Moody's Talks - Inside Economics - Stagflation(ish)

Episode Date: June 13, 2025

The specter of stagflation is on the rise.  While the higher tariffs have yet to translate into higher prices, the Inside Economics team and their colleague, inflation-maven Matt Colyar, argue they soon will. And weaker growth isn’t too far behind – the team’s recession probabilities are increasing again. Mass immigrant deportations, and Israel’s bombing of Iran and the resulting spike in oil prices, also point to higher inflation and weaker growth. Just how serious a threat stagflation poses depends on many factors, the least of which is whether the Fed is willing and able to stick to its inflation mandate.Guest: Matt Colyar – Assistant Director, Moody's AnalyticsHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X', BlueSky or LinkedIn @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-hosts. And Chris is back. Hey, Chris. How are you? I'm doing well, Mark. Good to see you. I think you missed a couple podcasts.

No? I did. I did. I think at least one. You were en route to your home in Italy. Yes, I was in the UK, actually. Oh, when you were recording that one. I saw some of our team in London.

And did some touring around there. Saw Garav, saw Don. Dawn. Fantastic. Yeah. Nice to connect with them. And that beautiful city, of course. So is there on vacation with family?

And now they're safely somewhere in Tuscany? Not Tuscany. Abruzzo. Oh, Abruzzo. How do I mess that up every year? A Brutso. I love a Brutzo. I like saying Abruzzo more than Tuscany.

It's nice, too. Yeah. And Abruzzo is kind of, is it a little, tell me, is it north or south of Tuscany? It is south. It is south. If Italy is the leg, this is the calf, if you will. So opposite coast from Rome on the Adriatic sea. Right.

Very nice. That sounds really pleasant. And is it pleasant? You look very relaxed. It's very pleasant. Yeah, it's nice. It's not too hot, not too cold. That's great.

Sun is shining, a little different than the UK. So, you know, it's good. Yeah. And here in the U.S. too, we've got a lot of cold, wet weather. This weekend, this Father Day's weekend, is not going to, it's not looking so nice, right, Matt? Oh, and Marissa, I have to just the other co-host, Marissa. Sorry about that, Marissa. That's okay.

Chris is a star, you know. Chris has been gone for a couple weeks. You know, thank you, Marissa. Get a little spotlight. And Marissa kept it, kept it all together, kept, you know, was key, was the glue, kept it all together. As usual, as usual. As usual. As usual.

And we got Matt Collier. Hey, Matt. Hey, Mark. Hey, everybody. Yeah, we're talking about inflation. and of course, Matt's Mr. Inflation. Good to have you back on Inside Economics. Great to be here.

Yeah. And where are you hailing from? Are you in the Philadelphia area? Similar to Tuscany, King of Prussia. Yeah. Yeah. Oh, I didn't realize you live in King of Prussia. I live in Malvern, but I came to the office because my son's daycare is closed for the day.

And if his door, if I close my office door, like, he has to bend on it while while I was working. I had to come the office. Got, got it, got it. Well, good to have you on board. I've been there. Yes, indeed. I miss those days. Yeah.

Believe it or not, I do. I mean, at least in my mind, I miss those days. I don't know if in reality, I would miss them. It makes me think where things are headed. It's like, you know, when I was a kid, we'd get in a station wagon, and I have four siblings. you know, Carl being one of them. And I'm the oldest and seven years from the oldest to the youngest. And we pile into the station wagon.

No seatbelts, mind you. No seatbelts. And we would drive from Philadelphia. My dad had a good friend in Minnesota, Minneapolis. And it's a two-day drive, you know, pretty hard two-day drive. And, you know, no air conditioning, you know, pretty Spartan kind of living conditions. I don't know what we ate, you know. Twigs and berries along the way.

And I look back on those trips with enormous fondness. I'm telling you guys, I may just leave this podcast right now, get in my car, and just drive. And just drive. I mean, I just had so such great memories of, you know, those trips. Do you have those kind of childhood memories like that? Chris, you must. Yeah, definitely. Definitely.

Did you have the station wagon where they had the seats in the back that face backwards? Yes. Yes. That was the best. That was the best. And we fought over it. Who's going to sit in those seats until the exhaust starts coming into the back? I always wanted to sit back there, but then it would make me car sick driving backwards.

Yeah. Oh, yeah. Those were the days, man. Those were the days. We'd stop at these run-down motels. It's like in the middle of nowhere. I was just, and I can't, I can't tell you how much I, how much I think about that. And I wish I were back in that car, you know, somehow.

Just pretty amazing times. Anyway, enough of reminiscing. Here's the here and now. I don't think I want to, I'm going to remember any of this with any fondness. No. Maybe we want to continue reminiscing. It's a complete mess out there. Oh, my goodness.

And I want to talk about stackflation. You know, this is a word we're hearing more of for good reason. And a lot of questions about what stagflation is and, you know, how you get into a stackflationary environment and so forth and so on. And, of course, this all revolves around the tariffs, immigration policy. And now, of course, the most recent news is that Israel has been bombing Iranian nuclear facilities and other military installations. And, of course, oil prices are up a lot on that news.

So I thought, you know, maybe we can just, Chris, give us a kind of primer on stagflation. Talk a little bit about that. And then we can talk about each of these things that are going on that are adding to the stagflationary, stagflation scenario. And then we can, I guess, ultimately end up, you know, how concerned are we about this? Does that sound like a good game plan? Yeah, absolutely. I think there are a lot of questions.

And also maybe we put it in a little bit of context because inflation has actually come back in. We've got the May CPI, PPI data, consumer price index, producer price index for the month of May. And they look pretty good. So you look at that and you wouldn't think stackflation is an issue. But nonetheless, we'll talk about that as well. So stackflation, Chris, you want to give us a little bit of a storyline there? What is that all about? Yeah, yeah. So at its core, stagflation is a situation where you have stagnant economic growth, high unemployment, and high inflation. So you have the stagnant plus the inflation. So stackflation. It was, I think the term was coined in the 1970s, right? At least that's the period of time we typically think it was really stackflationary, where you did have very substantial unemployment, substantial inflation. And of course,

very, very weak economic growth, even contracting economic growth. So that's the gist of it. It's nothing more than that. Where we get some into controversy is where the lines, what are the specifics, right? If you are, you maybe experience a stagflationary environment where the growth may be weak and inflation is ticking up and unemployment is also ticking up. So yeah, you could say it's stagflationary, but no one would necessarily call that stagflation until it's substantial and pronounced. So that's, I think, where we get into some of the discussions in terms of are we currently in a stagnationary environment? Certainly, I would say not, well, especially not given the latest inflation report, as you mentioned, it's actually coming in.

