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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Amongst a bunch of economic data released last week, one

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Speaker 2: data point in particular got a lot of attention. Now,

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Speaker 2: the numbers everybody's been waiting for pc CORE comes in

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Speaker 2: double last month at four tenths. The Personal Consumption Expenditures

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Speaker 2: price Index, which is closely watched by the Federal Reserve,

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Speaker 2: rose at the fastest pace in nearly a year.

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Speaker 1: The story lately has been that inflation has been decelerating

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Speaker 1: relatively quickly. Now what happened in January is we got

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Speaker 1: a bit of a pop in the other direction.

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Speaker 2: Today on the show, we'll talk with Matthew Bosler, a

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Speaker 2: reporter and editor on the US Economy team at Bloomberg

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Speaker 2: covering economic indicators and the Fed. He'll tell us what

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Speaker 2: this data means and whether we should con consider this

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Speaker 2: a one off aberration or a resurgence of inflation. This

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Speaker 2: is the big take. I'm Sarah Holder, Matthew. We're happy

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Speaker 2: to have you here with us today. Welcome to the show.

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Speaker 1: Thanks so much for having me. I always excited to

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Speaker 1: talk inflation data.

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Speaker 2: So let's just start by defining our terms. What is

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Speaker 2: the PCE.

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Speaker 1: So the PCE stands for personal consumption expenditures. So it's

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Speaker 1: the big report that we get every month on consumer spending,

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Speaker 1: and it not only includes, you know, how much of

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Speaker 1: everything people are buying, but also the prices they're paying

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Speaker 1: for them. And so that's why the PCE Price Index

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Speaker 1: is always a big deal. At the end of each month.

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Speaker 2: We have several indicators of inflation. What makes this one unique?

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Speaker 1: Yeah, So the PCE is especially closely watched because it's

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Speaker 1: the one that the Federal Reserve defines as its target,

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Speaker 1: so it's targeting two percent PCE inflation, and it contrasts

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Speaker 1: with the other big inflation data that we get each month,

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Speaker 1: the CPI, the Consumer Price Index. Broadly speaking, the CPI

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Speaker 1: tries to measure more out of pocket costs that consumers

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Speaker 1: are paying for things, whereas the PCE index that the

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Speaker 1: Fed targets is a little bit broader of a measure.

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Speaker 1: It contains more things like health insurance payments and financial

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Speaker 1: services costs that are not necessarily being paid by consumers

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Speaker 1: out of pocket but might be paid on their behalf,

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Speaker 1: or might be things that they're essentially spending on in

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Speaker 1: implicit ways.

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Speaker 2: So it's more granular and detailed data exactly.

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Speaker 1: It's a more comprehensive measure. That's what the Fed would say,

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Speaker 1: and that's why they tend to prefer it.

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Speaker 2: So what happened with the PCE this past week?

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Speaker 1: We got the PCE inflation data for the month of

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Speaker 1: January and it came in a little hot, So it

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Speaker 1: was up four tenths of a percent. That was the

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Speaker 1: highest monthly inflation reading actually in a full year. And

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Speaker 1: so the story lately has been that inflation has been

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Speaker 1: decelerating relatively quickly. If you went back six nine months,

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Speaker 1: nobody was expecting inflation to come down as quickly as

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Speaker 1: it has over that time period. Now, what happened in

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Speaker 1: January is we got a bit of a pop in

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Speaker 1: the other direction, right, So it's kind of been disrupting

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Speaker 1: that trend, and so it's opening up this interesting debate

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Speaker 1: about whether this is just a one off aberration in

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Speaker 1: that trend toward lower inflation that we've been seeing, or

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Speaker 1: whether this might be the start of a resurgence in

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Speaker 1: inflationary pressures, and whether we're not actually quite there yet

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Speaker 1: in overcoming this pandemic inflationary episode that we've seen.

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Speaker 2: So was this expected or predicted or were people kind

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Speaker 2: of surprised.

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Speaker 1: It definitely came as a surprise, and there are a

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Speaker 1: lot of reasons why people are skeptical of it. I

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Speaker 1: think the big one, of course, is just that again,

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Speaker 1: you know, we've had month after month of inflation decelerating,

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Speaker 1: and that's really kind of established a trend. So you know,

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Speaker 1: if we were going back, say two or three years

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Speaker 1: to early twenty twenty two, and we had a very

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Speaker 1: hot January inflation reading, then nobody would have thought anything

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Speaker 1: of it because inflation was going up quickly each month.

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Speaker 1: But now we're in a bit of a different situation.

