Rise Like a Rocket, Fall Like a Feather
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Welcome inside economics. I'm mark andy, the chief chemist of mood's analytics, and i'm joined by a few of my colleagues, my two trusted cohoes Christians and Mercedes ital. Hi guys.

Hey mark. Look back.

It's good to be back. I've been away two weeks in europe, learned a lot of really a fascinating trip. Everyone got a pretty nervous about the new administration, what IT means, a tears. We'll come back to that um immersive year .

year on vacation. I am um florida, one of your home states here and home state of president elect Donald j. trump. And my mother .

are you?

What's coaster? coaster? Southwest .

florida, naples?

Oh, oh, okay. yes. yeah.

Beautiful with nails. Spare the hurricane. I think that.

yeah, I mean, he lost power for about a day during melton, but no damage or anything.

right? Yeah, I can't wait to get down there. Weather is good.

It's beautiful, about eighty two and Sunny. And we went to the beach yesterday and slovenly.

Very, very nice. Think you're doing this. I appreciate IT, of course. yeah. And we ve got matt, matt collier that right? Match your ples and call your account so I had a bit of a hit there.

but that's right. Yeah i'm then call your county.

That's that's good.

I put put together um nice to be body now now the need I know have platters, geography. Well you should .

know the counties. I'm just .

say that you .

should know how three thousand.

three thousand, two hundred or something like that like.

yeah, it's the emission. And like to learn, remember all the capitals around the world and memorize many counties across the country.

So tell me your counties.

test me, give me a country .

quick after that.

cool.

See how?

See that is not matter. You impressed.

I was pakistan is mine. Marty, on to the next one.

Are you? Oh, cash can't. 嗯。 O, K, I don't know .

that right.

Is that I IT is right? Okay, you guys, are you impressed? duly.

Ss, I am duly impressed. OK, very good. OK, that's that's my whole goal here. Personal cohoes .

flags next week. That's right. Right for radio.

Yeah, do you exactly? Um uh, where are we? Oh, we're going to talk about inflation, right?

I mean, this is a for a week chock full of economic statistics, mostly sended around inflation. We got the consumer present, dex, C, P, I, the producer Price, recent P, P. I talk about that with that.

And I do want to uh uh, talk about inflation uh, more broadly. I'm getting a lot of questions regarding why don't Prices fall back. You know the uh yes, inflation, the rate of growth in Prices has slowed and back closer to something the feds comfortable with, you know of the two percent inflation target. But why don't they fall?

I mean food and even gas to some degree or still well above where they were three, four years because so when I talk a little bit about that and then talk about the potential forer inflation in the future, given present trumps uh spouse policies, you know terrorist like so talk a little IT about that will play the game. The stats came along along the way here, and we got some listen questions we took a few last week or take a few more this week. Sounds good, like a good game. plan. everything?

sure.

I like IT. okay. Chris, anything else? yeah.

Sounds great.

Okay, very good. okay. Let's go to you, matt.

And you want to give us a bit of a run down on the C. P. I. I.

You know, I have to say, you know, if you go back six, twelve months ago, I waited with baited breath for the C. P. I reports, man, now feels a little less pressing, doesn't a little less urgent. Get the same feeling.

Yeah, i'm waiting for the time you stop .

and .

give me on the park. Yeah, I know. I think about this adjective for this report and the kind of the mind. So I think we're thinking some of the same things, uh is a range of expections for where Prices where Price trends are going and for quite while most of twenty twenty four, it's it's uh been unsurprising.

So october, we got the consumer Price index, as you alluded to, point two percent growth from the month before is in line with expectations. Year over year rate uh two point six percent. That's you still a little bit ove where the favor like to see IT.

I mean the inaction measure to the target. But um yeah unsurprising. The number was rounded down from two point two four percent. Um the strong is monthly gain since April. But again, i'm concerning underneath the hood the uh major components that we always touch on energy Prices, uh, neutral contribution.

October energy been a drag for for most of late summer, most of summer as as energy Prices, oil, gas, uh, those Prices fell in october. There was a run up in middle month. But but ultimately the most your key energy Prices ended the month where they started. So so not a whole luck going on there. Um food is um gone on the .

energy look quick. Uh you know there's a lot of hand ringing about the cost of electricity because the demand feels like it's on the rise here. Data centres being the obvious source of that demand to drive a eye. Uh is that showing up the at is that to come IT .

is and it's I think that's a sound argument of electricity Prices rose one point two percent. A lot of electricity production comes from natural gas Prices. Natural gas Prices are low.

So why is that relationship a little bit? Uh, the coupling slightly. I mean, something dramatic and I and I think in increased demand, uh the the the something like data that would create, I think is interesting. I don't have the year every year rate in front of me, but yeah, a electricity Prices was one point two percent, but that was offset by at one point about a one percent decline in gasoline Prices. So um yeah kind of government forces there um but uh yeah the energy subject something to to to keep an eye moving forward but but nothing but I think is that it's an add .

but not not a big edd at least at this point to inflation. I think that there yeah okay but IT maybe coming yeah, food Prices.

next big component that been focusing more um on food Prices and I we have over the past a few years and other stuff to think about um and food was kind of A A grocery Prices got a lot of attention. But for the most the past twelve, eighteen months, grocery Prices said, first inflation has has been pretty mild uh but we ve got a point four percent increase in september that a lot of attention, I was stronger than expected.

So a lot of focus this month data and their food Prices were were mild. So uh, food at home, the C. P, I for food at home, which is our proxy for grocery Prices, that rose point one percent.

It's now one point one percent higher than a year ago. So in isolation, that's a good story. But uh, as now we talk about a lot compared to twenty nineteen, that's one of the things that people point to to say, look out, look out. Painful inflation has been grocery Prices are up eighteen percent over the past four or five years um but recent trend uh encouraging and the look at softer in october, then we expected, then I expected um and then the video syncrude .

things gone on there right like eg Prices because of baby and flu. I guess there's been uh, a problem with blight uh, in the orange crop and that's affecting orange, right, orange juice Prices and bunch of stuff like that. Uh, is that right?

