Moody's Talks - Inside Economics - The Great Rate Debate

Episode Date: September 11, 2026

The Inside Economics team is joined by colleague and CPI guru Matt Colyar to discuss August's CPI inflation report, which came in a touch hotter than expected. Mark ranks his top four inflation culprits, and the team weighs in. Next week's Fed meeting is top of mind, and there's some disagreement about the likelihood of a Fed rate hike.Guest: Matt ColyarTo access Mark and Matt's paper The Fed's Inflation Drama, click here: https://www.economy.com/getfile?q=0944A835-CD53-4092-ADD2-B22EEC4A45D3&app=downloadHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you. To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Marissa Dina Talley, Chris Dreadies. Hi, guys. Good morning. Hi, Mark. Good to see you again. Good to see you as well.

I see, Marissa, you're wearing your 76ers sweater there, or what is that? It's a sweatshirt. Yeah, kind of cool. Pretty flashy. I've gone all in on Philly. I've got my Wawa coffee and my Sixers sweatshirt since I'm here. You know, we got LeBron James here, you know, with the Sixers. It's a big deal.

I know, yeah. I mean, I followed him across the country. That's why I'm here. Really? Are you're LeBron James Groupie? No, no, no, not at all. Not at all. It's a joke.

That was a joke, okay. But you made your way across the country to, because we had our own strategic offsite yesterday, but you had a little bit of a mishap. I guess we shouldn't go down that path. I did, yeah, yeah. So I ended up remote anyway from a hotel room despite flying from California to be at this meeting yesterday. Well, you look no worse for you aware. And I'm glad you can make the podcast.

Right. And we've got Matt Collier. Hey, Matt. How are you? I'm doing well. How's everybody doing well? I don't know. I speak for myself.

I'm doing okay. We haven't heard from Chris. Doing great. Doing great. Really? Yeah. That's a big word. Great.

It's a big word. You know. CPI Day. What could be better? I know. That's why Matt's on because today we got the consumer price index for the month of August. It's Friday, September 11th. And we're going to go through the CPI numbers. We're going to play the stats game. Oh, of course, we're going to see what the market reactions. And of course, we've got to talk about the Federal Reserve what it means for the Fed meeting next week, all this stuff. But we'll play the game. And we've got some listener questions. And Sarah told me to remind everybody, please, send in your questions. We haven't done listener questions in a while, but please send them in. We always appreciate those cues, and we'll get to them as we continue the conversation here. And I was also, Marissa, Sarah, also asked me to remind everyone that you're going to be out in Denver.

When is that for the customer forum banking conference, the Moody's conference? Yeah, in two weeks. That's right. I'm going to give the keynote at the Moody's Customer Forum in Denver. Oh, what does the keynote mean? What does that mean exactly? I think you of all people know what a keynote is. Yeah, the big speech, the big opening speech. Right. Are you going to, got any surprises for the audience?

I don't know. You'll have to come and find out. No, you're a great speaker. I get brave reviews when you speak. Thanks. Yeah. Yeah, it should be fun. That's in Denver.

On what day is that? September 23rd. That's in, uh, Yes, that's right. September 23rd, okay. Okay, very good. Okay, well, anything else before we get down to the brass tax here in the data? Anybody got any news?

No news? Matt got any news? We've got a New York City conference October 22nd. Oh, that's right. That's right. If you're talking conferences. Who's giving the keynote there? I'm just asking.

I don't know. I think they're still looking, right? You guys are ditching me, aren't you? They're still looking. They're still looking. Yeah. It's a Moody's conference, economics conference. Yeah, I don't know.

But, you know, Marissa is not doing the keynotes. I've noticed, like, she's the headliner. I'm like, chop liver now, you know? Oh, I'm pretty sure they probably asked you first before they went to me. I don't think so. I don't know. You're a draw. Your draw. All right. Let's get down the brass tax and the data, the consumer price index for the month of August. Hey, Matt, you want to give us a rundown? Sure. So fresh data came out this morning. We have August CPI, consumer price index. As opposed to stale data. I'm just, you know.

Some data is stale, revised, obsolete. This is fresh. Rotten data. Hot up and reliable. Yeah, this is a couple hours old, which is also a way of me. prefacing if there's any underlying detail I haven't intimately familiarized myself with is because it's two-hour-old data. Got it. It's newborn. Newborn. My wife is pregnant, so that's a very good pun or play on. So, yes, it's not a pun.

0.4% increase. Who's going to step in for you when you're away on paternity league? Have you thought about that at all? Are you going to join? We're trying to time labor around the CPI and the podcast. Oh, okay. As one should. Right.

So we have, yeah. Exactly. BLS determined child birth. Did I tell you, this reminds me, as you can tell, I really don't want to get down to business. That was an interesting report. When my firstborn child was due, I asked my wife, if she could please have the baby on a Friday afternoon. We had just started a company.

And, of course, we were working 24 hours a day, seven days a week. And she obliged. Friday at 5 p.m. I mean, really amazing wife and kid. And then the second one comes along. I said the same thing. And it was like Friday 8 p.m., you know, very good. And then the third one came along, and that was a little tardy, Friday, you know, midnight, you know, something like that. They were all born on a Friday? On Friday. Yeah. Yeah. And I got, I was able to work the weekend, you know? No, only kidding. That sounds so cold-hearted. It was a different age. I was, I was fighting for my financial life at the time.

So anyway. Were you smoking in the delivery room? Cigar. Different age. Cigar. Wasn't that different. No, no, actually not. No cigars.

I don't think I've ever tried a cigar. But anyway, I digress. Okay. And you didn't time it for December 31st for tax. I was more worried about whether I was going to get that, you know, work done over the weekend. Fair enough. Anyway, sorry, Matt.

Go ahead. No, no, no. I'll leave you along. This is good intel. I'm not sure. Go ahead. So we have August CPI now. The increase in the headline consumer price index was 0.4%.

That was in line with consensus expectations a little bit higher than ours. We were at 0.3%. Year over year rate, 3.4. It's the same as it was in July. that's that 0.4% increases up from 0.1%. And if you're following or filling up your car with gas, you have a pretty good sense that what's driving month to month changes in the headline CPI right now is energy prices is gas. And that was certainly the case in August 2.1% increase on the month in the CPI for energy.

