expected that were to show up in the inflation numbers, but you did not see it? You could have convinced me that you would start to see an uptick in food prices. I mean, it's just the beginning of a supply chain of a much, you know, it takes a long time to get to the grocery store in some instances. So I wasn't expecting 0.9% there, too, but to see a point. point two percent decline in grocery store prices in March, I think was a bit of a surprise. Understandable, but not, but certainly not will be forecast that we expected another modest increase.

Okay. I want to go on to the tariffs and AI and other things that are powering inflation, but let me turn it to Marissa. Is there anything on the war effects that you want to call out that we didn't talk about? No, I was keyed in to see if there were any secondary effects. So I had noted that there was no inflation and food, for example, and just was going to ask Matt how long he thinks it will take for that kind of thing to show up. Got it. Got it. Okay. Chris, anything on that before we move forward? No, I think it's, like Matt said, pretty straightforward, and we have to wait for the effects to flow through. Okay. Okay, so Matt, the tariffs, it feels like to me, and I have to look at the day as obviously as closely as you have, that the tariff effects are

still happening. This isn't over. It's almost like we've seen a kind of a resurgence of the tariff effect in the pass through in the data. Is that fair to say? Yeah, I think you see more evidence of it in February's PCE deflator than we see in March. So March, every month, we aggregate all the things that we are very import intensive, very vulnerable to tariffs. We look at those, we weigh them, take an average and say, what did the tariff-sensitive goods that we're we're focused on what the prices look like there. Pretty flat in March after a strong increase in February. So it's been choppy.

It's been uneven. If you think about certain products, things that are kind of low margin, inventory turns over quickly. A lot of that pass-through effect, I think, is behind us. Other big ticket items, and I'm tiptoeing closer and closer to talking about cars. These are big purchases. People make once every six, seven years. And car manufacturers remain.

hesitant to pass through car to pass through tariff costs increases to consumer so I focus on that it hasn't happened again we got another month in in March where new vehicle prices were up 0.1% used vehicle prices fell 0.4%. It's little inconsistent with other data we've been seeing so we look at wholesale auction prices a lot of attention spent on that over the past week that we're starting to see market data suggest that cars are cost and used vehicles in particular costing more and a lot of that story is higher demand because new vehicle prices and use vehicle prices are going to move in the same way.

If new vehicle prices start to cost more, that's going to push more people into the use market. So that's our expectation. It hasn't shown up in CPI data yet, but it's one we remain confident in. So just a good example of kind of the uneven pass-through speed that across different products. So it's there.

The vehicle prices are always, it seems like to me, always like that. They always, because they've been, going up and down and all around since the pandemic because the supply chain's got all messed up. And both on the upside and on the downside with regard to vehicle prices, you know, we keep saying it's going to happen, it's going to happen, it's going to happen, it doesn't happen, it doesn't happen, and then boom, it happens. It feels like that's what's going to happen here.

I mean, also in the context for the vehicle industry, I've been talking to a couple people in the industry, there's a lot of hand-wringing around the chip availability, right? given the demand from AI. And of course, vehicles are very chip intensive, and they're having difficulty getting chips and the costs are rising rapidly. So you would think, forget about the tariffs. You know, that by itself would start to have an impact as well on, for us.

Yeah, that was so much of the story back in 2022, which was these cars are just about finished except for these chips, which we can't get a hold of. And now they're filling up lots because we can't sell them. The car dealerships can't sell them, or the car manufacturers can't roll them out to the car dealerships until we have chips. That was so much of the binding constraint back then to push car prices really, really high. Now, I know you've been constructing a kind of a tariff of CPI, so a CPI index for goods that are subject to tariff.

What did that show in the month? Do you know? Flat this month. So again, that's a new vehicle. Is that vehicles? That's new vehicles. But even excluding new vehicles very slightly up. This is after a strong increase. last month and that was

0.5.6% last month. We're still hot. I mean, if you exclude new vehicles, all the tariff apparel, food and certain beverages that are imported into the United States, recreational goods, the kind of things that are just dependent on trade.

3.2% year-over-year growth. Oh, 3.2% year-over-year. That's right. So much higher than core CPI right now and rising. It's up from the price. I'm sorry, 3.5%. It was 3.3.2%. 2% last month, 3.5% this month. So faster than, you know, broader inflation. It is an inflationary source. But new vehicles, if you look at the broader index, are keeping that a little bit subdued for now.