So I don't see it as an immediate threat, if you will, but given the policy, certainly you can create scenarios and we do create scenarios where things could move in that direction, right? certainly where inflation could pick up because of the tariffs, where unemployment also could rise, unemployment rate rises and the economy weakens and you get into more of that stagflationary environment. What's troublesome about it is the exit. It becomes, there's a very large psychological component in that stagflationary environment makes it very difficult to actually exit from it. It makes it make life very difficult for the Fed. You can all think back to Volker in the early 1980s, we needed extremely high interest rates to break that inflationary cycle

led to a recession and then eventually the economy recovered and we were moving back in a more normal growth environment. That's really the real risk here. It's much worse than a high level of inflation alone. We know how to deal with that or weak growth, right? We have tools to deal with that as well, but that combination is really very difficult to break out of. Yeah, and does anyone know where that term came from? Maybe someone can chat GPT it quickly. I used to know several times, and I've forgotten several times, you know, who or what, where that came from. But it's a very apt description, particularly the 70s and early 80s.

You know, at that time you had double-digit inflation and double-digit unemployment. and that's kind of the used to describe what stackplation is all about. And as you point out, the only way out was a very severe recession. Paul Volcker, the Fed Chair became Fed Chair in the late 70s during that period, jacked up interest rates to extraordinarily levels more than a couple times, I think. And we had some pretty significant downturns that kind of rung out those inflation, the inflation are expectations and brought inflation back in, but it required a pretty difficult, long period of recession to get there. And I think, I don't know if you mentioned it,

Chris, but I think a critical element of a stagflation scenario is inflation expectations, right? I didn't mention it, but definitely. That's, so you want to explain that part about it? Sure. Sure, I can start off by saying 1916. In the 65, Ian McLeod from the UK came up with the term. So that's the historical. Ian McLeod, McLeod. Really interesting. Chancellor of the exact as checker.

Oh, okay. Oh, that's interesting. 1965. Wow. Yeah, gave a speech. So even all the way back in the 60s, I guess in the UK, they might have experienced a bout of stackplation before came to us. Right.

Yes. Yeah. Okay. And they're very clever with their, with their terminology. Yeah. I learned that last week. So the British are. That's interesting. The British are, right? Yeah. Yeah. But inflation expectations definitely are a critical component of the stack inflation environment. This gets back to that psychological component. You have investors, households, businesses. If they expect that inflation is going to continue, or even accelerate, they're going to modify their behaviors in ways that make fighting inflation even more difficult. If I know if I expect that inflation is going to rise in the future, I'm going to change my consumption, change my investment patterns. And it just becomes more difficult. It actually becomes self-reinforcing, right? My expectation of higher inflation actually leads to more inflation because now I maybe I purchase more in the short term expecting prices to go up later on. So that was a novelty in the economic literature, right? Before the 1970s, that was not even consider this concept of inflation expectations wasn't even anywhere in the models. And that's

perhaps why the models actually failed so dramatically because they didn't account for that. Now, of course, we have learned experience. We do follow inflation expectations closely. We're talking about them every week on our podcast here. And it gives the Fed a little bit more of insight into what's going on. And that's really the key metric that they focus on when they are setting monetary policy, right? It's more that expectations element than current inflation itself. Right, right. Yeah, I mean, expectations really broadly, not only with regard to inflation, but, you know, with regard to all aspects of economic behavior, really took hold during that period, you know, the sort of rational expectations kind of theories, you know, became predominant in economic

theory at that point in time. So, Matt, any whiff of kind of stagflation in the inflation numbers we got this week for the month of May? Anything in there that would suggest that there's a stagflation problem dead ahead? The stag part, you could get a little bit more created and say, it's created and say, okay, there is this, you're seeing some weakening in demand. But on the inflation front, no, you're looking at subdued inflation in Maine, both the CPI, consumer price index and producer price index reports. Right. I mean, CPI came in at what, well, one-tenth of one percent during the month, top line, two-tenths on core. That's right. That's right. That's right. So very, very tame. And PPI, producer price index, similarly came in below

expectations. And there's a kind of a bit of hand-wringing going on around why we haven't seen the tariffs, the tariff increases, which, you know, really took hold in April. Why haven't they shown up in the inflation statistics in the May data? Do you have to say to that? Well, the first, core CPI was 0.1 percent. And I mean- Oh, it was 0.1?

Yeah, so that was-0. Oh, it was like 0.14 or something. Yeah, it was rounded down. In general, I think the most persuasive case, and this is hard and there's not a ton of historic history to say what happens when the U.S. erects a bunch of trade barriers overnight. How long does that take to flow through to retailers and consumer prices? But we aren't seeing those price pressures just yet. I think a lot of it has to do with the surge in imports and inventories that we saw at the

beginning of year, even going back to late 2024, when the expectation was that stuff is going to start costing a lot more. So let's get a lot of it as much as we can. If you're selling something that's you're able to do that too, you can't do it with bananas. but you can do it with, you know, big, durable goods. So what businesses are doing is drawing down that inventory and refusing or avoiding passing that through to consumers the best they can. I think that's consistent in a way with our forecast.

We expect tariffs not the worst, in a sense, just looking at the effective tariff rate to be behind us. So it's not as bad as it was, and it'll get a little bit better. I think people look at equity markets. They're saying the same thing. You're almost, your S&Ps back over 6,000. As of yesterday. Yeah, I was probably, yeah, double check.

The expectation is that these policies aren't going to be here. And I think a lot of, you know, whether it's at the wholesale level or the retailers, they're not trying to alienate customers. They think these policies are not going to be here. We can eat these tariffs for a little bit, not pass them through to consumers. Short-term strategy. We'll see how it plays out. But I think that's the best explanation for why,

we haven't seen it through May. Oh, that's interesting. There's that word expectations again. So what I heard was three reasons. So the terrorists got juiced in beginning in April. Here we are looking at data for May. That's not a whole lot of time, but nonetheless. It means a few weeks.

