Regional CPI and R-Star

Episode Summary

Executive Summary: The episode centered on April CPI inflation, which showed signs of easing in headline terms but still remained uncomfortably high, with core and shelter pressures lingering. The hosts debated how much blame the Fed deserves, concluded it was limited, and focused on how aggressive policy tightening, market conditions, supply chains, housing, and China lockdowns will shape the inflation and recession outlook. They also explored regional inflation differences and played a statistics game tied to current data releases.

Main Topics: April CPI and inflation cross-currents (Priority: 5/5): Headline inflation cooled somewhat, but core CPI accelerated month-over-month, with transportation, shelter, and food still exerting pressure. The hosts interpreted the report as directionally better but not yet convincing evidence of sustained disinflation. Vehicle prices and supply-chain effects (Priority: 5/5): New vehicle prices jumped after a BLS methodology change, while used car prices fell for three straight months. The discussion treated vehicle inflation as a key signal of supply-chain repair and broader goods disinflation. Housing, rent, and services inflation (Priority: 5/5): Rents and owners’ equivalent rent continued to accelerate and were flowing into CPI with a lag. The panel highlighted shelter as a major reason inflation may remain sticky even if goods prices cool. Fed culpability and policy response (Priority: 5/5): The hosts argued the Fed deserves limited blame for current inflation, citing pandemic, fiscal stimulus, and energy shocks as bigger drivers. They did, however, critique prolonged MBS purchases and the framework shift toward broader objectives. Monetary policy outlook and market pricing (Priority: 5/5): Markets expect two 50 bps hikes followed by smaller moves, with a terminal rate near 3.1%. Moody’s baseline was slightly less aggressive at 2.75%, and the group debated whether financial conditions are already tight enough. Recession risk and economic sensitivity (Priority: 4/5): They examined whether the economy is more or less sensitive to rate hikes than in prior cycles, citing fixed-rate debt, excess savings, pent-up demand, and the Fed put. The conclusion was that outcomes are bimodal: either soft landing or recession. Regional CPI and sentiment indicators (Priority: 3/5): The conversation highlighted wide metro-level inflation differences, with fast-growing Sun Belt markets much hotter than places like San Francisco, Chicago, and New York. They also discussed low consumer sentiment, especially among Republicans, and a small business expectations collapse.

Key Arguments: Headline inflation is improving, but core inflation remains too hot to declare victory; month-over-month core gains need to settle near 0.2%-0.3% before confidence improves. Vehicle prices are a major driver of CPI swings, and the BLS methodology change for new cars likely made the April reading hotter than older survey methods would have shown. Shelter inflation is now fully feeding through to CPI and will keep services inflation elevated for months. The Fed contributed some marginally through prolonged QE and MBS purchases, but the larger inflation drivers were the pandemic, fiscal policy, and the energy shock. Market financial conditions are already tightening substantially, reducing the need for the Fed to overshoot dramatically. Because so much household and corporate debt is fixed-rate, the economy may be less sensitive to rate increases than in past cycles. Excess savings and pent-up demand can cushion the downturn, but they also make it harder for higher rates to slow spending quickly. Regional inflation largely tracks housing market strength and migration flows, with Sun Belt metros running hotter and legacy coastal metros cooler. Consumer and small business sentiment appear weak, but low-and-stable sentiment is less recessionary than a sudden collapse. China lockdowns and supply bottlenecks remain an upside risk to inflation over the near term.

Data Points: Headline CPI YoY peak: 8.6% - Peak in March before easing in April Headline CPI YoY April: 8.3% - April reading showed moderation Core CPI MoM: 0.6% - Accelerated in April despite headline easing Core PCEDeflator MoM forecast: 0.3% - Expected to run below core CPI due to producer price input Used car prices: Down for 3 consecutive months - Signaled possible rollover in disrupted goods prices Supply-chain constraint contribution to CPI: Less than 2 percentage points in April - Down from well above 2 percentage points in prior months Rent and owner’s equivalent rent YoY: 4.8% - Shelter inflation accelerating into CPI Hotel/motel prices YoY: About 20%-22% - Large but relatively small CPI component CPI forecast Dec 2022: About 5.5% - Moody’s forecast for year-end inflation CPI forecast Dec 2023: About 2.5% - Forecast close to Fed’s target range Fed funds futures hikes: 50 bps in June and 50 bps in July - Market-implied policy path Fed funds futures terminal rate: 3.1% - Market expectation for peak tightening Moody’s terminal rate forecast: 2.75% - Baseline outlook for Fed funds peak Neutral Fed funds rate estimate: About 2.4%-2.5% - Discussed as equilibrium or r* Household excess savings: $2.6 trillion - Considered a cushion against tighter policy Household debt service burden: Near record low - Fixed-rate mortgage structure limits interest-rate pass-through Consumer sentiment, Republicans: 41.2 - Lowest in the history of the series Consumer sentiment, post-pandemic decline: Down 40 points - Drop from post-pandemic peak Small business expectations diffusion index: -50% - Ryan’s guessed statistic tied to Conference Board/NFIB-style survey discussion Daycare CPI YoY: 3.2% - Chris’s game statistic from CPI services Daycare worker average hourly earnings YoY: 9.9% - Input cost rising much faster than daycare prices Metro CPI number of cities in double digits: 4 cities - Discussed as evidence of regional inflation divergence Atlanta metro CPI: Double digits - One of the high-inflation metros identified Phoenix metro CPI: Double digits - One of the high-inflation metros identified Tampa metro CPI: Double digits - One of the high-inflation metros identified San Francisco metro CPI: Lowest among discussed metros - Weak housing and outflows kept inflation relatively subdued New England regional CPI: 7% - Weakest census region in the discussion

Pivotal Quotes: "I think we are paying the price of our success in avoiding a depression with the inflation." — Chris Dorites: On whether the Fed deserves blame for today’s inflation "If you want to say that publicly, how about let me push back. How about some spending?" — Mark Sandy: On whether excess savings and demand destruction will cushion the slowdown "I think it's a pretty bimodal outcome: either we're going to skate through this or we're going recession." — Ryan Sweet: On the range of likely outcomes from Fed tightening

Implications: Listeners should expect inflation to ease unevenly, with shelter and supply-chain risks keeping price pressures sticky. The Fed likely keeps tightening, but the bigger question is whether the economy absorbs it smoothly or slips into recession.