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Speaker 1: I think the tech remained the same that got barving,

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Speaker 1: lice and flu.

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Speaker 2: Consumers hate inflation. It reduces the buying power of their cash,

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Speaker 2: it sends rates higher, and it makes anything purchased with

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Speaker 2: credit even more expensive. During the COVID era, people walked

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Speaker 2: down at home, shifted their consumption from services to goods.

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Speaker 2: Supply chains became snarled. Then we had a massive fiscal

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Speaker 2: stimulus and that is what led to the giant inflation

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Speaker 2: spike of twenty twenty one and twenty two. The good

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Speaker 2: news is inflation peaked in the summer of twenty two

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Speaker 2: and seems to be on its way back to normal.

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Speaker 2: But that raises an important question for investors. Is inflation

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Speaker 2: over and is the Fed done? I'm Barry Ridults and

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Speaker 2: on today's edition of At the Money, we are going

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Speaker 2: to discuss how to look at the data and think

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Speaker 2: about inflation. To help us unpack all of this and

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Speaker 2: what it means for your portfolio, Let's bring in Claudia Sam.

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Speaker 2: She is a former Federal Reserve economist and creator of

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Speaker 2: what is known as the sum Rule. Claudia, let's start

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Speaker 2: with a basic definition. What is inflation.

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Speaker 3: Inflation is the increase in prices, the percent increase in prices.

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Speaker 2: So we hear about all sorts of different measures of inflation.

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Speaker 2: There's CPR, the Consumer Price Indicator, there's pceevre's consumption consumption right,

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Speaker 2: there's core inflation. There's like a half a dozen different

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Speaker 2: measures of inflation. Why are there so many different measures?

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Speaker 2: Do they measure the same things? And which should we

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Speaker 2: pay attention to.

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Speaker 3: It's absolutely important that we have a pulse on where

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Speaker 3: inflation is and where it's going. So if something is

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Speaker 3: a complicated phenomenon, you got to have multiple ways of

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Speaker 3: looking at it. And the questions differ some so to

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Speaker 3: the consumer price Index versus the Personal Consumption Expenditure Index,

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Speaker 3: the CPI is pretty close to out of pocket expenses,

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Speaker 3: and that the difference then is the Personal Consumption Expenditure Index,

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Speaker 3: which is the one the FED uses and it's two

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Speaker 3: percent target. It takes a bigger picture on what's the

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Speaker 3: price of all the things that we quote unquote consume.

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Speaker 3: Healthcare is a big example of this. In CPI, it's

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Speaker 3: only out of pocket medical expenses. In PCE, it's also

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Speaker 3: the prices of things bought on our behalf, like by

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Speaker 3: our health insurance, also by the government with Medicare. So

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Speaker 3: these are two different things. CPI matters a lot to

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Speaker 3: people because I mean, that's really what's coming out of

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Speaker 3: their pocket directly. It's also what's used to index Social

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Speaker 3: Security benefits every year. So these are both very important.

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Speaker 3: And this issue of total versus CORE and CORE is

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Speaker 3: in the inflation taking out the food and energy. So

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Speaker 3: the reason we talk about CORE, it's not that the

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Speaker 3: FED is targeting CORE. The Fed's mandate is with all prices.

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Speaker 3: What CORE is is it helps us have a sense

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Speaker 3: of where inflation might be going. Food and energy can

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Speaker 3: move all over the place, and you don't want to

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Speaker 3: get head faked by what's happening with gasoline prices per se.

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Speaker 3: So the FED needs to have a sense of where

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Speaker 3: things are headed with inflation because interest rates that tool,

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Speaker 3: it takes a little bit to work its way through

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Speaker 3: the economy. That's the reason that CORE gets as much

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Speaker 3: attention as it does.

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Speaker 2: So we saw inflation tick up through the two percent

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Speaker 2: target I want to say, first quarter of twenty twenty one,

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Speaker 2: on its way up to just about nine percent. It

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Speaker 2: felt to me very different than the inflation we experienced

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Speaker 2: in the nineteen seventies. What is the data say, is

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Speaker 2: this inflation similar to what we saw in that decade

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Speaker 2: or very.