But, okay, we're all saying this inflation storm is coming because the tariffs will ultimately get passed through. And they're not getting, haven't gotten passed through. And I heard three reasons for that. One kind of more marginal reason is demand. You know, demand is, the economy is softening. Demand is softening. You could see that, for example, in air travel.

People aren't traveling as much. You showed that really cool chart with a number of people going through TSA pre-check. It's down. A lot of foreign travelers are not coming for obvious reasons. And airfares are falling. At least that's in the last few months they've been falling. So that's an example of demand. I got that right, Matt?

Something like that. Yeah, there's a few components you can look at and say they react quickly in price to demand. So their fare fare is kind of a good indicator. Second is all the forward, the front, so-called front loading, where, you know, we knew the expectations again. Everyone expected the tariffs were going to come. So importers brought in a lot of stuff beginning in January, but really in February

of March, just a lot of stuff came in pre-tariff before the April tariffs. And that inventory, they brought it in, they put it in an inventory. And that inventory is now being worked down, but that won't reflect the tariffs because that was before the tariffs were put into place. So there's a, that delays when we actually get into the inventories that are actually tariffed. And that'll take, that's going to take a little bit of times. That's the second reason.

Did I get that right? I, exactly. And I think the vehicle market is illustrative. there. You have a 0.3% decline in new vehicle prices in May. There's a 25% tariff on imported cars into the US. There's no way that those two things can be consistent over a longer period of time. So it really is a matter of timing right now.

And it's a lot of the imports we saw at the beginning of the year. They're being sold. As inventory lots become more and more composed of tariffed cars, that's going to pass through to consumers, just there isn't that magic space on balance sheets to absorb that kind of cost for car manufacturers. And then the third reason you gave, which is kind of a novel, at least for me, kind of a novel reason, kind of interesting. Going back to expectations, you're saying there's a widespread expectation among businesses, and you can see it in the stock and investors. You can see it in stock prices coming back to where they were before the tariffs really got going.

And that is that people think those tariffs are going to come back down. that, you know, right now it's 40% on China. I think we're calculating the effective tariff rate across all products and countries at 15%. It was 2% before this whole thing began. But if you think that 15% is going to go down to 10 or 5 or back to 2 at some reasonable amount of time, you're going to be less likely to pass through the higher tariffs that you're experiencing at this particular point in time because you don't want to lose market

share. You don't want to make your customers. angry, you're going to eat it, meaning you're going to, you're going to shoulder the burden of that tariff in the form of a lower profit margin. And that's what you're, that's a third reason that you're giving. Yeah. And yes. And in that context, April was just a buying opportunity. Again, I don't share that mentality, I put the expectation that, you know, earnings really won't be hit in any kind of substantive way for a long period of time, means that markets are going to go back to where they were at the beginning of year. That's my, what I've got to be the most

persuasive case for why equities in the U.S. have come calling back despite really no good, positive news that, okay, we're going to walk this back entirely. It's more just what I think to be a growing expectation that it will. Right. I'd not heard that explain. Marissa, how did those three reasons resonate for you? So, Matt, just to clarify on that third reason, so you're just, you're basing that on the equity market. Just to explain why the equity market is doing what it's doing, Yeah, I don't think that... Well, it also explains why prices haven't risen. Yeah, exactly.

And it's, I don't think, totally different than our forecast. I mean, it is. It's more optimistic than our forecast, but we expect a walk in back. I think the difference is, I think that even if tariffs disappeared tomorrow, there's already paying in tow and then there will be a pass-to-effect. I mean, it's just rippling through supply chains now, and you will see it to earnings. But that's, I don't think that's being totally accounted for, but that's financial advice. and nobody asked for it.

So. Well, and just to be clear, we, we, we, we, we have terrorists peaking at their current 15%. But we don't really have them coming in for a while, not until next year, right? So that, that's a pretty lengthy period of time. So do you buy that argument, Marissa, or do you have anything to add to, to? Well, I mean, I just think it's so new. And I think there was such a buildup and inventory that we're just not seeing it yet, but I think it's coming. I think within the next few months, we are going to start seeing it in the price data

because you're going to blow through the inventory that was, you know, not the non-tariffed inventory, if you will, for big durable goods. I mean, we saw that surge in auto sales, right, at the beginning of the year. So I think it's coming. I think that there are some large companies that have the margin to absorb tariffs for a little bit. But if it continues throughout this year, if we don't see some major turnaround, which we're not expecting a total reversal, then it's only going to be a few months before they can eat it. I'll say last week I was talking to a client and he was saying, at a bank and he was talking to a business who was saying that the Chinese importer, a essentially reimbursed for the tariff.

So there was a, you know, a U.S., I'm sorry, Chinese exporter. There was a U.S. importer who was bringing Chinese goods into the country, right? He has to pay a tariff on that. And that the Chinese producer essentially to get this guy to buy, keep buying from him, reimbursed him for the price of the tariff, which I thought was interesting. I wonder how prevalent or widespread or how. Right. I mean, but there's going to be some of that, I think, going on, right?

At least temporarily. Temporarily until. If you believe this is going to go away, you know. Yeah. If you think you can manage that for a couple months and then this all reverses, you'll try to do that before passing it on to consumers. So I would expect it would take a few months before it would show up in the inflation data. It's not surprising to me that we're not seeing it yet.

What about you, Chris? Yeah, I'd agree with that. I think the initial conditions as well matter here, too. You had businesses and higher income households that are pretty in good shape coming into this. So they had some resilience built in. So they may have some ability to eat the margin for a while here, waiting to see how things play out rather than having to pass it through immediately. And they'll get a bit of a buy from their investors because their balance sheets look, look, pretty good or they've been profitable over the last couple of years. I think that's a different

situation than perhaps in previous episodes where maybe coming into an episode like this, businesses may not have been as strong. So I think that theory holds water here. But again, like everyone else, I think it's coming. Presuming there is no deal or the tariffs remain high, right? This can only go on for so long. That exporter can only eat the tariff for so long before, it just becomes not feasible or profitable for them to do so. Right, right. I mean, that's interesting, an interesting point. I guess the other, the point, sorry, the point being that coming into this profit margins were very wide.