So that 3.5% CPI includes vehicles or excludes vehicles? That's the one that excludes vehicles, 2.8% year-over-year, including new vehicles, and that's a big weight being. And here we are, where a year after Liberation Day, Liberation Day was a year ago, April. fourth when President Trump imposed reciprocal tariffs. The same tariffs had been struck down by the Supreme Supreme Court is illegal. But a year in, we're seeing the CPI inflation for those goods that are subject to tariffs. It's up around 3%, 3.5%. Something like that. Right. And if there were no tariffs, what do you think that would show, basically flat it down? Yeah. You can look at household furnishings. You know, all those things have just taken a, there's an acceleration that happens. mid-year, last year, continues to the end of 2025 before we start to see a little bit more mild growth. So take that out and there's no reason to expect anything outside of two, two and a half

percent growth there. Got it. Got it. Chris, anything you want to add on the tariff front? Yeah, just on the vehicles. I noticed a pretty sizable jump in parts, vehicle parts inflation. So I wonder if that's the first step, right? That's where the, the, where those inflationary or the whole tariff aspects will be pushed through, and then eventually they make their way to the new cars as well. I know there's also a series of data from Japan, right, in terms of the export prices of vehicles. And we had seen that that's been really depressed

and looked like the manufacturers were eating the cost for a while. Is that still the case? It's not as depressed as it was, but if you look at the price index that the Bank of Japan publishes, the cars that Japanese automakers are sending to North America are selling more cheaply today than they were prior to these tariffs. Elsewhere, they break it out by everywhere else in the world, and you see kind of normal, modest price increases.

So that discount is, if I'm selling to a dealership in America, or I'm going to, I know what the tariff rate is, I'll discount that a little bit, so we're all even for the time being. That's not a sustainable project. And a lot of these are lower costs, high volume, very price sensitive buyers. That pass-through effect, you know, that sacrifice in that kind of margin is not sustainable. So yes, it's going away, not as fast as you might have guessed. We're not back to the same price index that was before the tariffs, but it's less of a discount than prior.

And we get a new data point either tonight or Monday. So we'll see what it looks like in March. So the war and the pass through for the higher energy prices, that'll continue for at least a few months, maybe to the end of the year. It depends, obviously, again, on the path of oil prices, but that feels likely. And then the tariff effects,

that feels like that is starting to come to an end, but it too probably has another couple, three, four months to play out as well, adding to inflationary pressures. I don't mean to put words in your mouth, But let me just take it one step further. The one thing that has surprised me is the inflationary effects of AI, artificial intelligence. And that feels like that's starting to show, particularly in the producer price indices,

which then affect the consumer expenditure quota. How do you think about that? How big a deal with that? I think it's important. And so if you look at within the PCE data in February, we got a strong reading in core goods or just core CPI. in general was stronger in February for the PCE deflater than it was for the core CPI. And why? Because a lot of computer software, out of components, have a bigger weight in the PCE than it does in the CPI.

And why was that rising very quickly? Well, that's part of the infrastructure buildout for AI. And it's a lot of demand for data centers and computing capabilities that are so in demand right now. And that pushed core PCE inflation much stronger in February than we saw a month ago for the core CPI. So it is there when you're talking about the actual hardware that's enabling the AI buildout. We're starting to see increasing evidence there.

I think a lot of people would also point to prior to the to the war would look at rising demand for energy. Is that going to show up in household utility bills the way the CPI, the BLS looks at utility bills month to month? What that increase flows through as energy services is that increased demand from AI going to drive inflation higher? I think that's kind of a late 2026, 2027 story. That was the expectation. I talk about energy now. It's going to be about oil and Iran. But yeah, those effects are increasingly visible.

And prior to the war, would have been kind of what we're combing through when it comes to energy data. But then the hardware computer story, too, is a story of demand, outstripping productive capacity and supply right now. Yeah. I feel like I mean, it's kind of, I don't know what the right word is. I always use the word ironic incorrectly. It feels ironic that AI, you know, it's juicing up demand more than supply at this point. Supply being the productivity gains that we're expecting to come from the use of artificial intelligence. But the demand side effects are already there.

