Prices, Petroleum, and Prosciutto

Episode Summary

Executive Summary: The episode focused on the latest U.S. CPI report, which showed inflation still easing despite a shelter-driven monthly pop, and broadened the lens to Europe, where inflation is also falling but remains stickier in the UK than the eurozone. The panel argued that disinflation is continuing, aided by fading supply shocks, though climate- and geopolitics-related food/energy risks and tight services inflation remain concerns.

Main Topics: U.S. CPI and the inflation trajectory (Priority: 5/5): Matt Colyar walked through September CPI: headline and core inflation were near expectations, and the team argued the broader disinflation trend remains intact even if monthly volatility persists. Shelter, used cars, and core inflation composition (Priority: 5/5): The discussion centered on an unexpected shelter acceleration and a sharper-than-expected drop in used vehicle prices, with the panel debating how much to trim from core measures when assessing underlying inflation. Fed policy and the odds of another rate hike (Priority: 5/5): Speakers assessed whether inflation and financial conditions leave room for another Fed hike, ultimately leaning toward a pause because tightening in markets is doing some of the Fed’s work. European inflation comparison (Priority: 4/5): Gaurav Ganguly explained why European inflation surged from pandemic and Ukraine-related supply shocks, and why it is now falling faster in the eurozone than the UK, where wage growth and services inflation remain stickier. Survey sentiment versus hard data (Priority: 3/5): The team compared University of Michigan sentiment to actual spending and labor data, concluding survey pessimism is often distorted and should be interpreted cautiously. Oil, refining margins, and food/climate shocks (Priority: 5/5): Chris Lafakis discussed oil around the Israel-Hamas conflict, refinery crack spreads, and how climate stress is lifting food prices—especially olive oil—highlighting longer-run inflation risks. Holiday, vacation, and podcast banter (Priority: 1/5): The episode opened with Marissa’s Japan/South Korea vacation, light commentary on travel, and friendly banter before shifting into economic analysis.

Key Arguments: U.S. inflation is still too high but is clearly trending down; core CPI hit its lowest annual rate in two years. The September CPI upside surprise was mostly a shelter noise issue, not evidence of a new inflation uptrend. Used vehicle prices fell more than expected, partly offsetting shelter strength and validating the broader disinflation story. The Fed is more likely to pause than hike again because market rates, mortgage rates, and tighter financial conditions are already doing additional restraint. In Europe, inflation came from pandemic supply disruptions and the Russia-Ukraine shock, especially gas, food, and fertilizer channels. The eurozone is disinflating faster than the UK because UK wage growth and services inflation are more persistent. Consumer sentiment surveys, especially Michigan, often look worse than actual spending behavior and can be distorted by politics and inflation expectations. Oil prices may remain range-bound near current levels if Saudi production offsets any Iranian supply disruption, but refining margins and climate-related commodity shocks still threaten inflation. Climate change is emerging as a structural upside risk to food prices, with olive oil cited as a vivid example. The strongest long-run disinflation case rests on shelter: market rents are flat to down, so housing-services inflation should keep slowing with a lag.

Data Points: U.S. CPI headline MoM: 0.4% - September consumer price index rose from August U.S. CPI headline YoY: 3.7% - September year-over-year headline inflation, unchanged from August U.S. core CPI MoM: 0.3% - September core inflation excluding food and energy U.S. core CPI YoY: 4.1% - September core inflation, down from 4.3% in August U.S. core CPI YoY peak: 6.6% - Core CPI a year earlier, cited as the post-pandemic high Energy prices MoM: 1.5% - September energy price increase after 5.6% in August Energy prices MoM prior month: 5.6% - August energy price jump referenced as a key driver of headline inflation Food prices MoM: 0.2% - September food price increase was described as modest Shelter prices MoM: 0.6% - September shelter increase, surprising to the upside Used vehicle prices MoM: -2.5% - September used-car prices fell more than expected Used vehicle prices expected MoM: -0.5% - Forecast for September used-car prices before the report Core CPI excluding shelter MoM: 0.1% - Mark’s cited estimate of core CPI minus shelter Core CPI excluding shelter YoY: 2.0% - Mark’s cited estimate of core CPI minus shelter through September Social Security COLA: 3.2% - 2024 benefit increase derived from September CPI Prior Social Security COLA: 8.7% - January 2023 increase Supercore inflation: about 3.7%–3.8% - Services inflation excluding housing/energy remained elevated but lower than a year earlier UK inflation (Aug): 6.7% - Cited by Gaurav as the latest UK rate available in the discussion Eurozone inflation (Aug): 5.3% - August eurozone CPI before the September preliminary reading Eurozone inflation (Sep prelim.): 4.3% - Preliminary September eurozone CPI showed a sharp drop UK wage growth: about 8% - Used to explain persistent UK services inflation Eurozone wage growth: about 5% - Used to explain lower eurozone services inflation versus the UK University of Michigan expectations index: 60.7 - October preliminary consumer expectations fell from 66 in September University of Michigan year-ahead inflation expectations: 3.8% - October preliminary reading, up from 3.2% in September University of Michigan long-term inflation expectations: 3.0% - Five-year expectations increased from 2.8% in September Mortgage rate: 7.7% - Weekly 30-year fixed mortgage rate cited as a sign of tighter financial conditions WTI oil price: $85/barrel - Current crude price discussed as a reference point for inflation and energy markets Brent forecast: $87/barrel - Chris’s 2024 baseline forecast for Brent crude Saudi excess capacity: 5.1 million barrels/day - Estimated spare production capacity cited as a buffer for oil shocks Global oil production/consumption: about 100 million barrels/day - Used to frame the scale of the oil market Iranian oil production: about 3 million barrels/day - Production level cited as having risen from roughly 2 million earlier in the Biden administration Gasoline crack spread: $29/barrel - Post-invasion average versus $11 per barrel pre-invasion Pre-invasion gasoline crack spread: $11/barrel - Ten-year average before Russia’s invasion of Ukraine Gasoline pump-price effect from wider crack spread: about 45 cents/gallon - Chris translated gasoline crack widening into retail prices Diesel pump-price effect from wider crack spread: about 70 cents/gallon - Refining squeeze impact on diesel prices Olive oil price: $9,034/metric ton - Matt’s climate-driven food-price example Olive oil price change: more than doubled YoY - Attributed to drought and heat in Mediterranean producing regions UK energy inflation (Aug): -3.2% - Gaurav’s stat-game clue for August UK energy inflation

Pivotal Quotes: "I think we're on the right track. Maybe patience is the right way." — Matt Colyar: Assessment of U.S. inflation and the likely Fed approach after the CPI report "It's service sector inflation. So that difference between 6.7 and 5.3... a lot of that is service sector inflation." — Gaurav Ganguly: Explaining why UK inflation is stickier than eurozone inflation "The cure for high prices is high prices." — Chris Lafakis: Discussion of refinery crack spreads and how elevated margins should eventually attract new supply

Implications: Listeners should expect continued disinflation in the U.S. and Europe, but not a straight line. Shelter will keep cooling, yet energy, services, and climate-related food shocks could keep inflation above target longer than hoped. For policy, the Fed likely pauses, while oil and food markets remain the biggest upside risks.