Gas prices, CPI for gas up almost 4%. That's in line with expectations. So on the high end of a little bit higher than what we were expecting, but in line with consensus expectations, not a ton of surprise there. Happy to start to shift into core CPI where I think there's a lot more interesting. Food prices, the one thing, you know, because you're energy food, you know, the thought has been that food prices would get elevated by the higher energy prices via diesel.

And diesel prices are going skyward here. I think there's six bucks a gallon, a record high. Of course, that's for the month of September, and we'll talk about what that all means for the next month's report. But it didn't look like much of a pass through there, or there's other things going on. I guess lettuce prices fell again, going back to the cyclosporos problems. But are you surprised we're not seeing more food,

particularly food at home inflation, given the higher diesel costs or not? I think of the, I mean, diesel prices have been elevated for a while. I think the major stories are the past couple weeks and that remains to be seen whether that's going to be driving prices higher. But at 2.2% year over year, the CPI for food at homes or a grocery store measure. That is a little bit lower than I would have expected. I think there's more risks than just what's happening in energy markets given, you know, different agricultural challenges because of Al-Nino and other weather events going on. So there's a lot of upside risk there. But I would say that it's a lot of upside risk there. But I would say that it's, has been on the softer side of expectations. There's different pockets, whether it's lettuce taking a plummeting far, meat prices still elevated. So there's different things happening underneath the hood, but in general, a softer story than anticipated.

Got it, got it. Okay, so core CPI, that's X food and energy. What did that do? So 0.29% increase, so 3% or 0.3% rounded, that lowered still the year-over-year rate from 2.5 to 2.4%. So even a stronger increase, you get a lower year-over-year change just based off of the base effects, the comparison to a year ago. We were a bit below that.

We were at 0.16, so rounded up to 0.2, but a pretty substantial gap and bigger miss than normal, which was, I think, the story for everybody. And just in general, even if the miss was less big for consensus, it was a former core CPI reading than markets anticipated. and we can, you know, what were the reasons for the mess? Vehicle prices, which I thought were stuck at 0% forever. We're a little bit hot, so 0.3% increase in new vehicles,

0.4% in used vehicles. That's one. That's a heavily weighted component. Wireless phone service, so your phone bill that you, everybody's paying each month, jumped almost 6% on the month. It's not seasonally adjusted ever. But so it's, but it's either way, it's the biggest month-to-month increase on that series, in that series is history, which is interesting. And that's, you know, meaningful, even if it's only a percent and a half of the overall CPI. That was enough to add some real basis points and, you know, explains a decent amount of R miss. I would hold on those two things. Do we have any idea why that jumped like that? The BLS did some methodological changes last year. So if you look at the series,

over the past 10 years. And the adjustment was put in place to address a lot of quality changes, which you can imagine is very hard for a technology like which just didn't exist 30 years ago. And now it's unlimited data. And it's all these things are very hard to keep up with. Since they've made that change last August, you've had in absolute terms, your five or six biggest month-to-month changes on record. So something there is happening that's maybe not reflective of wireless providers

passing through big price hikes as much as the BLS's methodology. is introduced a little bit more volatility. So interesting, worth watching, but significant enough to drive some of the increase in August. In the vehicle prices, is that pass through from tariffs? Is it starting to flow through, or is that something else?

It looks like the new vehicle increase. There is some sense that this is a little bit of a catch-up from what we've seen in third-party data that prices, which are still flat year-over-year, if it's a tariff story, I think we'd have to see it sustained a little bit longer, but whatever the effect that tariffs have had on new vehicle prices, some of that is showing up a little bit. But really, it's kind of more of a normal demand story. If you look at new vehicle sales recently, they've been pretty strong. And if you're a dealer, you're feeling comfortable about your

pricing power and there's a little bit of your, or some degree of pricing power there. Use vehicles, we look at wholesale prices. That's gone actually pretty soft. after being modest increases over the past 12 months. So you could tell me or convince me, just based off how wacky the vehicle market has been or how dynamic it's been over the past year and a half, two years, that this is kind of a one-off increase. And really the longer running trend now is for pretty modest

or flat price growth there. All right. Okay, so vehicle prices surprised us. Wireless services surprised us. Any other surprises? Hotels were up big after a big drop the month before. That kind of muddies the water with what's been a pretty good shelter story. So 0.17 rent, the CPI for rent and then 0.19% increase on the month for OER. So the owner's equivalent rent to very big, especially OER. Measures within the CPI mild. So under 0.2%. But then you get a 2.4% jump in lodging away from home, which is the measure of hotel prices. And that's, you know, enough to put shelter up to 0.3%. That could go the other way in a given

month, and that's enough to go from perhaps rounding up to point three to rounding down to 0.2. So I would call that out as something it's very hard to predict in real time and it's volatile, but it also explains some of our forecast miss. Right. And I guess

this you didn't miss, but just to call out is AI looks like it's having an impact too, right? It sure does. And it's not, It's, if you look at software over the past year or two, that's, you know, 25% higher the CPI for, you know, computer software. And that's just, you know, demand for the infrastructure that's enabling the AI build out. But it's shifted more recent, in recent months to hardware. And if you look at, you know, computers's peripheral equipment, that's a memory story largely, which is these chips are in such demand. Even if they're not the high-end chips, demand is all being absorbed upward and prices are rising for personal computers and, you know, not just for data centers. And there, what we got in both July and August, we're almost 0.4% increases on the month. And I think that's significant. And that's, again, not a huge component of the CPI.

But it's downstream of the AI story, and it's pushing pressure, pushing core CPI and CPI higher. Right. So any good news? Anything that you would call out that says inflation is moderating or less than you anticipated? I think if you really drill down on services, which is a lot of drilling this month because phone bills are services, but the broader story of shelter, of medical care, I think those things

are tame enough to feel good about. We'll decide and debate whether that means the Fed can not raise rates now or if this is enough to push them into action. But I think there's a story there that we didn't know six months ago, which was, is this war going to spill over and push prices up for a whole bunch of other things outside of energy markets. And I think that story is not unambiguous, but the most prevailing story there is that that has not happened. And I think that's largely a good story. And so you said shelter, owner's equivalent rent, rent of shelter, that continues to moderate relatively low. You said medical care services, that seems to be okay. And those are the two, those are the two largest components of this, broadly speaking of the CPI, right?