You know, the data centers, all the electronics that go into the data centers, the wealth effects generated by the run-up at stock prices for the hyperscalers. That's powering a lot of consumer spending by the wealth to do. So demand greater than supply means prices go up, all else being equal, and that's what it feels like it's happening here. I know there's some headwinds to inflation, most notably housing, but before we go there, are there any other kind of broader tailwinds to inflation? You know, there's the war, there's the tariffs, there's AI, anything else out there that I'm missing? What about immigration? Immigration. Yeah, what do you think about that? Do you think the heavy-handed immigration policy is having an impact? Inflation or inflation? I mean, kind of the broad contours of our forecasts have been that services because you're taking away a certain segment of the labor force. That's going to make a tighter labor force. You're going to have health care expenses. That's, you know, immigrant-dependent industry are going to rise more quickly because staff have to be paid higher. And that's the same, you know, construction similarly. I think that's a good, you know,

a good prior to have. You can come, you know, get specific and look to see if there's evidence of that, but it's really not been services inflation, at least in, in, in, uh, PCE data, uh, that looks like it's driving inflation. It's more of a good story, but that certainly is part of our forecast and I think, you know, a reasonable and important one that, you know, heavy-handed immigration is going to tighten the labor market, push service prices higher. Well, services X and X shelter has been persistent, right?

In core CPI, yeah, or in a CPI, yeah, that certainly has been the case. So because you're saying that's evidence or at least circumstantial evidence and immigration is having an impact, because that's where the immigrant workers would be a bigger part of the labor force. That's my conjecture. Conjecture, yeah. There's not a cross currents here, obviously, but you're not seeing that curve bend back down to 2%. It's been kind of hanging out in the 3.5% range for a while now. Yeah, and wage growth, I think you can. find some evidence that that's happening.

I think generally we're seeing deceleration in wage growth that pushes is a little bit inconsistent with that. But yeah, and that's a little bit different, a little bit different, broader measure. Okay. Now the one meaningful

force that's restraining inflation is housing. And that goes to, has a much bigger weight in the CPI, consumer price index, than the PC, the consumer expenditure later. But that does appear to be

restraining inflation, and that feels like that's going to continue to do so through the remainder of the year, right? Yeah, so March data was a little bit stronger than February, but still mild. So owner's equivalent rent, that's the biggest single component within the CPI, 0.3% increase.

It's up, you know, so 0.28, up from 0.22 the month before. I don't think there's an expectation that any kind of reacceleration is happening. that's just kind of a choppy downward trend. But next month is when we get that correction from the federal government shutdown. And what we'll see next month is effectively a double, a double month increase in April. So the change from March to April is going to look in the point four.

So take March, take the average of March and February's increase, you're getting to 0.5% month over month growth because it's kind of a catch up for what didn't happen in October. So the BLS assumes 0%. now the way that they're addressing that is to kind of do two months at once, just one time, and that should catch up. I think it's an effective way to do that. But we're going to see strong growth next month. And I think everybody's expectations for certainly core CPI. We don't know what's going to happen with energy prices,

but core CPI is you're going to see an acceleration because of that in month-to-month growth next month. So interesting, the cost of housing has been slowing because of weak rents, because we've had a building in parts of the high end of the rental market in particular. And that is a weight on inflation, but not for the next month. Because in that next month, because of this technical adjustment related to the effects of the government shutdown, we're actually going to see a pop in-house, of course. Yeah. So I was experimenting with how much but oil prices have to fall just to offset that increase.

And it's like we have to get back to like $2 a gallon just to see a normal increase to offset that. Yeah. So impossible. So even if prices move sideways, I think you're going to see another increase next year in both core and headline CPI year-over-year grades, grades just because of that doubling and that catch-up and shelter inflation, which I think is interesting. It's important to see ahead of time and have a full understanding of.

Yeah. Now, the one key thing to how persistent this inflation is going to be and what it actually means for the conduct of monetary policy and the interest rate set by the Federal Reserve is inflation expectations. You know, what happens with inflation expectations? Because inflation expectations, you know, what investors, business people,

consumers think inflation is going to be in the future goes a long way to determining how persistent inflation will be and how big a deal it is and how the Fed should respond to that. Chris, have you been watching those inflation expectations, statistics at all? Yeah, I've been looking at that. them. They have, the five-year break-evens have been moving up. They're not out of control, but certainly the expectation is higher now than it was prior to the conflict. Right. Right. Mercia, have you looked at them at all, at the expectations of numbers? Not since we last spoke.