That is and there are some commodity indexes, special europe, that just seem a little IT unusually elevated. So is that is that an environment where where Prices are are are little sticker inflations little sticker than we we expected? Um again, it's the story of uh, nothing sending the alarm as much as it's um you know just something to monitor now as well as were waiting for the kind that's a little bit more disappointed to get to target.

Now the real sticky part of on inflation know why inflation was C P. I. Inflation came in little stronger than anticipated. That feels like it's kind of hanging around just north of three percent, which is just above where the fed would like to see IT. So the so called last smile here is to get inflation back all the way into the fed targets. Becoming little difficult to to navigate goes to service Price inflation， right? And mostly still the cost of housing that right?

That's right. yes. Oh, owner equipment, right. We've we talked quite a bit about point four percent rise, the heaviest way given the item within the C P I, the basket of goods and services that the make up the inflation measures the heaviest weight. So kind of as IT goes, that IT really does dictate what a month a month reading looks like. And L R rose point four percent um that's on the higher side.

But but about where it's been for most of twenty twenty four, we get we'll get a point three will get a point for um and that's enough to take date you know uh headline C P I N, core C P I um and so I this month, I went back and like where we thought shelter inflation would be now this time the year ago and and it's slow, but it's it's about a half a percentage point slower. We thought we'd closer about four four now, four point four percent every year growth in shelter inflation and it's closer to four point nine. Um so that you in general inflation forecasts has been spot on. But but that's been in element. That's been slow and it's about yeah about a half a percentage point slow and lot of measurement, corky, is that if we've .

in in my minds eye, i've made this point before I make IT again, the only difference bring current inflation and the feed target. Is this still elevated growth in the cost of housing? correct.

The owner's equal, right? In particular because in fact, I was looking at, and I hope I don't take anyone is game of state for the game. But if I look at the C, P, I consumer Price index x shelter, and that's a little bit more than just O E R, that also includes rent of shelter.

But that that I could easily get IT shows that europe growth is one point three percent, european one point three, and it's been well below two percent for Better here and have so IT really feels like a the last mile here is about the cost to shelter are particularly cost of home mothership. We are under equivalent. We will agree with that.

Yeah, if you take a step for the that harmonize measure that really isolates pluck out the O E R, that's been in that one point. Five is at one point nine percent every year now, but been below two percent for for quite a while.

right. okay. The other thing that think we want to maybe we can focus on for just a minute is vehicle Prices and everything related to vehicles repair, maintenance and insurance. And IT feels like we're an inflection point there.

No up for sure that I use vehicles big jump in october um still down relative to a year ago, but two point seven percent increase in october and there was a slight uptake in september, but that's two months in a row of increases for the first time in a year uh which I was a persecute decline in a used vehicle market, uh, that I think we can pretty confidently say his bottom out.

So we look at whole sale auction Prices that they flow through to what consumers end up paying for use vehicles. They rose, uh, in the middle of twenty twenty four. And since you kind of move flat, but but we're not expect any more declines .

I was going on there. Is that simply that there was fewer new vehicle sold in recent years, therefore, few coming off least going into the used car market. And that's now, please, supply and demand is less supply, that means Prices are firming. Is that is that right?

That baLances makes sense to me. I know um I usually meet with mike person in each month and and and that's a lot of the same part language forward.

Okay okay. Uh I did notice view on surge Prices though right .

tick down .

tick that's something yeah .

um point one percent decline in october, still fourteen percent higher every year. Uh, repairs which have they have kind of moved intend them to a degree they rose strong one point one percent on on the month. Uh so I I I think there is its reasonable to expect things have turned over and increases going to come in a much slower rate um but yeah encouraging to see auto insurance that had run over percent growth each month for for quite a while take down even so speaking.

what you're saying is the declines and new annese vehicle Prices may be coming to an end. We've been seeing that over the last year or more. But the strong increases in repair, maintenance and now vehicle insurance costs maybe also coming to an so cross current here in terms what that means for overall inflation.

Yeah yeah. I think that the drag on inflation from falling vehicle Prices can be relied on anymore. But I auto insurance repairs, given what we've seen over the past and eighteen months, twenty four months h with vehicle Prices, um that growth has to has to wrap up as well and no longer deliver that upward pressure.

Maybe sound weird to people, you know, why are they on such a different dynamics? But this goes to the legs, right? This takes a long time before changes in vehicle Prices show up in terms of what that means for a permitting cost and then what IT ultimately means for vehicle concerns. That lag could be more than a couple three years. So uh, they're kind of on different dynamics and that's that's what we're observing here.

Yeah and I think that's a great sag way to medical care services, which is another um it's it's a component did updates on a leg you you you talking about helps care providers negotiating and Prices with insures and those things all happen every day in advance. So we're still seeing uh, medical career lation kind of be digested by by that sector. So in OK top, we have a point four percent rise in the C P.

I for medical care services. That follows point seven percent growth in sept. So so prety strong. Well to two years ago, this component is up three point eight percent and and rising steadily. Um again, given the nature of the the the sector and how these Prices are determined, that was uh relatively expected to see the to expect the in place was going to rise.

We expect anything um off the charity here but but is the kind of dynamic that's moving in the open direction uh, of a lot of other components, does a methodological change for for how they look at this two, which I leading up to this report, I don't know exactly how would shake out um point four percent growth isn't anything too value. But I will be interesting to watch moving forward as the views now looks at actual insurance claims data to see what Prices are being charged rather than calling your physician and saying, hey, what this procedure cost compared to last last month. So um yeah you run into some you can imagine that the latter is a little IT with responses, privacy shoes. I think .

the response rates from physical hospitals .

like collapsing real numbers so so you get all these cross current um but .

generally don't an words in your mouth but generally inflation is moving in the right direction here. It's slowly going back to the low and stable inflation, the two percent inflation target at the fed ones. We're not quite there yet. It's little not get there quite as fast as we thought I would because of the cost of shelter, but all the train lines here look like their own track, right?