You know, they had increased very significantly during the pandemic. Businesses were able to push up prices for their goods and services well beyond the increase in their costs. So margins coming into this were extraordinary. And so they're just taking some of that back here, at least temporarily. Yeah, that's an interesting point. What about also just fear, corporate fear? I mean, you know, there's a bright, shiny light on everybody, especially large retailers, like a Walmart, you know, and everyone knows what I'm talking about. You know, when I say that, that's got it.

I don't know that that forestall. If terrorists are up and stay up, I don't think that forced. stalls of higher prices, but it may take a while for that to show up because you don't want to be, you don't want to be the first to actually raise prices in a meaningful way. What do you know that argument, Chris? I think that's, there's a lot of credence to that as well. Or you're going to do it more gradually, perhaps, or, you know, you're not going to, I think some of the issue was that there were announcement made on earnings calls, right, where company

set out, given the situation it's likely that our price is going to have to go up. That's kind of a shining beacon, right? So I think that'll be more, maybe more subtle in the future here. Right, right. Okay. Yeah, that makes a lot of sense to me. You know, our rule of thumb has been for every percentage point increase in the effective tariff rate, and the effective tariff rate across all products and countries is simply

divide up all the tariff revenue divide by the value of imports that are subject to tariff. For every percentage point that that rises, it adds 10 basis points to, inflation as measured by the growth in the consumer expenditure deflator, the PCE deflure that the Fed uses for setting policy, that's the 2% target. So if you do the arithmetic, our estimate is we're at 15. And of course, that could go up or down all around. But my sense is that that's kind of where it's going to settle here. You'll see some of the reciprocal, so-called reciprocal tariffs come up, but you'll, we'll see some sectoral tariffs on perhaps chips or pharmaceuticals. So the net of all that is I'm we're expecting to be about 15%. That's up. I'm doing, I'm going to round for sake

of math, the arithmetic, two percent before all this started. That's a 13 percentage point increase multiply by 10 basis points. That's 1.3%. So the inflation rate goes from, correct me if I'm wrong, but I think the core PCE deflators at two and a half now year over year. That would suggest about a year from now it's going to be three and a half to four percent. That's kind of sort of what we're thinking. That's in our forecast, you know, basically, you know, and that's just the tariff effects. That doesn't include, you know, anything related to immigration policy or this most recent surge in oil prices that has been caused by there's really a bombing of Iranian nuclear facilities. Does that, does that, is, does that, are we still sticking to that? Everyone feels

pretty comfortable with that? Anyone not comfortable with that kind of forecast? No. That doesn't account or, well, that's just sort of a static. Is that a static rule of thumb? In other words, if demand weakens, right? If we go near a recession, then that puts downward pressure on prices. So some of that would be offset, right? Yeah, if we go into recession. That is a dynamic element to that, meaning we accounted for that in our calculations. Okay, that's coming from the model. Yeah, from the model. But you make a good point. We're not, we don't have a, the other rule of thumb is every percentage point increase in the tariff, effective tariff rate reduces GDP by 7, 8 basis points in the subsequent year.

So you do the arithmetic. It's going to lower GDP growth by a point. So we go from two to one. I'm making this up, but you're roughly speaking. That's weaker demand, which will weigh on prices and we account for that. But it's obviously not a recession, which would be a different bond. Okay. So, but, okay.

All right. Okay. Matt, do you think we're on sound ground in our assumptions around the tariffs? I mean, that's an impossible question to answer, but do you feel pretty comfortable with the 15% or is that, do you have any sense of that? Just looking for validation, Matt. Yeah, I think the longer, I think a process is to just ramble on about something. 10% longer run settling, at least for the next couple of years. That's how I think about it. I think that's very reasonable. Say that again? What was that?

10% being kind of the new effect of tariff rate. We're talking like 2026. Yeah, well, it's 15. It goes down to 10 and kind of hangs at 10. Yeah. I think that's very reasonable. I think the UK deal is informative that even our closest allies get 10%. That seems like a full work on U.S. trade moving forward.

Okay. Okay. So, you know, those rules of thumb I just gave you to the listener, that's pushing the economy towards stagflation, right? I mean, that means the higher tariff means higher inflation and weaker growth. Now, it's not, I wouldn't characterize it as stagflation, right? But it's stagflation-esque, or maybe someone can come up with a better way of describing it. We're moving in that direction, you know, but it doesn't feel like the stagflation, certainly not, nowhere, anything close to what we were experiencing in the 70s days, but moving in that direction. But having said that,

there's immigration policy, right? You know, what's going on on the immigration front? And Merced, you want to describe kind of, you know, what we're thinking there and how you're thinking about that, particularly in the context of stackplation? Yeah. So we know that in the labor market over the past few years, much of the labor supply has come from immigration, right? We've seen this, we've managed to see this very strong job growth month after month, with a relatively low unemployment rate and kind of wage growth that was okay. I mean, nothing that was concerning on the wage front. And all of that, if we dig into the data from BLS and we look at population data,

data from the Census Bureau, we know that much of that was fueled by international immigration. And a lot of it was from undocumented people coming over the southern border. We now know the southern border is essentially closed at this point, right? And we know that international immigration has fallen off quite a bit. We're expecting levels of net international immigration to be lower over the next four years than they were even under President Trump's first term, which was very low in kind of the historical context of things. So you take all of that labor supply out of the market. And I'm just talking about people coming over the board.

now we're seeing deportation step up. We know that there's going to be a lot more focus on that, although the numbers on deportation are still fairly low, actually, in the grand historical scheme of things. But obviously, there's a plan to step that up. And then there's a lot of people self-deporting or people that plan to come and just won't come, right, because they see what's happening. So when you're taking out a huge chunk of labor supply, then that's going to put upward pressure on wages, right? So you're not going to have the supply of people to do a lot of the jobs that a lot of these immigrants did. Companies are going to find themselves in a position where in order to attract labor,

they're going to have to raise wages for a lot of these jobs. And we're talking about industries like leisure hospitality, construction and agriculture, the three, and health care too, are the three that I would call out specifically where you have a very, very high share. of immigrant labor. I mean, we've seen, you know, we've seen estimates like in the construction industry in California, Texas of maybe up to 40% of the workforce being immigrant labor, and a lot of that probably undocumented as well. So you're talking about taking a chunk of labor supply out. That is going to put upward pressure on wages in these industries, industries in which I'll

point out, some of which already had an under supply of labor. So even, with this immigrant labor, if you think about, you know, a industry like construction where you already had a lot of wage pressure because a lot of people in the past decade who were working in this industry left, never came back or went into other industries. And on top of that, you had other price pressures in these industries, just if you think of raw materials and construction, right, putting upward pressure on the cost of building a home and that sort of thing.