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Speaker 1: You've got all of these other reasons to perhaps question

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Speaker 1: the validity of that data. Relating to the seasonal adjustment

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Speaker 1: process around the turn of the year, going from December

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Speaker 1: to January, some of the you know, particular components of

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Speaker 1: the inflation index that really showed a lot of strength

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Speaker 1: in January don't necessarily seem like they add up, especially

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Speaker 1: when you start digging into the way rental inflation is

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Speaker 1: measured in the indexes, and just given the outsize importance

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Speaker 1: of that component in the inflation index, there are some

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Speaker 1: funky things in the PCE index that are not in

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Speaker 1: the CPI index. One of them is basically the stock market.

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Speaker 1: And so there's this component of the PCE price index

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Speaker 1: called portfolio management and investment advice services, and that basically

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Speaker 1: just tracks movements in the stock market up and down.

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Speaker 1: So the FED likes to say that, you know, they're

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Speaker 1: not looking at stock prices, they don't care what the

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Speaker 1: stock market's doing, they're not targeting the stock market, but

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Speaker 1: in fact, the stock market in a very real way

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Speaker 1: is kind of part of the inflation index that they

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Speaker 1: do target. And so what we've seen over the last

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Speaker 1: several months is a big run up in the stock

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Speaker 1: market and that's really pushed up that component of the

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Speaker 1: PCE index, and that was a big part of the

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Speaker 1: reason for why the January inflation number in particular was

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Speaker 1: so hot. And so people are going to be looking

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Speaker 1: at that and saying, should we really be putting too

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Speaker 1: much way on that it's not likely to repeat? Is

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Speaker 1: that something we can look through? Is that really going

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Speaker 1: to matter two months from now? Probably not, And so

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Speaker 1: I think that's going to be part of the debate

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Speaker 1: versus you know, other people might say, well, even if

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Speaker 1: it is the stock market that's pushing it up, it's

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Speaker 1: still part of the index, so we still need to

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Speaker 1: kind of be consistent.

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Speaker 2: After the break. The Federal Reserve's next meeting is in March.

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Speaker 2: We'll talk to Matthew about how this latest inflation report

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Speaker 2: might impact what happens there. Welcome back to the Big

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Speaker 2: Take from Bloomberg News. We're talking today with Bloomberg's Matthew

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Speaker 2: Bosler about the latest PCE inflation data. This PCE report

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Speaker 2: is the last the Fed will get before their next

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Speaker 2: meeting in March, so I asked Matthew, how will it

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Speaker 2: impact what happens there.

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Speaker 1: So the big question right now is whether the Fed

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Speaker 1: is going to wait until this summer to start cutting

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Speaker 1: interest rates, or if there's a possibility that they could

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Speaker 1: start cutting interest rates as soon as May. And before

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Speaker 1: the latest inflation data, May was looking more likely, and

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Speaker 1: in fact, that's kind of what investors were expecting to

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Speaker 1: be the likely start date. And the result of this

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Speaker 1: hot inflation data that we got this past month was

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Speaker 1: to basically push that out one more meeting. And so

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Speaker 1: the idea is that you know whether or not you

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Speaker 1: believe this inflation data that we got is representative of

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Speaker 1: the actual underlying trend. It just prolongs the uncertainty as

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Speaker 1: to where inflation is going and when it will go there.

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Speaker 1: And so this meeting in March is probably going to

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Speaker 1: be a lot of you know, debating what we're actually

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Speaker 1: seeing in the underlying inflation numbers as opposed to necessarily

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Speaker 1: getting ready to start cutting interest rates as soon as

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Speaker 1: the next meeting.

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Speaker 2: Right, So, if the inflation data we saw this past

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Speaker 2: month had been a little less hot, maybe we would

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Speaker 2: have said seen some movement in March, but given these

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Speaker 2: latest reports, that's probably not going to happen.

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Speaker 1: That's exactly right. And again that was kind of the

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Speaker 1: baseline expectation in markets before we got this inflation data,

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Speaker 1: and now it's just been pushed back a little bit.

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Speaker 2: So the Fed has this dual mandate. Right on one side,

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Speaker 2: they want to keep prices stable, but they're also charged

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Speaker 2: with trying to attain what's called maximum employment. What are

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Speaker 2: they watching when it comes to employment and jobs numbers

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Speaker 2: that we're seeing.