I think IT might argue that think that's been the .

story for a while and still. K, Chris, what?

You think anything else on that? Yeah, no. I, he, okay. trends?

yes. Mr.

yeah. And we ve got P, P, I data too. I mean, it's all kind of in line, right? We got import export data. Um yeah I mean, it's sticker then we would have hoped, but going in the right direction .

and that sticking enough to cause the fed to stop what is doing mining lowing rates.

we will see I mean, maybe next year as we get into twenty, twenty five and we see what policy will be and how that might shape inflation going forward. Um that I think they they very well may pause at some point, but not next month. Next month, i'm sure. Go though go again.

O, K, O, K. I know on the P P, I, that's the producer pricing. Dex is kind of of all sale Prices are just per sick of complete ness mad. Anything there that stood out for you .

h point two percent increase as as expected. Nothing jumped out. Uh I quickly look at the components that feed into the P C E of later, which began a few weeks. There you see a little bit of um strength.

So airfares, portfolio management, those are kind of know in getting into the weeds, but the kind of those those items inform the P C E to flatter, which is what the fed actually targets um and they were a little bit stronger. So we're expecting, uh the P C E of later when we get that the end the month to be point three percent uh as well. So even though even though shelter inflation was the primary cause of C P, S A elevated know still strong reading, um there are some factors that are going to keep the P C deflated, elevated as well. But um yeah again, kind of in in in in the range of expected and and nothing to surprise yeah.

What you're saying is the C P I, the consumer Price index and the P P I 的 produce Price index are used uh both are used to construct the P C E deflator， which is the consumer expenditure deflator, which is actually the inflation measure the friends targeting. And they're not targeting C P I. They are not targeting P P I.

They want a two percent inflation rate as measured by the P C E. The consumer expense for in cleaning what that is going to be. It's going to releasing a couple weeks, I guess, around the forgiving a from the C P I, the P P.

I. In point three, let's turn to this question about why Prices per vis Brent gasoline remains sticky that you know the rave inflation, the rate of increase in the Prices for these things has slow dramatically. Like food inflation is grocery Prices are basically flat, maybe up a little bit. Uh, in aggregate, rents have really gone nowhere for last year to gasoline Prices are down, down from where they were, but there still way up from where they were three, four years ago, twenty, twenty five percent.

So what is IT uh that uh, result in this kind of Chris stickiness? Why don't we see Prices actually for? And by the way, you know we may also want to talk about whether a decline Prices might actually be a micro o economic issue if its broad base that's that's called deflation and that never actually works out very well for anybody. So we don't want to see broad base Price declines that that so called deflation that's that's uh consistent with you know depressions know in the past. But you know if you look at specific items, why, for example, grocery Prices or the cost of housing Price so sticky h you want take a crack at that be have you on that?

Yeah well, I I guess I push back on the .

press premise OK. Uh.

if you look at the C P. I report and look at some the details, there are quite a few Prices that are fallowing on a year for your basis, right? So it's not entirely true that at all Prices just go up there. There is A A reaction there is.

but they're still higher than they were. And say twenty, even if even if things are falling on a year over year basis now they're not back .

to where they were four years ago except smart phones. But yeah in general, say the case right, there are some that are actually rarely rapidly, right? It's so the other there still higher, but many Prices, I would argue, are actually on trend, right? If you would have looked at the trend in twenty nineteen and extended IT going forward, help me not all that far off from from where we would be anyway, even that two percent inflation were looking at.

Well, I guess the maybe it's more housing and rents, right? Let's degree gas, gasoline Prices, right? Because IT come down. So let to take grocery Prices and maybe it's the city of sync rrap specific to eat these items. But grocery Prices, as I said, they're not they've got nowhere over the past year up a little bit, but they're still up twenty, twenty five percent for more they were four years ago. So if I go look at october twenty twenty four, the latest ata point compared to october twenty twenty, there are up twenty twenty five percent, same as rents, same as rds.

So and that's what I think most people are focused on because you got to buy grocery reason, you got to live somewhere and um you know particular for lower middle of housel to such a large share of their budget uh that you know really matters. Uh, why would they go back to where they were? You know you were close to where they were, you know before this run up over the past four years?

Yeah, i'd say first of all, there there is some mediocre tic movement here and some of the Prices. So we think about housing and rents, right? We have a very large uh, amount of pent up demand.

We we already had a lot of ten of demand before the pandemic. And then. H, that has uh, increased. We've had a large know the the monitor population has aged into their prime home buying years.

So there's just a lot of demand out there for housing, and we haven't been supplying, we haven't been building. So there is a dynamic here that is uh maybe was enhanced by the by the pandemic itself um but that day isn't GTA way. It's not as those demographic trends have receded um along with other supply in issues in the in the economy. So that would be my my first argument is that Price the Price of housing was likely to go up anyway because there was this demographic wave and then just got enhanced by the um by the pandemic yeah this very .

severe shortage of house developing since the financial crisis uh that's represented in low vacancy rates and me book of the vacancy rate for home owners but still pretty close to a record law. Started to push up a little bit for uh for rental, but that is most state the high end of the market with the lower and the affordable market market still very low. And so you're saying we have this physical persisted shortage that if anything is certain, hasn't gotta Better. And therefore, why would you expect the the Price for housing to go back down where I was given the the shortage regardless of anything, there is no way we could have expected that to a, uh, cost of housing to come back down in the context of the shortage of OK.

That's right. And then you throw on top of that the lock and effects of home, right? And that just um you know IT, I think Prices certainly i've gotten ahead of themselves over this period, but the the retreat Prices is is going to be delayed because of the deck and effect .

because of the finance. But the impact of that measured small that affects house Prices and is really which are ultimately related to rent, but is really the rent that drive the measure of cost of housing in the C P. I.

