CPI and AI with Capital Group's Jared Franz

Episode Summary

Executive Summary: The episode centers on August CPI inflation, tariff pass-through, and the outlook for growth, Fed policy, and AI. Matt Collier and Jared Franz argue inflation is running near 3%, with tariffs increasingly showing up in goods prices, while growth slows into a “mini-cycle” rather than recession. The second half explores AI’s macro impact, with Franz seeing meaningful productivity gains but not a labor-market collapse.

Main Topics: August CPI and inflation composition (Priority: 5/5): The hosts review hotter-than-expected August CPI, noting energy, food, and shelter components, and discussing how these feed into broader inflation measures. Tariffs and import-intensive goods prices (Priority: 5/5): Matt Collier explains that tariff-exposed goods are rising faster than the overall basket, suggesting tariffs are now clearly filtering into consumer prices. Immigration policy, labor supply, and inflation (Priority: 4/5): The group considers whether restrictive immigration policy is contributing to price pressure through labor shortages in agriculture, construction, and related sectors, but concludes evidence is still limited. Growth outlook and the “mini-cycle” thesis (Priority: 5/5): Jared Franz argues the economy is slowing, but likely avoiding recession, as tariffs and uncertainty dampen capex and spending while services and labor market resilience provide a cushion. Fed policy, inflation target, and interest rates (Priority: 4/5): The conversation covers the likely path of PCE inflation, the Fed’s tolerance for inflation above target, and the uncertain outlook for the 10-year Treasury. AI, productivity, and labor-market disruption (Priority: 5/5): A lengthy debate examines whether AI is overhyped or transformative. Franz expects notable productivity gains, but thinks job losses will be concentrated in specific standardized, high-paid roles rather than the entire labor market. Workflow changes and practical AI use (Priority: 3/5): Mark Sandy and Jared Franz describe how AI is already changing research workflows by accelerating drafting, research, and synthesis, though both note it remains imperfect for analytics and charting.

Key Arguments: Inflation is no longer just a shelter story; energy and food are contributing more, with tariffs increasingly visible in goods prices. Tariff-sensitive, import-intensive goods rose 0.6% in August and are running above 5% annualized over the last three months, a sharp change from the flat-to-down pattern of prior years. Evidence that immigration restrictions are directly boosting CPI is still speculative, though labor shortages could eventually affect food and construction-related prices. The economy is slowing into a “deep mini-cycle,” not a recession, because services and labor markets remain intact even as manufacturing and goods sectors weaken. The Fed is likely to tolerate inflation in the 2% to 2.5% range rather than force it back to a hard 2.0%, reflecting post-COVID realities and measurement uncertainty. The 10-year Treasury has not risen as much as expected despite fiscal concerns; Jared Franz acknowledges he has been wrong on duration and is less confident on long rates than on the front end. AI is unlikely to create near-term mass unemployment, but it will disrupt specific cohorts of workers in highly standardized, high-value tasks such as coding and call centers. AI is already raising productivity by reducing rote work, speeding research, and improving workflow, even if it falls short of full “AGI” or human-like intelligence. A reasonable macro forecast could include a meaningful productivity uplift from AI, potentially pushing U.S. trend productivity higher, though the exact magnitude is highly uncertain.

Data Points: Headline CPI, month over month: 0.4% - August CPI increased faster than expected. Headline CPI, year over year: 2.9% - Fastest annual pace since January. Energy CPI, month over month: 0.7% - Key contributor to the August forecast miss. Electricity CPI, year over year: 6.2% - BLS measure cited as being pressured by data-center demand linked to AI investment. Food at home CPI, month over month: 0.6% - Fastest pace since 2023; grocery prices accelerated. Meats, poultry, and fish CPI, year over year: 5.4% - Cited as one of the strongest food-price increases. Core CPI, month over month: 0.35% (rounded to 0.3%) - Strongest monthly core pace since January. Core CPI, year over year: 3.1% - Held steady from the prior month. Tariffed/import-intensive goods CPI, month over month: 0.6% - August increase was faster than the overall basket. Tariffed/import-intensive goods, annualized three-month pace: Over 5% - Indicates tariffs are increasingly passing through to prices. Headline PCE forecast, month over month: 0.2% - Moody’s/guest forecast for August PCE. Core PCE forecast, month over month: 0.2% - Expected to match headline PCE. Headline PCE forecast, year over year: 2.7% - Expected to rise from 2.6% on soft prior-year comparisons. Core PCE forecast, year over year: 2.9% - Estimated to remain about one point above the Fed’s target. Capital Group assets: Over $3 trillion - Jared Franz describes Capital Group as one of the largest investment firms. Expected inflation regime: 2% to 2.5% - Franz’s view of the likely longer-run PCE inflation range. Potential front-end Fed easing: 50 basis points in 2025 and 50 basis points in 2026 - Franz’s earlier rate-cut expectation tied to the mini-cycle view. Potential U.S. productivity trend without AI: ~1.7% per year - Mark Sandy’s baseline nonfarm business productivity assumption. Potential U.S. productivity trend with AI: ~2.2% per year - Sandy’s illustrative uplift from AI. Alternative AI productivity view: 2.5% to 3.0% per year - Franz’s more optimistic estimate for productivity gains. Labor force growth assumption: ~0.25% per year - Used in Sandy’s potential GDP framework. Illustrative potential GDP growth: ~2.25% per year - Sandy’s estimate combining productivity and labor force growth.

Pivotal Quotes: "We're going to get 3% inflation. We're already close to that now." — Jared Franz: Franz frames his near-term inflation base case as tariffs and other pressures keep inflation elevated. "We're in this deep mini-cycle that is going to slow growth because of the tariff pressure." — Jared Franz: Franz describes his view that the economy will slow but avoid recession. "I think it can be very useful, and airplanes are very useful because they bring people to and fro." — Jared Franz: He uses this analogy to argue AI need not equal human intelligence to be economically transformative.

Implications: Listeners should expect inflation to stay sticky, with tariffs and possibly labor-supply shocks keeping prices above target. Growth may slow without collapsing, while AI could lift productivity but also reshape specific job categories and investment priorities.