Consumer Prices, Consumer Credit, Client Concerns

Episode Summary

Executive Summary: The episode focused on the delayed September CPI release amid the government shutdown, with Moody’s team expecting inflation to keep drifting higher as tariffs, immigration constraints, and energy costs pass through. They also assessed consumer credit and bank-system risks, concluding stresses are concentrated in pockets like subprime auto and student loans, while the broader banking system remains well capitalized and not yet systemically threatened.

Main Topics: September CPI outlook amid government shutdown (Priority: 5/5): Matt explains the BLS will release September CPI on Oct. 24 because it is legally required for Social Security and GDP benchmarking, despite the shutdown. The team expects a modest but meaningful inflation uptick. Data quality and imputation in CPI (Priority: 4/5): They discuss the growing share of CPI prices that are imputed because of BLS staffing constraints, but expect the shutdown itself not to materially worsen the September release quality. Tariffs, immigration, and inflation pass-through (Priority: 5/5): The hosts argue tariff effects are finally moving through the economy, but with a lag because firms delayed price hikes due to inventory hoarding, uncertainty, and fear of political backlash. Alternative labor-market data and soft-landing dynamics (Priority: 4/5): Private and state-level labor indicators such as UI claims, Fed surveys, and job postings point to a weak but not collapsing labor market, consistent with 'no hire, no fire.' Consumer credit stress and subprime auto (Priority: 5/5): They assess recent bankruptcies and lender problems as real but mostly contained to subprime auto, with broader consumer credit still manageable and delinquency problems clustered in lower-quality vintages. Banking-system resilience and private credit (Priority: 4/5): The discussion emphasizes that bank capital is strong and systemic risk remains low, though exposure to private credit and isolated fraud-related failures warrants vigilance. Shutdown risks and recession threshold (Priority: 4/5): They debate how long the shutdown can last before materially hurting GDP or recession risk, concluding a month or more is damaging, and past Thanksgiving into December would be much more serious.

Key Arguments: Headline CPI is expected to rise 0.3% month-over-month in September, pushing year-over-year inflation from 2.9% to 3.0%. Core CPI is expected to rise 0.22% month-over-month, leaving core year-over-year inflation around 3.0%. Inflation is delayed, not derailed: firms appear to be passing tariffs through more slowly because of inventory buffers, uncertainty, and public pressure from policymakers. Food, energy, and electricity are likely to keep headline inflation firmer than core inflation, with AI/data-center electricity demand becoming a notable cost driver. The labor market remains soft but stable: layoffs are limited, hiring is weak, and claims and job-posting data still fit a no-hire/no-fire environment. Subprime auto delinquency is elevated, but the affected borrower base is small relative to total household credit and does not yet imply a broad consumer-credit crisis. Student loan delinquencies are high because repayment has resumed after a long moratorium, but this is partly a normalization effect rather than a new systemic shock. The banking system appears resilient because capital levels are high and stress tests leave banks with substantial buffers, though private credit growth and isolated fraud cases deserve scrutiny. If the shutdown persists through the holiday season, GDP damage and market stress could become large enough to raise recession risk.

Data Points: Expected September headline CPI MoM: 0.3% - Moody’s forecast for the upcoming September CPI print Expected September headline CPI YoY: 3.0% - Would rise from 2.9% in August Expected September core CPI MoM: 0.22% - Moody’s forecast excluding food and energy Expected September core CPI YoY: 3.0% - Would fall from 3.1% in August CPI imputation rate: about 33% - Share of CPI components now imputed due to BLS staffing constraints Initial UI claims estimate: 217,000 - Moody’s estimate for the week of Oct. 11 Initial claims recent range: 224,000 to 234,000 - Claims moved up last week and then eased back down Continuing claims: 1.92 million to 1.93 million - Shows elevated duration of unemployment despite low layoffs Unemployment rate referenced: 4.3% - Used to frame concern about credit stress in a soft labor market Subprime/near-prime auto debt outstanding: $400 billion to $450 billion - Size of the risky auto-loan segment discussed as a share of overall household debt Approximate household debt stock: about $15 trillion - Used for context on how small subprime auto is relative to total consumer/mortgage debt High-yield corporate bond spread: 3.04 percentage points - Spread over the 10-year Treasury, rising modestly on credit concerns Fiserv small business index: 115 - Real small-business spending index, down 0.6% year over year Fiserv small business index YoY change: -0.6% - Signals weak but not collapsing small-business activity Bank capital ratio mentioned: 15% - Illustrative high capitalization level for major banks under stress-testing Shutdown duration referenced: more than two weeks - Used to assess fiscal and macro drag already in place Potential GDP hit from one month shutdown: 2 to 3 tenths annualized - Estimated current-quarter drag if shutdown lasts about a month Potential GDP hit from six-week shutdown: about half a point - Estimated current-quarter drag if shutdown persists longer Student-loan delinquency level: close to 10% - Share of non-deferred student loans in delinquency per Equifax data Private credit market size: about $1.7 trillion - Broadly defined market size discussed as large but not system-threatening

Pivotal Quotes: "We're at 0.3%. That would lift the year-over-year change in the headline CPI from 2.9% to 3%." — Matt Collier: Explaining Moody’s September CPI forecast "I think we're generally, you take all the interesting or important inflation measures. We're all about 3% now. We think we're going to touch 4% or just underneath 4%." — Matt Zandi: Framing the likely inflation path over the next several quarters "If something is growing like a weed, it's probably a weed." — Mark Zandi: Describing why rapid growth in lending or credit exposures should trigger closer scrutiny

Implications: Listeners should expect inflation to edge higher rather than spike, while consumer-credit and bank risks remain concentrated and manageable. The bigger wildcard is the shutdown: if it lasts into the holiday season, macro and market damage could become serious.