So you're talking about another, you know, upward sort of inflationary pressure coming from immigration policy here. And that's part of the stagflation story, too, that Chris was mentioning is that as prices are moving higher in the overall economy, people will be asking for a raise to keep up with the prices that they're facing, right? And so you have that going on because of tariff policy, and then you have this upward wage pressure because of the labor supply issue. And, you know, for example, we talked about this last week on the podcast. When we got the Friday, the jobs report for the month of May, we saw this enormous decline in the labor force. I mean, a bigger decline than we've seen, you have to go back to a recession to see a decline that big. Now, that's one month. I'm not saying that we're going to see that every single month.

But certainly we've seen labor force growth drop off pretty rapidly just since the start of the year. Yeah, I did an X and a blue sky. You saw that? I mean, I was pretty surprised. I mean, the Bureau of Labor Statistics puts out labor force employment statistics on native-born and foreign born. And, you know, you've got to be careful because of population controls and everything else. And I did my best to control for it. And, of course, looked at growth year over year to get around seasonality.

as best I could. And it was, I thought it was eye-popping. If you go back a little over a year ago, the foreign-born labor force was growing four to five percent. And it had been for several years. That goes back to that surge that came across the Southern Board. Then, of course, this time last year, Biden passed that executive order around asylum seekers. That really stopped a lot of the flow. And then President Trump's come in and completely shut it off. In labor force growth for foreign-born is actually negative. I took a three-month moving average of the data, too, just to smooth it out a little bit. And it's declining. It's declining. You know, you've seen a little bit of a pickup in native-born, but the net of all that is labor force growth is very weak. And in recent months, has come to a

virtual standstill. You've talked about last month. Yeah. That may overstate the case, but there's definitely a case. And so it's not, you kind of focused on the price, the cost and price effects, the inflationary effects, but that's growth, right? Because if you don't have labor supply, your growth rates are going to be a lot slower. I mean, the break-even employment gain, that's the gain consistent with stable unemployment. You know, if you go back a year or two ago, it's probably close to $200,000 per month. Now it feels like at best it's $100,000 in the way this is all going. It's going to be well below $100K, you know, six, 12 months from now. So that means the economy just can't grow. Therefore,

for stackflation, right? I mean, again, not in the classic sense, but that's moving in that direction, higher inflation, higher costs, and weaker economic growth. Yeah, if the potential growth of the economy is the growth rate in the labor force plus the growth rate in productivity, and you have much weaker labor force growth than you're looking at just a diminished overall economy unless you can make up for it with, you know, AI. Yeah, right. Well, the other thing, and I'm not sure if I'm conflating things, this goes back to the price effects, the higher costs related to the weaker immigration. It's not only about the wage costs, the labor cost.

It's also reducing supply of whatever is being produced, and it's going to have price effects. I mean, the most obvious is in construction and housing, right? If, you know, 50, 50 percent of your workforce is gone or, you know, even 20 or 30 percent of your workforce is gone, then you can't build homes. You can't buy, you can't build multifamily units, rental units. And that means higher rents. That means higher prices. That means higher inflation, right?

So it's more than just the labor costs. I literally can't build. I literally can't build the units that I need. And particularly in the South and the West where that's where the demand is. I mean, you know, that's where, you know, you need homes. So there is, though, one argument that, you know, the immigration deportations reduces demand, right? Going back to, you know, something that could constrain inflation. So it's not only about the costs, which we've been focused on, but, you know, you have fewer people here consuming things and living in homes.

There are fewer households, all else being equal, that would weigh on inflation. And in fact, I think if you look at the academic literature on the effects of immigration on inflation, it's kind of a wash. You know, it's not like it's screamingly adds to inflation. I think part of that may simply be your horizon, you know, what horizon you're looking at. I think the initial effects are inflationary. But any commentary on that, anything anyone want to add about that? Chris, do you have anything to add about that? Just to ask.

Yeah, I always have something to add. I knew you did. Certainly, there's something to that, right? The demand is there. The immigrants do demand and consume things, but the distribution of demand is quite different, right? Right. Immigrants tend to be lower income. They're working in lower income jobs. The amount of consumption they have is, you know, a fraction of what, say, higher income or even median income, native-born people consume. So the relative impact, I would suggest, is stronger in the supply side than on the demand side in terms of inflationary effects. Got it. Got it. Hey, Matt, one thing we might want to do, and I hate giving you an assignment on air, but we might want to take a look at this, a scatter plot of inflation by city on one axis in kind of immigration where people are settling in.

We can see where the immigrants are going on the X, on the Y axis and see if there's some kind of relationship there. I mean, I think it might be too early to pick that up, but it might be interesting to take a look at. And of course, it might all get screwed up because BLS can't measure inflation anymore because of the imputation. They're having problems with getting accurate reads on inflation below the top line. So, but maybe you can take a look at that. It would be interesting to say. Okay.

Okay. So we got trade tariffs. That's a negative, so-called negative supply shock. It's stackflation-esque. It raises inflation. It lowers growth. We've got immigration policy. policy, very restrictive immigration policy, lots of deportations, it looks like in train.

That feels stagflation-esque. That means higher cost, higher inflation, and it means weaker economic growth. And now we throw into the mix, you know, what's happening in the Middle East and this bombing in Iran, Israeli bombing of Iranian nuclear facilities. That feels like that could be a real problem, right, right, Matt? How are you, what's the fallout there so far? I think, as Chris was saying earlier, yes, businesses have come into this year with solid margins and the ability to absorb some of these higher tariff costs that we're seeing. And maybe that's not, that's why it's not passing through to consumers. But that means they can't take on another heightened cost.

