Inflation Head Fakes and Heartbreaks

Episode Summary

Executive Summary: The podcast centered on a detailed review of January inflation data, revised CPI methodology, and what it means for the Fed, consumers, and markets. The hosts agreed inflation is still easing but uneven, with shelter and services the key lagging components. They also discussed the PPI, import prices, debt-limit timing, recession odds, and how weather, seasonality, and policy lags are complicating the outlook.

Main Topics: January CPI and inflation trend (Priority: 5/5): Bernard Yaros walked through the January CPI report, highlighting that headline and core inflation remain elevated but continue to trend down year over year, albeit with a bumpy path and several one-time distortions. CPI methodology revisions and seasonal adjustment (Priority: 5/5): The group discussed the Bureau of Labor Statistics’ updated seasonal factors and annual weight changes, including more timely spending weights that better reflect post-pandemic consumer behavior, though the practical impact was seen as modest. Shelter and services inflation (Priority: 5/5): Shelter remains the dominant driver of core inflation, while so-called super-core services inflation is still hot but moderating. The hosts emphasized lagged rent transmission and wage growth as the key variables to watch. Producer prices and import prices (Priority: 4/5): They reviewed PPI and import-price data as secondary but useful inflation indicators. Energy again distorted the headline numbers, while food and non-fuel import costs suggested some easing ahead. Debt-limit X-date and Treasury cash runway (Priority: 4/5): Bernard updated the Treasury’s expected X-date to mid-August, explaining the seasonal pattern in cash flows, tax receipts, and the role of extraordinary measures. Recession risk and policy outlook (Priority: 4/5): The hosts compared recession probabilities and debated how far the Fed may ultimately need to raise rates, with most agreeing inflation is improving but remains vulnerable to shocks. Market behavior and consumer conditions (Priority: 3/5): Retail sales, gas bills, and oil/natural gas inventories were used to illustrate that January data and energy costs may have temporarily boosted inflation readings and consumer spending.

Key Arguments: January CPI was stronger than desired on a monthly basis, but the broader year-over-year disinflation trend is still intact. New BLS weights and seasonal adjustments improve CPI accuracy after the pandemic, though they do not radically change the inflation story. Shelter inflation is the main near-term obstacle to getting core inflation back to target, but market rents suggest relief later in 2023. Super-core services inflation remains elevated because it is linked to wages, but wage growth is decelerating. The January energy spike, especially natural gas, was largely a one-off and should not persist into coming months. Used-car and new-car price trends show volatility, but the bigger picture still points to easing goods inflation as supply chains normalize. PPI and import-price data offer supportive evidence that inflation pressures are moderating, especially on the food side. The Treasury is likely to hit its debt ceiling limit in mid-August if Congress does nothing, with tax receipts in April and June providing temporary breathing room. Recession risk remains elevated but not overwhelming; panelists placed it roughly in the 40% to 60% range depending on the time horizon. The Fed may need a couple more quarter-point hikes, but the panel did not see a return to large 50-basis-point increases.

Data Points: Headline CPI (January, month over month): 0.5% - Bernard said CPI rose 0.5% in January after smaller gains in prior months. Headline CPI (year over year): 6.3% - Fastest slowdown since October 2021, though still well above target. Core CPI (3-month annualized, revised): 4.6% - Bernard said revisions showed core inflation running hotter than previously thought. Core CPI (3-month annualized, prior estimate): about 4.0% - Before the seasonal adjustment and weight revisions. Core CPI (monthly, January): 0.4% - Core inflation rose 0.4% for the second month in a row. Energy CPI (January): large increase - Energy moved from a drag to a major driver, with gasoline and utility gas bills pushing the index up. Utility gas services CPI (West region): about 37% - Marissa’s California utility bill example matched the regional spike noted by Bernard. Food CPI (January): 0.5% - Food prices accelerated modestly in the monthly report. Core shelter share of core CPI: 43% - Bernard noted shelter remains the largest component of core CPI. Tenant rent and owners’ equivalent rent (January): 0.7% each - These key shelter subcomponents eased slightly from the prior month’s 0.8% pace. Core services excluding shelter (January): 0.3% - Bernard cited an estimate showing moderation in super-core services. Core services excluding shelter (year over year): 6.1% - Still far above target, but decelerating. Relevant wage growth for core services industries: about 5% - Moody’s wage measure for industries tied to services inflation fell from nearly 9% earlier in the year. PCE core services excluding housing (3-month annualized): about 4% - Used to illustrate that services inflation is still sticky in the Fed’s preferred measure. Used vehicle CPI (January): -1.9% - A surprise decline despite firmer wholesale used-car prices. New vehicle CPI (January): 0.2% - Slower increase than the prior month’s 0.6%. PPI (January): 0.7% - Higher than expected, largely because of energy. PPI food component: -1.0% - Suggested easing food-price pressure ahead. PPI for goods excluding food and energy: 0.6% - A concerning acceleration, though expected to be temporary. Total import prices (January): -0.2% - Lower natural gas and petroleum prices pulled the headline down. Non-fuel import prices (January): 0.3% - Second monthly increase after a long stretch of declines. Retail sales (January): 3.0% - Bernard used this to argue January consumer spending was boosted by several one-time factors. Small businesses planning to raise compensation: 22% - Marissa’s stats-game number, down from 27% in December. Previous month for small-business compensation plans: 27% - Used to show wage pressures may be easing. Average of small-business compensation question: about 15% - Mark and Bernard discussed its long-run norm. Peak of the compensation-plans series: 32% - Bernard referenced the recent high point. Housing starts (annualized): 1.3 million - Used to discuss whether housing construction is near the bottom. Single-family permits: down about 40% - Chris noted significant weakness in one-unit housing permits. Two-to-four-unit permits: 58,000 - Chris’s stats-game number, highlighting relative resilience in this segment. Oil inventories: 417 million barrels - Mark’s stats-game number, used to show energy supply is ample. WTI crude price: about $75 per barrel - Mark cited this as consistent with lower gasoline inflation. Brent crude price: a little over $80 per barrel - Used as further evidence of tame oil prices. Natural gas storage: 15%–20% above year-ago levels - Mark linked this to warm weather and lower gas prices. Treasury X-date: mid-August - Bernard’s updated estimate of when extraordinary measures may run out. Treasury cash on hand: less than $100 billion - Expected low point before tax receipts temporarily replenish cash. CBO forecast error range: 2% to 5% - Bernard noted budget projections are imperfect, especially post-pandemic. Recession probability (Bernard): 40%–50% - Bernard’s view for recession by end of Q1 2024. Recession probability (Marissa): 50% - Marissa kept her estimate unchanged. Recession probability (Chris): 60% - Chris said the January data pushed his risk assessment higher. Recession probability (Mark): 45% - Mark lowered his estimate, citing improved confidence in inflation moderation.

Pivotal Quotes: "This was just further news that inflation is proving stickier than maybe we had all hoped for." — Bernard Yaros: Bernard’s assessment of the revised CPI and monthly report. "It’s going to be a bumpy road in the path towards this inflation, in the path towards the Fed’s 2% inflation target." — Bernard Yaros: Summarizing why January data do not imply a straight-line disinflation path. "I feel confidently optimistic about the inflation outlook." — Mark Zandi: Mark’s bottom-line view after discussing shelter, food, labor costs, and energy.

Implications: Inflation is still easing, but the last mile will be messy and shelter/services remain the key bottlenecks. Markets and the Fed should expect more volatility, while the debt-limit clock points to mid-August as a critical policy deadline.