I mean, if you add them together, it must be, what, well over 50% of the index, those two things together. Of course, CPI, yeah. Yeah. Yeah, okay. And you're also saying, I guess the good news is that the, obviously, energy prices are all over the report, but it doesn't feel like it's bleeding through to other prices, at least not so far. airline fares it's showing up that's pretty predictable that's pretty that's pretty that's pretty direct right yeah uh it's it's but the but the food the durable goods story it's either

marginal or or really not visible right right okay um you know when you look at the the 2.4% in a top line inflation and 2.4% core and we look at core because the thinking is a that's a better forecast of where inflation is going. That's kind of underlying. And we'll come back to that in the context of the Fed, whether that is a good way of thinking about it or not. But when you look at 2.4% on core, that doesn't feel too bad, right?

I mean, that's pretty close to the Fed's target on a CPI for on the CPI basis, correct? Yeah, that's if you look over. Yeah. Long period of time, that's not your bit of arms length of where the PCE, the Fed's target would be at two. percent. Right, right. Okay. We also got a PPI. Oh, anything else on the CPI that we want to call out before we move on to the PPI and the consumer expenditure flater? No, I think that covers it. Yeah. Guys, anything else on the CPI that you noticed? Did you take a look? Chris, Marissa, anything that you noticed that you want to call out? No. Motor vehicle insurance came in a little bit. It has. And that year over year rate at five percent, lower five percent down is a great story. after the really painful run-up in previous years,

but another almost 1% decline on the month. So it's been a pretty predictable and steady reduction in motor vehicle insurance prices. And that's just a lag effect of the slowing in vehicle prices up until this month. You know, in the last year or two, vehicle price growth has moderated and been relatively weak, and that now is with a lag flowing through to insurance premiums

and that's what we're observing, right? Do I have that right? Exactly. So we had the run up in prices in 2022. Then they went flat, but insurance kept going up and that was the focus. And now we're kind of on the other side of that. Okay. And so yesterday, I'm sorry, Chris, go ahead.

I was going to just close the parenthesis. But I saw that repair and servicing costs actually rose. Oh, right. You know, that's a grain of salt. Yeah, that's a good point. Yeah, a little bit different story of there. 2.5, 2.6% year every year and repair prices. I'm not confident predicting a trend or understanding.

Okay. Marissa, anything on the CPI report? No. Okay. No. I think we covered it. So yesterday we got, I believe it was yesterday, the producer price index, PPI, that was pretty consistent with the expectations, right? Did anything that stood out there for you?

No, not a ton. Yes, it was consistent with expectations. 0.4% increase. That's where we were. markets were. Again, you could guess energy was the big driver there jumping 4.2% on the month. Gasoline prices rise after July's dip. Underneath the hood, there's some technical stuff that's interesting based off of methodological changes. So the portfolio management, PPI component that normally would feed into the PCE was soft in the month. It won't when we get the PCE in a few weeks.

But outside of that, I think the broad story that we're seeing with sort of services prices with goods prices, the inflationary pressures there are fairly consistent with what we just talked about in the CPI. Yeah, PC is the consumer expenditure deflator, which is the measure of inflation the Fed uses for setting its 2% inflation target. And that's coming. That is based on the CPI report we got today and the PPI report we got yesterday. So I don't know, have you done the arithmetic yet, Matt? What does all this mean for the consumer expenditure deflator? Well, if I get too bogged down, and methodological details. Just shout me down.

But just give me the top line and then we'll go to the detail. So, 0.3% increase. We're looking at a 0.3% increase in the headline PCE. Okay. So a little bit softer

than the course of CPI, or I'm sorry, in the CPI. And then a 0.22% increase on the month in the core PCE. Oh, really? It's not higher than that. No, it's not. Okay.

Yeah, you expected much. strong growth? Well, we got point three on the core CPI. I was, I was, is that, can I ask, is that, because we're getting some methodological changes, and we'll talk about that in just a second what they are, but does that include the effects of the methodological changes, the point two? Yes, it does. Both of them in attempt to estimate. I mean, there's some stuff on the margins there where we don't know yet exactly how computer software is going to change from the CPI component to a mix of both CPI and PPI, a compositional index is going to be used. That is enough that could change things a little bit.

But yeah, we're looking at the new legal services and we're dropping the portfolio management and looking at average hourly earnings for financial services employees, which is what the BEA has outlined is the new measure of financial services costs for consumers. So the Bureau of Economic Analysis, BEA, is going to, is going to make some changes to the methodology used to construct the PCE for portfolio management for what computer software, computer services? Software is the best way to. Software.

Okay. Software. And the other is legal services. And so with those changes, that will lower the measured rate of inflation. And after accounting for that, you're saying for the month of August, PCE is going to be up a little over 0.2, like I think you said 22 basis points, 0.22. And what would that be on a year-over-year basis then? That would be, and again, this requires some other assumptions about revisions that are going to happen,

but that will put us at 3.1% year-over-year in, which sounds like a drop. But if we didn't make those changes, we'd be the 3.3%, which is where we stay the same. And for headline CPI, I'm sorry, headline PCE, we would be at 3.7. Given these changes, you're probably looking at 3.5, potentially round up to 3.6, because the effect is a little bit lesser in the bigger basket. Okay, so got it. So the core consumer expenditure deflator, PCE deflator, is all said and done 3.1%. And that, of course, that indeed is well above the Federal Reserve's 2% inflation target.

That's a pretty big difference. That's right. Yeah, got it. Okay. Okay, anything else on the inflation numbers that you want to call out, Matt? A lot of moving parts there, a lot to keep track of. Yeah, more interesting than most and some oddities going on at the hood. But, no, I think we've covered the most important parts.