And energy prices like we see today are of 8% if that's sustained or continues to rise. That makes it that much harder to kind of eat the tariff increases and now diesel fuel. or any other energy product you're using costs more. It'll just accelerate that timeline of moving to pass through these costs or to let people go, much more vulnerable to this type of shot. Yeah, it feels like this could be a deal because I think, and we should have Crystal FACIS on, but I believe Iran exports two to three million barrels of oil a day, I believe.

In just for context, the world consumes I'm rounding 100 million barrels. today. So that's 2-3% that feels like that pretty at significant risk here, at least for a while. Now, you know, maybe the Saudis can fill the void. They've got some excess capacity. But nonetheless, two to three million barrels is a lot of oil. And we could be in store for higher prices for, you know, then otherwise would have been the case for quite some time. I think everyone was counting on low oil prices, you know, but this may make that much more difficult. And, you know, the, the there's a high oil prices are pretty pernicious in in that again they raise prices and costs you mentioned diesel which goes into food and you know everything else and it lowers growth because

it cuts into purchasing power particularly for lower middle income households who devote a much higher share of their budget to you know filling their gasoline tank and in heating their home uh the other thing that it does going back to expectations yeah right chris you you want to yeah i know you go ahead, complete the sentence. Oh, I didn't want to take the... No, go ahead. Go ahead. Go ahead. I was just speaking too much. You fill in the blank.

All good. In terms of expectations, particularly for households, right, we've mentioned in the past, that the oil price is kind of front and center, right? It's a price that everyone kind of sees on a regular basis. If you're driving, certainly, you're filling your tank up regularly. You're passing signs with the price of gallon of gas. So it's a very notable price. So if you see that price starting to tick up, right,

you're passing Wawa every day and seeing your gas prices rising, that certainly feeds in the inflation expectations. And that, again, can have these negative downstream effects. So it's not only the direct impact. You mentioned the budget. You have to fill your car with gas regularly. Gas prices also affect food prices dramatically. So not only will you see it at the pump,

but you'll also start to see it in the supermarket as well because there's a very direct correlation between diesel prices and food prices as well. So now this is definitely something to keep an eye on if oil prices were to remain this high or continue to accelerate. Yeah, the other weird thing on expectations is bond market expectations are also tied to oil prices.

You know, it's weird. You would think that the bond investor would be sophisticated enough to look like the Fed to look through because prices go up, they go down, they go all around, But that doesn't look like what happens. When oil prices are up, you see bond market inflation expectations go up and conversely. So it's not only about household expectations goes to interest rates as well. Yeah, you're right.

And the other pernicious thing about all these dynamics, you know, tariffs, deportation, oil prices, is the position that puts the Fed in, right? I mean, what's the Fed do with this, right? I mean, how do they handle it? Mercy, you want to walk through the kind of the thinking there? Yeah, I mean, actually, Jay Powell gave a speech a couple months ago where he was asked this question specifically and acknowledged that all of this policy is stagflationary and was asked how they were going to handle it.

And, you know, he basically said that back then a month ago, they thought that the labor market and inflation risks were kind of balanced, that they were going by the data. that they would react to kind of whichever started getting away from them first, right? So if they started seeing the labor market really start tanking rapidly and inflation was still kind of okay, then that would probably call for lower rates. If the opposite was happening, the labor market was still hanging in there and they saw inflation rising, you know, then they're, I don't know if they're going to raise rates, but they're certainly not going to be in any rush to lower them, right?

I don't know. Maybe they will raise rates. if the labor market can hang in there and we really do start seeing inflation rapidly getting out of control. I think they're very sensitive to inflation. I think they're probably leaning to be more sensitive to inflation than they are to the labor market data. They really don't want, they've been through it the last couple of years and they don't want, you know, that getting out of hand. And we just talked about all of these things. And while all of them are a negative for growth and a positive for inflation, I feel like all of these things tip more on the

inflation balance, right, particularly the latter one, the geopolitical stuff that has the potential for really spiking costs, both of energy that consumers consume as well as food. So they're not in an envious position at all. And I think the upshot of all of it is they're going to wait and see what the data looks like, but I don't think they're in any rush to lower rates. Yeah. And And by the way, it's what you just expressed about the Fed in their deep hatred of inflation, why economists like me and I think the rest of the group think that an actual stagflation scenario is unlikely because the Fed will kill that before it actually gets going. I mean, if it felt like inflation expectations were rising, getting into wages and you

get into that kind of wage price spiral that's critical to a stack inflation scenario, they'd stab that right in the heart, meaning they'll jack up interest rates and push us into recession to bring that out because they know if they don't do that and we get into an actual stagflation scenario, then the kind of recession we're going to have to suffer through is much more serious, kind of like what we experienced in the 70s and 80s. So it's built into their DNA at the Fed. You know, I just don't see them allowing that to happen. Chris, you have a comment on that?

Well, that's true for the current FOMC. Ah. We've talked about that independence in the future. and certainly there's a risk that you could end up with an FOCMC that sees things differently. It adds to the stackflation scenario. And adds to the uncertainty and stackflationary scenario. You think the stackplation thing is a real thing. Yeah.

Wow. Okay. Okay. I want to play the game, the stats game. Then I want to end by probability of recession. We haven't done that in a few weeks. Now that we have a quorum, I want to get everyone's final perspectives on that. Maybe I should also ask about what you think the inflation rate is going to be a year from now.

But I think I might do that. But before we go to the stats game, anything else on all this? Anything we're missing, the stagflation scenario? No? No. Matt, anything? It's terrible for interest rates and Google recession. And it's a whole different rant that I find is at the core of the stagnationary argument.

What's that? You're going to need more government spending. slows and we do tip in recession and you're going to be at a time when interest rates are higher and it's keep interest rate restrictive policy restrictive to take care of inflation. It just makes the government's borrowing that much more expensive. It's painful in every direction and particularly that well. Yeah, you're saying in addition to all the other bad stuff, the other bad thing that happens in the stagnation scenarios, it makes our dire fiscal situation even more dire.

Much worse, yeah. Yeah, interesting. Yeah, good point. Okay, 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 stat is one that is not so easy. We get it immediately, although that's getting harder and harder to do.

This group's pretty good, particularly, you know, Marissa, she's, you know, she's ruining the game for me. That's not true, Mark. I know. I'm making that up. It's more at this point. And one that sounds so hard and we never get it. If it's apropos of the topic at hand, all the better. Marcia, we begin with you.