Absolutely absolutely has this interact effect though in terms of locking up some inventory that otherwise available or um the inventories unable ly distributed. So the rental Prices may may be distorted by that as well.

But okay, what about food Prices? If you have any prospect on the same deal? You know it's it's up twenty, twenty five percent from three, four years ago, like the cost of housing.

Any reason why? And they've gone flat over last year, we're in a half or so. But why aren't they going back down? And and again, the individual food items, they do go up and down and all around for lots of different reasons.

You know, egg Prices last month, we wait down because they gone way up before because of the ab flu effects. So but in aggregate of if I look at grocery Prices there, they they remain elevated. Any any thoughts to whats going on there?

I I I do think that there is a lot of nuance in these things. So you know take eggs there up thirty percent over the year, but that's mostly because of something going on with avian flu. As you said, I think I think that there's pricing power in some of these industries.

And I think that companies look at what their competition is doing and they try to keep up with what their competition is doing. Um like we know that in grocery stores, for example, there's there's some big players in those markets. There's a few big players, particularly if you look around different geography of the country, right? So where I live in southern california, there's maybe like three or four big grocery stores in the whole southern and california area.

So they're going to look at their competition and they're going to say, you know, what's my competition charging for this product? I think this happens in every industry to some extent and how can I be competitive with that? Um so I so I do think that there's some you know market power in a lot of these industries and companies are not willing to necessarily slash Prices unless it's their interest to do so, unless they think they can get some market chair by doing that.

Um and then there's a input costs, right like so go back to housing or go to food. And yes, you know uh, disease, fuel and energy Prices have been falling recently, but they're also still higher than they were five years ago. That's a major input into food. There is a lot of things along the supply chain that are more expensive, I mean, even just labor. So in a lot of these industries rates.

So if you look at farm n Prices, if you look at uh, the cost of labor and agriculture, certainly if you look at the cost of labor and construction and housing, that's all gone up to and that's going to be one of the biggest input costs here. So I think because of all these shocks we had during the pandemic, input cost for a lot of this stuff is higher. So just to make any margin, you know, companies need to at least recoup what their cost structure looks like now relative to what I was four years ago.

Yeah, I think you make a great point. You're not arguing Price gouging.

yeah. I'm sort of tip telling around saying that because I don't think it's that. I don't think it's that I think this is sort of Normal business practice.

Yeah still that Prices rise like a rocket and ball like a feather. You know they if some for some reason they they rise like during the pandemic when you had supply disruptions and labour market disruption is the competitive pressures have to drive back down those margins, but that takes time. IT doesn't happen quickly.

And what you're saying is in many Marks, particularly in the grocery business, specifically, the company committee purchase may not be what they used to be. Uh, that they're not quite so that there is taking a longer time to come back to earth. And margins are actually quite wide.

If you look at corporate profit margins, you know the Price they charge to to to their cost, they are extraordinary ly wide by historical standard. And they jumped in the pandemic again. I don't know that that we are maybe this system matter degree is not gouging per this is what you would expect. But IT goes to the um you know potentially the the the not the lack of but the kind of the soft competition in all of these markets in these Prices come in as much they otherwise that's what you're saying.

Yeah yeah. And then like take a very competitive market like gas stations, right? So if you think about a gas station, there's usually one on every single corner of a major intersection, right? There might be one here and then one bright across catty corner from that gas station.

That's a that's a market where every single day, you can see the Price that your competitor is charging. And you absolutely have to be competitive and shift depending on what your competition is doing. And gas stations have very little pricing power when IT comes to what they're charging for the cost of fuel.

They make most of their money from what they sell in the convenience store. When you go in after you pay for your gas, right, and you buy a back of chips and and a soda or something like that. But that's a market where you do see Prices fluctuate up and down very, very quickly and very dramatically. And you could see those Prices easily fall back because there are really Price takers. And it's a very competitive landscape when IT comes to that product, unlike some of the others stuff were talking about.

Yeah, okay, good point. I got another explanation. But before I give mine maybe mad, do you have any other thoughts on this?

I I think a lot like there hasn't been the pressure. Consumers are upset, but they are still spending. And I don't think businesses have the in to say that.

I mean, to be just to get out ahead of him to be nice. I mean, I I I don't think they've had do that and that certainly that had to matters a lot. They stop like the markets, competition, that specific industry. But um yeah that's that's how you get practice of us if if consumption drops. So um I think that's .

namic actually just uh effect to ID. Well, if C P I Prices, consumer Price, uh uh, inflation Prices are up by measure, by Prices, measure by the C P I are up twenty twenty five percent from where they were four years ago. So are wages.

Wages are also help by twenty twenty five percent. So, uh, that less input is for consumers to fight. And maybe they got out of the habit of fighting, right, because we hadn't been through for decades any high inflation.

Consumers kind of got out of. When I was a kid, my mom was clipped coupons from the newspapers because Prices were high. And that was a way to you cut your grocery bill.

I like the anyone do that anymore? I I don't know, but I don't think you know people you know there just out of practice, you know, fighting back and then shopping Better, buying this kind of brand of jam is post that kind of brand. And or my case, peanut buttery.

I have been looking at the Price of I need to look at the Price of peanut, but i'm sure I could get a Better deal OK. Once I get on one kind of brand, I can get up IT. It's like .

about maybe, maybe, maybe you're .

doing that to me. Well, netlist to the other explanation. Wages right in the service side of the economy, the cost is largely the cost of labor.

So what happens Prices go up like what happens in the pendel c business because lamer marker was tight, had no choice but to raise wages. But there's like no possible way the business can go back and say to their workers I cut your wage. They can do that.

Therefore, they can cut the Price. They can cut the Price. So that's why ah you know very difficult on the service side of the economy side with regard food and gas, uh, you know you do see Prices go up and down, but on the service side, that's incredibly rare for that.

