CPI Data Reaction - Blu Putnam, Managing Director and Chief Economist of CME Group
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CPI Data Reaction
CPI Data Reaction
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00:00 All right, let me just real quick, and you hear these debates going back and forth about
00:07 the integrity of the CPI data, what they put in, what they take out, how they put lipstick
00:15 on the pig here.
00:17 Is that a correct description of what the Fed does?
00:24 I know we've discussed this before, but Mike in the chat, I believe, Mike W. mentioned
00:30 it.
00:31 Talk about the integrity of the CPI data.
00:34 Well, the folks that collect the data, which is not the Fed, but they do a great job on
00:40 collecting the data and putting it together.
00:42 But the thing is that we have five, six, seven different measures of inflation.
00:47 And the Fed does like to look at the personal consumption expenditure price index, or deflator
00:55 as they call it, and they look at the core, which takes out food and energy.
01:00 Food and energy are a little more volatile, and the Fed doesn't want to get a head fake,
01:05 but it really doesn't make any difference.
01:07 The core and the headline are going to tell you the same story, whether the inflation
01:12 rate's coming down or not coming down.
01:15 The rest of us, like at 830, we're going to look at the headline consumer price inflation.
01:20 Now, it does have some problems.
01:23 I don't know if you'd call it integrity.
01:26 They collect the data the way they say they're going to collect it, but interpretation-wise,
01:31 it's challenged.
01:33 And the big challenge is shelter.
01:35 25% of the headline CPI comes from owner equivalent rent.
01:42 That's in the shelter section.
01:45 And that just means that you rent your house to yourself, you collect the money, the statistical
01:51 people put that money in your account, even though you don't have it, they count it as
01:57 personal income, and that's 25%.
02:01 And it's seriously lagged.
02:03 And of course, it's a very much an imaginary number.
02:07 Now, you can find out exactly how they calculate it on the website, BLS website.
02:14 So that's the problem.
02:15 And if you take the owner equivalent rent out, you'll still have some shelter in there.
02:21 You'll have 7% of that index still belongs to real rent, what people actually pay every
02:26 month.
02:27 But if you take those out, we've been under a 2% inflation rate for four or five months.
02:34 I mean, we're already at the Fed's target by that measure.
02:38 The core PCE is getting pretty close to the Fed's target.
02:42 And we'll get that data at the end of the month, and it'll be within spitting distance
02:46 at 2%.
02:47 So as far as I'm concerned, the data, the guys that collect the data, they do a great
02:53 job, but the interpretation leaves a little bit to be desired.
02:57 You mentioned the soft landing there.
03:00 When will we know if we have the soft landing?
03:03 The Fed's already brought now inflation down from our 40-year highs near 10% down to around
03:11 2%.
03:12 And the market hasn't really crashed at all.
03:14 Unemployment hasn't really gone anywhere.
03:16 Could you make an argument that we've already had a soft landing?
03:19 Well, we're going to post GDP growth between 2.5% and 3% for 2023 when that number comes
03:26 out.
03:27 The fourth quarter, the third quarter was close to 5%.
03:31 The fourth quarter looks more like 2.5%.
03:36 I wouldn't call that a soft landing.
03:38 I would say that that is either average to slightly above potential GDP growth.
03:45 And so when will we know?
03:46 Well, what happens is people keep spending money as long as they have a job.
03:52 But if their neighbor loses their job, they get a little nervous.
03:55 And if some family member loses their job, they get more nervous.
03:58 And if they lose their job, they panic.
04:01 So but nobody's losing their jobs, right?
04:03 Well, a few people are, but they're getting new jobs fairly quickly.
04:09 And we're still creating a lot of jobs every month.
04:12 So there is no sign of us deviating from potential trend.
04:18 Forget soft landing.
04:20 A recession means you have negative GDP.
04:23 A soft landing, I think, is somewhere between 0% and 1% or something.
04:27 It stays positive, but it clearly slows down.
04:31 We're not doing that.
04:32 We are running on a potential trend here of 2% to 2.5% GDP.
04:37 That's the US economy.
04:39 And there's no sign of it.
04:42 What could cause it?
04:43 Well, higher rates don't cause recessions.
04:46 Higher rates trigger problems that cause recessions.
04:49 So it's a little subtlety there.
04:51 But back last year in March, we got the regional bank crisis with Silicon Valley Bank.