I was just about to look it up. I think you, the University of Michigan survey comes out later this morning, doesn't it? And then, of course, they asked about. In like 20 minutes, it comes out, yeah. Like in 20 minutes. I think the conference board did come out and that did show a, increase? Do I have that right? New York Fed came out and showed an increase. It did. It did show an increase. Which is not surprising. Consumers are going to be more likely to internalize the inflation and expected to be

higher than forward. But your point, Chris, is bottom line, you don't think inflation expectations are becoming unbored or unhinged or not quite yet. We had that episode last year as well. All right. So we're kind of matching where we were last year in terms of the the movement up, but it's not back to 2022 levels, right, when there was really a concern about inflation taking off. But certainly investors and consumers are more concerned now.

But I think for the most part, they're looking through the oil price shock, thinking that it's going to be relatively temporary and not lead to long-lasting inflation. Yeah. Matt, do you have a perspective on inflation expectation? Yeah, I'm consistent with Chris. I think the five-year break-even is probably if I had to pick one to follow. That's what I'll look at. And I read 2-5 to 26 right now, which is above the Fed's target. That's what investors think inflation is going to average over the next five years. That's high. But it's not 2022. And I don't think it's enough to spook the Fed for sure. Right. Yeah. The break-even is it 256. Excuse me, 256. Which is on the high side, right? It is, but I mean, it's come down in the past four or five days since the ceasefire. Yeah.

But it is high for sure. And, Bark, do you think that's enough that if I'm a member at the Fed to say, okay, this is starting to get embedded? I mean, I don't know if there's a magic number there, but I would, my intuition is that they would maybe see something closer to 3% sustained for a bit to be concerned or unmoored is how they would then describe inflation expectations. Well, I think at the very least it means the Fed does not cut rates. No way until, you know, feels like the coast is clear. Even if the job market starts to choke on all of this and we start to see some job loss, I think they're going to be slow to respond with the inflation expectations. If they're still, you know, hanging in there at 2.5, 26. Because that is on the high, my mind's eye, right? I don't have the day in front of me. But that's on the high side of the range that it's been in since, you know, inflation has subsided in the wake of the Russian invasion of Ukraine. I had an inflation expectation. So, you know, I think they must be a bit, and I know they are a bit because they're telling us, they're uncomfortable with where they are and they're not going to move. But if they start drifting higher, you know, if it's 27, 2.8, it looks like it's headed higher.

I actually think there's, obviously it depends on what's going on in the labor market and financial system and everything else, but all else being equal, I think that might argue for a rate hike. That's not our forecast for our baseline, but that's not our forecast. for our baseline, but that definitely is. That's a risk. And particularly in the kind of, I think we've talked about this in previous podcast, but particularly in the context of inflation has been above the Fed's target now for a long time, at least five years.

And so at some point, you would think investors, business people, consumers would say, I don't think you really mean 2% my friend. Yeah. You mean something higher than that. So therefore, you know, then you got a problem on this. Yeah. Especially with the new chairman coming in, right? Yeah, especially when the new chairman coming in, who's predisposed to actually lower rates, but I don't think I don't think yet.

No. Okay. Okay, so let's take a big step back in kind of the way I think about where we are and where we're headed is that inflation, you know, you take all the measures of inflation, consumer expenditure deflator, CPI, producer prices, PPI. and it feels like inflation is kind of sort of around 3%-ish, you know, give or take. On the PCE, it's higher. On the CPI, it's a little lower, and that goes to housing as being a bigger component in the CPI to the PCE. Largely, there's other reasons, too, but that's the key reason. And AI is probably showing up more on the PCE than the CPI at this point.

CPI is getting affected by electricity prices, but the PCE is also getting affected by all the intermediate consumer electronics, chips, that kind of stuff. But given the dynamics here with regard to the war in Iran and how that's playing out, given the still considerable pass-through from the tariffs, given the AI-juice demand and the effect that's having, given the effects of immigration, heavy-handed immigration, feels like inflation is headed north, not south. You know, that it's going to, if you told me, you know, three, four, five, six months from now, that we're kind of in the three and a half percent range.

That sounds about right. You know, something like that. But then ultimately, because inflation expectations remain anchored, we'll get inflation moving back in. And, you know, as we move into 2027, it'll be drifting back closer to three, going, you know, back into the twos. It's going to take a long time without a recession to get back to a 2% inflation target. That's kind of the path forward.