You have to a rip warn recession for that to happen. So think that is the other reason why Prices are you know kind of sticky. They don't fall because you know wages don't fall.

The wages circled sticky as well. Um okay. But you think we explained IT pretty well. Uh, well.

you also look at the fact that we actually don't want right yes.

broader ady right enter .

into a deflationary cycle. The issue is you don't know where the bottom is and that starts to um feed on itself in terms of consumer behavior and that could be very， very damaging to the economy. So that's the that's the risk we run as well, right, where it's an asiatic c yeah .

because once Prices for things start to fall going back to labor, what do businesses do? They can't cut, wait, then they cut workers and then that's when you get. Recession, that's how you got into depression.

And then of course, exact if you are oh anything you know. It's not like if your wages or profits are falling. It's not like your debt is gonna any lower.

So your your debt service rises the percent of your your your income work corporate cash for know right? Because the the debt rises get more default and then you can easily construct a pretty ark scena. So you really don't want broad based deflation. So okay.

consumers also pulling back on their spending.

thinking they going to get a Better, yeah, too, right. Yeah, yeah. Where once I was, I I was one in my some of my travels.

I was, oh, I was in europe and there was one of the people I was talking to wasn't going to buy a car because this way for the Price to cut, get up before buy. yeah. So okay, let's play the game.

The stats game we each before is that, uh, the rest of the group traced to figure that out through clues and questions to doctor reading the best start one that's not so easy to get to immediately, one that's not so hard. We never get IT if it's proper to the topic at hand, all the Better. And we always begin with mera marsa.

you're up. Okay, four point four percent.

war point four percent of state that came out this week.

yes. Super car, no, but I was going to ask you what super car .

was was not per core.

More point three eight.

no interest OK.

I was so confident.

Not super core.

But are you sure .

it's not a OK super core services x housing and energy services? Yeah, that's what a chair power called out, right? Uh to to follow that was up both side .

up phone .

four years .

OK in the C P I report IT C I P .

but it's not super car .

year over year.

It's year over year.

Um is the housing is like was a rent of shelter? No, no. okay. Is this is a component though you're you're focused on a component of .

the particular product, product in in the CPI report that i'm highlighting because I think the conversation is gonna go toward what inflation could look like over the course of the next two years with some of the policies that the new administration .

is putting in place. So you're going about you're talking about terrace soon.

So imported product .

some some down, but four four because goods Prices have been really soft, right? Then name him in falling. So this is good in import Prices. No, no, not important. A, C, P, I, uh, what do you think that some commodity?

What's your down?

It's good.

It's a good french wine. No, no, I know. I give up. What is IT?

It's washing, washing machines .

and driers known to explain the listener why why .

washers. So I I picked this because if you recall when, uh, president trump came into office and twenty sixteen and started putting broad based terrains on chinese imported goods, this was one of the products that had a very high terf rate and was was always called out as an example of how tabs were driving Prices of imported goods up in the us. right? So a lot of washers and dryers um are made outside of the united states. And this was a product that really got hit with terrace and IT was one where people have been speculating recently given that we know that there is going to be higher terrace on imports over the next couple years at least. You know there's should people be sort of buying in anticipation some of these big ticket items before they are terrible slapped on them in washing machines is always one that gets mentioned where are washing .

machines made or are they made in china? Do you know I don't know where they .

are made well so you know a lot made in like south korea, other asian countries yeah um I think that there are components of them that made in china, even even the ones made in the U. S. I I would presume I have to do a little research on this before I speculate too much, but I would presume that a lot of those parts may come from asian economies. And we know in terms of tariffs, not just going to be china, right? It's gonna fairly broad based likely and will be spread across a lot of these economies that um that we import from.

That's a good so up four point four percent that seems that seems already that seems high for a good.

for a good. That's right. Yeah, which is which is sort of surprising, right? And that's just in the last year. yeah. So okay.

mad. You want to go next.

Two point three percent.

呃， C, P, I.

no.

P, P, I, no. A state that came out this week, yes.

imports merit. Imported.

import x petrol products.

Ah, yes, yeah. Import x fuel, yes. yeah. Here.

your good is credit for that. yeah. The same story as as mr.

something were going to be watching in coming years that I haven't .

spent a of time. Oh, think it's gona be years. I I thought if you said coming followed in the coming years, i'd be depressed. But you're saying coming years.

I don't want to do the overly pessimistic. That's the realistic expectation.

right? absolutely. I want to drag out .

I think to change the heart is coming yeah um unfortunately. So the uh import Prices x feel feel big can distort things and import Prices including feels are n up as much. So are looking at this. It's kind of uh a harmonia a of inflationary pressures coming from uh trade restrictions that we are expected to see in the in the next coming years. So uh yeah something I watched that I I haven't .

watched uh all that much um in recent years in Prices x patroling .

products are you said .

two point .

three percent year I have IT as x fuels, I don't know, uh, a little bit throughout .

most the dollar is strong. What is that all about? I wonder why already we're saying that kind of washers .

and the .

washers and dies, right? Uh, okay, that was good one, Chris.

Okay, my number is six hundred, eight dollars and four cents.

six hundred and eight dollars and four cents. This is the monthly payment on an all alone. No, was that close? I think it's a bit higher .

than that is probably .

probably closer seven hundred dollars that but that's not IT. That's not IT. That's not is IT is IT related to the cost of living? No, no, no, not really very indirectly.

The cost of a bitch coin?

No.

no, I did already right. Are you kidding me? Big points.

Like what is the thousand.

thousand, thousand?

See, i'm surprised perceiving .

shows up to work anymore.

Give them .

given the Price. I mean, he's least flying around in his own private jet. Now it's for less, I heard.

So can go to this bottle ball tournament all over the world. Drink, please have a different balcony every week, weekend. The drinkers, can they?