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Speaker 3: Different versus in the nineteen seventies, we had high inflation

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Speaker 3: for many years. It was a kind of slow burn

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Speaker 3: on the economy. We also had high unemployment at various

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Speaker 3: times in that period. And it it had this, there

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Speaker 3: was a lot of demand behind it. There was some

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Speaker 3: energy shocks, like there were other things going.

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Speaker 2: On in Bargo in seventy three.

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Speaker 3: Yeah, but we talked about the We had the guns

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Speaker 3: and butter as they call it. So there was a

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Speaker 3: big effort with Vietnam, and then there was a big

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Speaker 3: Great Society like program to spending. This time, we did

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Speaker 3: have massive fiscal relief. Everything from the Cares Act through

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Speaker 3: the Rescue Plan was pushing out a lot of money

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Speaker 3: to help people in small businesses and communities. We also

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Speaker 3: had these very strange disruptions, and you talked about several them.

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Speaker 3: I would add to the list. When we shut down

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Speaker 3: the economy, not only did people switch from services to goods,

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Speaker 3: they didn't spend as much, and so you had this

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Speaker 3: big pentup demand even from people who did not get

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Speaker 3: the fiscal stimulus. So when the vaccine started rolling out

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Speaker 3: in twenty twenty one, you had this massive pent of

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Speaker 3: demand that came out at the same time relief was

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Speaker 3: going out, and that, you know, the pentom demand. We

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Speaker 3: talk about the quote unquote revenge travel, right, the summer

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Speaker 3: of travel, Yes, and so that had that was shutting

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Speaker 3: down a twenty trillion dollar plus economy is just like unfathomable.

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Speaker 3: And it turns out that flipping the switch back on

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Speaker 3: was really hard. And one place that that difficulty showed

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Speaker 3: up was in inflation.

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Speaker 2: So investors who were tracking these various measures of inflation,

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Speaker 2: what should they be paying attention to when inflation is

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Speaker 2: on the rise.

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Speaker 3: It's very important right now to not get hung up

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Speaker 3: in every single data release. We've seen a lot of

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Speaker 3: progress with inflation coming down. There is absolutely going to

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Speaker 3: be turbulence on the way down. Not every data release

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Speaker 3: is a good one, and the Fed knows that, so,

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Speaker 3: I mean, this is not news to them. I do

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Speaker 3: worry sometimes that investors get pulled around by the latest number.

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Speaker 3: It's about looking for the trajectory, like the momentum, and

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Speaker 3: inflation is complicated. It is important to look under the

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Speaker 3: hood at what's going on.

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Speaker 2: So you mentioned the federal Reserve. Obviously, we can't talk

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Speaker 2: about inflation without mentioning them. They have a dual mandate

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Speaker 2: full employment and stable prices. What does Jerome Palel, the

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Speaker 2: Federal Reserve Chairman, pay attention to when he's looking at inflation.

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Speaker 3: That it's coming down. I mean, the FED is going

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Speaker 3: to keep going until they have inflation at two percent

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Speaker 3: in December. At their last meeting, for the first time,

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Speaker 3: there was a little more of this tone like, oh,

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Speaker 3: we're watching unemployment too. So they do realize they are

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Speaker 3: making a lot of progress towards two percent. It is

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Speaker 3: essential that they get both sides of their mandate. The

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Speaker 3: FED is not just about inflation.

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Speaker 2: And j.

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Speaker 3: Powell in his entire tenure as FED chair has really emphasized, Hey,

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Speaker 3: we know we have that employment mandate, and that's heartening,

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Speaker 3: and that's the law, right that's what Congress gave them

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Speaker 3: as a dual mandate. And yet right now the FED,

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Speaker 3: in terms of the decisions about when do we cut

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Speaker 3: interest rates, how low do they go next year, is

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Speaker 3: all about the inflation data.

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Speaker 2: So let's talk about the FED Open Market Committee and

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Speaker 2: the raising of rates. Typically, when the FED raises their rates,

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Speaker 2: it slows the economy by making consumer credit more expensive.

