Hot CPI and Hail Mary Outlook

Episode Summary

Executive Summary: The episode dissects a hotter-than-expected U.S. CPI report, broad inflation pressure in services, and the market’s dramatic whipsaw reaction. The hosts argue inflation will cool materially over 6-18 months as energy, goods, and housing ease, but they worry wage pressures and medical care inflation may keep the Fed tightening into a rising recession risk.

Main Topics: Hot CPI report and broad-based inflation (Priority: 5/5): The panel breaks down September CPI as far above expectations, with headline and core both accelerating, especially in services such as housing, airfare, medical care, and transportation. Market reaction and volatility (Priority: 4/5): They puzzle over why stocks, bonds, FX, and oil initially sold off on CPI but then reversed sharply, attributing the move to technical factors, short covering, algorithms, and bear-market dynamics rather than fundamentals. Inflation outlook and disinflation framework (Priority: 5/5): Mark Sandy outlines a base case where CPI falls from about 8% to around 4% within 6-9 months and toward 2.5% by spring/summer 2024, driven by easing energy, goods, and housing costs. Energy prices, oil supply, and OPEC/SPR dynamics (Priority: 4/5): The discussion centers on stable-to-lower oil prices, strategic petroleum reserve releases, and OPEC’s apparent effort to keep Brent around $90-$100, which would support slower inflation. Housing and rent disinflation (Priority: 4/5): Market rents are now weakening and even falling in some indices, but the CPI housing measures will lag by months; this should eventually reduce shelter inflation materially in 2023-2024. Wages, services, and recession risk (Priority: 5/5): The group debates whether wage growth and labor shortages—especially in healthcare—can slow enough without recession; they see services inflation and medical care as the biggest threat to a soft landing. Fed policy path and recession probabilities (Priority: 5/5): They discuss a likely terminal fed funds rate around 4.75%-5.00% or higher, with recession odds ranging from 55% to 70% over the next 12-18 months depending on whose view is used.

Key Arguments: CPI was much hotter than expected, with both headline and core inflation printing at levels that signal persistent price pressures, especially in services. The broad pattern of repeated 0.8% monthly increases across several components suggests inflation is still running too hot to declare victory. Market reversals after the CPI report likely reflected technical trading, short covering, algorithmic momentum, and a bear-market rally rather than any fundamental improvement. Energy inflation should fade if oil remains around current levels, and SPR releases plus OPEC behavior may help keep oil in a $90-$100 Brent range. Goods inflation should ease as supply chains normalize, inventories rebuild, and vehicle and other product prices stop rising or begin falling. Housing inflation is likely near peak because asking rents are weakening now, though CPI shelter measures will lag the market by many months. Wage growth needs to slow toward roughly 3.5% to be consistent with a 2% inflation target plus productivity gains, but that may require a much weaker labor market. Medical care inflation is a major concern because it is labor-intensive and structurally difficult to slow, making the PCE inflation outlook harder than CPI. A recession is increasingly likely, but the hosts still treat it as a risk rather than the base case, though probabilities are rising quickly. The Fed is likely to keep hiking aggressively, and higher policy rates may be necessary to break inflation even if growth slows materially.

Data Points: Headline CPI YoY: 8.2% - September consumer price inflation, cited as far above expectations Headline CPI MoM: 0.4% - September month-over-month CPI, double the expected 0.2% Core CPI MoM: 0.6% - Core inflation in September, versus an expected 0.3% Core CPI YoY: 6.6% - Year-over-year core inflation Food prices MoM: 0.8% - One of the broad price increases contributing to inflation Shelter/rent of shelter MoM: 0.8% - Housing-related inflation component Owners’ equivalent rent MoM: 0.8% - A major shelter measure in CPI Airfare MoM: 0.8% - Transportation services showed the same monthly increase Used vehicle prices: -1.1% - Fell for the third consecutive month Health insurance YoY: 28.2% - A standout service category within CPI NFIB firms planning to raise prices: 31% - September reading, down from 51% in November 2021 NFIB peak price-raising plans: 51% - All-time series high in November 2021 SP 500 intraday low: 3,500 - Referenced as the market bottom after the CPI shock SP 500 peak earlier in year: 4,800 - Used to illustrate the bear market decline 10-year Treasury yield: ~4.0% / 3.88%-3.95% - Yield surged initially then reversed after CPI Retail sales MoM: 0.0% - September retail sales released during the episode Retail sales ex autos: 0.1% - September reading as discussed on air Retail sales ex autos and gas: 0.3% - Stronger measure of underlying consumer demand Oil inventories: 439 million barrels - Weekly U.S. inventory level discussed in relation to demand destruction Weekly oil inventory change: +~10 million barrels - A large weekly build that the hosts linked to weaker demand or export disruption Oil demand change: -~4% YoY - Oil demand was described as down sharply from a year earlier Brent oil price assumption: $90-$100/barrel - Sandy’s working assumption for the inflation outlook Gasoline price peak: $5/gallon - Summer peak used for comparison Gasoline price trough: $3.50-$3.60/gallon - Recent lows before stabilizing near $4 Strategic petroleum reserve release assumption: 700,000 barrels/day - Projected average SPR release over the next 6-9 months Russian oil offline due to sanctions: 4.4 million barrels/day - Referenced as supply potentially removed as EU sanctions bite Fed funds terminal rate expectation: 4.75%-5.00% - Market-implied terminal rate after the CPI release Fed hikes discussed: 75 bps in Nov, 50 bps in Dec, 25 bps in Jan - Illustrative path discussed for the policy rate Sandy recession probability: 55% - His estimate over the next 12-18 months Marissa recession probability: ~66.7% - She placed it at two-thirds Chris recession probability: 70% - He was the most bearish on recession risk Wage growth needed for target consistency: 3.5% - Sandy’s estimate of wage growth consistent with 2% inflation plus productivity

Pivotal Quotes: "The headline CPI, so overall, consumer price index came in at 8.2%, right, year over year." — Chris Dorides: Opening summary of the September inflation report "I’m going to put a frame around that. And I want to go component by component and talk about where it feels like inflation for those components are going and then add it up to total inflation." — Mark Sandy: Sandy introduces his disinflation framework "I think there is that path more broadly, but I think we also face deeper structural issues." — Chris Dorides: Recession-risk and labor-market discussion

Implications: Inflation may peak soon but is unlikely to fall smoothly; the Fed may need to keep tightening while recession odds rise. Listeners should expect continued volatility in rates, stocks, and consumer prices, with housing and energy easing first and services lagging.