Okay, laid that out. How does that sound to you? Does that sound like a reasonable kind of forecast? Yeah, because I expect we are going to see these pass through kind of secondary tertiary effects on other goods and services over the course of the next few months, even if this conflict, you know, comes to an end, whatever that looks like. We haven't seen the end of it, right? We talked about transportation costs and food costs and all these other things. So we'll see that over the next few months. And that stuff is widespread.

It is important to consumers. It makes up a significant share of consumer spending. So the story is not over here, despite what actually happens, I think, in Iran. Chris? Yeah, I agree. We have these three supply shocks going on. and it's going to take time for them to resolve. And some of them are going to be long-lasting,

like the immigration or the tariff effects. Right. Yeah, I like the way that three supply shots and one demand shot. The AI is more of a demand shot at this point. Well, yeah, it could shift. That would look at shift. Yeah, for sure. And Matt, he'll give you the last word on this.

Do you push back on all you that? I would maybe push towards the upper, I mean, 3.5% as a potentiality, I would say, is optimistic. That's year over year, though, Matt. Yeah, yeah. Yeah. Wow. I mean, two, three months ago, I'm looking at our forecast, and I think we were

CPI we had going just as basically a tariff story. This is pre-war. We were at three five, three-four, three-six, and I thought that was too high. But, you know, we didn't spend too much time talking about PCE, but PCE inflation prior to the war, if you look at a six-month moving average, was running at 3.4%. That's to February. So that's before. the effects that we're talking about here. That's the Fed's inflation target. I know we look at them all,

but hard for me to say that growth is going to be equivalent or weaker in the next six months. So you take that average over those two. I think 3.5 is on the hopeful side. Reasonable, but I'd go closer to four. Great. Oh, interesting. Hey, I just want to point out, I think the peak in inflation is going to be in November of this year. I'm just saying. That's what it feels like it's lining up to be. I mean, it mean, hard to imagine that that's kind of where, you know, policymakers would want it. But just saying, okay, let's play the game, the statistics game. And I'm assuming we have stats.

Do we have stats? Okay, great. I didn't ask. The game is we each before it is stat. The rest of the group tries to figure that out with clues, questions, deductive reasoning. the best stat is one that's not so easy that we get it right away, like last week or not too easy, that we never get it. And if it's apropos to the topic at hand, which is largely inflation,

but doesn't have to be. It can be anything all the better. And we always begin, Marissa. Marissa, what's your stack? My stat is minus 12.7%. Minus 12.7%. Inflation related? Yeah.

Is it in the CPI report? Yes. Is it a decline, is it over a year over a year price? It is. So something has declined 12.7% Some product or good or service has declined 12.7% year of year. Guys, Matt, you know the data. Oh, go ahead, Chris.

I was going to say eggs. Eggs? No, actually, eggs are down like 45%. Oh, wow. Okay. Matt? No AI, Matt. You can't be using AI.

Don't do that. No, no, I see you. I see you looking over there. Yeah. You got AI in your ear now. No cheating. It's a very productive, agenetic day. Any ideas?

Is it food related? I would have guessed eggs, too. But is it food related? It's not food related, but it is seasonal. Oh, it is seasonal, but not food related. Is it related to recreational service, recreation at all? I would not call this recreation, no. I was going to guess sunscreen.

That's not a component. sunscreen. Is cannabis in the CPI? Do we know? Is cannabis? It should be, shouldn't it? That's like, I don't think so. Isn't it still federally like a, it is?

Yeah. It is. It should be. So we're probably understating inflation because of the lack of the cannabis. Do you have some intel that prices are high? What about other drugs? I, good, good point. I have no knowledge.

I have no knowledge. No, these guys. know I had never, ever had a smoking marijuana. And it was never. Have I said that before? All right, Clinton. Let's say. Okay.

And I won't ask you guys. I won't ask you guys. Thanks. I, you know, I give up. My is 12.7%. What is it? It's tax prep services. Oh,

makes total sense. That's a great stat. That is a great stack. It was up 2.2% over the month, but yeah, it's down almost 13% over the year. And it's actually down quite a lot from its recent peak. So it's back to 2022 levels. And this is something I picked it obviously because we're coming up on April 15th here. But I was thinking about it. And I was thinking this is probably one of those services that will be very affected by AI in the future and the proliferate. Yeah. Right. I mean, the future is now. may perhaps, right? Yeah. That this is one of those things that's really, I think, if you look at, if you look at all the list of occupations and tasks that can be most easily done by AI,

tax prep is one of the things that you always see at the top, right? Is the price of this to the consumer is likely to fall pretty significantly as AI becomes embedded in more software and is just available to people. Yeah. That runs counter to my point about AI juicing demand and price. This is, I think, a case where it's actually weighing on price. It could be. Maybe it's not yet.