What's your stat? My stat is 31%. 31%. Is inflation related? Yes, it is. Ooh. Is it based on a survey, consumer survey? It's based on a survey.

Not a consumer. Is it a government survey? No. Trade group survey. Yes. Okay. Is it NFIB? Yes.

National Federation of Independent Business, the percent of businesses that say they're going to raise cost, their prices the next three months. That's right. See that? Well done. Well done. Deaductive. Man. Like I nailed that baby.

That's very sure I comes. Right. I was like a dog with a bone. That's right. So you asked Matt, if there was any data that came out over the last week that showed any signs of inflation. And he said no, but I would argue that this actually goes in the opposite direction. So these are, this is a survey of small businesses and they're asked how many of them are planned,

planned to raise prices over the, you said three months. I don't, I think, I think it's six. Is it six? I was going to say, yeah. And this rose to 31 from 28. And this is the highest it's been in over a year. It's the highest it's been in about 15, 16 months. So while all these surveys that came out over this past week, and I'm not going to take anybody's other statistic, but kind of show that people are feeling better on the inflation front since all of the tariff heat has kind of waned a bit, this is one that shows businesses are still thinking, that they're going to have to raise prices, regardless of all of this tariff back and forth. So I think it goes to our earlier discussion.

Yeah, I'm definitely going to go take a look at that. That's a good one. And usually the NFIB survey is a bit more Republican-esque, right? Matt? I mean, you've done some work here on that. The swings in November and December on election years are wild. Right.

Yeah. That's interesting. So despite that political prism, it's showing that small businesses are saying, hey, I'm going to raise prices here. And I guess that makes sense because we were talking about profit margins. Small businesses just don't have those margins. They can't delay. If their cost goes up because of a tariff for having to pay their workers more, they've got to pass it through. They have no choice.

And just one other thing I'll note. I mean, this has been high since the pandemic, obviously, right? Because we've had all these supply chain issues and inflation and pass through. go back and you look at the whole series back to 1980, this is really high. Like this 31% is quite high from a historical perspective. It was higher back in the teeth of the pandemic, you know, for obvious reasons. But go back years and years and years, you have to go back like 08 because of housing costs. It was a bit high, but it's higher than it's been historically. Wow. That is interesting. A great situation.

Matt, you want to go next? Yeah, 30%. It feels like a trick. Is it from the CPI? Yes. Year over your growth in something? No. Component of the CPU?

Oh, I know what it is. It's the percent of the components that are imputed. I send you guys too many emails. Oh, yeah. Yeah. That's great. I'm just saying. That's good.

That's good. Yeah, Matt and I are going back and forth on email all the time. And I'm on the email. I knew he was going to, I said to myself the other day, bet this is going to be a statistic. I know. And Mark, like, flirted with the topic about 10 minutes ago. And I hope you don't say it.

Yeah, that's right. I did. Yeah, so it's a half-baked thought comes into my head. I fire off when we're out to you guys. So, um. And by the way, keep them coming. Those are three quarters of a baked, you know, not half-baked. Maybe, maybe even 80% baked, you know, so.

Which is much better than I get from. Chris, Chris is like 30% baked. I'm not sure. You can finish to baking yourself. Sorry. Right, right. Go ahead, Matt. So tell us that's a stat.

Different cell incutation is the share of price components we're referring to 30% of stuff that the BLS looks at to gather prices that you have to have the consumer price index. 30% of them require an assumption that is more or less a guess. So if we don't have specific data on a price in a specific city, they say, okay, let's look at a similar city or a close-by city and see what prices are in May. Typically, it's about 10 to 12 percent of things require that assumption. And in April, that jumped up to 29 percent. And then in May, stay at a little bit higher at 30 percent. So much higher and the expectation is relatively

intuitive. The BLS has had a higher, across the board is a hiring freeze. There's not the, these are physical people that are actually going out to different cities and observing prices and reporting that back. The BLS is they advocate up the CPI. Without as many people doing that, they're forced to make more assumptions. So the sample size and the underlying data of the CPI is a little bit more sparse. And that means with any statistical survey like this, that just means higher volatility, both directions. Guesses could be high. Guesses could be your estimates to be high and low.

But right now we are seeing a kind of material change in what they need to do to put this index together. Again, let me say anything about direction of the last couple meeting, but it's certainly no way. Hey, Matt, and there's a lot to dig in there. You know, we're starting a research stream on this issue of measurement at survey response rates, but now the fact that the government doesn't enough workers, job holders, actually collect the data in a timely way. Do you know of any other private maybe source of price information that we can use that to try to gauge what's going on?

Or anything we should be, maybe there's like a representative product or service or products and services or some subset of the components that we can start looking at to gauge whether it's running on a different. dynamic than the dynamic for those series that are reputed. You see what I'm saying? I do. And I know, you know that that means that you're in making an analog, but it's a diminished quality because how good the governments and how comprehensive government data is. But to do that, to kind of track, nothing jumps them on. I think it's probably a lot of a lot of... I think this is a big deal. This is a big deal. We, you know, we really need to start thinking about

this, you know, more deeply, and thinking about tracking it, trying to understand what it means for the data that we're watching. Because if you can't track CPI, you know, in a time when we're all focused on inflation, that's a problem, you know, a massive problem. So, you know, something we need to think about. Anyway, can I ask a quick follow-up to that? Yeah. Do we know what particular products are being affected by this more than others? They, the BLS has described this change for the past two months in geographic terms because it's a lot easier that way. So I reached out earlier this week and said, if we get anything like, is it just a goods or service story would be really helpful. Right. But these are geographic holes. We don't have a numerator to go to, you know, Harrisburg

or Philadelphia or whatever it is and go collect this data. So in that city, there's these holes. Okay. Oh, interesting. So it's widespread just by geography. Yeah. I mean, there's just more cities that not getting a statistician there. But it would be really nice to know products because we saw goods prices remain subdued. And it was like, well, is it all these holes coming from durable goods at a time focused on tariffaster. That would be certainly relevant. But I see why that's not easily available.

Yeah. All right. Let's do one more for sake of time. Chris, what's your stat? All right. This one's hard. Hard. 19.1%.