Okay, before we get to the market reaction and what it all means for the Federal Reserve, just more fundamentally, Matt, what's behind the higher inflation? I mean, my kind of way I think about it is rank ordered is at the top of the list is what's going on in Iran, the Iran more, and the higher energy prices. And they're obviously moving in the wrong direction here. I mean, we got gasoline prices back up close to $4.50, I believe. You know, we're not far away from the peak we saw a few months ago for lots of different reasons. And that's number one.

it hasn't, as you say, flowed through to other prices to a significant degree by itself, it's adding significantly to inflation. Second, I'd say at this point would be kind of the AI-related price increases, you know, that we talked about. Third, I think tariffs are probably still playing a bit of a role and maybe even will be more of a role going forward if things don't settle down with Canada. That might become more of an issue. And the fourth, I'd even throw in immigration policy. I do think there's some evidence, and this is more circumstantial, and I don't mean to push it too hard, why it's fourth on the list, is that businesses that have a lot of immigrant workers and are losing those workers to deportation

and just people are scared to come to work because of the ice raids, that they're not raising wages because they know they can't raise wages high enough to attract native-born workers, the so-called reservation wage for those workers is just too high. It's uneconomic. And in fact, they're just raising prices to reduce demand to a point where they can actually meet that demand with the limited number of labor immigrant workers that they have. And that, again, that's a stretch, but I put that number four on the list. Okay. What do you think about that list? Do I, do I have that? Am I missing anything? And is that kind of the way you would rank order things? I was hoping you put tariffs too so I could disagree with you and put AI too, but you did.

I agree with you there. I think that's changed over the past couple months. I think the evidence of what AI, you know, just the CAPEX required and then what that's doing to component prices has grown. And the tariff story is there, but it's to a lesser extent. I would ask about the immigration side of it. That's my own theory. Yeah, I mean, because you look at like food at home, which, you know, is, or I'm sorry, food away from home. So dining out. Those prices are elevated. they're still higher. Outside of that, you know, wage growth in general, you're arguing it's not where it would show up,

but it would show up in consumer prices. Right. Core services. I think it's compelling. I, outside of the food away from home, I don't know that I'm confident holding up anything else where you're seeing that conclusively. Yeah, but in general, I think the AI story is probably the most interesting one,

has become the most interesting one, because it is, you know, Fed policy is designed, When Fed's tightening policy, it's designed to slow down CAPX. That's kind of proof right now that policy is not tight enough to do that. I'm not saying that's the argument that I buy wholesale, but that's really interesting when it comes to what the Fed should do. Yeah. Do you think the Fed can slow down CAPX? I mean, when we say CAPX, you mean AI buildout infrastructure.

I mean, that's running on a dynamic that feels like it's going to be pretty hard to change, you know, with a quarter. a point or half a point change in the funds rate target. There is an interest rate that would slow this down. I mean, there is. There is an interest. It's just a matter of one. Yeah. Okay.

Got it. Okay. Hey, Marissa, you heard my kind of rank ordering of the causes. Am I missing anything on the list? And do I have the rank order correct in your mind? So, yeah. I think you've got to correct. I can't think of anything you're missing.

I will say on the immigration point that if you look at wage growth broken out by industry or occupation from like the ECI, the Employant Cost Index, or the Atlanta Fed's wage tracker, you do see firmer wage growth holding up better in industries that employ a lot of immigrants. So you see higher wages in construction. Now, some of that could be, I don't want to conflate with the AI build out there, too. There's a lot of demand for construction work right now because of the on the non-res side. and construction's been sort of perpetually in a labor shortage for years and years.

I don't think the immigration story is making it better. But that and some of the other industries where we know a lot of immigrants work, wage growth has been firmer. Got it, got it. Chris, what about you? Any other things you'd add to the list? And do I have the list right?

No, you have the right list. And I think Marissa's points, Matt's points, cover all of mine. They cover all your points. Yes. We stole his points is what he said. You stole his point. Yeah.

Yeah. And he's not upset about it. I don't know. I'm endorsing your points. He seems at peace with it. He seems at peace with it. He's resigned to them. Moving on.

All right. Move on. Okay. Well, you're up. So what's the market reaction to all this? And what do you think it means? Interesting. It's a bit a bit mixed.

On the equity side, saw a bit of a rally this morning. Equities are up about 1%. I think that's a sigh of relief rally. That's how I would interpret that. Could have been worse. And this is better than, or, you know, even being in line with that consensus is, is good. However, at the same time, you see that the odds of a Fed rate hike now next week shot up to close to 90%. Right. So clearly, market is interpreting this as more hawkish fed, the 25 basis points, almost guaranteed, at least as of this morning. And you saw that ripple through some of the treasuries as well, so the two-year treasury rate, which is more sensitive to that Fed decision also up, you know,

several basis points. But the 10-year actually pretty flat, actually came down a basis point or two. So, you know, some interesting dynamics there seems like the consensus might be, oh, inflation, yeah, high, but still expecting perhaps a softer runway. going forward here. So you're looking at what, CME futures for funds the funds rate? And you're saying the probability, according to futures for a rate hike next week of a quarter point is over 90%. So basically- Just under, yeah.

Or just under 90%. And I think yesterday, last I looked yesterday, I think it was 70-75%. So it's up meaningfully. That's right. And it was 60% last week. 60% last week. So markets are fully anticipating a rate increase. Okay.

So I know you've been like to a more significant degree than me or the others saying the Fed would not raise interest rates. Have you changed your mind now? Are you part of the 90%? Are you still holding out the 10%? For next week? Yeah. Still close call. I guess I would argue that they're going to wait until the last minute and see what the other data look like.

I think the oil price is a big part of that decision. What are the data? What are the data would they look at at at this point? Even just the oil price, right? Between now and next week, oil prices settle in, and they came down a bit this morning. You know, if we do dip down below 100, maybe that's enough to tip them in the direction of a pause here. So I think it's that close. That's my point is that it's, you know, certainly the odds went up this morning, but there's still other factors here in place.

that I would argue it's going to be a split decision among the committee. What do you think, Marissa, what would probably, so, Chris, what probability would you put on a rate hike then? If it's not 90, what is it?

50. Yeah, I'm kind of 50-50. 50-50, okay. All right. So what do you say? I was going to say 60% odds they hike. Right, right. I mean, I think there will be some resistance

to hiking for sure. there's going to be a lot of people in the wait and sea camp. Right. What about you, Matt? What do you think? You've been more on the other side of this. Yeah, I think that there's a good case to not, but I think the pressure now is, I would go above 60%. I think the backdrop of, yes, we have three points.

You could look at the existing inflation data we already have, but this is all happening as diesel's over 6%. This is happening as, you know, there's a lot of other financial market weirdness going on. that I think could be helped by a more forceful Fed and that started tightening policy. So I think that's reasonable not to, but I think that's where we're headed. So what probability did you say? Marissa said 60.