Maybe this is something totally different. But I mean, I think certainly in the future, when we start seeing it weigh on consumer prices, this will be one of the places where we see it, for sure. Well, do you guys use a, do you do your own taxes or do you have some of your taxes? I do my own and I use a software to do it. Okay. Is that a change or has that always been the case? You've always done your tax?

No, I've always done it. Yeah. Matt, do you do your taxes? My wife handles it. Okay. That's a no. I don't know if she's got if it's on by hand or where it happens, but it seems to always happen.

It always happens, yeah. And Chris, I can't, I'm, let's say, what do you guys think? Does Chris does it do his own? taxes, do you think? Yeah, he does. I think he has a team. I think he does. I think he has a team of accountants that do it.

He is AI accountants. No, you don't do your taxes? It's just me. You do your taxes. I've always done them. You've always done them. And I use TurboTax and I just looked up the stock price of into it and it's down 40%. Oh, wow.

Marissa, I can imagine. Over the last year. So it was a great step, Marissa. That was great. Well, I don't do my own taxes and, you know, nobody would want me to do my own taxes. my taxes. I'd probably be in jail by now. Not because I, not because I... You'll edit that out.

Yeah, you know what I mean. I just, like, I have no patience. I have no patience. Or you might be paying too much. Let's put it that way. I'm sure I'm paying way too much. I'm sure I'm paying with me. That's my sense. I guess that's everyone since we all are.

We all are. We're all paying way too much. Anyway, that was an excellent. Excellent statistic. Very, very good. Matt, you want to go next? Yes, it's inadequate compared to that. But 6.2%. CPI. Inflation? Inflation related, not CPI. PPI? No.

PC? No. Non-governmental. Oh, it's a third-party data source. It's in one of the, is it one of the ISM surveys? No. Auto-related? Oh, Marissa. I don't know. Go ahead. Go ahead.

I don't know. Is it the wholesale price of some car? Yeah, yeah, yeah. That's exactly right. So the Mannheim used car index. So it's like auction prices. It's for the quarter. So the quarter that we just finished, so 2021, I'm sorry, 2026 Q1 compared to the year before that wholesale auction prices for used cars are 6.2% higher. That's the highest rate year over year since 2023. We're still in the kind of thick of the supply crunch back then, at the back half of it. it. So every month we're forecasting some increase in use vehicle prices, some increase in new vehicle prices because of tariffs, hasn't happened. I think you could have a school of thought that would say maybe you should adjust your forecast, but this is something we should not adjust. It will happen. These are higher costs that the entire automotive industry is having to grapple with in different ways. So those price increases are coming. These auction prices lead used vehicle prices by a few months. So we saw strong growth, big over one, one.

point four percent growth just from February to March. That will make its way to lots and to consumers. They will see sticker prices rise. And we're going to continue to expect it, even if we're surprised on any given month's report. What's pushing up? Maybe you said it and I missed it. What's pushing up used car prices? Manheim describes it as a demand story. It's bigger tax refunds than we're seeing. That's driving it. There's some seasonality there, but it's still a. Oh, that's interesting. Yeah, but it's still, you know, it's price increases in an industry that has so far avoided them despite being, you know, globalized supply chain and tariffed pretty significantly. Oh, good. That was a good one.

Chris, what's your stat? 5.6 percent. Inflation? No. No. Not inflation related. What is it? Quarter of a quarter.

Is it in the GDP report? Yes. Hmm. It was in net in a GDI gross domestic income. Is it nominal GDP? No. Is it a component, one of the major components of GDP? It's in the report.

Is it profits? Yes. Exactly. Corporate profits after tax. Yeah, after. I knew that after tax. So from course. Q3 to Q4 was up.

