'Teflon' Inflation Won't Stick, JPMorgan's Kelly Says

[00:00:00] Speaker 1: So what's your take on this bang in line CPI print. You can see under the hood there's just inflation coming from energy and there's some inflationary pressures coming from housing and elsewhere. Well first of all when you look at an employment reporter a CPI report. The truth is CPI is almost always what the analysts think because we have a lot of data going into it which just makes it very hard to have a big surprise. So not not surprised that we're not surprised. Having said that I think there is a clear disinflationary trend. There are a lot of cross currents a lot of crosswaves in the data this morning or things like airline fare is up but tobacco prices you know not not moving as much as it did last month the differences in medical commodities and services. But beneath it all I think there are a few things to bear in mind. One we're going to have lower tariff costs going forward than we've had a year ago because the new tariffs are not going to fully replace the IEPA tariffs. Second I do think that eventually oil prices will come down because eventually we're going to we there's only one solution to this thing and and everybody's always going to get out of the strategy for moves. I think it will. But the biggest thing to me is this is the fourth consecutive month in which wages have gone up by less than CPI inflation. Three point two percent year over year on wages. Three point four percent on CPI. And what that tells me is American workers can't get a raise. And if they can't you cannot have sticky inflation. We've essentially got Teflon inflation in America. It won't stick and it won't stick because you've got this. You can't get a price wage spiral going if the wages won't react. [00:01:29] Speaker 2: After another. And there have been many consecutive ones at a certain point. When does it stay sticky. Like what. How do you define sticky. It's been more than five years. And so it really hasn't. It's been more than five years on a year [00:01:42] Speaker 1: over year basis. But it takes about a year to fix a year over year problem. That's the first thing. So if you actually look on a three month basis there have been plenty of periods where inflation has fallen below two percent over that five year period. It's just on a year over year basis. Yes. You say we've had one supply shock after another. But they've been you know COVID in the policy response. We had Ukraine. We've now had the Iran war. We've had tariffs. All you know most of this is actually most of it apart from the Ukraine war is policy decisions. I mean we know the inflation we have right now are policy decisions on immigration on tariffs on the Iran war. If we back off. And I would even think that it was more divided government next year. Quite possibly. We will back off on these things. I think inflation will gradually come down. I think the wise thing for policymakers to do here is is just let it happen. It's going to work slowly. That's just how it's going to be. When you say policymakers you mean Fed officials. You think that the Fed should stay on hold. Absolutely. They should stay on hold. I actually think they will. I mean I think I noticed just just after this report we just saw a further just slight decline in expectations for a Fed rate hike. And you know every confirmation that we're on a downward path. I know it's not coming down as fast as anybody you'd like. But you can do no good by trying to hurry this process. There's some. It's like an injury. It just heals slowly. And if you try and speed it up you're just going to mess everything up. So we have an inflation problem which we're going to heal slowly here. Right. And if the data is [00:03:00] Speaker 3: coming in either bang in line or a little bit softer like it did last month when it comes to inflation. Then why do you see more Fed officials [00:03:06] Speaker 1: becoming more hawkish. Well I think they want to sound hawkish. But ultimately I think they have a real communications problem. I think that I think that they are on entirely the wrong track by saying we're going to communicate less. And so I think right now they're very. Well it's only one. That's the Fed chair. Well yeah. But I think but I think it's it is. But it's important that the Fed chair tried to reflect the consensus on the committee and tell markets about it. So I think the Jackson Hill speech that that Kevin Walsh is going to do at the end of this month. That's very important because I think at that point he's going to have to back off a little bit from his very aggressive rhetoric and say you know admit that there and acknowledge that there's some progress in inflation. It's not as fast as we'd like but there's some progress. And you know there is a cost to everybody in raising rates if you don't [00:03:50] Speaker 2: need to do this. And if it's if it's healing on its own. Do you think that if the Fed did raise rates that would actually take control of the long deal end of the yield curve a bit more that that will create a better financing environment because it could suppress some of the concerns about Fed credibility and longer term inflation taking hold in the system. I think it's I think it's a close call because the [00:04:10] Speaker 1: other thing is that if they do that then what's to say they won't also then start attacking the balance sheet. And the one thing that's going to push up the long end of the yield curve is if you try and pull down the balance sheet. So I think that would be a kind of a kind of a mixed message. You know I ultimately I think the most important thing in deciding inflation expectations is how long does it take us to get to a settlement in the in the Middle East. Some sort of settlement that [00:04:33] Speaker 2: allows traffic resumed there. Does it really matter whether the Fed hikes rates by 25 or 50 basis points because pretty much everyone who we've talked to say that the fiscal stimulus that's coming from all the AI companies that keep doing all this capex spending is insensitive to where the Fed funds rate. It doesn't matter for the economy. It does matter for markets because [00:04:51] Speaker 1: there's a lot of leverage in the system. There's a lot of leverage bets in financial markets right now. You take you increase the cost of leverage that could help the markets you know hit a peak and come down. So I think it could. And I'm not saying the you know I think the markets are too frothy. But again there are other things we probably should be doing to try [00:05:12] Speaker 2: to rein that in rather than just raising interest rates. So you think that it really is a financial market response to the rate hikes that could potentially be problematic because of how much leverage there is in the system. Absolutely. Yeah. And you know [00:05:24] Speaker 1: if you do hike and you've got you know higher short term rates and the temptation is to you know to move to a little bit more safety. And that could that could take some of the wind out of the market sales. So that's that's where I think you'll see the response. Interest rates a matter for financial markets. Honestly they don't matter that much for the economy anymore.