Inflection Points and Inflation

Episode Summary

Executive Summary: The episode centers on a strong March economic rebound and a deep dive into inflation’s outlook. The hosts highlight booming retail sales, improving sentiment, and record-ish equity levels, then debate whether inflation settles near 1.8%, rises modestly above 2%, or accelerates more sharply as labor markets tighten, demographics shift, and pandemic-era supply and market-structure changes persist.

Main Topics: Booming March economic data (Priority: 5/5): The hosts review a run of exceptionally strong indicators—retail sales, housing starts, claims, regional Fed surveys, and sentiment—arguing the economy is entering a robust reopening-driven boom. Consumer spending and retail sales surge (Priority: 5/5): Ryan’s favorite indicator is control retail sales, which rose at a 27.5% annualized rate in Q1; the discussion ties this to fiscal stimulus, broad category strength, and Moody’s/Courterra business-to-business data. Inflation history and regime shifts (Priority: 5/5): The hosts frame the inflation debate by reviewing postwar inflation regimes: low inflation in the 1950s-60s, high inflation from the mid-1960s to mid-1990s, and sub-2% inflation since the mid-1990s. Competing inflation forecasts (Priority: 5/5): Chris expects inflation modestly above 2% over the next 5-10 years, Ryan expects it to remain below 2%, and Mark argues risks skew higher toward 2.5% or more, despite acknowledging the baseline may stay near 2.2-2.3%. Drivers of inflation: demographics, labor, and supply chains (Priority: 5/5): Ryan emphasizes aging demographics and low velocity of money as disinflationary forces; Mark counters that tightening labor markets, lower immigration, supply-chain disruptions, and market concentration could raise inflation persistently. Near-term inflation signals and indicators (Priority: 4/5): The group compares favorite inflation trackers: copper prices, olive oil, gas prices, NFIB pricing plans, and M2 money supply, emphasizing both market-based and survey-based signals.

Key Arguments: A stimulus-fueled spending surge is visible in the data, with control retail sales jumping 27.5% annualized in Q1 and every retail subcategory rising in March. The March data suggest the economy is expanding rapidly enough that Q1 GDP tracking models were revised up sharply, indicating potential downside risk to existing forecasts if strength persists. Ryan argues aging demographics reduce inflation by lowering marginal propensity to consume and keeping money velocity subdued, limiting sustained price acceleration. Chris argues the combination of strong demand and a Fed committed to higher inflation will push inflation above the historical 1.8% average to around 2.2%-2.3%. Mark argues the post-pandemic economy may experience persistent inflation pressure from tight labor markets, supply-chain disruptions, trade frictions, and higher corporate pricing power. The Phillips curve may be flatter than in the past, but Mark believes it still matters enough that very tight labor markets will eventually lift wages and prices. Healthcare inflation should ease as temporary reimbursement-rate boosts expire, adding a disinflationary offset in the near term. The NFIB survey’s pricing intentions are presented as a strong short-term predictor of CPI growth and suggest transitory inflation pressure over the next six months. Longer-term inflation expectations are likely to be shaped by policy, especially the Fed’s willingness and ability to keep inflation above target without letting expectations become unanchored.

Data Points: Control retail sales, Q1 annualized growth: 27.5% - Ryan’s favorite indicator; boosted the GDP tracking model substantially. Moody’s high-frequency GDP model: 4.7% to 7.1% - Revised upward after strong March retail data. University of Michigan consumer confidence index: 86.5 - Chris’s favorite indicator; improved but not as strong as expected. 1-year inflation expectations (UMich): 3.7% - Highest in a long time; seen as heavily influenced by gas and food prices. 5-year inflation expectations (UMich): 2.7% - Above pre-pandemic levels and creeping higher. Moody’s Analytics Business Survey diffusion index: 17% - A strong positive reading, near the best since early 2020. S&P 500: 4,185 - Used to illustrate a broad market rally and risk-on environment. Average inflation, 1950s to mid-1960s: ~1.9% per year - Postwar low-inflation regime. Average inflation, mid-1960s to mid-1990s: 4.9% per year - High-inflation regime associated with Great Society/Vietnam-era pressures. Average inflation, mid-1990s to present: 1.8% per year - Low-inflation regime that serves as the current reference point. Chris’s long-run inflation forecast: 2.2%-2.3% - Expected over the next 5-10 years, modestly above historical average. Ryan’s long-run inflation forecast: below 2% - He expects the low-inflation regime to persist over the next five years. Mark’s long-run inflation forecast: 2.5% or higher - He sees risks skewed toward somewhat higher inflation and occasional readings near or above 3%. Pre-pandemic labor force participation peak: 63% - Mark cites this as a level he expects the labor market to return toward. Current labor force participation: 61.5% - Used to argue there is still slack to absorb. Prime-age employment-population benchmark: ~80% - Mark’s reference point for a very strong labor market. Healthcare PCE inflation: just over 3% y/y in February - Higher than the prior 10-year average due to temporary reimbursement changes. Prior 10-year healthcare inflation average: 1.6% - Historical comparison for healthcare costs. Healthcare reimbursement-rate increase: 3.75% - Temporary increase that is expected to expire at year-end. Olive oil futures: up 40% over the last year - Chris’s personal example of inflation felt in household goods. Copper price: about $4 per pound - Used by Mark as a leading indicator of inflation and growth. Typical copper price average: about $3 per pound - Historical benchmark referenced in the discussion. NFIB pricing plans: mentioned as a strong near-term inflation indicator - Ryan cites it as a survey measure with a strong correlation to CPI growth.

Pivotal Quotes: "I think we're above 2%. We can get into some of the reasons, but not that much higher, right? So if you told me 2.2, 2.3%, I'd I'd find that reasonable." — Chris: Chris states his long-run inflation forecast and frames it as a modest rise above the historical average. "I think we're below two over the next five years on average. On average, so we're still stuck in the low inflation world that we've been in." — Ryan: Ryan explains why demographics and low money velocity keep him in the disinflationary camp. "I think the risks are skewed to much higher rates of inflation that we could see. 2.5% per annum, which would mean you would see periods years where you could be closer to three, maybe even above three." — Mark: Mark argues the post-pandemic environment and tight labor markets could push inflation above the baseline.

Implications: Listeners should expect a strong reopening-led expansion but also rising debate over whether inflation stays anchored or becomes persistently higher. The next few quarters’ labor, supply-chain, and pricing data will be critical for Fed policy and market expectations.