I'll go 75. 75, okay. Yeah, this goes to what will they do and what they should do. In my mind, I think they're going to raise rates. I mean, I think that would be. be surprising. So I don't know if I'm at 90%, but I'm pretty darned close. I think they're going to raise rates. I don't think they should, though. I really don't. I mean, this goes to our conversation just a few minutes ago about the energy effects. It doesn't feel like there's a lot of pass-through

there. It feels like it's kind of bottled up in energy. Yeah, we're paying more for gasoline, more for airfares. You know, diesel is contributing to food price inflation, but it doesn't feel like it's more, it's having a broader, you know, kind of effect. There's other reasons for the higher inflation. They all also feel, you know, they're shocks. I mean, they're having some impact, but I don't think they're, you know, kind of being, becoming more, resulting in more entrenched inflation. And inflation expectations still remain low. I mean, there is this argument that the only reason why inflation expectations are lower is because the expectation is the Fed is going to raise rates. So, you know, I think there's something to that, but there's, I think that that's a small

part of the story. I think people, I think there's still a general sense that inflation is going to come back to target. It won't take too much from the Fed to get us there. So I, I would wait, but, you know, that's me. And I think at the end of the day, they're going to, they're going to actually have, they're going to actually raise rates here next week, which means our forecast for the month of September is wrong, by the way. Because remember we're having this debate last weekend? I said to make the choice. I did decide not to include a rate increase. And at this point, I think we're wrong. We'll see next week. I mean, do you think there's other factors that could play a role? You know, because there's a lot of other things going on here besides the economic data.

You know, the midterm elections. Yeah, like the midterm elections, what the president said, what Kevin Warsh has said before, you know, what he said at his confirmation hearing. You know, he pointed to trim mean and said inflation is going back to target uh you know he seemed to change his tune at the jackson hole when he came up with his own diffusion index matt and i actually wrote a piece i don't know if you caught it but we put up on ev on this uh particular point that people might find of some interest evy being the uh economic view and as it's it's free up on the site if you were if you're interested um talking about the these different inflation measures and how they're sending you know very different signals so i i guess i'm asking are there other things that

enter in here to sway the decision so there's not a rate increase. Any views on that, Matt? The other way, I think what's happening with global bond yields would suggest that outside of the inflationary structural stuff we're doing with would say that let's, you know, let's start tightening a little bit. Yeah. Oh, I would say that means tightening. Oh, it means tighten. Yeah. I think there's just, I mean, there's just too much debt issuance and there's, uh, needs to be some kind of sense that it's going to have to cost more. Or at least the world's most important central bank could signal that they're combating that or sensitive to that in a way. I don't think it's the primary driver, but I think that's a factor that could matter. And then on the other side, midterm going back,

which is, you know, going back on the trim mean story that we're going to have to cut rates, the political pressure that Warsh may be under. You know, we'll see. I think that's the big question we need to answer is how much is he going to be tethered to that? And, and, you know, and the promises he's made or the stance he took in the lead-up. But I think after Jackson Hall, I think he's showing a little bit more independence or willing to acknowledge what everybody else is seeing. Yeah, it's an interesting point you make about the bond yields. The way I interpreted what you were saying is so-called financial conditions have tightened.

You know, so the transmission of monetary policy rate decisions by the Fed to the economy works through financial markets, the equity market, the bond market, and bank lending, underwriting standards, that kind of thing. And clearly financial conditions have tightened up here. I mean, the bond yield at 10-year bond yield now is hovering around 5 percent, the fixed mortgage rate, is it over 7 percent? I think it's over 37 percent now. That would suggest a real tightening down of financial conditions. And that was where my mind went when you said, you know, the bond yields would have an impact. I took it as it would make it less likely the Fed would raise. Chris, where would your mind go when he said that?

That's where my mind went, but then listening to Matt, it almost sounds like he's making the case for 50, right? We have limited transmission mechanism because of AI. You have these other factor. You want to send a signal, you know, that Sherrison Town. It almost sounds like you're saying, gosh, you got to, if you really want to make a move here, and crush inflation, you got to go bold. Is that your thesis? As much as I would love to see Warsh have to defend a 50 basis point rate hike at the podium, I think that's probably dreaming. But I like the idea of, you know, not just credibility, I don't think it's just a U.S. dynamic

that's happening now, but the argument that there's just too much debt issuance, and that's what's starting to spook. Investors across the board and across the globe, especially at the long end, I think would be addressed in a way by a Fed that was willing to raise rates and kind of allay a lot of concerns that they aren't willing to do that. You know, I think we're flirting with a recession if that kind of the way they're thinking, right? Because the only thing that's driving the train, the economic train is AI and the AI buildout. And you're getting the AI buildout because the cost of capital is low, which means high equity prices. So if your goal is to break that, then you're going to break the economy.

It feels like to me, I mean, we're only growing 2% GDP. It's not like we're growing 3%. We're not growing above potential. We're growing pretty close to potential. So, you know, you're flirting with really doing some damage, I would think, if you went down that path. Oh, go ahead, Chris. I was going to ask you, Mark, right? So we're wrong, and it should be a 25 basis point hike next.

week. How does that fundamentally change your forecast though? Does that is that still too low to really make a difference from a GDP unemployment perspective or? I think it depends on how a market's interpret what's the next thing that's going to do. You know, can you imagine though if chair Warsh sticks to his guns and doesn't say anything about what this all means about future inflation future rate hikes? I mean, I think that's He very well may not. Yeah, it can create a lot of

volatility and raises the risk. It feels like the, I guess the broader point is it feels like we're going down a path that is rife with risk that the Fed's going to make a mistake here, a pretty big mistake. It very feels like that's what's happening. But to answer your question, Chris, it depends, right? It depends on what they say. Is this, are they, do they signal nothing or do they signal that this is one and done? Do they signal that this is one of a series of rain hikes?

I mean, and, you know, what's their thinking? Or, again, if they say nothing, then goodness gracious, you know, it would be very interesting to see how the markets react at that point. Anyway. You're going to be studying his tie. Yeah, is the side. What color suit is? I don't think he has a briefcase.

