The Chicken or the Egg?

Episode Summary

Executive Summary: The episode centers on a generally favorable August CPI report, with energy and groceries cooling but shelter inflation unexpectedly reaccelerating. The hosts debate whether food and gas price-gouging claims are justified, conclude they mostly are not, and then assess the Fed’s likely quarter-point rate cut and its modest but positive effects through confidence, borrowing costs, and asset prices.

Main Topics: August CPI: good overall, but not great (Priority: 5/5): Mark and Matt characterize the report as broadly encouraging because headline inflation slowed, food stayed tame, and energy kept falling, even though shelter inflation worsened and services remained sticky. Food prices and the price-gouging debate (Priority: 5/5): The group argues that grocery inflation has been flat-to-low for a long stretch and that claims of widespread grocery price gouging are not well supported; market structure, margins, and cost inputs matter more than political rhetoric. Energy and gasoline prices as an inflation and political signal (Priority: 5/5): Gasoline and oil prices continued declining, helping CPI and consumer finances. The hosts note a meaningful psychological threshold around $3.50/gallon and discuss how gasoline costs affect voting behavior and inflation perceptions. Shelter inflation and the OER problem (Priority: 5/5): Shelter inflation unexpectedly accelerated, driven by owner’s equivalent rent (OER). The hosts stress that this metric is methodologically difficult, likely noisy, and contributes to the CPI/PCE divergence. Fed outlook and the size of rate cuts (Priority: 4/5): The team expects the Fed to cut rates soon, likely by 25 bps, and debates whether the central bank should move more aggressively. Their baseline remains gradual easing toward about 3% by 2026. How rate cuts affect the economy (Priority: 4/5): They argue the effect is mostly indirect: lower borrowing costs, better confidence, higher asset prices, and a weaker dollar are more important than the first 25 bps cut itself. Listener questions, reviews, and feedback (Priority: 2/5): The show answers listener questions about a higher inflation target and gas-price stimulus, then reads positive reviews that praise the show’s explanations and forecasting record.

Key Arguments: Headline CPI was still constructive because month-over-month inflation was modest and year-over-year inflation fell, largely due to favorable energy base effects. Food inflation is not a major current inflation driver; grocery prices have been nearly flat for about a year and a half, and current prices reflect earlier pandemic/supply-chain shocks rather than ongoing gouging. Price gouging is a weak explanation for grocery inflation; margins may be elevated in some segments, but competition, technology investments, and input-cost dynamics matter more. The strongest price-gouging case would be in more concentrated industries like tech, not groceries. Gas prices are a major consumer and political variable; prices above roughly $3.50/gallon trigger stronger media attention and voter concern. Shelter/OER is the biggest CPI problem because it is hard to measure, slow to adjust, and may reflect methodological changes such as more weight on single-family rents. Core PCE is likely to remain subdued relative to CPI because it downweights housing and uses a different construction; thus the Fed will look through the CPI shelter spike. The Fed is likely to cut rates by 25 bps, not 50 bps, given solid labor data and a mixed but not alarming inflation picture. Rate cuts matter more through expectations and financial markets than through the first small move in policy rates themselves. A higher inflation target, such as 3%, would reduce the risk of hitting the zero lower bound and needing quantitative easing in downturns. Lower gas prices function as a modest consumer stimulus, but only materially so when price changes are large or when lower-income households face high driving burdens.

Data Points: Headline CPI month-over-month: 0.2% - August CPI rose modestly, with the monthly increase rounding to 0.2%. Headline CPI year-over-year: 2.5% - Inflation slowed from 2.9% in the prior year-ago comparison, helped by favorable energy base effects. Food CPI month-over-month: 0.1% - Overall food inflation remained mild in August. Food at home CPI month-over-month: 0.0% - Grocery prices were flat in August. Food at home CPI year-over-year: 0.9% - Grocery inflation continued a very low trend. Energy CPI month-over-month: -0.8% - Energy prices fell again in August after prior monthly declines earlier in the summer. Average U.S. gasoline price: about $3.20 per gallon - Used as a current reference point in the discussion. WTI crude oil average in August: about $75 per barrel - Monthly average cited as oil prices softened. Current WTI crude oil level: a little under $70 per barrel - Used to illustrate continued declines after August. Shelter CPI month-over-month: 0.5% - Shelter inflation accelerated in August. Shelter CPI year-over-year: 5.2% - Year-over-year shelter inflation ticked up from 5.1%. Motor vehicle insurance CPI month-over-month: 0.6% - Insurance inflation remained elevated but less extreme than earlier periods. Repairs CPI month-over-month: 0.6% - Vehicle repair costs stayed strong. Airfare CPI month-over-month: 3.9% - Airfares were a notable source of services inflation. Public transportation CPI month-over-month: 2.5% - Transportation services contributed to supercore inflation. New vehicles CPI year-over-year: down about 1% - New-car prices were flat in August and lower over the past year. Used vehicles CPI year-over-year: down more than 10% - Used-car deflation remained a key disinflationary force in core CPI. Core PCE estimate for August: 0.14% month-over-month - The hosts’ forecast based on CPI/PPI inputs. Core PCE year-over-year estimate: 2.6% - Projected to remain unchanged because base effects are less favorable than in headline CPI. Harmonized CPI excluding OER: 1.3% year-over-year - Cited to show inflation is below target when shelter imputation is removed. Consumer inflation expectations: 2.7% - University of Michigan one-year-ahead inflation expectations trending lower. Current fed funds rate: just under 5.5% - The Fed’s policy rate before expected cuts. Expected path of fed funds rate in forecast: toward 3% by 2026 - Moody’s baseline expects quarter-point cuts each quarter. 30-year fixed mortgage rate: 6.14%-6.15% - Mortgage rates were already falling ahead of the Fed meeting. 10-year Treasury yield: 3.7% - Cited as part of the decline in borrowing costs and mortgage rates. Egg prices year-over-year: 28.1% - Used as an example of bird-flu-driven price spikes, not gouging. Egg prices month-over-month: almost 5% - Recent monthly increase tied to avian flu outbreaks. Gasoline threshold for media attention: about $3.50 per gallon - Discussed as the level at which consumers and media focus intensify. Rule of thumb for gasoline and spending: about $2 billion per penny - Every 1-cent change in gasoline prices changes consumer purchasing power by roughly $2 billion.

Pivotal Quotes: "Good, not great." — Matt Collier: His assessment of the August CPI report, capturing the overall tone of the inflation discussion. "It would be the tech industry, right? Where we've seen prices kind of remain elevated and margins wider." — Chris Dries: Chris argues that if one wanted to look for price gouging, concentrated tech markets are a better candidate than groceries. "The only caveat here, obviously, is how do you get from here to there, you know, in a reasonably graceful way." — Mark Zandi: On why he favors a higher inflation target but wants a careful transition to avoid destabilizing expectations.

Implications: Inflation looks broadly better, but shelter and services remain the main risks. The Fed likely has room to ease gradually, supporting borrowing, markets, and confidence without reigniting inflation.