Inflation Pressures Up, Not Down: Lakshman Achuthan on Bloomberg Surveillance

[00:00:00] Speaker 1: It is a research note on fire. It's Economic Cycle Research Institute. All the legend back before World War II of Cycle Research. Latchman out of the Putney School in Vermont. Did you know what a senior essay was? Black Flies. How much do we hate them? Latchman joins us. Your note is on fire. Let me start with it. The U.S. future inflation gauge sits near a 47-month high. You [00:00:25] Speaker 2: don't buy the disinflation story. No, we don't. We have these indicators. They are forward looking, not rear view mirror looking. And they are telling us that the movement of inflation is to the upside, not the downside. So you were talking just a moment ago, markets are priced for perfection, but it feels a little weird. Like, how much better can it get? You're banking on growth doing really well, and you're banking on inflation or disinflation, as Tom just said. Our cycle indicators are actually challenging both of those views. As you just said, Tom, on the note, inflation to the upside, but also on growth. We were here, I think, a couple of months ago, and I was saying, hey, these short-leaning indicators are going to start coming in, and they have, so there's some moderation on growth ahead. Inflation, I think the risk is still to the upside. We could talk about the war. We could talk about oil. We could talk about all that stuff. And so I'm looking toward, is there some stagflation ahead? The market's looking a totally different direction. I'm not calling stagflation, but I'm looking in that direction to see. I don't [00:01:40] Speaker 3: want to be surprised by it. Do you think the Fed shares your view here, or do they feel like they've got inflation kind of getting under control, maybe? Yeah, I think the Fed, the consensus, [00:01:52] Speaker 2: right, is saying, oh yeah, we had a good read for a month or two on the coincident data. If you slice and dice it, it's calming down. Nothing to see here. Don't worry about it. We'll get a reversion to the mean. So when you look at rates, and you look at inflation expectations or breakevens or whatever, and you see they're sitting about a point below what inflation's running at. I mean core PCE and things like that. So something's got to give. There's a gap there. Our indicators on inflation are pointing to the upside. And one last thing I'd point out here is, I think one rate hike is priced, something like that. Since the late 90s, if the Fed starts a rate hike cycle, it's not one and done. I think it's at least six. So just to give you an idea of the, your other guest was talking about commodities and Tom was saying, so what's it going to do? What's the price? What's going to happen to the price? I liked his answer, volatility. Right. So I guess the [00:02:55] Speaker 3: question is, is how much is it the energy swings, you know, oil just whipping all over the place here? How much is that? Is that masking underlying inflation? Is that a key component of where [00:03:06] Speaker 2: inflation is going? I think it's hard to look away, right? When you see the headlines on the Middle East on Hormuz on oil, all the supply issues, it's hard to look away. And and it's in your mind, it's it's easy to draw a line, right? Oil equal inflation. It actually doesn't work that way. So just to share with you a little of the insides of how we do this, oil actually, our inflation cycle upturn, which was before the war, we made that call in February, right? We didn't have the headlines, we didn't have oil running up, and we still had a cyclical upturn in inflation. So it wasn't predicated on oil coming up. And so the big miss here may be that if oil comes down, what's at 80 something now low 80s? If it comes down that there's no inflation, that is not the read. [00:03:55] Speaker 1: Okay, I want to give you a window into this, folks. And this and Larry Kudlow and I actually once talked about this. This goes way back, like before Latchman was born, my grandparents were aware of Wesley Claire Mitchell. Yes, and a guy named Jeffrey H. Moore, who founded Latchman shop. Mr. Moore died in 2000. And the bottom line was they never gave up on nominal GDP. Everybody in the industry wandered off to a calculation x inflation of real GDP. And Jeffrey Moore said nominal matters. Right now we got a boom mental economy of nominal GDP. What happens to our viewers and listeners, if and when nominal GDP [00:04:37] Speaker 2: finally comes in? Well, that's going to hurt, right? That'll hurt. That'll be a bit more of kind of how does it the way you get there is if stagflation comes into view, right? And we start to get some volatility in the base economic numbers, and that'll hurt. That's not going to feel good. Because the markets, as we said at the beginning of the hit, are priced for perfection. They're not priced for any of that. Right now, when you go nominal and inflation adjusted, your real earnings are not that good. They're negative. Okay, the consumers crushed. They're buying, they're doing that survival swiping in order to make basic ends meet. So everything works as long as the market stays up. And the bet is that there's a reversion to the mean on inflation, then everything works. If that doesn't hold, things get wonky. Paul, get one more in here. The other side of the Fed mandate labor [00:05:41] Speaker 3: market. Yeah. I don't know, I look at a 4.1% unemployment rate. I'm happy. Yeah. Is that okay? [00:05:48] Speaker 2: Well, it's stable. We don't see the wheels coming off. And so even when I said growth easing, it's not collapsing. There's no hard landing. There's no recessionary job losses. Quite to the contrary, there's less people, there's less claims, they look smoother. That's what's happening there. And there's a lot of churn underneath gig economy, all these other things. But the aggregates are going to hold up. Thank you so much. Really, [00:06:15] Speaker 1: really. You're welcome. I can't say enough folks about the economic cycle, excuse me, research institute, the latest note, just on fire for