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Speaker 2: This is credit card, debt, car loans, mortgage is and

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Speaker 2: that tends to slow the economy. But it also comes

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Speaker 2: with what everybody calls a long and variable lag. Tell

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Speaker 2: us about why it is so difficult to tell when

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Speaker 2: Fed policy action makes its way into the economy.

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Speaker 3: The Fed's policy tools are very blunt, and over time

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Speaker 3: they have made them even harder to figure out what's

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Speaker 3: going on. So the Federal Reserve right now has raised

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Speaker 3: interest rates well over five percentage points, and they did

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Speaker 3: it very quickly. The discussion has turned late last year

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Speaker 3: to when are they going to cut? When are they

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Speaker 3: going to reduce interest rates?

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Speaker 1: Okay?

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Speaker 3: Jay Palell goes out after the committee meeting in December

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Speaker 3: does a press conference. Another one of the Fed's new

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Speaker 3: tools is communication policy, Like what the what Jay pal says?

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Speaker 3: As far as I was concerned, as someone who listens

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Speaker 3: to a lot of Fed speak, Jay Palell's press conference

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Speaker 3: was basically pop the champagne bottle. I mean, it was

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Speaker 3: just a very like we're headed towards this off landing,

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Speaker 3: we're gonna cut without any specifics, right. I don't want

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Speaker 3: to overseew what he said, but I mean markets, they

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Speaker 3: heard a lot of what I heard. Interest rates have

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Speaker 3: moved down considerably. The Fed hasn't even cut yet. This

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Speaker 3: is where they say, maybe those aren't so long and

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Speaker 3: variable lags. They might actually be some pretty short legs,

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Speaker 3: because the market's already like ahead of them. But it's

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Speaker 3: because the FED told them like this communication. It's not

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Speaker 3: just the Fed or the markets made it up like

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Speaker 3: they're listening, but the Fed doesn't know what it's going

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Speaker 3: to do.

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Speaker 2: So I'm glad, glad you brought up that aspect of it,

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Speaker 2: of the jaw boning for some younger listeners. I remember

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Speaker 2: when I started forget press conferences, there wasn't even an

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Speaker 2: announcement that the FED had changed interest rates. The only

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Speaker 2: way you found out about it is you saw it

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Speaker 2: in the bond market. The world today is so different

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Speaker 2: than it was in the ninth eighteen seventies, and maybe

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Speaker 2: that's why so many of the economists who came of

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Speaker 2: age in the nineteen seventies seem to have gotten this

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Speaker 2: inflation spike wrong. They saw it as a structural, long

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Speaker 2: term issue, but it seems to have been transitory. Tell

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Speaker 2: us a little bit about team transitory.

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Speaker 3: I'm a card carrying member of team transitory. I would

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Speaker 3: never have used the word transitory. Economists should not be

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Speaker 3: allowed to give names to anything.

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Speaker 2: Well, everything is transitory if you have a long enough timeline.

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Speaker 3: I had someone on Twitter ask me, aren't we all transitory?

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Speaker 3: And I'm just yes. It's like, let's stick to inflation.

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Speaker 2: Eventually heat death will take over the universe and everything

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Speaker 2: will end. But on a shorter timeline, there's a difference

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Speaker 2: between structural inflation like we saw in the seventies that

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Speaker 2: lasted almost a decade and this up and down inflation

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Speaker 2: that seems to have lasted less than two years.

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Speaker 3: Absolutely, the concern in this cycle, the frankly I think

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Speaker 3: there was frankly overplayed, was the idea that we were

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Speaker 3: getting embedded inflation, that we would have an inflation mentality

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Speaker 3: like set in after a decade in the nineteen seventies.

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Speaker 3: That was the big concern, and that's the embedded inflation

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Speaker 3: was then Fedchair Vulcar's reason for just like really pushing

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Speaker 3: up interest rates and without a lot of warning to

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Speaker 3: your point, but this time, if you have temporary disruptions

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Speaker 3: and they're the form of these supply disruptions, that really

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Speaker 3: aren't about the FED. Typically, if you have those disruptions

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Speaker 3: like you would have during a hurricane, the FED is

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Speaker 3: supposed to look through it in that they don't react.

