The Inside Economics team breaks down the latest inflation data -- August’s consumer price index. They unpack the underlying components, focusing most of their attention on the confounding acceleration in shelter inflation. “Eggflation” makes a return to the podcast as well. Nevertheless, U.S. inflation has cooled considerably, and the Fed is set to start lowering their policy rate at next week’s meeting. What will that mean for U.S. consumers and businesses? Finally, Marisa takes some listener questions and Matt reads some (mostly positive) reviews of the Inside Economics podcast.
The Inside Economics team breaks down the latest inflation data -- August’s consumer price index. They unpack the underlying components, focusing most of their attention on the confounding acceleration in shelter inflation. “Eggflation” makes a return to the podcast as well. Nevertheless, U.S. inflation has cooled considerably, and the Fed is set to start lowering their policy rate at next week’s meeting. What will that mean for U.S. consumers and businesses? Finally, Marisa takes some listener questions and Matt reads some (mostly positive) reviews of the Inside Economics podcast.
Guest: Matt Colyar - Assistant Director, Moody's Analytics
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist at Moody's Analytics. I'm joined by a few of my colleagues. I've got Marisa DiNatale and Cris deRitis, my two co-hosts. Hi, guys.
Cris deRitis: Hey, Mark. Good to see you.
Marisa DiNatale: Aloha.
Mark Zandi: Good to see you. Aloha, aloha. What are you referring to?
Marisa DiNatale: The fact that you're in Hawaii.
Mark Zandi: Oh, okay. Indeed. Yeah, I've really enjoyed it. We were in Southern California last week. Was it last week? Yeah, last week.
Cris deRitis: Yes.
Mark Zandi: [inaudible 00:00:45]. It seems like a gazillion years ago. Decided to come a little further over to Hawaii and really enjoying that. Looking forward to getting back into the swing of things as well. There's only so much sunshine you can take, really. I know that sounds really bad. [inaudible 00:01:02].
Marisa DiNatale: No, there's not.
Mark Zandi: I know there's not. Have we got Matt Colyar? Matt, good to see you.
Matt Colyar: Good to see you too, Mark, Cris, Marisa.
Marisa DiNatale: [inaudible 00:01:10].
Mark Zandi: You look like you have more of a military buzz than I've seen in the past.
Matt Colyar: Somebody else said that to me, too. I went a little shorter, but the hair-
Mark Zandi: It looks great.
Matt Colyar: My hair is not getting thicker, so I think I'm just slowly getting less and easing my way towards the inevitable.
Mark Zandi: Did anyone ever tell you you look like Kevin Costner?
Matt Colyar: No, but I like that.
Mark Zandi: A young Kevin Costner? I don't know. Not the current Kevin Costner.
Matt Colyar: That's-
Mark Zandi: The older Kevin Costner looks great too, but I'm just saying you look like a young Kevin Costner.
Matt Colyar: That's a great compliment. I love Tin Cup. He's a good actor, handsome man, so I'll take it. No, no one's ever told me that or anything close to it.
Mark Zandi: What was the movie where he was in the military? You know what I'm talking about? No?
Matt Colyar: There's an obscure one. He's like a vet. He came back from Vietnam? Are you talking like way back?
Mark Zandi: No. No, that's not Costner. That's Cruise, I think, coming back from Vietnam? No?
Marisa DiNatale: [inaudible 00:02:06].
Cris deRitis: [inaudible 00:02:06] called War.
Mark Zandi: Oh, okay. No, Costner is-
Marisa DiNatale: Matt clearly knows the deep cut, the Kevin Costner deep cut movies that [inaudible 00:02:16].
Mark Zandi: Does he? He's [inaudible 00:02:17].
Matt Colyar: I've always wanted to be him, and this is huge.
Marisa DiNatale: And now you are him.
Mark Zandi: You succeeded. You look [inaudible 00:02:24].
Matt Colyar: Field of Dreams, not a great movie?
Mark Zandi: Oh, that is a great movie.
Matt Colyar: Yeah, for sure.
Mark Zandi: I heard James Earl Jones, he was in that right-
Matt Colyar: Yeah, sure.
Mark Zandi: ... he recently died. Great, great actor and great voice. That was a great movie, Field of Dreams. I should go back and take a look at that. Okay, so we got lot around to cover. Matt, of course, you're on when we talk about inflation and the Consumer Price Index. CPI came out this week, so we want to do a deep dive there. I'm really confused about the housing component. It feels like everybody's confused about it. So maybe we could just talk about that again. We'll talk about it again. Then, of course, the Fed, the Reserve meets next week, and everyone now expects 100% probability that they're going to cut rates. So let's talk a little bit about that, where rates are headed and how rates impact the economy, what kind of impact we think it will have on the economy. We'll take a few listener questions, maybe one, two or three questions depending on how much time we have. We'll do the game. I say this with some trepidation, but we told listeners we'd go over some of the reviews. Matt, I understand you've got a few reviews that you can read.