Does anyone have a briefcase? Do you guys still have briefcases? Matt, do you have a briefcase? No. You go, what's a briefcase? I was going to make that joke, but it was too obvious. No, I don't have a briefcase. Chris, do you have a briefcase?

Not that I use, but yes, I do. How do you carry your PC around? What do you do? Oh, a backpack. Damn, I got to get a backpack. You have a briefcase, like, with the handle, it's square. Yeah, fantastic. No, no, no, no.

It's like a bag, you know, it's not like a, yeah. But it's not like one of these 1950s, circa, 1950s. That's what I'm envisioning. Yeah. Like the shell. Yeah. Right. Like a madman kind of briefcase to the office.

No, I don't have that. It's like a very nice bag, though. You would know the brand. I can't remember, but you would know it. My mother-in-law got it for me, you know, for some birthday or something. Okay. Let's play the, anything else on any of that? Inflation of the Fed meeting, the market reaction, anything else?

No? Okay. Let's play the stats game. We each put four a stat. The rest of the group tries to figure that out with questions, clues, deductive reasoning. The best stat is one that's not so easy to get it, one that's not so hard we never get in. If it's apropos to the topic at hand, inflation, but doesn't have to be all the better. And we always begin with Marissa. Marissa, I know you've had a lot going on the last couple of days. Are you up for the... Oh, yeah. Okay, okay. What's your stat? Nothing can stop me when it comes to the stats game. My stat is minus 12.2%. An inflation statistic? Yes.

Is it in the CPI report? Mm-hmm. Is it a price change for a certain item? Yep. Yep. Okay. Month to month? No. Year of year.

Year of year. Down 12. Month to month? it was minus 1.7% in August. Is it related to eggs? It is not related to eggs. Why do you say a lot, Matt? Chris.

Melissa has gone to the egg well a couple times. I love eggs. I love eggs. I keep a close watch on what's going on with the chickens. I believe egg prices are down over the year. They are. They're down like 25% over the year. Yeah.

You're not going to the lettuce, are you? No. No, no, no. Is it a food item? No, it's not. Oh, it's not. Is it electronics related to consumer electronics? Oh, it is.

What is that, Matt? What would it be? Consumer, because everything's up in consumer electronics, except for this one thing. There's one thing that's not up. Smart phones? What is that? Yes, it's smartphone prices. What?

Down 12% over the year. I know. It's shocking, right? That's why I picked it. Quality adjusted, right? That's the thing. Boy, that means a lot of quality adjustment, though, doesn't it? Yep, yep.

So, I mean, we keep hearing about how smartphone prices are rising. If you read news headlines, Apple's coming out with a new iPhone that's going to be a flip phone, I guess. And it's going to retail at $2,000. But if you look at the measured prices in the CPI for smartphones, they just, they have been falling, falling, falling for years and years. And they're down 12% year over year. reason for that is because BLS does this hedonic adjustment where they try to adjust for the quality of the product that's coming out. Right. So every time a smartphone gets released, it's got newfangled features. So BLS tries to adjust for this by just comparing like for like features. And if you

quality adjust to smartphone, BLS says it's cheaper than it was last year by 12%. Gosh, that's, that is surprising. Mattia, any comments on that? No, but the fast-moving, I mean, nowhere is to quality adjustments as fast as it would be. Yeah. TVs in the past 20 years and cell phones. So that's surprising, for sure. Yeah. Well, have you seen the new, is a $2,000 iPhone out yet? Is that out?

No. No. Okay. It was just announced this week, Tuesday maybe. Does it solve problems like global climate change or something? I mean, that's right. It's got, you know. It solves the folding problem. Yeah, which you knew that was. You always wanted to fold your phone.

So you'll pay $1,000 premium for that. But that's going back to the future, isn't it? My wife had a flip phone for many, many years. I think it flips this way. Yeah, the screen is larger. Oh, it's like a book. Yeah, flips open like a book. Oh, that's kind of cool.

I pay for that. That's worth 12% now, you know? Yeah. Yeah. All right, got it. Okay. that's a good one. That was very good one, Mercer. Matt, what's your stat?

Let's go with nine. Are you swinging this, Matt? Do I seem like I'm winging it? Yes, you're looking up into the right. Just see, trees, clouds. 9.99. 999. 99, that's right. Is that a percentage?

No. Is it a price? It is a price. $9.99. That's right. Pound of beef. No. That's pretty high for a pound of beef. A large pizza.

It's not diesel. A burrito. It's a burrito. Chicken burrito. Marissa would be the most likely to know this. It is diesel prices. In California.

Yeah. And they're running out of room on the gas stations because they only have, it's kind of like a not Y2K, but like a just they were built to not be in double digits. So this isn't everywhere. It's not the average in California. You're somewhere like 950 or so.

But some prices, some places in California are now selling what would be $10 diesel. And they're running out of room. And that's, of course, a record high at just over $6. Today's, according to AAA, today's diesel price is the all-time record high. That's amazing. $9.99. You're saying they don't have another digit. So that's why they're keeping it $9.99?

Yeah, but they do it to the third decimal. but so that you're looking at 9-999. Oh, I see. So, yeah, but they were not designed. Not everywhere on the standard. What happens if prices keep going up? What are they going to do? I think they switch to leaders is what I've heard.

Really? Leaders. Oh, my God. So now you're going to get like, you know, I don't know. That's true. It's going to be like in Europe. Yeah, I think we switch to them. This finally pushes us into the metric system, I think.

I should know this, but what's the relationship between leaders and gallons? Does anyone know? 3.8. liters to the gallon? Leaders to the gallon? Yeah, okay. That's a good one. But you're saying it's six bucks nationwide for a gallon of...

Just over $6. Yeah. Right. Yeah, pretty amazing. And this goes to... Oil prices are still lower than they were back in the peak in the summer. But diesel prices are at new record highs. Gas prices are pretty close to where they were at the peak.

I don't know about jet fuel or in airfares, But that goes to the so-called cracks spreads in the patrol and refining industry, right? That's right. So reduced refining capacity is pushing prices for stuff that takes oil and is refined into other products. Reduced capacity there. Seems like Chris just lost his number or something. Yes, yes, he did. 63.33.33.33 is the crack spread for diesel.