The corporations actually don't do their own taxes. they're probably they probably will be soon with AI but anyway Chris go ahead yeah so 5.6% quarter over quarter that sounds nice and healthy relatively strong uh but if you look at year over year it's 2.8 and that's been slowing Q3 was phenomenal and then it's slowed in Q4 so you know this is before any type of shock here so some concern perhaps if the corporate profits continue to it is slow here, the growth, especially given the energy shocks, we could have some weakness in the stock market, and that leads to some of the wealth effects, negative wealth effects we've been talking about. So something to keep an eye on. It's a number that kind of stood out to me.

It looks really healthy on the surface. Right, right. I guess if you, I always, when you look at corporate profits, now I think about technology stocks like, you know, like for soft and Apple, and throw in Tesla. I mean, they're just making gobs of money, you know? They're making gobs. They're spending on gobs of money, too, though. Yeah, yeah, no, but I'm saying, you know, what I'm saying is if you exclude those guys,

and, you know, just for the sake of looking at the rest of the economy, I bet you're profits maybe declined. You know, if they exclude the magnificent seven, probably. In fact, that would be an interesting thing to look at. They're under a lot of pressure. Yeah. Okay.

$8.34. Is it energy related? Not energy, but it's a price. Commodity? Kind of like a commodity that we consume. $8.34. You guys are too? Go ahead, Chris.

Is it Wawa-related? No, it's not Wawa-related. You guys are too high flutin to, you know, eat this and I just gave you a big hint. Oh, is it the cost of a Big Mac? That's a good one. It's the cost of a pound of ground beef, the record. Why? Yeah.

It's gone skyward. Oh, yeah. There's this supply problem. Yeah. The herds are very small. The herds are very small. I'm trying to figure out why, but I think it goes to just the cost. I mean, because of drought and beet costs and everything else.

The herds have been cold, and they're a lot smaller, so we have a lot less supply. I don't think the tariffs have really helped all that much, even though there's been some release there from the president, I think that hasn't helped also. You know, I'm sorry, go ahead, Chris. I was going to say, I heard a related stat around steakhouses. Did you hear this? That steakhouses are actually booming because of risk management, right? The cost of steak is so high that people don't want to cook it at home because if you burn it, you, you know, you lose out. So instead, they prefer, they might be eating less steak, but they will go.

go to the steakhouse and have it cooked. So there's just some fixed amount of steak that needs to be eaten, and they're just... Apparently. It's totally inelastic. Okay. But the steakhouses, if you look at their profitability, they're actually doing well. So... That is interesting.

I don't know if I buy that. Talk about... It goes up like a rock and come down as like a feather. I think this thing's going to come down like a... Like, it's never coming down. It's like once it goes up. Because it is so pricing a lot. I would think.

Well, ground beef. But so that reminds, that brings something to mind, Matt. You know, you have a tariff inflation indicator. Maybe we should have a indicator that reflects kind of what American consumers consume on a regular basis, what you might consider necessities, you know. That would be eggs. That would be a pound of ground beef, you know. That would be a gallon of milk. That would be a loaf of bread.

Because that, I think, goes to affordability, goes to sentiment, it goes to the election, you know, all those kinds of things. But isn't that, I mean, isn't that what the CPI basket is supposed to be? Like a vehicle price I wouldn't put in there because you buy that once every six, you know, six years. It's not salient. It's not like, I need this every month. I'm buying this all the time. Gasoline prices, you know, something that's in my face all the time that, you know, affects the way I think about my own financial. You can make like a monthly expense index or something like that.

Yeah, maybe that's what it is. You know, it's not your budget over the, you know, it's not like the typical budget. It's like what are the things that you need to buy on a regular basis that, you know, that, that you, that you, that you probably, it's very inelastic. You have to buy it or you need to. It's hard to change your behavior, you know. It's hard to change. If I had a hamburger, you know, every Sunday night, and I'm not saying. thing I do, but if I did, I want a hamburger, you know, every Sunday night, I want that hamburger,

you know, and if it goes up from six bucks to eight bucks, you know, I'm still going to pay the eight bucks, but I'm not happy about it. I'm not happy. So the Mark Zandi basket consists of lava coffee, blueberries, bananas, oatmeal, oatmeal, almonds, yogurt, yeah, yogurt. And not cannabis, not, I'm just saying. going to say that, but I felt like it was too much. So don't include the hypothetical rents. That should be in the index.