Matt Colyar: I do. I have them queued up.
Mark Zandi: Okay, good. Of course, we were getting a lot of reviews at the conference, weren't we, Cris? [inaudible 00:03:50].
Cris deRitis: We did. Again, nice conference. Yeah, people seemed to really enjoy it.
Mark Zandi: Well, they said related to the podcast, they like the chit-chat. That's what I'm hearing. No?
Cris deRitis: I was told, "I like the chit-chat, but not too much chit-chat, and I don't like chit-chat about chit-chat," like we're doing now.
Mark Zandi: Oh, okay. Got it. Let's move on.
Marisa DiNatale: That's a fair complaint.
Matt Colyar: Say no more.
Mark Zandi: A fair complaint, no more chit-chat. Yeah, I got it. All right, Matt, CPI, Consumer Price Index, tell us about it.
Matt Colyar: I would call it the same way I would call last week's jobs report. Good, not great. There's things to be less enthusiastic about, but generally it's a good report. Headline CPI rose 0.2%, slightly rounded up from 0.18%. The bigger story there is that the year-ago rates, so comparing to last August, headline inflation fell from 2.9% to 2.5%. That's almost a half a percentage point drop. That's owed to high energy prices last year. Now when we look back, favorable base effects is what we chalk that up to. Food rose 0.1%. Again, that's kind of where it's been range bound, really mild inflation when it comes to food.
Mark Zandi: Is that groceries or is that-
Matt Colyar: That's top-line food, so incorporating both those. If we focused just on grocery store prices, so food at home, the CPI for food at home, that was flat. That didn't change in August, and the year-over-year rate fell from 1.1% to 0.9%. So I feel like it's been a consistent trend. That's an essential good. That's a component of inflation that really gets a lot of attention for good reason. It's essential. You can't survive without food. So the fact that wages and household income is growing faster than food is certainly a good thing. So 0.9% growth.
Mark Zandi: Correct me if I'm wrong, but I think CPI, Consumer Price Index for food at home, I just say groceries, short-hand groceries, that really hasn't risen much at all, if any, over the last almost year and a half now. It's been basically flat.
Matt Colyar: That feels right. The last time that it's risen more than, I think, 0.2% in a month, which is kind of commensurate with 2% inflation, so something we wouldn't be alarmed about, maybe once in the past year. So every month, it's 0.0%, 0.1%, 0.0%.
Mark Zandi: Now, of course, grocery prices are still, what, 20%, 25% above where they were, say, certainly maybe three or four years ago. They took off in '21, '22 with supply chain issues. Of course, diesel is a big part of the cost of food because you have to move the stuff from the port or from the farm to the store shelf, and so diesel is a big part of that. So they took off in that period when the Russian war affected energy prices, and the pandemic was affecting supply chains. But really in the last year and a half, I'd say since early 2023 maybe, really no movement there of any consequence.
Matt Colyar: Yeah. I think if you look at other components, just diesel, fertilizer, wheat, all those things topped out in 2022, early 2023, and have trended down since. So you're seeing slower growth. Yes, comparisons to 2019 aren't great. It's 25% higher. But slower growth has allowed wages to catch up. So it's mostly encouraging but still certainly painful in some areas.
Mark Zandi: Now, of course, food prices and grocery prices have received some attention on the campaign trail recently. The idea that maybe grocery stores and others in the supply chain have been, meatpacking industry, taking advantage of the pandemic and supply chain disruptions to push up prices, push up margins, the whole price gouging thing. Do you have a sense of that at all? Do you have any views on that? Has there been price gouging there? You certainly can't see it in the last year and a half.
Matt Colyar: I think if you focus specifically on corporate profit margins, you drill that down to retail industries and food and beverage, you can make your case there. But what's appropriate margins and what's the right intervention, I think, is the much bigger story there, some consolidation in the industry. But if prices are growing at a level that we wouldn't consider right now to be placing upward pressure on inflation in any kind of worrying way, it's hard for me to get too worked up or too persuaded by that as being a considerable reason that inflation is still high if it's not coming from food that's growing 0.9% year over year.