This is just a cover.

right? okay? So six .

hundred dollars.

six hundred dollars and seven cents.

Now, oh, oh, I know what that is. I know what IT is. Yeah, no, I don't really, I was going to say. But now that I thought the the cost of thanksgiving dinner for a family of four, right, let's look that's a costal .

talk right there.

So 是我 已经 that's right。 That's like gold dusted.

I don't know. I yeah .

he gives isn't .

a commodity Price.

This is a commodate in an important .

commodity. It's not gold. No goal is two thousand five hundred dollars or something a important commodity for or not.

Copper housing .

housing copper, copper were .

bops down. Chips, no chips.

What .

you want .

to talk about .

chips all the time.

That's why brought I thought you get IT away.

That's a good one.

That's a really good one and it's a shot up. It's um just over the last year, it's up thirteen percent and just over the last week is shot up. It's that .

reflect tears because the software .

long tears. Thank you. I to the into the calculus because others .

tested rise in August. I believe on canadian software, software number imports, I believe, right? I think so.

Do they change? I yeah they rose. I think they increase. Yes, that that must be at.

yes.

contributing force, contributing factor will hear from .

folks out there. Not that. And that was the result of these are the biden administration turfs.

They were poah under by in August and I think it's um I I don't know the particular so publisher and say, but yeah, they increase in August .

but those are the Terry on canadians are yes those in place for a long time now they predate right .

yeah but .

he didn't get rid of .

you getting increased.

Ah I thought they went down and maybe that maybe now he's problem .

pretty sure that they were rose .

in August interest yeah I think .

previously .

previously yeah, they were still they were still positive. They were still there and maybe now they are just bring them back up. Yeah, yes, take a work. Yeah.

what I was good one. Uh, can I ask how long did they go? How worthy. We know what's in in recent history.

Like back in july, they were .

down to four statistics. It's good, segway. Into the next part, the conversation around president trump in his policies and inflation.

You may not get IT, so I won't keep you in your misery for very long. Two point four, two percent. Two point four, two percent. It's it's a uh, interest rate is related to inflation expectations. It's a pretty big hit.

The five year five ford .

is five year break even. So OK you take a look at uh, the five year treasury compared to the five year yield on tips uh in relation protect security that gives you uh an investment of what investors think inflation average over the next five years. And that's two point four two percent.

That's up from one point eight percent back in september in back in september. That's when vice person Harris was at the peak of her popularity, at least in the polls and in the bedding market. The thought was he was gona win the election since then.

Her, you know obviously her polling them was declined in by the by the time of the election of the markets strongly expected trump to win in post trump trams Victory. Uh, inflation ing expections of continue arrives. So we've gone from one point eight, roughly speaking, to two point four up, you know sixty basis points are so point six percentage points and echoes to inflation expectations. Investors are beginning to and already and are beginning to discount some significant pickup of inflation down the road related to a present trumps uh, policies I can think of floor policies that he the obvious most obviously being terrible but there are three others that come to mind when thinking about the policy is his space on the campaign trail and uh and the potential for future inflation. You guys want to take a cricket though, so the first .

one ee's terrify .

was the second one. And immigration.

deportation. Or just lower tax rate for for increased spending, its inflation .

er yeah ah in a form employment economy, if you get deficit financed tax cuts, uh then that would use of demand and inflation. And what's the final the the fourth one that I think is important .

compromised fed .

yeah right you explain that one.

Um throughout the campaign different times and there there's different policy documents that the trump campaign had that suggested that basically that the White house should have some kind of influence or some say in uh rate decisions at the fed.

Those different theories put forward as to what look like with it's a shadow president at the fed that would saying be a proxy before the White house um but ultimately independent to the central bank is important because is without IT you have politicians that electoral chances matter based off are determined by the economic environment that they are running in. And then that gives a really strong imposes to ease policy, keep things lose. Uh that's inflationary, that the inflation expectations over the long run um imposes a lot of other problems um especially if you're running deficit financed tax cuts. There's an input there to keep interest late greats that you can have to pay on that debt low. Very proven vulnerabilities uh to that method but um yeah generally how I think .

about IT yeah right course that plays out over a period of time that that's not next quarter, even next year, but no over the period years. I mean and I don't know that, that matters a lot in a declining interest ate environment like the one or in now is this when get to a point where the feed should be raising rates and IT is not able to, then that becomes an issue but potentially inflationary issue. So something down the road um well, all the .

other policies are inflationary, yes, that you ticked off, then this becomes a real issue soon.

sooner rather later right that well I don't know IT takes a little while for Terry kick in and for deportations to have have a ite right? The tax cuts probably won't be implemented until twenty twenty six probably right because the so I i've .

been giving this some thought because we think you and I think in our last podcast, we even mentioned, well, the fed has to has look at the data to be data dependent. They take one step at a time they can. They shouldn't be in the business of trying to anticipate where the fed is, where government policy is headed and how that might impact inflation. They they should be neutral, right? Just, uh, avoid that speculation when making their decisions.

And then I think he said that and he said that is Price conference is the last week in the wake of the F M. C. Meeting last week, he said, we don't speculate, we don't forecast we our time, we react.

Yes, yeah, we stay or lane. But your point and in your statistic, I think is the right one. If investors are anticipate those inflation expectations, are reacting or anticipating those policies, then the fed has to react should be incorporating that, that piece of information in the in their decision. So IT, maybe an indirect that .

that's a really, really critical point because when you look at the red circle feed reaction function, what is that, that they look at when they set the interest ate and they lay this out in the statement, every F O M C meeting, that federal open market committee meeting, that's the commune that meets to decide in restate policy.

They say we look at 呃， is where is the economy related for employment? What's the unemployment rate? We look at inflation.

We look at inflation expectations, right? We we look at international developments, uh, in financial conditions more broadly. yeah.

And so inflation expectations is explicit called out. They look at inflation. If so, you're saying, look, he hasn't done anything but investors are thin.