04:58 And that could have caused a recession.
05:01 But the regulators pumped the money in, put firewalls around it, and we didn't have that
05:06 problem.
05:07 Go back to the last recession before that was the pandemic.
05:10 Had nothing to do with interest rates.
05:12 Go back before that, and you got the mortgage, subprime mortgage crisis, which did have to
05:18 do with interest rates, but it also had to do with really poor regulation of the banking
05:23 system and an inability to put a firewall around that quickly.
05:28 And then the really messed up bankruptcy of Lehman.
05:31 A lot of own goals on that one, not just interest rates.
05:36 Let's go back one more.
05:38 We raised interest rates 1999-2000, but we had a tech wreck on Wall Street and we had
05:43 9/11, and we had a very mild recession before we came out of it.
05:47 So I don't think interest rates-- there's a lot of focus on interest rates causing recessions,
05:54 but interest rates have to trigger something that then causes it.
05:58 So subprime or back in the SNL days of 1990, something like that, that's fine.
06:06 But we don't have a cause out there.
06:08 We've gone through the labor market situation.
06:10 The unions have got settlements.
06:12 It's OK.
06:14 Why would the Fed want to keep rates above the current inflation rate going forward?
06:22 I understand that there's still some people think there's still too much money in the
06:27 market and that it's going too fast still, and they want to cool it down a little bit.
06:31 But say inflation is right around that 2% target rate.
06:35 Why keep rates at, say, 4% or higher like the dot plot currently shows?
06:40 There's a couple of things in your question.
06:43 But the general consensus is that maybe putting rates at zero and keeping them there for a
06:48 decade wasn't the brightest move.
06:51 Because we didn't get extra growth in the economy.
06:54 It really helped the equity market.
06:56 It helped the bond market, but it didn't really help the economy.
06:59 And we didn't get the inflation until we had that $5 trillion of fiscal stimulus during
07:06 the pandemic.
07:07 And then they raised rates afterwards and so forth.
07:10 So that's one issue.
07:11 The second issue is the Fed has a credibility problem.
07:15 And they spent a long time telling us that the inflation was transitory.
07:20 And by the way, in 2030, when you look back on the chart, it's going to look transitory.
07:25 It's just that it took three years.
07:27 And the Fed was talking months.
07:30 So they got their units wrong.
07:33 And then the Fed raised rates and said, we're going to keep them higher longer.
07:37 Well, that's what they've been saying for a year.
07:41 So they don't want to unwind that credibility, that guidance so quickly.
07:47 But the general consensus is that the Fed funds could be about a percent, percent and
07:53 a half above the core inflation rate.
07:56 So three and a half would be a perfectly fine number in this environment.
08:01 The real question is, how can the Fed get there and be comfortable with its credibility?
08:07 We got 3.4 percent versus 3.2 percent year over year CPI.
08:13 The last month was 3.1 percent.
08:15 So you see a three tenths increase there.
08:17 And then the core CPI month over month did come in line with the three tenths of a percent
08:23 estimate.
08:24 Initial jobless claims come in at two two hundred and two thousand versus two ten.
08:28 But no one cares about that on a morning like this.
08:30 We're talking about CPI, core CPI year over year came in at 3.9 percent expected versus
08:36 3.8 percent expected.
08:37 So, Joel, this is what I was telling you I was worried about this morning when we talked
08:41 before the show.
08:42 I was worried about a slightly high.
08:44 I mean, come on.
08:45 I mean, we had good numbers for so many months in a row.
08:50 Is this just a little hiccup or.
08:52 Yeah, I think this is a hiccup, but it is a hot number.
08:56 But you got to realize, you know, when you're talking point to a month or point three a
09:01 month, those are rounded numbers, you know, I mean, and they're really small differences.
09:07 I got to tell you, as an economist, we are not remotely that good to get it within a
09:11 tenth over the you know.
09:13 There's going to be a little volatility here.
09:15 So I'm going to count this one as a one off in the in the up direction.
09:19 So it is a little hot.
09:21 And you know, that certainly takes January off the table for the Fed.
09:27 March and May are still on the table, but probably the market will think more about
09:31 May than March with this number.
09:33 But you know, at the end of the month, we get the core PCE.
09:37 That's going to be a little better number.
09:39 It might be slightly hot, too, but but it's a lower number on the core.
09:43 So I'm still in the camp that inflation is well under control.