Mark Zandi: Cris, do you have a perspective on that particular issue, the price gouging? Prices surged. They've been flat for a year and a half. But if you look at margins, to Matt's point, they still remain very, very wide, it's hard to measure, but seemingly very wide. Do you sense any...? What's going on there? I don't think you'd consider that price gouging, but what is that? Should we be worried about that?
Cris deRitis: I'd say look at apples.
Mark Zandi: [inaudible 00:09:19].
Cris deRitis: The price of apples is down 13.9% year over year. These prices go up. They also do come down and certainly in certain segments. So that price gouging argument, it doesn't hold much water with me. Margins also, you got to be careful there. You got to really dig in to see what's going on. Grocery stores have also invested in other technologies. They could be seeing their margin improve because of those enhancements. Or it could be regional. I think you really need to dig in before we can generalize that indeed it's price gouging that's been driving the grocery industry. I guess a broader point, if I was to look at sources of potential gouging, it wouldn't be grocery. It would probably be the tech industry where we've seen prices remain elevated and margins wider. Grocery is still very competitive to a large degree. So I think hard to make the case that it's truly suffering from this massive gouging, and especially because we are seeing prices either flat or coming in certain products.
Mark Zandi: Tech industry? What are you referring to there?
Cris deRitis: Just if you look at the profit margins of some of the bigger players in the tech industry, they've been pretty healthy throughout this time period. You'd also suggest that they have a lot more market power. There are not a lot of large tech firms out there, so the level of competition is more reduced than what I would suggest you see from grocery stores. Within my geography, I can think of three or four grocery stores that are actively competing with each other. But when I have to look for a cloud provider, what do I have? Two, three options maybe?
Mark Zandi: I see, I see. Yeah, interesting. Marisa, any views on this issue before we move on?
Marisa DiNatale: I think it's just a political populist play to placate people's ire over the fact that food prices are high, and it is a staple. First of all I would say, I don't really know what the definition of gouging is. I don't know if there is one, but I don't even know how you measure that. Like Cris said, profit margins, they go up, they go down, they vary for different reasons across industries. I would say the same thing. I saw a headline the other day that somebody was complaining that there was only five competitors in the grocery space in their area. But I kind of chuckle at that, too, because if I want to buy a cell phone, how many choices do I have? I have two. So to pick groceries out as the thing to go after, I think, is just playing into people's concerns about inflation and what they're facing. I don't take it as a serious policy discussion really.
Mark Zandi: Yeah, I don't see price gouging. Generally, that happens after a natural disaster or some major disruptive event, and you do potentially see companies take advantage of that, businesses take advantage and jack up price for whatever is that people need in the wake of that crisis. That's not a good thing, and there are state laws that are in many states, not all states, but many states that make that illegal. So maybe there's something there. But that's not what we're observing now. But I would say it is appropriate, in my view and I think desirable, for the federal government through the Federal Trade Commission or the Department of Justice to keep shining a bright light on pricing practices, make sure that there's transparency around pricing, and make sure that markets are competitive.
I do worry, if you do look at business profit margins overall, not just in the grocery business but across the economy, they did jump since the pandemic. They've kind of leveled off more recently, but they've not come back down. They're still very wide. That may go to some reasonable concern about competitiveness in lots of markets, that markets just feel and look less competitive than they have historically. You need that competition to get those margins back down to something that is more consistent with historical norms. I don't think we see... Generally, that would not result in price declines, but it would result in flat pricing for a while. Maybe that's what we're observing here. Certainly, we're observing that in grocery prices. I stopped you, Matt, right away on food prices. Where do you want to go next on the CPI?
Matt Colyar: We can hit energy. It feels like a natural [inaudible 00:14:17].
Mark Zandi: That's a good one.
Matt Colyar: Energy prices have basically fallen all summer. You have 2% drops in May and June, no change in July, and now a 0.8% decrease in August for the CPI for energy. Gasoline prices, so the average gasoline price in the United States is around 3.2, so $3.20 cents per gallon. Last I checked, it's continued to fall pretty steadily throughout the summer. WTI, so West Texas Intermediate Crude, that averaged about $75 per month in August and is now a couple bucks under $70 per barrel. So this negative contribution from energy been pretty consistent, likely to continue at least in September. I know our baseline forecast is for a little bit higher over the long run, but as of right now, prices continue in decline, mostly chalked up to softening demand, a lot of that coming from China. Now we can shift to core CPI, which excludes the-
Mark Zandi: Well, before you do that, on energy, there's nothing but good news there if you're a consumer of energy. I mean, 3 buck 20 for a gallon of regular unleaded. I think in our local Wawa back in Philly, it's still 3 buck 25. Correct me if I'm wrong, Cris, is that right, 3 buck 25?