The 321 crack spread. Not three, two, one, like I said. Anyway. What is that? You don't have to explain that. No, that's, this goes to things like Russia and Ukraine being up on each other and destroying a lot of refining capacity. And we're at, the U.S. is exporting a lot of refined product to the rest of the world, right? And so that's putting up with pressure here on our, on our prices.

Yeah. Okay. Hey, Chris, yeah. Yeah. Oh, I'm sorry, what? I was going to say, so even if the oil price comes down, you get crude oil flowing. Yeah. There might be a longer lag for diesel and gas given the refinery bottle and X.

Yeah. But I've got one. Yeah, okay. All right. Far away. I've always got a backup. 2.46%. 2.46% is that inflation as well?

Inflation number? It is not in the CPI report. It is inflation related. Oh, okay. Is it derived from the CPI report? No. Well, no. I mean, Supercore, I think, is pretty close to that year over year.

Oh, it's not. Maybe it's still higher. No, it's higher. No, it's not. I think it's hard. Is it in the PPI report? Yeah, it is higher. Nope.

Nope. It's related to inflation. You said, it's a percentage. Is it a price increase? I don't know if you said that or not. No, it's not a price increase. Michigan rate inflation expectations? Not Michigan.

Oh, is that the bond market break even? Like 10-year break-even? Five-year. Okay. Five-year break-even. Yep. You want to explain? Between the yield on a five-year treasury bond and a five-year treasury inflation protected,

secured our tips security. 2.46 is up. Yeah. It's climbing up. It's not at astronomical levels, but it's moving upward, right? So that's up a 20-25 basis points, point two. Point two, point two-five percentage points, isn't it? From the end of July, yeah.

Yeah. Yeah, that's, that is up a little bit. Another reason for the Fed to raise rates, I think. So something to watch, yeah. What's the range, do you have a rule of thumb mark for what range represents unanchored inflation? Anything about two and a half percent, I would say, you know, high, you know, I'd say yellow flare should be going off at 2.46, but anything over two and a half, closer to 26, I'd say red flare should be going off at that point. Not if it's a day or two or maybe even a week or two, but, you know, more. sustained.

Yeah. All right. We're at 2.7 in May just for 207 in May. Just for a few days. And that was before the expectation around the Fed shifted. Remember?

Because prior to that, there was the expectation of the foot was going to cut rates this year and then that flipped because of the higher inflation. Okay. Well, let's move on. Let's got to take some listener questions.

And again, folks out there, please, you know, fire away, give us your questions. And I know, again, because of Marissa's mish's mishaps here the last couple of days, Matt's going to lead the way on the listener question. So what's on the top of the list, Matt?

Let's start with a softball. Mark mentioned two podcasts that he listens to with some regularity. One of them was the AI Daily. What was the other one? I don't know if this was... Oh, Dwar Keshe. Dwar Keshe. Do you guys know Dwar Keshe?

No. You'll find him. He's everywhere. He has these very lengthy... podcast, AI, generally AI-related, not always.

He's an interesting fellow, a young guy. And I brought this up, I think last week or the week before, because he had a great podcast on the hugging face hack and was talking with a researcher from, I think it's a mater or it might be meter.

You know, it's an organization that tests LLMs for safety on all the various dimensions of that. And they did a forensic kind of assessment of what happened. And that podcast was a discussion around that. And it was just fascinating, bordering on terrifying, back to fascinating. And so I highly recommend, you know, that.

And he's very, very good. So great podcast. And AI Daily's, do you guys listen to AI Daily? You really ought to. It really is, you know, quite good. He's very good. I think it's Nathaniel Whitmore. I believe I have that right.

We should try to get him on the podcast. I wonder if he would come on. But he, he's very, very good at summarizing, you know, what's going on in the AI world and then has some topics that he addresses, you know, on a regular basis that are, you know, quite informative and insightful. Anyway, that was, there's, this is the two I generally follow. Okay. Do you follow any others? Do you guys follow any AI podcasts, related podcasts? Matt, do you?

A lot of the podcasts I listen to regularly have AI topics as the center of the episode, but not... Do you listen to Inside Economics? I'm just asking. I do. You do? Okay. And so where do we rank in your list of podcasts? We're not number one? Top 15. Top 15th.

Yeah, top 15. If I'm not too busy. Because you're the demographic we're trying to get to. Really? Yeah, I'm making that up. Yeah, I wouldn't target me. Aim higher. I'll break any listener I can get.

It could be, you know, doesn't matter. Yeah, yeah. No, I listen to regularly. I mean, but daily ones, like, I like the 30-minute one that you're on regularly. Prof G. Ed Elson is a great host. So many of his guests are AI, either investors or technology. Yeah.

Yeah. Okay. Okay. Chris has mentioned that he hates. slash despises the New York Fed's consumer credit data. I thought I was going to despise them. I thought so too. Yeah, but Chris is happy to, you know, imitate.

I'd love to hear his critique. I followed other research that uses the data and always appreciate a critical lens. So this person uses it. It doesn't seem to, I think it warrants the degree of skepticism that Chris may or may not have. May or may not have. No, Chris, Chris,

Chris actually does despise the New York Fed, but he will never say that he despises the New York. I can't imagine Chris despises anything. Yeah, no, no, he actually does. He does, but he won't articulate it. You don't despise the New York Fed as an institution. No, no, no, no, no, no. No, no, no.

No, no, no. Let's go on the record. He loves the Fed. He loves the Fed. He loves John Williams. He doesn't like the New York Fed consumer credit report. Because of my love of the Fed, I want them to improve.

to improve and shine. And my fear is that the data that they're releasing is quite misleading for... See how he does that. He says quite misleading as it's supposed to misleading. Just, you know, it's not quite. It's misleading. No? Well, that's hate versus despise, my remark.

