Four experts react to May's hotter-than-expected inflation report

[00:00:00] Speaker 1: Yeah, look, I mean, you look at the monthly number, that's what I'd look at, not the 12 months. I'd look at the core, because there's a lot of volatility and other stuff. That monthly number was an 8% annual rate for core CPI. You can point to some special factors there. Car prices were up again in May. Some of that is supply chains out of China, out of Ukraine. Airfares were up a lot. Some of that is people resuming their travel. But even take all the special factors out, the underlying inflation rate here is quite high, and it's potentially rising. Now, I think the good news is the Fed was behind the curve last year. I think they're there now. They're going to do 50 basis points at the next two meetings. They're not going to let up in September. It's going to take them a while to tackle this. But I think their heads really are in the right place right now, and this number will keep it there. [00:00:50] Speaker 2: I thought, Jason, that when I watch the stock market on certain days, I think it's worried about the terminal rate. I don't know how many 50s we do. Do you expect it to – are we undershooting or overshooting for what we think the Fed finally stops? And then the reason I'm asking you that is if the Fed stopped raising rates, can inflation alone cause a recession? I always think that inflation causes the Fed to shut down business activity with higher interest rates than ACA Volcker. But if they didn't raise too much, can inflation itself cause consumers just to say, no mas, I'm not going to spend any more. I can't afford it, so I'm not going to, and everything shuts down. Have we seen that historically? [00:01:34] Speaker 1: On your second, for the most part, no, because when prices are rising faster, wages are rising faster, and so people can afford those higher prices. Right. Right now, wages have been behind prices, but at some point, probably, I hope, they'll catch up. On your first question, I think the Fed's raising rates at a decent clip. What's the terminal rate? Right, but that's where my complaint is. I think they need to be clearer. My modal expectation is 4% Fed funds rate at the end of 2023. I think they're going to need to do that to deal with this inflation. Doesn't sound very hot. It doesn't scare me. I don't think the market's ready for it. I don't think the market, sorry, at least four. I don't think the market's ready for it, though. They've not priced that in. [00:02:12] Speaker 2: Okay, four. God, four, we would have killed for four in many periods of the past. They would have been dropping in half to get to four, it seems like. Where are we going, Mona? Strain, I guess we should do strain. Are you going to argue with, I'll let you talk if you're going to argue with Jason. [00:02:30] Speaker 3: I'd love to argue with Jason. I think that this is a bad headline number. Inflation is a real problem. If you kind of look under the hood, you see much less of a problem in underlying inflation. The two big things that I've been worried about are shelter inflation and services less energy. Inflation, those both look a lot better than the headline look. They look better than the headline core look as well. And that's the real question. The real question is, are we in for a period where we see wages pushing up prices and then prices pushing up wages and then wages pushing up prices? Or are we in for a period where we have high gas prices, we have an economy where the goods services tilt is starting to normalize, but the Fed can get it under control? This tells me that we're not in for five years of misery, that the Fed will be able to get it under control. [00:03:27] Speaker 4: Why is that? I don't understand. [00:03:31] Speaker 3: Because this tells me that inflation is not accelerating kind of throughout the economy. Again, durable goods inflation has been declining. Shelter inflation has been rising. Services inflation has been rising. But we didn't see a big acceleration in shelter inflation last month. We didn't see a big acceleration in services less energy last month. And so if things are kind of plateauing along those dimensions, then I would expect that higher interest rates will be able to cool off demand. And the kind of wage price spiral that we're all concerned about seems less likely. [00:04:12] Speaker 2: Okay. We have time now, Mona, although I'm dying to get to Kathy Bostanchik, just so I can say Kathy B. And I'm going to start. That is going to stick, I think, Kathy. But Mona, what do you think? [00:04:24] Speaker 5: Yeah, you know, we're kind of in the camp where Michael is falling out on this. I think generally, while headline inflation will continue to cause some concern, you know, it's hard to handicap what the war in Russia will – how the war in Russia will play out. We're seeing China come back online. All of those factors will lead to higher demand for energy, higher food prices potentially. But if you look at the core inflation, services and shelter and rent are about a third of CPI. And what we're seeing in mortgage prices, you know, moving higher, that is putting some downward pressure on housing. It takes a little bit of time for that to play out into CPI. But over time, that should be a supportive factor for lower core CPI. Also, what we're seeing in terms of some of the headlines around the tech layoffs, for example, over time, that will play into lower wages as well. And so we think generally some of the components of core CPI should trend better. Keep in mind, the Fed's preferred metric is core PCE. Raising rates can't really impact, you know, WTI or energy and food prices all that much. It's really – their focus should be on bringing down the core. And hopefully, over time, that's a trend we'll see. [00:05:34] Speaker 2: Kathy, you know, I practice, too. It's kind of a waste if I start calling you Kathy B after practicing how to actually say you're – but I'm going to do it anyway. What do you think, Kathy? [00:05:43] Speaker 4: Well, I think that this is still a concerning read for the Federal Reserve. I do agree with Mona's points. Our own view is that inflation will trend lower as economic activity slows and interest rates start to bite. But when I look at, you know, owners of clothing rents or rental prices, they actually did pick up. They were up six-tenths. And it had been running five-tenths. So that's a hot number. Core service prices are picking up. Core goods aren't cooling quite as quickly as some people expected. And let's keep in mind, remember, in March, people were cheering that, oh, we reached the peak in inflation. Well, we just found out today we didn't. We're back – we're higher today, right, year and year, 8.6 percent. So gasoline prices are going to stay high. So I do agree eventually this is going to cool, and we should see, you know, cooling along with wage growth as well. But I think it's going to take a bit more effort by the Federal Reserve in time. And I would think that 50 basis points, you know, next week, July – and this puts 50 basis points on the table for September too, I believe.