Cris deRitis: I saw 3.32 this morning.
Mark Zandi: Oh, 3.32, 3.32. I haven't been in the neighborhood recently. So 3 buck 32.
Cris deRitis: What is it out there in Hawaii?
Mark Zandi: In Hawaii? I think it's very similar to California, isn't it?
Marisa DiNatale: Probably.
Mark Zandi: Add a dollar. What are you? 4.20, 4.30?
Marisa DiNatale: It's like 4.30, 4.40.
Mark Zandi: Yeah, add a dollar.
Marisa DiNatale: Yeah.
Mark Zandi: But it feels like, if there's been a real surprise on the inflation front recently, it's been around energy and the fall in oil prices. That's been very surprising. Our energy guys, Cris Lafakis and team had expected that we would see oil prices in the low 80s, and here we are in the high 60s, low 70s. That's pretty amazing.
Matt Colyar: I know we go back six months, maybe that's a little too far, but when the election model started running and we were thinking, the 3.90 that comes to mind, something in that area was what would tip, one forecast, one winner to the next because of voters' sensitivity to gas prices. There was some really cool research on about 3.50 per gallon, news coverage about oil or gasoline picks up, goes through the roof, which is interesting. So a pretty safe distance there, which I would assume, I would guess favors-
Mark Zandi: Harris.
Matt Colyar: ... at least certainly our model favors President or Vice President Harris. [inaudible 00:17:08].
Mark Zandi: I think you make a great point. You can see 3 buck 50 per gallon of regular unleaded nationwide is a real threshold in terms of when everyone starts focusing on gasoline prices as an issue for people's finances, and in the current context, the election because that's going to be central. People think about their own finances and how they're going to vote. Once you get above 3 buck 50, closer to 3 buck 60, the media is all over it. As you said in our modeling around the election, if we get close to 4.00, all else being equal, that's when... Right now the model is saying Harris is going to win, in part gas is at 3 buck 30 or 3 buck 25. But once you get it up to 4.00, all else equal, the election flips over to former President Trump. So that cost of a gallon of regular unleaded is a very important statistic not only in terms of what it means for CPI inflation, but what it means more broadly about how people perceive inflation, inflation expectations, the bond market inflation expectations, and also the election, by the election.
Matt Colyar: That 3.50 doesn't change too. That was the threshold 15 years ago, and it's the threshold now despite-
Mark Zandi: Isn't that bizarre?
Matt Colyar: ... the income growth. It is very bizarre.
Mark Zandi: It's so bizarre. If you take a step back and look at all prices over the long run, 3 buck 20, we've been up and down and all around that level now for, I don't know, at least 10 years, probably 15 years. On a real basis, that means, after overall inflation, prices are actually lower now than they've been on average. But still, people have that in their mind, that that's kind of the threshold, 3 buck 50 [inaudible 00:18:55].
Marisa DiNatale: Interestingly, this is another industry where I hear this price gouging argument made. In fact, we've even got questions from listeners asking about gas stations setting prices and how they set prices and are they gouging. From what I understand about that, actually the margins there on a gas station selling a gallon of gas are razor thin. They're truly price takers depending on the price of oil, the price of distribution, the price of transportation to get the oil to the gas stations. But that's another industry weirdly that I keep hearing this gouging argument made even in light of the fact, what you're saying, the gas prices have essentially been very little changed for the past 10 to 15 years.
Mark Zandi: Well, this is where you hear that old adage, prices go up like a rocket, come back in like a feather. I think that's still pretty true in the energy business and gasoline. Oil prices have now been down for a fair amount of time, and they're now going lower. That's why, I think, we're starting to see prices come in. But historically, that's been the case, that it takes a while for energy prices and all prices to adjust. But this goes back to the competitive environment. The more competitive environment, the faster that feather comes in. If it's not competitive, it doesn't come in very quickly. So good news on groceries, check. Good news the price of gas, check. I know winners [inaudible 00:20:42] of gas prices are really important. They're still very low by historical standards, so that's good. So let's go to the next big thing, and that's housing. This is where we had some disappointment, I think.
Matt Colyar: This CPI for shelter, housing, which kind of captures everything that we're going to break down here, so owner's equivalent rent, which we spent a lot of time talking about, the rent that you think about for somebody that lives in a house that they don't own. The CPI for shelter rose 0.5% in August from the month before, and that caused the year-ago rate to tick up from 5.1% to 5.2%. That's the first time that that year-over-year growth rate has actually accelerated. We've been talking and waiting and waiting and waiting for shelter disinflation to come. It has. It did occur but just hadn't been occurring at the pace that we wanted to. Now we actually see a reversal of that. Look at the year-ago rate, shelter inflation picked up one strong month, and we can talk about why.
