Inflation, Tariffs, Spreads…Hike?

Episode Summary

Executive Summary: The episode reviews November CPI, PPI, and related inflation data, concluding inflation remains sticky but is still gradually trending toward target. The hosts and Matt Collier debate whether stronger growth, higher inflation expectations, and very easy financial conditions could leave the Fed on hold—or even leaning hawkish—despite market expectations for a December cut.

Main Topics: November CPI shows sticky but not worsening inflation trend (Priority: 5/5): Headline CPI rose 0.3% month over month and 2.7% year over year; core CPI also rose 0.3% and held at 3.3% y/y. The panel frames this as sticky, with slower progress toward target after months of improvement earlier in the year. What is keeping inflation elevated (Priority: 5/5): The discussion focuses on shelter, medical care services, and core goods—especially vehicles—as the main sources of persistence. Food and egg prices contributed to monthly volatility in headline CPI but were viewed as temporary noise. PPI offers a slightly better signal than usual (Priority: 4/5): Producer prices rose 0.4% m/m, but the more important services PPI rose only 0.2%, suggesting underlying disinflation continues even if the headline producer number was stronger than expected. PCE inflation expected to be softer than CPI (Priority: 4/5): Because the Fed targets PCE rather than CPI, the hosts note that December PCE could come in near 0.1% m/m, helped by weak PPI-linked components such as airfare and physician services. Fed policy: market expects a cut, but next year is uncertain (Priority: 5/5): Markets are highly confident in a December rate cut, but there is little conviction beyond that. The group debates whether inflation, expectations, growth, and financial conditions point to more cuts, a pause, or even a hike in 2025. Growth and financial conditions complicate the outlook (Priority: 5/5): A strong current-quarter GDP tracking estimate and very loose financial conditions—rising asset prices, tight credit spreads, and strong risk appetite—argue against aggressive easing and may even support a pause or hike. Trump policy uncertainty could shift the 2025 stance (Priority: 4/5): Tariffs and deportations are treated as negative supply shocks that could raise inflation and slow growth, adding uncertainty to the Fed’s 2025 decision-making and potentially reducing the case for cuts.

Key Arguments: Inflation is sticky because shelter and medical services are inertial and because falling goods prices no longer offset them. Headline food volatility, including egg prices, is real but likely temporary and not the main driver of the broader inflation problem. The PPI’s services component is a more encouraging sign than the top-line number, reinforcing the case that disinflation continues underneath the noise. PCE inflation is likely to undershoot CPI because some weak CPI/PPI-linked components feed directly into the Fed’s preferred measure. Market pricing strongly supports a December cut, but expectations for additional cuts in 2025 are weak and dispersed. A strong GDP tracking estimate and solid job growth suggest the economy is not weak enough to justify easy policy. Financial conditions look frothy, with high asset prices and narrow credit spreads, which could argue for less easing or even tightening. Tariffs and deportations may create a supply shock that raises inflation while slowing growth, making policy direction harder to determine. The panel ultimately leans toward a 2025 pause, though inflation alone would justify some cuts and financial conditions could justify a hike.

Data Points: Headline CPI m/m: 0.3% - November consumer price index increase, in line with expectations Headline CPI y/y: 2.7% - Year-over-year inflation rose from 2.6% to 2.7% Core CPI m/m: 0.3% - November core CPI increase, slightly above expectations Core CPI y/y: 3.3% - Core inflation held steady for the third straight month Core CPI 3-month annualized: 3.7% - Rose from the prior month, indicating stickier recent inflation Core CPI 6-month annualized: 2.9% - Up from 2.6%, first increase in several months Food prices m/m: 0.5% - November food inflation helped lift headline CPI Egg prices: 8% in September, -6% in October, rebound in November - Used as an example of food-price volatility Food at home y/y: 1.6% - Grocery prices year over year Medical care services m/m: 0.4% - November increase in a sticky CPI component Medical care services y/y: 3.7% - Accelerating annual pace Physician services m/m: 0.3% - Part of the medical care services basket Hospital-related services m/m: 0.1% - Part of the medical care services basket Health insurance m/m: 0.2% - Part of the medical care services basket Auto insurance y/y: 12.7% - Still elevated despite recent monthly moderation Auto insurance m/m: -0.1% in October, +0.1% in November - Shows recent inflection from prior sharp increases PPI m/m: 0.4% - November producer price index increase, slightly above consensus Services PPI m/m: 0.2% - Key underlying PPI detail moving lower than prior months Expected PCE m/m: 0.1% - Forecast for the upcoming release Expected core PCE m/m: 0.13% - Forecast for the upcoming release Expected PCE y/y: 2.4% - Would rise from 2.3% if forecast is realized Expected core PCE y/y: 2.8% - Expected to remain unchanged Market probability of December Fed cut: 97% - Futures pricing ahead of the next FOMC meeting Probability of another cut by March: 60% - Market odds for a second cut in early 2025 5-year breakeven inflation: 2.4% - Inflation expectations have risen since the election Q4 2024 GDP tracking estimate: 3.9% annualized - Current-quarter model estimate that may be revised lower as more data arrives Likely Q4 2024 GDP after adjustment: ~2.5% - Speaker’s judgment after trade/import volatility is normalized Monthly job growth trend: ~150K+ - Underlying labor-market pace discussed from recent payroll data HF corporate bond spread: 266 bps - High-yield spread versus Treasuries, near historical lows Historical HF spread average: 500 bps - Long-run comparison excluding the financial crisis NFIB Small Business Optimism Index monthly jump: 8.7 percentage points - Largest monthly increase in the survey’s history after the election Survey on present business conditions: ~50% positive - Moody’s own survey measure described as consistent with a healthy economy Recession probability for 2025: ~20% (Mark) / 25-30% (Chris) - Panel estimates of recession risk for the coming year

Pivotal Quotes: "I don't think the stickiness is more of an issue. I think it's more of a measurement issue where there was a boost from these falling goods prices." — Matt Collier: Explaining why inflation appears stuck even though underlying disinflation may still be intact "It feels frothy, like I said." — Chris Drides: Describing financial conditions as easy due to high asset prices and narrow credit spreads "I think it means a pause, actually." — Chris Drides: His view that Trump-era tariffs and deportations would likely push the Fed toward holding rates steady in 2025

Implications: Listeners should expect a December Fed cut, but 2025 is far less certain. Sticky inflation, strong growth, and loose financial conditions limit easing, while tariffs and deportations could keep the Fed on hold or even tilt it hawkish.