Banner Inflation, Banking Braves Out

Episode Summary

Executive Summary: The episode centers on a detailed review of July inflation data, which came in broadly as expected and reinforced the view that U.S. inflation is still decelerating. The panel highlights near-term upside risks from energy, food, autos, and a health-insurance measurement quirk, but argues the larger trend remains disinflation driven by easing supply chains and cooling shelter inflation. A later interview with University of Maryland professor Sebnem Kalemli-Ozcan argues the post-bank-crisis fallout has been modest, banks remain under pressure but are unlikely to be the primary source of the next downturn, and the Fed is likely near the end of its hiking cycle, with a soft landing still plausible.

Main Topics: July CPI and the disinflation trend (Priority: 5/5): The panel reviews the latest CPI report, emphasizing that both headline and core CPI rose 0.2% and matched expectations, reinforcing that inflation is moving lower year over year. Near-term inflation risks from energy, food, autos, and health insurance (Priority: 5/5): Bernard and the hosts discuss possible upside risks: higher gasoline and diesel prices, potential pass-through into food, a possible UAW strike affecting new vehicles, and a health-insurance CPI methodology reversal. Why inflation is falling without a recession (Priority: 5/5): The discussion attributes disinflation to unwinding supply-chain stress, falling shelter inflation, and slower wage growth in services rather than to a major rise in unemployment or a collapse in demand. Banking stress and the March crisis aftermath (Priority: 5/5): Sebnem Kalemli-Ozcan argues the regional-bank turmoil did not become systemic because small firms can still borrow from large banks and because the real economy, not banking, is the more likely source of future weakness. Regulation, supervision, and bank structure (Priority: 4/5): The guest argues smaller banks took excessive interest-rate risk and should be more comprehensively supervised, while Chris raises the tradeoff between tighter regulation and preserving a diverse banking system. Fed policy, soft landing, and terminal rate (Priority: 4/5): The conversation concludes that the Fed is near terminal rates, likely around 5.5%-6%, and that a soft landing remains plausible though not guaranteed. Hard data vs soft data in business sentiment (Priority: 3/5): The hosts contrast weak sentiment surveys with stronger actual business actions, using the NFIB index and Moody’s business survey to illustrate that pessimism has not yet translated into recessionary behavior.

Key Arguments: Inflation is clearly coming down, with year-over-year CPI falling from nearly 9% to just over 3%, while the economy has avoided a major labor-market deterioration. The biggest drivers of disinflation are the unwinding of pandemic supply-chain disruptions and the coming decline in shelter costs, especially rents and owner’s equivalent rent. Near-term inflation could get a temporary lift from rising gasoline, diesel, and potentially new vehicle prices if the UAW strike disrupts supply. Health insurance CPI is likely to stop being a drag and may soon become a positive contributor because of how the BLS measures insurer retained earnings. Wage growth in leisure and hospitality has slowed sharply, which should help restaurant and services inflation moderate further. The March 2023 banking stress was serious but not systemic; small businesses are not solely dependent on small banks, because large banks still provide credit. Banks are under pressure from higher rates, regulation, and an inverted curve, but the next economic problem is more likely to come from the real economy than from the banking system itself. The Fed likely does not need to go much above current levels; a terminal rate around 5.5%-6% is plausible, and cuts are not expected soon. A soft landing is still the base case if inflation continues to fall and employment weakens only modestly. Soft data are gloomy, but hard data such as hiring, capital spending, and loan activity still point to an economy that is slowing but not collapsing.

Data Points: July headline CPI: 0.2% month over month - Consumer prices rose in line with expectations in July. July core CPI: 0.2% month over month - Core inflation also matched expectations and suggested continued disinflation. Year-over-year CPI: just over 3% - Inflation has fallen from nearly 9% about a year earlier. Prior peak CPI: a little under 9% - Used to highlight the magnitude of disinflation over the last year. Gasoline prices in July CPI: +0.2% - Minor contributor in July, but expected to rise more in August. National average regular unleaded gasoline: 30 cents higher than a month ago - Pointed to a likely larger August contribution to CPI. Energy services in July: -0.1% - Electricity and utility gas services fell slightly in the July CPI. Food CPI in July: +0.2% - Food inflation was moderate, with restaurant prices notably softer. Food away from home: slowest pace since March 2021 - Restaurant inflation slowed, likely due to easing wage pressures. Diesel spot price: highest level since early February/late January - Seen as a lead indicator for future grocery price pressure. New vehicle prices in July: -0.1% - Prices fell as expected amid improved auto assemblies. Used vehicle prices in July: -1.3% - Expected to continue declining and offset some new-car price pressure. Health insurance CPI: -1.5% year over year; -0.4% month over month - A methodological artifact expected to reverse later in the year. Medical care services contribution: 90% of core services increase in July - Shelter was described as dominating core-services inflation. Core CPI excluding food, energy, and shelter: 2.5% year over year - Presented as effectively at the Fed’s target if shelter is excluded. Rents in core CPI: over 40% weight - Explains why shelter is so important to the headline core measure. Rents tracking: 7.8% year over year - Expected to slow to 6% and then below 3% by end-2024. University of Michigan present conditions index: 77.4 - August reading, improving for three straight months. University of Michigan inflation expectations, 1-year ahead: 3.3% - Considered close to a level consistent with the Fed’s target regime. NFIB small business optimism index: 91.9 - Showed pessimism, but hard-data components remained relatively solid. Moody’s business survey diffusion index: 2.1 - Slightly positive, suggesting expansion rather than recession. Fed funds target range: 5.25%-5.5% - Current policy rate at the time of the discussion. Possible terminal rate: 5.5%-6% - Sebnem’s expectation for where the Fed could stop hiking. SMEs share of firms: 99%+ (described as 99.9%) - Used to stress the importance of small and mid-sized enterprises to the economy. SMEs share of employment: about 70% - Shows why their access to credit matters for the business cycle.

Pivotal Quotes: "Inflation is coming down." — Bernard Yaros: Directly summarizes the panel’s core view on the July CPI report and the broader trend. "The fundamental point is what inflation is inflation's coming down." — Mark Zandi: Mark pushes the conversation toward the overarching macro message behind the data. "I think we are at the end." — Sebnem Kalemli-Ozcan: Her view that the Fed is near the end of its tightening cycle and likely close to terminal rates.

Implications: Listeners should expect inflation to keep easing, but not in a straight line: energy, autos, and health insurance may create bumps. Banking stress looks contained, so the bigger risk is a real-economy slowdown rather than a financial crisis.