I hope you weren't looking for too much clarity from me because I scratched my head looking at it. There's plausible reasons why. We've talked about it. Earlier this year, it was we know that market rents are flat or declining and the way that the government estimates owner's equivalent rent, so hypothetical costs for staying in your house, if you own that house, that estimate is pegged to market rents, why aren't we seeing strong disinflation? Maybe I'll pass it to Cris there.
Mark Zandi: One theory we've been playing with or toying with is the introduction of single-family rents into the calculation. Because increasingly people are renting a single-family home because they can't afford to buy, and presumably a single-family rent is more representative of the cost of homeownership than rent of a multifamily unit of an apartment. So the BLS, Bureau of Labor Statistics, the folks that put the data together, are using single-family rents to a greater degree. I'm going to stop, and you correct me if I'm wrong but this is my understanding, it could be the case... This is just conjecture because the BLS doesn't release the data, I don't think. We can't see it. But the conjecture is that those rents may be rising more quickly. Does that sound plausible to you, Matt, that kind of explanation?
Matt Colyar: I think that's certainly plausible. I also think that just the weight that estimate is carrying because it's just so hard to say, if you live in a neighborhood where everybody owns that house and that's the track that the government is looking at to estimate prices, there's no real comparable house to look at that somebody is renting, and we can say it used to cost this, the more weight that estimate has to carry because there's not good comparisons. The BLS has addressed this earlier this year and just said, "That's going to lead to some volatility because of gaps in the estimates." Is that the reason that we saw an acceleration in August, and can we expect a snap back in September? Perhaps. The housing market certainly isn't roaring like it was in 2022 when prices were going up really dramatically. It's more modest growth. So I think the larger story is unchanged, but for the technical reasons-
Mark Zandi: Just, house prices don't matter here, at least not in any direct way. [inaudible 00:24:24].
Matt Colyar: I'm thinking about market rents.
Mark Zandi: This is rents.
Matt Colyar: Right.
Mark Zandi: Now, obviously, they're correlated with each other, and in the long run, they move together. But in the kind of horizons we're talking about here, there's basically no relationship between what's going on with house prices and what we're observing, at least there shouldn't be.
Matt Colyar: It's all dictated by rent-
Mark Zandi: By rents.
Matt Colyar: ... market rents.
Mark Zandi: Cris, any insight here? I gave a theory. What do you think? Do you have an alternative theory? [inaudible 00:24:51].
Cris deRitis: My broad theory is that it's methodological, that it's survey noise. We've talked ad nauseam in the past about how difficult this estimate is and what it actually represents, not only in terms of the theory behind it, but how you actually collect the data and what the pitfalls are in terms of the market distribution that Matt referred to. You have certain areas of the country that are predominantly owned, other parts of the country that are more rented, and then how do you infer one from the other? It is just very difficult. I think, sure, single-family rentals being a larger part of the equation now, maybe that introduced some noise in here. But if we look at the single-family rental market from other market data, the rent growth is stronger than what we see for apartments, but it's still weaker than it was just a couple years ago. So it seems implausible that it's really pushing up the owner's equivalent rent to the degree that it is, at least that's my take.
Mark Zandi: Marisa, any insight here?
Marisa DiNatale: Cris, I'm just curious. What is the difference in rent growth between single-family homes and multi-family?
Cris deRitis: Data I've seen from CoreLogic suggests single-family rentals are growing about 2.9% year over year, and for one-bedroom apartments, even two-bedroom apartments, sources suggest that it's flat to even negative, slightly negative, not dramatically.
Marisa DiNatale: That's quite a big difference between the single-family market and the multi-family.
Cris deRitis: It is, but if we compare the 2.9% to the 5.4% in the CPI-
Marisa DiNatale: Right, [inaudible 00:26:35].
Cris deRitis: ... that's a pretty healthy difference as well. If you told me owner's equivalent rent should be stronger than rent growth, okay, that's plausible, but this seems like a pretty big delta.
Mark Zandi: Well, also the rent of shelter CPI, what is that, Matt, year over year? That's not zero. That's not one. That's still elevated.
Cris deRitis: Primary residence?
Mark Zandi: Yeah, not [inaudible 00:27:01].
Matt Colyar: [inaudible 00:27:01].