He's gonna things in a legal inflation. So that would argue all of equal. Then maybe you shouldn't be cutting interest rates at that, right? Yeah, that's interesting point.

I have not heard that point, but that's not really significant one. Uh, but they so far, they they haven't acknowledge that. I guess, I guess they may wait they may wait to the action the way inflation expectations would get into inflation.

Uh, lights different ways, but one key way is through wages. So if wage growth started to pick up, you know maybe at that point, that's when they would react and actually respond. I'm not sure or or, or maybe not maybe they go even more quickly than that. But that's interesting. That's very interesting.

And I don't know what the threshold is, right? You mention two point four percent that's rising, but it's not maybe it's not at the level.

It's actually pretty looked at in terms of five year break even. I mean. If you go back before the pandemic, IT was covering somewhere between one and half and two percent, which was arguably too low.

The fact that inflation, then I was too low, uh, I ve just took off during the pandemic. And russian war peaked when russian war is at its apex in the summer. Twenty twenty two is come back in， but two point four two is on the high end of the range that you know between two and two and hf percent that is prevailed since that time.

And that's that's above that's that's above target, that's above what they want, I think so you make a great point um uh uh on terrorist uh that's pretty strait forward understand the connection between terrorists and inflation territory attacks uh on gods uh and uh based on experience the that tax is paid by the consumer largely some of its born by retailers and distributors, some of born by the producer of the product overseas, but vast, vast majority of is born by the consumer. So at least I inflation IT, also at least I inflation through the impact that has on investment and supply change decisions because terrorists are very a messy to implement. You know which product, which country, which period time and businesses get exemptions all get.

Certainly he was the case. Trump one got a lot of exemptions for various reasons. So the generations of bottle of uncertainty, ty, which affects uh investment near showing in other decisions and so therefore a adds to cost and lowest productivity and adds to inflation of pressures long run.

So I think is that little easier understand the link between terrorists and inflation? Hello harder to understand the link between the immigrate, deportations and inflation, right? They have any perspective on that. A Christmas?

Sa, well, we know we've talked about this a lot, that the surge in immigration over the past couple years has provided a ton of supply to the labor market, right? It's why we've seen very high labor force participation rates and very strong job growth months after month after month despite the fact that, you know, we did have high inflation in the rest of the economy, was kind of slowing, right? Not slow, but slowing.

And we were getting extremely strong job growth. And a lot of that we now know is because of the search in immigration, supplying labor to, in particular, to industries that were hit by labor shortages coming out of the pandemic. So you think of things like construction, leather, hospitality, restaurants, health are a lot of health care jobs are filled by by immigrants.

So if you remove that supply from the labor force in the quantities that we are talking about, which is potentially a million or more people than you in some industries, may create a supply shortage for labor, which means that employers will, businesses will respond by having to raise wages to attract people to these jobs. And then you go down this path, right, of higher wages are being passed on to the consumer in the form of higher Prices for goods. So, you know, Chris was talking about the construction industry and costs for housing, immigrant labor and often undocumented labor.

A lot of echoes in the construction industry, right? So that certainly has a direct impact on the cost of housing, on the cost of constructed goods, whether it's residential or non residential. Um so that's the way I think about how immigration policy would have a direct impact on inflation is through higher wages.

Yeah I think the academic literature on this uh comes down on IT doesn't have a big impact on inflation. A immigration policy doesn't one where the other uh IT has supply side effects, the ones you just described. So I reducing immigration or close to the country or deporting people, IT does have a negative impact on supply.

You know Prices are supply and demand. So I have supply higher Prices but also has a demand side effect too, right? Because immigrants are consumers and so they're gone. And so IT then becomes a question of supply and demand. And I think the literature has said generally, it's kind of a wash, you know uh, ultimately, uh, which I I think is right.

But I do think in the current context, given how tight the labor market is, the supply side and also the fact that the immigrants coming into the country, particularly the focus are coming across the southern border, which is where you know a lot of them in coming there are very lowest income, few resources they're spending really on the margin. Uh, so it's more a supply side effect in a demand side effect at least here in in the next year too, given the tail liber market. So I I think I think the academy literature probably right over the sufficiently long enough run then supplying domain effects kind of net out and inflation effects are on on the on the margin.

But here in the near term, you know, in the next year to when we're really focused on this course, voters really are focused on this. Uh, the feed vary focused on this, this this is going to be more of inflation effect. The supply side impacts are gonna dominate the demand side effects. Does that sound right the way articulated IT does?

One of my concerns is that and I think that's right terms the general but there are certain instruction like construction and agriculture yeah and I worry that no, you're going to see that where you to see the effect almost immediately, right? That there's no there's no lie with construction. There maybe are some substitutes and there are naturally legs in in in that industry.

Not not that they won't be affected, but egg, I can see, is being directly affected. And given how sensitive consumers have been to food Prices, I if if we start to see food Prices now jump up even a little bit because of i've wonder what the the rations of that would be if consumers continue to really measure inflation through through those food Prices. Does that cause a reversal in the policy or other other changes here, uh, in order to get both food Prices back down?

Yeah, you make a great point. I mean, the two sectors that are going be affected the most on the supply side, this housing, because can build homes, you rely heavily on immigrant workers pickling in the south, in the west where building is strongest and you have more immigrants.

And then food agriculture, right, uh, in the terms are gonna crush agra food as well, right? Because a lot of imported product or vegetables and fruits and processed foods from overseas, right? So feels like the two things that people are most focused on when the comes to their pocket book, grocery Prices in the cost of housing. There are the things gonna, the the effects of these policies more in a more pronounced way.

And I think I think the labor in those sectors, if you think about agriculture, right in southern california, the largest egg producer of all states, and in the us, that's where, like all the let us comes from, all the strawberries, right? We saw during the pandemic, when a lot of workers voluntarily went back to mexico, IT didn't come to the U. S.