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Speaker 3: That was what they were doing in twenty twenty one.

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Speaker 3: They're like, this is not us. Unfortunately, these disruptions took

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Speaker 3: a much longer to unwind. J. Powell talked about as Yeah,

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Speaker 3: it was two year transitory, not one year, and that

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Speaker 3: was too long, right, And that's why the FED did

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Speaker 3: get in and they were concerned that as inflation stays high,

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Speaker 3: people would get it in their mind, oh, this is

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Speaker 3: just the way it is. We never saw a sign

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Speaker 3: of that. It's extremely important and the disruptions, the supply disruptions,

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Speaker 3: really have work themselves out. Now there's a question. I mean,

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Speaker 3: the fearmongers will not go down without a fight. That

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Speaker 3: it could be that what is left in the inflation

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Speaker 3: is demand driven and is about the FED and could

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Speaker 3: get embedded. So that's not my read of it, but

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Speaker 3: it's a risk people should pay attention to.

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Speaker 2: Ed Ardini has this really interesting observation quote, inflation tends

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Speaker 2: to be a symmetrical phenomena. It tends to come down

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Speaker 2: as quickly or as slowly as it went up. When

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Speaker 2: measured on a year over year basis, we see this

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Speaker 2: consistent pattern in the CPI inflation rate for the US

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Speaker 2: since nineteen twenty one. Really quite fascinating.

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Speaker 3: I sure hope we get that. You know, I've become

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Speaker 3: so skeptical of historical patterns just because the you know,

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Speaker 3: and the it was the nineteen eighteen pandemic, so you

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Speaker 3: got to go back a little further to what we've seen.

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Speaker 3: But it makes a lot of sense because inflation is

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Speaker 3: not just this blob like there are. There's a lot

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Speaker 3: of pieces under the hood. And if you have a

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Speaker 3: very like quick shock like we had, and if their

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Speaker 3: supply or something that's that would be very indicative of

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Speaker 3: a temporary you really jack it up and then it

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Speaker 3: comes back down quickly, as opposed to if it's demanded.

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Speaker 3: You have the inflation mentality it like, you slowly build

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Speaker 3: that up and then it can be hard to shake.

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Speaker 2: So last question, what should investors be on the lookout

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Speaker 2: for when it comes to falling inflation?

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Speaker 3: Since the summer of twenty twenty two, we have seen

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Speaker 3: steady declines in inflation and even the momentum picking up

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Speaker 3: some towards the end of last year. What we should

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Speaker 3: be looking for is that momentum to continue. If we

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Speaker 3: get stuck in the first quarter of this year, the

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Speaker 3: Fed is going to react very differently, maybe could even

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Speaker 3: raise rates. So what we're watching is, hey, is this

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Speaker 3: more of these disruptions onwinding, in which case they could

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Speaker 3: keep it coming down quickly, or have we gotten into

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Speaker 3: a place where this somewhat above the target inflation is

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Speaker 3: happening and the Fed is going to get two percent.

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Speaker 3: The Fed knows how to get two percent, but it

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Speaker 3: may not be pretty really interesting.

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Speaker 2: So to wrap up, investors and consumers who are concerned

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Speaker 2: about inflation should be aware of a few things. First,

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Speaker 2: be aware of the recency effect. Don't let any single

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Speaker 2: month's data point throw you off. Use a moving average.

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Speaker 2: This data series is very noisy. At any given month,

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Speaker 2: you can have really good or really bad number. You

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Speaker 2: have to look at the trend. Second, when it comes

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Speaker 2: to the level of inflation, look at CPI on a

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Speaker 2: year over year basis. That'll give you a sense of

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Speaker 2: where we are over the long term. And lastly, if

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Speaker 2: you're a consumer concerned about inflation, take an honest look

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Speaker 2: at your wages. Sure, inflation has risen, but so too

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Speaker 2: have salaries. In fact, the salary component of inflation is significant.

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Speaker 2: Hopefully your salaries have risen enough or more than inflation

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Speaker 2: to maintain your buying power. I'm Barry Ridolts. You're listening

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Speaker 2: to Bloomberg's at the Money

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Speaker 1: That remain the same, Got lice and flut