Mark Zandi: Yeah, rent of your primary residence.
Matt Colyar: Even that's up 5% year over year and was 0.4% in August [inaudible 00:27:10].
Mark Zandi: Now, there is clearly difference between market rents for new rental and the rents that people across the rental stock pay. Generally, that distinction doesn't matter. But in the current context it might because you saw, again, rents jumped back in... When the economy reopened and the households formed and there was no supply because of supply chain disruptions, you saw rent surge in '21 and '22, going into maybe the end of '22 into '23, and there's still maybe some catch up going on among existing... People who've been renting all along, landlords aren't going to jack up their rents 20%, at least most won't, 20% for their existing tenants. But over time, those tenants will get bigger rent increases, and so it'll take some time for the rents across the stock to catch up to the market rent. But it feels like we should be there as well at this point, right, Cris?
Cris deRitis: Yeah, yeah, it seems like.
Mark Zandi: I keep saying this and it feels hollow each month, but it feels like it's just in a matter of time.
Matt Colyar: I think we had it for a little while. Not too long ago, we thought that the dragon was slayed. It was like looking at 0.26%, I think, it was the low point in June for OER month over month. This really is a deviation from recent trend. It's always been a case of how slow and how frustratingly slow this has been, but increasingly, I think this will look like an oddity with time.
Mark Zandi: Well, here's the other thing. I think everyone's come to our view. We'll take some credit here. We were ahead of others. Exclude the OER, the owner's equivalent rent, just get rid of it, go to so-called harmonized inflation, harmonized CPI, harmonized because it's on a consistent basis with how most other countries in the world measure inflation. They don't try to calculate the cost of home ownership or owner's equivalent rent. Matt, what is CPI harmonized excluding OER year over year?
Matt Colyar: Year over year, it's 1.3%.
Mark Zandi: What is the core? No core CPI? [inaudible 00:29:35].
Matt Colyar: I don't have core.
Mark Zandi: What about core PCE, you calculate?
Matt Colyar: Core PCE, I calculate, that was most recently 1.7. I don't have the forecast yet for August.
Mark Zandi: But the point is, is it below two? Isn't it? Yeah, it's nowhere-
Matt Colyar: It's been there for a while, yeah.
Mark Zandi: Been there a while, for at least a year, which is going to get obviously critical to the Fed call, which we'll get to in just a minute. So that's housing. Here's the other thing that's been bugging everybody, me personally, and that's insurance, motor vehicle insurance and homeowners insurance. What's going on there? Any kind of moderation in the increase?
Matt Colyar: 0.6% growth in motor vehicle insurance-
Mark Zandi: [inaudible 00:30:18].
Matt Colyar: ... that's strong. Normally-
Marisa DiNatale: That's how [inaudible 00:30:20].
Matt Colyar: That's typically big, but that's where it's been. It's been great. It's been over for full percentage for most of the past two years. So call that relief. Repairs rose similarly, 0.6%. So if we go to supercore, which I know we would typically touch on, which excludes-
Mark Zandi: [inaudible 00:30:41] supercore.
Matt Colyar: It's got its problems, but supercore excludes shelter, and that still rose 0.3%. My first glance, I was a little confused by that. If it's all shelter driving inflation in August, what happened? Really, it was the case of strong growth in transportation services. Motor vehicle insurance and repairs make part of that up, but so does airfare. There's a big jump in airfare in August, 3.9%. A 2.5% increase in public transportation. That's US average, so it's a little trickier to wrap your head around exactly what that jump would be. But yeah, supercore, 0.3% increase in August and is up 4.5% relative to a year ago.
Mark Zandi: Supercore, which is services, you're looking on the service side of the economy, and it excludes housing services, right?
Matt Colyar: Core services, excluding housing, yeah.
Mark Zandi: It does feel like, with vehicle prices, now, they're still declining, both used and new vehicle prices. That should take some pressure ultimately off of the growth in repair costs, which then ultimately should take some pressure off the growth in vehicle insurance. So it does feel like we're moving in the right direction here on... Inflation is still elevated here but moving in the right direction.
Matt Colyar: Yeah, I think that's a good argument to make. But if we do touch vehicles, new vehicles were flat in August. It didn't change. Prices are down about a percent, a little more than a percent over the past year. That's for new vehicles. Used vehicles dropped a percentage point again this month, and they're more than 10% lower compared to a year ago, which has been a real important contribution to broader disinflation. For core CPI, every month, there's these lower and lower vehicle prices that flows through as a drag on core CPI. But the wholesale data, which we can look at and say, okay, prices are starting to change. That'll take a few months before it shows up in government statistics. That suggests that this disinflation is probably going to stop in the next month or two. Wholesale prices are up about 4% since June, and that's for used vehicles. So the 1%, 2% declines we've been seeing each month are likely to slow and become a lot more of a neutral contributor to core CPI. I think that's worth monitoring in the coming months.