Because there were jobs right in the economy was shut down. We saw that farmers were complaining that looked there. These vegetables are dying on the vine, right? We saw that affect very, very quickly since that's come back and some of this labor has come back. Um I think this labor in particular, because IT is more likely to be undocumented.

These are often people that than like group housing together in group quarters, right? They're not putting as much demand on the system for for housing and other things. Like you said, mark, right.

Their demand is not the same as, say, in immigrant with a PHD coming over from india to work at google, that's that's a very different kind of immigrant. And under trumps policy, that kind of immigration will be restricted to where he is. Not just talking about illegal immigration, is also talking about restricting legal immigration to some extent. But those are very different markets when you talk about demand and supply. And so I do agree that this is where you're going to see IT, and I think this is where supply certain the supply impacted outweigh demand impact.

So here we are, uh, long flight against inflation feels like we're just about slain that drag and put input tion back in the bottle. But what's feels like dead ahead given the shift in policy that's likely trade, immigration, tax deficients, tax cuts, policies around the third, that inflation gone coming back that you know it's going to be initial again here down the road. That's what IT feels like to me.

That's that's kind of sort what the investors seem to be saying or are actually saying in terms of inflation expectations, right? Anyone disagree with that? No.

OK by yards are up.

bends are up and stare up. Yes, OK, please take a couple listening questions. I got one.

I got one. No, uh, the other day i'll pose. But before I whos that maybe murcia is the one you wanted to pose.

Yeah there's there's actually there's a lot there's a something a matter of picking one, but I think be .

a good what .

about the dollar, the strength of the dollar, right? Um going forward. So the dollar has been strong, right? That's been advantages to to U.

S. consumers. But what happens under all these scenarios, we just laid out what what does the dollar do? Visit other major currencies?

Yeah, we were just talking about this. IT means a stronger listen initially. IT means a stronger dollar. A the you know, if the U. S. Is going to be imposing carbs on a wide array of countries, some develop countries and in emerging markets, it's gonna a lot of pressure on.

It's gone to pressure on our economies, going put even more pressure on those economies because there more open and less diversified, more fragile particular emerging markets. You know like a mexico would be a great case point. Uh so you get this kind of uh, flight to quality.

You know capital starts flowing from mexico in the the united states and that drives the value of the dollar up, the pay so down. And I think mexico is probably the poster child for that. But I think that applies a lot of uh, other emerging markets. Uh, so I think there's other kind of dynamics of play might affect you know wealth of interest rates, bed policy versus policy oversee. So I could see we were just talking about what all this means, means for inflation expectation in the fed.

My tent, Chris, was kind of sort arguing at least maybe the fed doesn't going to cut interest rates quite as much as they would have otherwise uh, but if you go over to europe to say to the european central bank, you know, I I think all these policies are going to be hard on growth when we can talk about the G O political dimension to this, which would really matters like what's gonna en in ukraine and little, and what kind of pressures is going to be put on the europeans to put, you know, more resources into their defense. You know, all those kinds of things. so.

Not going to add inflation, going to depress inflation in in europe. So I might mean the E C, B, european central bank is gonna t rates even more so you this this interesting differently widening and that attracts near term capital into the united states and pushes up the value of the dollar. So I think lot across turns, but that means a stronger dollar.

I don't think the dollar takes off here just because people are going to start worrying about the U. S. H. And what this all means for the U. S economy.

But do you think listening civil l future puts upward pressure on the door? And by the way, that's one factor that would tend to depress inflation in the us, right? Stronger dollar, less inflation. But I think that's not more on the margin. Um we think increased get that right roughly, right?

I did. I I think that it's tough to forecasts this one, right? Yeah the dyna is going to be the retaliation. What's a going to look like urban to see other trading blocks forms is gonna push europe into china's arms or you know there all sorts of, uh, other factors here that could could influence the did our streng no long run?

No, that's a good question. Okay, I got a question. Uh, this is around mortgage rates. Uh, uh, someone on twitter on x uh, uh, brought this up. Uh, and I thought we sit on the podcast because he's a listener too of the podcast he follows beyond x and on the IT listens to the pig cast he's thinking about buying human.

He noticed season at the season in the mortal astanding bly seasonally that in in kind of the winter months, uh, rich little bit on the lower side. And in the fall or summer, there are a little bit on the higher side that feels like that's very consistent with demand. But I never noticed the seasonality course. I know you follow this carefully. Is is there seasonality .

and rates there is I don't know the extent of IT is have a hard to to parcel out. But yeah, and I does .

make some sense to you are you are not point zero zero five, not point five, you know that's right.

And it's also hard to tease out because it's rate so close, a line with other long term rates, right, of the ten year treasury rate is is moving around for whatever reason, right? That's I have an effect on the on the mortality rate as well. So it's really you're trying to gage what that additional spread is and there is sum effect.

But yeah, it's it's basis points to get IT makes sense that it's tied to the housing cycle, right? If there is more activity in, in the summer, right? There's more competition.

There's are going to be more look, there are going to be more loans are origin during that period, right? May see the high um a moderate that is slightly higher than in the winter when maybe the the lender um lenders have more capacity. They may be more competitors bidding for whatever on more digits are are being originated there.

So it's there. I guess my voice, I think this is where this is calling is I wouldn't try to time this perfect. I think the bigger constraints today is just finding a home in the right home that, that you can afford 那 overall。 And if you can save that extra you basis point, that's great. But I don't think this really should be your your major concern. And in terms of making making a decision up about when to buy, if you try the time this perfectly, you may you know missing opportunity.

You got IT. okay. Alright, I think we're going to call the pockets.

I know murcer wants to get back on the beach. Yeah weather, yeah, there is. Can see your smiling. Uh, but uh, any last parting comments, any words of wisdom .

was well covered.

OK. Chris merson, anything? no. Okay, right. I think we going to call this pie cast. Dear listener, I I hope you found IT informative, and we will talk to next week. Take care now.