Inflation: CPI report offered ‘a little bit more good news,’ economist says

[00:00:00] Speaker 1: let's get back onto that cpi number let's bring in tom simmons uh over at jeffrey's who focuses on fixed income tom great to see you here uh this morning what your take on the cpi report and [00:00:14] Tom Simmons: what do you think it means to the bond market hey good morning yeah so uh the cpi report i think actually has a little bit more good news in it than it appears right on the surface you know obviously as we see these eye-popping numbers like eight and a half percent year over year uh you know comparisons with the late 1980s and uh you know the early 1990s when inflation was really running uh quite hot uh there's a number of things in here that suggests that we're starting to see inflation peak and it will roll over in the next few months you know we saw these really big increases in gasoline prices uh important to keep in mind that cpi for for march you know the the reference period here was right after the russian invasion of ukraine so really is capturing this the most acute period of gasoline price increases and we've seen them already starting to soften in the market a little bit uh in the few weeks since uh the other thing is that uh services x uh energy uh and if you strip out the uh the airline component uh that was actually a little bit softer as well than the last few months uh housing actually came in a little bit softer in the last few months as well and and uh goods x energy also are coming in a little bit softer as well so you know the consumer has been pretty well able to weather the storm here with inflation uh you know obviously it affects sentiment pretty negatively um and it's affected the markets but we haven't really seen too much in terms of a deterioration in spending and i expect that we'll continue to see the consumer be pretty [00:01:42] Speaker 3: resilient here in the next few months as well tom i posed this question to brian shong earlier but do you want to get your take as well do you think this report and the breakdown by components the increases or the decreases that we saw there do you think that changes anything for the fed [00:01:57] Tom Simmons: i don't i think that it gives them slightly better comfort in terms of the fact that you know maybe they're not quite as far behind the curve on inflation as it originally appeared but it doesn't change their uh imperative in terms of what they need to do in the next few months they really do need to bring interest rates up quite a bit higher uh because it's it's clear that they got started way too late on the on the tightening cycle the 50 basis point hikes that have been on the table here uh i i don't i think they continue to be on the table they're not going to look at you know this slight degree of deviation away from the recent trend as some indication that the transitory nature of inflation that they have been that narrative that they have been holding on to uh they're not going to you know go back to that at this point they know that in order to get inflation down they need to bring rates above the neutral rate at some point and in order to get there you know that estimate according to the fed is somewhere around two and a half to two and three quarters percent uh they need to get there in a hurry so uh we're still expecting that they're going to be raising rates 50 basis points at the may meeting as well as 50 basis points at the june meeting uh if anything this maybe starts to take off the possibility that they could have done 75 basis points at one of their upcoming meetings or perhaps that they would have had to have done an intermediate hike those things seem to be off the table because at least it looks like uh the upside risks for inflation are starting to to fade [00:03:16] Speaker 1: a little bit so tom ahead of that may fed meeting do you see the 10-year breaking past three percent and [00:03:24] Tom Simmons: if it does what does that mean to the stock market i think the 10-year has to go above three percent at some point you know brian mentioned earlier that uh it's it's this reflective of this idea that uh policy at some point is going to have to go above the neutral rate it's the only way they're going to get inflation to start to go down right i mean if they only bring policy up to the neutral rate all that's supposed to do is allow the economy to continue to grow unimpeded right so in order to get things to slow down in order to get inflation to go down policy rates need to be above that two and a half to two and three quarters percent rate and that means they're probably going to be at the policy rate is probably going to be at least three percent at some point so uh the market needs to reflect that uh i think that the reason why it's been very slow to get there is that there is this sort of sense of pessimism based on previous experiences that the fed either can't get up to the neutral rate or when they do they can't stay there for very long before the economy really starts to roll over uh i think that there's a number of reasons for optimism that uh you know the fed can engineer if not a soft landing at least a not so hard landing just because of the strength of the labor market uh the momentum and wages uh consumer balance sheets are very very strong uh so i think the stock market even though it will struggle somewhat with yields a little bit higher uh should start to look at more of these consumer fundamentals as uh as reasons for optimism that you know we won't see corporate profits uh you know deteriorate so fast uh such that we should see big sell-off you know i think that the stock market will cool off a little bit uh but i'm not particularly worried about uh you know some some major event you mentioned consumer balance sheets do you [00:05:02] Speaker 3: expect that consumer spending is going to be able to continue being resilient even if the rate of price increases slows from here because even if prices are rising at a slower rate they are still going up [00:05:12] Tom Simmons: they are still going up um we haven't seen it we've seen a couple of uh reports from various uh credit card spending aggregators and and the new york feds consumer sentiment or consumer expectation survey suggests that consumer budgets haven't really been you know drawn back here even as prices have increased obviously there is a limit to which uh consumers can continue to do that um with with prices going up uh you know endlessly obviously at some point they would have to pull back i again i still think that that point is still pretty far from here uh the consumer still has a lot of accumulated savings from during the pandemic era whether that's uh the result of you know stimulus that was never spent or just accumulated wage increases that haven't been spent either and and we've seen that across the spectrum all the way up from the high end of the skill level spectrum down to the low end and so uh you know i think that there's still plenty of reason for optimism that uh the wage pressures are going to continue to be uh you know in a positive direction uh because there is still a relative shortage of of labor in the in the labor market and so with uh more and more spend more and more spending power come from wages i do believe that they'll be able to at least uh sort of keep up with inflation from here you know we are talking about prices going up but again i think that there are reasons to believe that uh the degree to which prices are going to continue to increase from here is not going to be what we saw for the last uh you know 12 to 18 months but tom you know back to [00:06:43] Speaker 1: back 50 basis point rate hikes from the fed to to cool the inflation like we're seeing in today's cpi [00:06:48] Tom Simmons: doesn't that choke off the economic recovery uh i mean 100 basis points from here is still relatively low level for for rates uh you know i mean we would be at what 125 150 basis points for policy rate um we're i think that the issues that would affect the economy negatively we're already seeing even without the fed hiking you know specifically mortgage interest rates are up pretty significantly i think that's an area of concern uh but the consumer like i said you know they're already basically funding a lot of their consumption with uh with accumulated savings and and that costs them zero right i mean they're they're not borrowing a lot in order to uh to fund their consumption outside of homes and autos so i do think that there's a risk obviously the fed wants to slow things down a little bit they do want to take some of that demand out just that that's the only way you're going to get inflation to to come down um the fed can affect the supply side in terms of creating more inventory of these goods that are in short supply so the only thing they can really do is start to uh to um you know kind of cool demand a little bit um but again you know i think that these big increases are really just reflective of the fact that there have been a little bit too easy to this point um and we're not talking about you know successive 50 basis point hikes for months and months and months it's really just this adjustment in the short term uh that is then going to set them on a trajectory for a smoother uh increase in rates into the future [00:08:13] Speaker 1: tom simmons jeffries fixed income money market economist good to see you