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Speaker 1: Yeah, so they're very focused on a lot of those

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Speaker 1: headline numbers that we get in the monthly jobs are

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Speaker 1: port probably most notably the unemployment rate. Right. Unemployment was

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Speaker 1: at three point seven percent last month. It hasn't really

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Speaker 1: gone up at all since the FED started really aggressively

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Speaker 1: raising interest rates at the beginning of twenty twenty two,

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Speaker 1: so almost two years ago now, and so the FED

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Speaker 1: is kind of looking at that and saying, well, we're

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Speaker 1: not seeing any sort of softening in the labor market

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Speaker 1: from these high interest rates, and so maybe that means

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Speaker 1: we have more time to make sure inflation is really

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Speaker 1: coming down before we start cutting interest rates, because it

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Speaker 1: doesn't really look like that other side of our mandate,

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Speaker 1: that full employment side of the mandate that you're talking about,

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Speaker 1: is really a big risk right now. And so that

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Speaker 1: kind of is an outline of the FEDS thinking and

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Speaker 1: why they're doing what they're doing, why they're dragging their

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Speaker 1: feet a little bit to cut interest rates even though

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Speaker 1: again inflation has been coming down really quickly over the

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Speaker 1: last say, six or nine months. January numbers notwithstanding.

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Speaker 2: But the PCE is just one number that came out

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Speaker 2: in the past week. We saw a bunch of other

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Speaker 2: economic data released, consumer confidence, new home sales, manufacturing data.

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Speaker 2: What other indicators have caught your eye this month?

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Speaker 1: Yeah, so I think all of those are really important.

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Speaker 1: I think the housing stuff is interesting because it is

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Speaker 1: the most directly affected by interest rates, right, And what

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Speaker 1: we've seen in the broader economy is that a lot

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Speaker 1: of economic activity outside of the housing market really hasn't

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Speaker 1: shown much of a dent or impact from the higher rates.

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Speaker 1: Housing is one where it's a very clear direct connection,

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Speaker 1: and it's really been in the doldrums now for a

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Speaker 1: couple years and it's not really been showing much signs

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Speaker 1: of life. On the other hand, the FED kind of

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Speaker 1: sets that aside when they're looking at the economy, especially lately,

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Speaker 1: because it does seem like it's kind of disconnected from

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Speaker 1: broader economic dynamics, and so you know, that puts more

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Speaker 1: of a premium on some of the other data you mentioned.

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Speaker 1: Consumer confidence is an interesting one because it's really been

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Speaker 1: rebounding the last couple months, but it kind of took

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Speaker 1: a bit of a breather in January.

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Speaker 2: The consumer confidence one is super interesting, right because you know,

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Speaker 2: it's down, as you mentioned, but then we have the

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Speaker 2: market hitting all these record highs lately. That feels like

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Speaker 2: a disconnect to me, where stocks are soaring, but regular

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Speaker 2: people don't feel that great about what's happening in the economy.

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Speaker 2: What's going on there well.

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Speaker 1: Interestingly, the consumer confidence index does tend to track the

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Speaker 1: stock market, and so that's another reason why you might

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Speaker 1: look at the latest blip in the consumer confidence numbers

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Speaker 1: and say, well, can that really last or should we

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Speaker 1: expect that to go higher going forward if stocks stay

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Speaker 1: this high. There are also a number of different consumer

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Speaker 1: confidence indexes that we look at every month, just like

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Speaker 1: there are different inflation indexes, and you know, those consumer

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Speaker 1: confidence indexes tell slightly different stories, and so trying to

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Speaker 1: figure out what is the true signal there is a

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Speaker 1: bit of a challenge. But generally speaking, things have finally

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Speaker 1: been turning up a little bit, you know, near the

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Speaker 1: end of last year, after really, you know, having seen

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Speaker 1: a broader disconnect like you were talking about over the

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Speaker 1: last couple years, where you know, the economy is booming,

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Speaker 1: the stock market's doing well, but consumer confidence isn't as

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Speaker 1: much as you would expect. And maybe one big explanation

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Speaker 1: for that is the high inflation that we saw alongside

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Speaker 1: that booming stock market and rory economy. The upturn in

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Speaker 1: the last few months might, for example, be an indication

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Speaker 1: that inflation really is coming down in a way that

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Speaker 1: regular people at their kitchen tables are actually starting.

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Speaker 2: To feel Matt, thanks so much for joining us today.

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Speaker 1: Thanks for having me.

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Speaker 2: This has been the Big Take from Bloomberg News. I'm

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Speaker 2: Sarah Holder. This episode was produced by Alex Uguera. It

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Speaker 2: was edited by Caitlin Kenney. It was fact checked by

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Speaker 2: Naomi e. It was mixed by alex Ugura. Our senior

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Speaker 2: producers are Naomi Shaven and Jill Doddie Carley. We get

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Speaker 2: editorial direction from Elizabeth Ponso. Nicole Beemsterbor is our executive producer.

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Speaker 2: Sage Bauman is Bloomberg's head of podcasts. Thanks for listening.

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Speaker 2: Please listen and review The Big Take wherever you get

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Speaker 2: your podcasts. It helps new listeners find the show