Mark Zandi: So you add it all up, mix it all together, you come out, inflation is-
Matt Colyar: Low and stable.
Mark Zandi: Consistent with the Federal Reserve's 2% target?
Matt Colyar: I think that's the argument to make. Yeah, I think that's clear.
Mark Zandi: Okay, Marisa, Cris, anything else on the CPI or inflation more broadly before we move on?
Cris deRitis: Nope, I think we covered it.
Mark Zandi: Okay. Let's play this stats game. We haven't played that in a couple three weeks, I don't think. Then we'll come back and talk about the Federal Reserve and interest rates and take a couple of listener questions and call it... Oh, we want to hear some reviews, and then we'll call it quits. So we got a lot to cover here. Let's do the stats.
Marisa DiNatale: We have a lot to do.
Mark Zandi: A lot to do, let's get moving. So the stats game, we all put forward a stat, the rest of us try to figure that out with questions, deductive reasoning. The best stat is one where it's not so easy we get it immediately, one that's not so hard we never get it. If it's apropos to the topic at hand, all the better. Marisa, you're up.
Marisa DiNatale: 28.1%.
Cris deRitis: That's the year over year change in the price of eggs.
Marisa DiNatale: Damn.
Matt Colyar: Wow.
Mark Zandi: That must've been something he was going to say.
Cris deRitis: Exactly. That was my stat.
Marisa DiNatale: Was it really? Well, we had a conversation about it. He said, "Why didn't you talk about eggs after the last CPI report?"
Cris deRitis: That's right.
Mark Zandi: Oh my God. Have you noticed? Cris has been on fire playing this game recently? He's like-
Marisa DiNatale: He really has.
Mark Zandi: I feel like I'm in a Western movie. We're drawing guns, and I'm dead before even I can move. I can't even move towards my gun and I'm shot. Anyway, what's going on with egg prices?
Marisa DiNatale: Exactly. I picked it, because lest you think this is price gouging from Big Egg, this is because there is a avian flu outbreak. This seems to be the story like every summer. If you recall two summers ago, egg prices were soaring. It was because of an avian flu outbreak, and here we are again. So egg prices are up 28% just in the last year. They rose almost 5% just this past month. It's because, particularly in Colorado and in California, there are big bird flu outbreaks. They're dying. They're killing them. So there is a shortage of eggs. Poultry prices, anything related to poultry in general is elevated, and this is the reason why. I thought it was a good underscore to the price gouging conversation because most food prices are directly related to things like this, like agriculture and price of transportation and that kind of thing. This is a good example of where this price is not in the control of the retailer.
Mark Zandi: You say, it does feel like it's happening on a regular basis.
Marisa DiNatale: It does, yeah. It seems to be happening every year now. It was two years since the last very large bird flu outbreak.
Mark Zandi: Is this something we just need to get used to? It's going to keep on happening? It's hard to know, I guess.
Marisa DiNatale: It seems like it.
Mark Zandi: Matt, you're up. What's your stat? Oh, I'm sorry Cris, you wanted to say [inaudible 00:36:25]?
Cris deRitis: I was just going to add, so the price gouging argument here, those who believe that there's price gouging, suggests that there's a conspiracy because the suppliers aren't increasing their supply. They have this huge incentive because of the price movement. Therefore, why don't they respond to that by increasing supply to move the price down? Therefore, it must be price gouging. How do you respond to that, Marisa? What do you think?
Marisa DiNatale: The supply of chickens here?
Cris deRitis: Yes. That they aren't increasing the number of chickens in response to whatever, 28% growth in price.
Marisa DiNatale: I don't know. I don't know how chicken breeding supply works. I don't know how you can increase the supply of chickens during a pandemic of a bird flu outbreak. Okay, a little more seriously, yeah, you can make that... You get this question all the time about housing.
Cris deRitis: Yeah, yeah, yeah.
Marisa DiNatale: House prices are rising 5%. Why aren't builders incented to build more homes when house prices are surging? It's a lot more complicated in many of these industries than just respond to prices, again, because of the input costs of doing a lot of these things. I don't know specifically about why chicken and egg supply isn't rising, but I do know that it's a complicated issue in many industries where we hear that question. Do you know, Cris? Do you have an egg theory?