Anyway, I don't. Matt didn't say anything, so maybe it seems that's a dumb idea. No, I don't. I mean, it joins nicely with stuff that Chris and I are already working on. You know, I think you could say to definitely don't include the hypothetical rent that you could rent your house out at for, you know, that should be in the, that's in the CPI, but not in this type of, you know, basket of essential, you know, monthly bill. And that's a big deal. So I will say beef and veal is in our tariff index and we do focus on it. And 12.1% year over year, which is high, but 0.6% decline in March.

So maybe some relief, maybe just noise. But yeah. Very cool. Okay. We're going to end the podcast with kind of go around the horn. You know, because we had a lot of data came out. We didn't even talk about. You mentioned GDP that came in on the soft side.

for a half a point. We got personal spending data, which I don't know if you guys looked, but I thought that was pretty punk, right? The real spending is growing very slowly over the last six months, three, six months. It's positive, but not that much positive. So it feels like this is all before the effects

of the Iran war, so the effect on purchasing power. So I don't know. That gives me some reason for concern. And saving rates are very low. They're at 4%, which is about as low as they've been. they, you know, obviously could go lower, but that would be very unusual, and that goes to wealth effects. And so maybe they're starting to reverse with the stock market. The stock market really hasn't gone anywhere either for the last six months or so.

So everything seems to be kind of increasingly treading water, fragile is the word I use. But, you know, having said that as a purpose, okay, I didn't color your probabilities. What is the probability of recession over the next 12 months? Remember where we started. It feels like the consensus prediction markets appropriately corrected, Wall Street forecasts, our forecast, put them somewhere around 35, 40%. I think that's kind of sort of where they are. So with that as a preface, Matt, what's your probability recession over the next 12 months?

No. 51%? Oh, interesting. I'm kind of a, I'm perpetually. pessimistic. But yeah, I think the energy shock is, if you look at stock markets, we've had big sell-off days and the other days where we bounce back quickly. I think there's a, you know, maybe naive is a strong word, but a belief that there's a resolution that's going to happen and stick and we're going to get back to the status quo of February. I don't think

anybody that seems to know a lot about what's happening in the Middle East says that that's going to happen. I think there's going to be a risk premium on oil prices that even if the straight was, you know, open and flowing like it was on February 26th, you're not going to see the same oil prices. That's a big dent into consumers that aren't getting new jobs to begin with. We're seeing weak personal income growth, weak personal spending. I don't think it's overwhelmingly likely, like my percentage indicates. But I think this is just a supply shock too many as we hit number three here.

That's going to cause some real pain. And with 51%, you still wouldn't change the baseline forecast. If my voice was listened to in arguments about what to happen to begin with, no, I would not. But it's something I consider to be very, very plausible. Got it. Marissa, what's your probability? 40%. 40?

Yeah. 40%. Okay. That came down a little bit over the past week, I think. Yeah. I think it was a little higher. A little higher. Anything influence your...

I mean, I feel that... I feel like that's very high. Yeah. I don't know if you saw the personal income data this morning, incomes fell. Nominal income fell. I don't know. I just, the trajectory of the labor market is not good. The inflation trajectory is not good.

It's hard to see a lot of juice here outside of AI, which is only benefiting the portion of the economy. So, yeah, I'm increasingly pessimistic. I think. Right. And Chris, what about you? 42. 42%. Price is right. Yeah. It's the ultimate question.

Yeah. Right. And anything, any reason why you're not higher or why you're not lower? Lots of, still quite a bit of stimulus in the pipeline here, right? Tax cuts, lower, what, the investment, stimulus. should carry forward in terms of AI. So you have still a number of tailwinds here that are going to push us through and offset some of the headwinds. Got it. I'm at 45, 45%.

40% is our leading indicator model. Our BCI-Bish cycle index is saying a little over 50, so I'll split the difference roughly, say 45. But it feels very uncomfortable. And I'm with Marissa. The data feels very soft. It feels like we're right. on the edge here.

Okay. With that happy thought, anything else before we call it a podcast? Just say the University of Michigan just came out and it's not good. Not good? Not good. Declined a lot.

Felt of 47.6. Ooh, that reflects how we just ended. Yeah. Yeah. Okay. In the summit, guys, if you're interested in seeing all of us,

at the summit in San Diego on March the 6th. Please register to come on down and I think we'll have a very informative day and be good to see you. So with that, we are going to call this a podcast. Take care, dear listener. Talk to you next week.