Inflation related? Not directly. Labor market related? Nope. Is it something that came out this week? No. It did. It came out from the European Central Bank.

Oh. That's what makes it difficult. ECB. And it's not inflation related. Not directly. Not directly. Is that some mortgage market, housing market? No.

No. Okay. 19.1%. Is it tariff related? No. Again, it's a It refers to central banks. Okay, 19.1%

Not an interest rate. It's a It's not a demographic variable. Is something to do with the financial system? It has something to do with the their balance sheets. It's a share. It's a share.

share. Is there a balance sheet? U.S. treasuries on their balance sheets? No. Oh, that would be a lot. Boy, I think.

Gold? Yes. Gold. Oh, no. You got it. Wow. There you go. Whoa, baby.

Wow. How'd you pull that out? Come on. Did I get all three of them this week? Where's the competition? Where's the competition? It's hard to get it. in there. Once you start going down your Sherlock Holmes line, I know that's true. That's a good point. That's a good point. That's unfair, actually. It's unfair. Oh, that's so, so cool. Really? 19.1% of their assets or gold? Is, yeah, the share of global foreign assets are 90.1% are gold. It's relevant because it now is second place. It used to be euros, but now gold is

right after the dollar. $47. So dollar is still dominant, but it's been losing share and gold is outpacing euros now. So that goes to, yeah,

there's some inflationary. Yeah, there's got to go to price to some degree, right? Yeah, there's also geopolitics and sanctions, right? So, you know, this is also including Russia moving more towards gold

or other countries moving more towards gold. But I found it interesting. We had a discussion not too long ago about, you know, dollar dominance and what could come next and you know euro is not leading the way here that's actually gold is picking up some steam

here so who knows oh i wonder uh the swiss are not you know they're not on the euro so if the swiss because the swiss were shipping a lot of gold to new york because of the tariff arbitrage i wonder if they were shipping the swiss were shipping into you know other european capitals as well i well why why would they do that i don't know yeah sure well this is end of uh 2024 So it's, oh, okay. It was reported this week, but the first. That is a cool statistic, and I'm so proud of the guy who figured that out. Good job.

You're on their game still. Pat on right here. Pat here right here. Very good. All right. We're running out of time very quickly. Probability recession in the next 12 months. And if you want to throw in your inflation forecast, year-over-year core PCE, core consumer

expenditure deflator, which is now two. and a half percent what will it be a year from now that would be i'm all for it um matt you want to go first sure i'll go at two the magic two-thirds threshold for recession um i think that we what hold on well wow wow you said two-thirds i could have said 60 percent but that was playing at too too yeah i think so i think there's more pain you think we're going into recession in the next 12 months and it's not a severe recession but yeah i think there's paying i think consumer spending data there's nothing that you give you confidence even if we have you hoarding data that people have been spending more of the past few months, I think that falls off considerably.

And I think the energy shock on top of what businesses are already stomaking with tariff increases. You mentioned that nobody wants to be the first one that announced the price likes. I don't think they want to be the first one to announce mass layoffs either. But once that happens, I think we start to see a cast-stating effect. And I think we start to see a rise in joblessness. They like the guts. Yeah. Yeah.

If I'm wrong, I'll just say some other exogenous shock. Absolutely. Yeah. What about inflation? I don't think inflation rises as I would go a little bit more baseline. I think the demand aspects that I'm talking about are more de-inflation-and-than- disinflation than the tariff and the labor supply constraints, which are real, but I think what we're written by is a due to demand.

Got it. Cool. That was good one. Marissa, what do you say? I'm going to stick with 45% still. 45? Okay. Yeah.

With an up arrow next to it. Really? And why the up arrow? Well, the late, the Israel Iraq thing worries me. I mean, I just think the geopolitical part of all of this could really do damage to the global economy. Yeah. Right. And on inflation, a year from now, maybe it could be 3% year over year, up from two and a half. Okay. But like Matt, I think if we go into recession in the next year, I don't think it's going to be

that high. But even with your 45%, that means a weakened economy, and that's going to take enough out of demand. Yeah. Okay. Interesting. Chris? Similar. I'm at 50%. You went up. I went up. So my arrow is not just an arrow. It's actually up. Wow. Why? Why? Why? Look at the, read the newspaper, man. That's a... Okay. Okay. Okay. When you say that, you mean all terrorist. Yeah, absolutely. Everything. Everything, deportation.

Everything we were talking about. Everything we're talking about, the news today, of course, is really bombing. This is concerning. Interesting. So the group has turned decidedly darker. Darker. Well, you know what?

I'm going model-based. I love this new model, this machine learning, random force classifier model. It says 48%. And if you guys want five significant digits, I will give that to you. Five significant digits. No one wants that. Okay.

Sorry. 48%. I believe in that model. Shandor, this better be right. Shandor is the economists who put this together. Shandor Wichor, isn't that the coolest name you ever heard? Absolutely.

Matt Collier, now that I can pronounce it. You know. Shandor Wichor, it's like, oh, you can't make that name up. It's like fantastic. And he's a cool guy, too. And he's a cool guy, too. And he's smart as hell.

And he built this model, and it's a really cool model, 48%. And so I'm sticking with that. And I hear you on inflation, but I'm going to go to, I'm going to say three and a half. It's going to be up a point. Shave all three tents because of the demand effects. So I'm not at risk. Yeah, I'm so surprised you guys turn so dark on me. I'm the only one that hasn't gone up.

You got the arrow, though. You have the up arrow. I have the up arrow, but I haven't changed my probability. you've actually changed your probability because you were also at 45. I was, well, it wasn't really a change in my view. It was a change in my methodology.

So you're following the model. I'm model. I got to use that. I'm model based, baby. I'm model based. Yeah. We'll use that one of the forecast accuracy. Yeah.

We'll see. We'll see. Matt's 66% would our, argue that we change our baseline to a question. Yeah, he has influence over me, too. I really, yeah, yeah. I think about what you say all the time. Wow.

All right. So you've got to be careful what you say. Now I'm going to go way depressed all weekend. I love to pressure, yeah. All right. We got a long weekend ahead of us, Father's Day and all that, you know. So everyone have a great holiday weekend. And we'll talk to you.

Well, we got a podcast early next week. So we'll talk to you next week. And with that, we're going to call this a podcast. Take care, dear listener.