Healthy Inflation, Unhealthy Housing

Episode Summary

Executive Summary: The episode centers on a notably soft June CPI/PPI release, which reinforced the hosts’ view that U.S. inflation is steadily normalizing without a recession. They argue disinflation is broad-based, helped by easing goods prices, weaker inflation expectations, and cooling wage pressure, though some categories like shelter, restaurant prices, and car insurance remain sticky. The second half features a detailed housing discussion with Lance Lambert, who describes a weak but stabilizing market constrained by high mortgage rates, low inventory, and affordability pressures.

Main Topics: June CPI and PPI downside surprise (Priority: 5/5): Bernard Yaros and Chris Dreedes frame June inflation data as a clear disinflationary surprise, with both headline and core CPI coming in below consensus and PPI/import prices also softer than expected. What is driving disinflation (Priority: 5/5): They break down the components behind the softer CPI: gasoline, food at home, used vehicles, and airfare were weak, while restaurant inflation, car insurance, and some shelter-related items remain sticky. Seasonality and measurement issues (Priority: 4/5): The hosts discuss how post-pandemic travel patterns and reopening distortions may have made seasonal adjustment less flattering or harder to interpret, especially in volatile consumer-sensitive categories. Wage growth, inflation expectations, and the soft landing (Priority: 5/5): They argue wage growth is reacting to prior inflation rather than causing it, and that falling inflation expectations and easing labor demand reduce the odds of a recession-driven disinflation. Recession odds and inflation outlook (Priority: 4/5): The group keeps recession probabilities roughly unchanged but grows more confident that inflation can return to target gradually, with only modest unemployment deterioration required. Housing market outlook with Lance Lambert (Priority: 5/5): Lambert describes a housing market that is still unhealthy and affordability-stressed, yet no longer in free fall, with low inventory supporting prices even as high mortgage rates suppress transactions. Regional and institutional housing dynamics (Priority: 4/5): The housing discussion highlights stronger resilience in the Northeast/Midwest, weakness in parts of the West and Florida, and cautious institutional investors facing poor cap rates and weak returns.

Key Arguments: CPI rose just 0.2% in June and core CPI also rose 0.2%, both below expectations, showing inflation is cooling more broadly than many expected. Used vehicle prices turned negative after prior surges, and wholesale auto values point to continued downward pressure in coming months. Food-at-home inflation is weak due to easing supply-chain pressures and lower input costs, while food-away-from-home remains elevated because wage growth in food services is still high. Seasonal adjustment may be flattering the data somewhat due to pandemic-era distortions in travel, lodging, and other seasonal patterns, but the broader disinflation trend still looks real. Medical insurance will stop providing a temporary drag later in the year, so some CPI components may rebound even if the overall trend stays lower. The hosts reject the idea that inflation must be crushed through a deep recession; they think price growth can normalize while unemployment rises only modestly. Wage growth appears to have been driven largely by prior inflation and inflation expectations rather than a self-reinforcing wage-price spiral. In housing, high mortgage rates and low affordability are suppressing turnover, but limited inventory is still preventing a larger price collapse. Builders have supported sales with incentives, rate buydowns, and price cuts, while institutional buyers have stepped back because returns no longer pencil out. Regional housing outcomes are diverging: resilient in many Midwest/Northeast markets, weaker in markets that ran up the most, especially parts of the West and hurricane-prone areas.

Data Points: Headline CPI monthly change: 0.2% - June CPI rose less than the 0.3% consensus forecast. Core CPI monthly change: 0.2% - Core CPI also came in below expectations and marked the smallest monthly gain since February 2020. CPI year-over-year: ~3% - Inflation has fallen from a 9% peak in June 2022 to about 3% now. Used vehicle prices: -0.8% - Used car prices declined after two months of 0.4% monthly increases. Core CPI year-over-year: 4.8% - Not seasonally adjusted core CPI was the slowest since October 2021. Supercore inflation YoY: 3.8% - Services excluding housing and energy, a key Fed focus, eased from a 6.6% peak in September. Supercore 3-month annualized pace: ~2.3% to 2.5% - Recent consumer-service categories have cooled sharply, though some of this is helped by medical care dynamics. Food inflation monthly change: 0.1% - Overall food prices rose modestly, with food-at-home weak and food-away-from-home still sticky. Gasoline prices monthly change: 1.0% - Gasoline rebounded in June after falling sharply in May. Medical insurance change: -3.6% monthly - Temporary BLS methodology is currently subtracting from core CPI, but this effect should fade around September or October. Consumer inflation expectations: 3.8% - New York Fed one-year-ahead inflation expectations fell to 3.8% from a peak near 6.8% last summer. Misery index: 6.7% - Defined as inflation plus unemployment; the hosts say it is the lowest since March 2020. Household cost increase vs. a year ago: ~$200/month - The hosts say the typical household now pays about a couple hundred dollars more each month for the same goods and services. Household cost increase vs. two years ago: ~$750/month - A cumulative inflation burden that helps explain weak consumer sentiment. Consumer credit increase: $7.2 billion - Chris cites weaker-than-expected May consumer credit growth from the Fed. Revolving credit increase: $5.0 billion - Credit card balances rose while non-revolving credit fell. Non-revolving credit change: -$1.3 billion - Student loan and auto-related credit declined. Unemployment rate implication: 3.6% to just over 4% - The baseline forecast assumes only a modest rise in unemployment as inflation normalizes. Recession probability: 35% - Bernard keeps his NBER recession probability unchanged after the data. Mortgage rate consensus: ~6.5% in 2023, ~6.0% in 2024, ~5.5% later - Mark describes his baseline path for 30-year fixed mortgage rates. Mortgage News Daily rate: Above 6.8% since May 18 - Lance notes mortgage rates have firmed and remained elevated during the slower seasonal window. Inventory/active listings: ~40% below pre-pandemic levels - Lance says active listings remain far below pre-COVID norms, supporting prices despite weak demand.

Pivotal Quotes: "This was a week of disinflation, of downside surprises." — Bernard Yaros: Opening assessment of the CPI, PPI, and import price data. "The trend is there, right? Things are going down. Things are moving in the right direction." — Chris Dreedes: Discussion of why the soft landing case looks more plausible despite potential monthly volatility. "This is just a very unhealthy market." — Lance Lambert: His assessment of housing conditions in several vulnerable regional markets.

Implications: Listeners should expect inflation to keep easing, but not in a straight line. Housing remains constrained by affordability and mortgage rates, so transactions stay weak even if prices only drift lower. The broader message: soft landing odds are improving, but both CPI and housing will likely see uneven monthly reversals.