Inflation is outpacing pay raises: Steve Rattner

[00:00:00] Speaker 1: Steve, you're not at the wall with charts, and that makes us sad, but we're happy to have you at the table. Happy to have you at the table, nevertheless. I'm happy to be closer to you guys. That's true. We'll take it. So can you explain just the distinction here, if there is one, consumer price index, inflation, what that report yesterday means? [00:00:16] Speaker 2: Yeah, well, consumer price index is inflation. It's our measure of inflation. And what the report means is that the costs of this war are still coming through to American consumers. You have inflation, as you said, at the highest since 2023. Year over year, it's over 4%. We were supposed to be getting back to 2%. Obviously, gas prices are a big driver of that, but even beyond that, other prices have moved up as well. And so this is all tough. This is tough for consumers and, of course, tough for the president politically, [00:00:46] Speaker 1: which is a large part of why he's so desperate to get this war over with. Yeah, the president saying yesterday, I love the inflation, came in the context of his saying, I love the inflation because once I end this war, which, as we've been talking about this morning, there's no end in sight at the moment, it's going to come crashing down. Everything will be back to where it was. How do you assess that analysis? [00:01:06] Speaker 2: The president has a unique relationship with numbers and facts. Very generous. I love that. So diplomatic. That was kind. And I guess the bright side of it is inflation probably will come down a bit when this is over. But one of the many things to worry about here is that consumers' expectations of inflation, because what consumers expect to have inflation in some ways is as important as what actually happens, because it then drives future inflation, what we call expectations. And expectations have been ticking up. [00:01:40] Speaker 1: So we have some charts, even though you're not at the wall. We'll take them here at the table. Chart one, inflation overtaking wages. You just touched on that. What are we looking at in these numbers? [00:01:50] Speaker 2: So obviously the key question for consumers is what happens to wages when inflation occurs. And you can see the top line there shows wage increases, which actually have been trending down a bit. But we're contrary to probably many popular impressions running above inflation. And therefore, people actually were slightly better on average. We had the K-shaped recovery. We had people at the bottom doing worse. But then you see those lines cross in the last few months. And what those lines crossing in the last few months says is that consumers are now running behind inflation and they're losing purchasing power every month. Obviously, gas prices, everybody's well aware of. But other things are going up as well. And so as the president gets into the midterms and faces the ballot box in November, this is not the scenario in which you want to go into it. You guys talk a lot about Jimmy Carter and the hostage crisis and so forth. And the hostages were obviously a big impact on the 1980 election. But so was the 15 percent inflation that occurred in 1980. We're not going to have 15 percent inflation or anything like it. But I also don't think consumers are going to be as patient with inflation as they might have been back in 1980. Joe? [00:03:01] Speaker 3: Well, you're exactly right, Steve. Just for younger viewers, six, seven, eight percent inflation often throughout the 70s and 80s were seen. [00:03:13] Speaker 4: Oh, his IFB is not working. [00:03:15] Speaker 3: It's terrible. So, Willie, inflation at seven and eight percent during the 70s and 80s wasn't seen as radical. It certainly is now. You've got a generation of workers that aren't used to high inflation. So, as this inflation bumps up to four percent, even if it drags down to three, three and a half percent by the election, Steve, that's still a problem for consumers. You have, of course, we've had some of the lowest consumer confidence ratings in the history of that survey. You look at market valuations, a lot of banks think market valuations are at an all-time high and overly inflated. And then we have a $39 trillion debt. There are a lot of pressures weighing down on this economy, a lot of long-term pressures. And inflation on top of that seems to me just a very toxic mix for working Americans. [00:04:08] Speaker 2: Yeah, I totally agree with you, Joe. I don't think Americans have the same patience for inflation they might have had in the late 70s or the early 80s because, you know, because they go into this inflation in a fairly weak position. We all know that the pressure of housing prices and other costs, the so-called affordability crisis, say so-called is an affordability crisis, really, really weighs on them. And then on top of that, we're now facing the prospect of potentially higher interest rates. The Fed, as Willie mentioned, is going to have its first meeting under Kevin Walsh next week. And what's happening there, and if we can maybe go to that other chart that I brought, what's happening there is that people's expectations of interest rates, the market's expectations of interest rates, has deteriorated. And what this shows, the line across the middle is where the Fed's interest rate is at the moment. You go back to January, and we were expecting, everybody's expecting, substantial rate cuts. And this is another issue, of course, with the president, who thinks interest rates are already way too high. But what the chart shows is that the market thinks interest rates, if you look all the way to the right, are actually going to be higher at the end of this year than they are now. So that the Fed, in fact, instead of cutting rates, which is what everybody expected, what the president's been beating their drum about, what he thought he put Kevin Walsh at the Fed to do, it's now very possible interest rates will go up. And, of course, that means higher mortgage rates, which are already moving up a bit, and other kinds of higher costs for consumers on their credit. So this is all potentially very bad news for the president politically. This is not the backdrop in which you want to go into an election with the possibility of rates going up and certainly not of rates going down any time in the future. And it'll be interesting to watch the relationship between Walsh and the president as the Fed deals with the reality and the president deals in his own parallel universe about what he thinks the economy is doing and what the Fed should do. [00:06:03] Speaker 5: And, Steve, presumably the president will give Walsh a little bit of slack. He fought to get him in there. He's put him in, so he's going to allow him, you know, a little bit of rate increases, I imagine. Well, I just don't understand the economy at the moment. I don't understand why the stock market is booming. I don't understand why oil prices haven't gone up further than they're going. This bifurcation, it seems, that we seem to be seeing in the American economy, how long can that last for? How long can we be in this situation where we know that things are not getting better that much quicker in the Gulf? We've been told that oil gas prices might go up to $150, $200, and yet somehow what the investors are just assuming the president is right when he says it's going to work out and it's all going to be fixed soon? [00:06:45] Speaker 2: No, and this is also part of the president's political problem and part of what's really dividing our country at the moment, which is you do have companies doing exceptionally well. Corporate profits are unbelievably strong. The AI boom. A lot of it's the AI boom and it filters through because when you build data centers in Phoenix, you have to hire construction companies and they make money and all the suppliers of the parts make money and so on and so forth. And so the stock market is operating in its own parallel universe, which is to say that it looks at the corporate sector and things are going up pretty well. We're going to have this SpaceX IPO tomorrow on Friday. It's the largest IPO in history. It's going to be an unbelievable event. It's probably going to trade up substantially. And a lot of people are going to make a lot of money, except for all the people who really need the money, which are the people who are facing the gas prices and the higher costs of everything that they buy. [00:07:38] Speaker 4: And Jen, let's look at this through a political lens. I mean, it's, yes, it's inflation. Yes, it's up for everybody. But that to me is the key here is this. We have this stratification where the very richest are doing great. Like those people are benefiting from President Trump's policies and seemingly only going to get better from here while the rest of the country lags far behind. That seems to be the political message, not just for 26, but if I'm a potential democratic hopeful in 2028, I start right there. That that is like, this is a country that's leaving too many people behind. [00:08:08] Speaker ?: That's a country that's leaving too many people behind.