Yeah, I think we've mentioned in this. And certainly, I will say to its credit, it's, if you go to the FAQ section of the New York Fed, they lay this out. They're not hiding how they're defining things. I just find it misleading. So they the crux of the issue is that they continue to report on debt that has already been charged off, right? So lender makes a loan, borrower fails to make payments after 90, 120 whatever, some period of time, the lender will charge that debt off, right? So I'm not, this is uncollectable, I'm not going to collect. And they'll sell that debt perhaps to a debt collector who will, attempt to continue to collect, but oftentimes does not, right? They sell that debt for pennies on the

dollar because the chances of actually getting repaid are so low. The New York Fed definition continues to report on that data because it is outstanding. Technically, the borrower is on the hook for it. They, you know, they signed a contract. They said they would be making payments. But the reality is that this is out of the system, right? The lender has charged it off. They're not making any more decisions based on that on that debt it's unlikely that it will ever be repaid the borrower's credit score has already taken a large hit by that time so it's really this zombie debt that's out there that doesn't really tell us about the current state of the of the credit markets right you could have debt that's out there six seven years on that credit report still being reported upon and so you're

getting this lacked effect that may have nothing to do with with what the current conditions are And so my fear is a lot of researchers, analysts, look at that. They don't know this background. They assume that that is being reported on just as a bank would in their 10Ks or 10Q reports. And therefore, they may be getting a misleading view of the current state of consumer credit. That's my pitch. Yeah, yeah, no, it makes sense to me. I'm on board, you know, I think I probably recounted I had a lengthy email exchange with the folks at the New York Fed.

couldn't convince them. I saw that they actually put out a note recently. And I thought, well, maybe they listened to the podcast. Oh, maybe. Kind of reemphasizing this point and why they continue to report the way they do. Well, it's on my top five least appreciated or liked statistic. Hated. Hated.

Well, can I ask, what is the reason that they include that? So from their standpoint, this is a, they're providing a consumer. view of debt, right? So again, the consumer is technically still on the hook for this debt, right? They could still pay it. They could, they will, they may still be getting, uh, annoying phone calls to, uh, asking them to pay. So from that point of view, it's still, uh, out there. Uh, another factor, though, that I, I don't like is there's some arbitrariness to it, right? After seven years of nonpayment, that debt does fall off the roof. port, but just passively. So then it, then it does disappear eventually. So it's, again, I don't know what exactly, it's hard to interpret what this number is actually. Well, I mean, if you look at the delinquency rate, I think pick credit card or auto, or pick another one. The delinquency rate as the Fed measures it now is, I'm making this number up, but it's exactly what it was, it's higher than it was in the GFC, the global financial

prices. So you're saying, are you telling me the credit quality, things, are as bad as in the GFC or worse? The answer is obviously no, but that's what the data is saying. So what's the value of this issue? Because it covers the pandemic, you know? Right, right. Yeah, so it's not, it is, the word is misleading.

I think that's what it is. It's just misleading. But, you know, people don't know that. And the media, you know, do pick it up and run with it. And, you know, I can remember testifying in Congress on the same day that it was, there was an article in the Washington Post about auto delinquency rates based on that data.

And everyone was coming to the exact wrong conclusion about what was going on. And so it was actually having an impact on a congressional hearing, you know, so policy. So that's the problem, you know, when it's misleading. The other problem is that this is not the way that the banks or the lenders actually report, right?

So they use the definition I described. they remove the loans once they've been charged off. So when you do this comparative analysis and a bank says, my delinquency rate is 2% versus what Mark said, you know, 8, 10%, there's this disconnect in terms of what reality is and people get confused. Yeah. All right, let's do one more.

If you have one more, Matt, give us one more question. On numerous podcasts or in numerous podcasts, it has been mentioned at the participation rate in the U.S. has been falling, it is. And one of the likely drivers is an increase in retirements. Essentially, why isn't that showing up in the Joltz quits rate?

If we are seeing an increased amount of separations via quits, which is what would, retirements would be characterized. How come that has, it would not be characterized in quits? Nope, no. Just separations. That's why, yeah, there's this other

separations category. And they're in, there. Now, to be fair, when you look at that other separations category, you don't see much of an increase there either. But it's a much smaller category. And we've talked about some of the problems with the Joltz data, with the sample size and the response rates. But yeah, you don't see it in the quits rate because it's not considered a quit when someone retires. Okay. To this anonymous questioners credit, they didn't assume that quits were automatically I mean, they did, but that was actually my assumption, too.

So I inserted that part. So that's interesting. That's nice of you, Matt, to pass up to that. I mean, humble, hey. Yeah, very humble. Yeah, I appreciate that. I would never do that, but no. To maintain that ability.

Oh, I'm kidding. Only kidding. Well, I mean, the decline, there's been some, I've done a little bit of work here. I've seen some other research on the decline in the participation rate, you know, since the end of last year beginning of this. You know, obviously some of it's just a big chunk of it's just the population controls, right? And I won't go into detail. But that's at least half the decline, I think, is related to that.

Some is just the kind of the general aging of the population, you know, although I don't know how big a deal that is because we're only talking about the last eight months or seven, eight months. But, you know, maybe a tenth or so. And my sense is that only two or three tenths of a percent, very outside, four tenths of a percent is related to kind of cyclical forces, you know, people kind of stepping out because they're, feel like they're not going to be able to find a job. It's not worth looking. And you've got to satisfy certain requirements to be counted as, you know, in the labor force and unemployed. So it is reflective of some general weakening in the labor market, but it certainly overstates the case.

You can't take it at face value. In my sense is if you do the, if you kind of adjust the unemployment rate for this cyclical component of the decline in the participation rate, the unemployment rate today is probably about 4.5%. So, you know, we were at 4.5% back at the start of the year. We're down to 4.1. And my sense is that that's mostly or entirely related to this declining participation. If you count for that participation, we're at four and a half, which means that the economy's operating a little bit below its potential, which is probably closer to four.

We've had this conversation when we had the jobs numbers back last weekend. But that's kind of where I would land on it. But good. Those are great questions. And again, please feel free to. Where should, Marissa, where should people email all those questions if they have them? What would be the most, the best way to be? We have a new email address.

Sarah, is it inside economics? Is it Sarah will tell me? Inside economics at Moody's.com. Inside economics at moody's.com. Just email your questions there. Okay. Okay. Great.

All right. Well, anything else before we call this a podcast? Marissa, good luck in Denver. Thank you. Yeah. Banking forum, the Moody's Banking Forum. You're the keynote. I'm, you know. Only because you declined it. Really? Did I call it?

Okay. All right. You're trying to make me feel better. No. Chris, Matt, anything? No. That's it. No. All right.

Well, this is a very good podcast. I hope, dear listener, you enjoyed it. And we will talk to you next week. Take care now.