Cris deRitis: No. Just to say, that on the surface, these things look really easy. "Oh, price is up, just produce more." But it's a lot more complicated than that.
Mark Zandi: Well, yeah, you can construct all kinds of conspiracy theories you want, but the birds are getting sick and dying. Matt, you're up. What's your stat?
Matt Colyar: 0.14%
Mark Zandi: In the CPI report?
Matt Colyar: No.
Mark Zandi: No? In the PPI report, Producer Price Index report?
Cris deRitis: No.
Mark Zandi: Wow. How can we [inaudible 00:38:36]?
Cris deRitis: Are these hard no's or-
Marisa DiNatale: [inaudible 00:38:38] think about that.
Cris deRitis: Yeah. Are they derivative?
Matt Colyar: Indirect, both of the two [inaudible 00:38:43].
Mark Zandi: Oh, okay. This is what your estimate is of core PCE inflation-
Matt Colyar: Exactly.
Mark Zandi: ... of August.
Matt Colyar: That's right. Nice.
Mark Zandi: Cris, Cris-
Cris deRitis: Wow.
Mark Zandi: Cris, Cris, You see how that's done? I'm just [inaudible 00:38:55].
Cris deRitis: Impressive.
Mark Zandi: See, because I put two and two together, CPI, PPI, he hesitated-
Matt Colyar: My intentional hesitation-
Mark Zandi: His intentional hesitation.
Matt Colyar: ... that was a tell.
Mark Zandi: That's a good one. Yeah, that's a good one.
Matt Colyar: I was hoping-
Mark Zandi: [inaudible 00:39:08].
Marisa DiNatale: Sorry, so what?
Matt Colyar: I was hoping it didn't get brought up earlier in the conversation. 0.14% is what we forecast, now that we have CPI and PPI, for August for the core PCE in the month. That will keep the year-ago rate at 2.6%. So the favorable base effects that we saw for headline CPI, we don't get core PCE, so there's no real change there, but it would be another month of really soft, mild growth. It won't be released until after the Fed meets. We're right at 0.14%. It could be rounded up to 0.2% if we undershoot a little bit. But at 0.1%, I think you immediately start getting calls for a 50 basis point cut at November's meeting as long as there's no other data running counter to that. So that's going to be pretty interesting to look forward to in two weeks.
Mark Zandi: The PCE, that so-called consumer expenditure deflator, that's the measure the Fed is looking at when setting its 2% target. That's why we're so focused on it. That downweighs housing, owner's equivalent rent, rent of shelter, compared to the CPI. So even though the CPI came in hot on OER, that has less of an impact on the PCE, the consumer expenditure deflator.
Matt Colyar: Right. So when you see a CPI that really is singularly driven by strong shelter prices, you know that's a month where there's going to be a pretty big divergence between CPI and PCE. That's what we'll see in August.
Mark Zandi: Even though CPI came in on the hot side because of housing, it has less of an impact on what the Fed's going to do or not do just because they're focused on mostly... They're focused on everything obviously, but mostly focused in terms of their inflation target on the consumer expenditure deflator.
Matt Colyar: That's right.
Mark Zandi: I think in terms of the weights, I'm going to make this up, correct me if I'm wrong, but in the CPI, housing is a third of the index maybe, something like that.
Matt Colyar: Yes.
Mark Zandi: Then the consumer expenditure deflator-
Marisa DiNatale: It's like half of that.
Mark Zandi: ... it's about half that.
Matt Colyar: It's about half that, yeah.
Mark Zandi: About half that, right?
Matt Colyar: Yeah. The PPI too, I would say, just not to get too grandiose, the [inaudible 00:41:18] and CPI were up big, as I mentioned up to, whatever, 3%. For the PCE, what actually gets inputted is from the PPI, so airfare is there, we're actually down. I don't know how normal that much of-
Mark Zandi: Oh, interesting.
Matt Colyar: ... that kind of dissonance is. But, yeah, it was down. That's what flows through into our model because that's the BA, government agency that puts the PCE deflator together, looks at. So it points in the same direction, which is for a lower figure.
Mark Zandi: Got it, okay. Cris, you're up.
Cris deRitis: Well, since my original stat was taken, I'll go with 2.7%.
Mark Zandi: In the CPI?
Cris deRitis: Nope.
Mark Zandi: In the PPI?
Cris deRitis: Nope.
Matt Colyar: Breakfast food related?
Cris deRitis: What's that?
Matt Colyar: Is it related to breakfast food?
Cris deRitis: No.
Matt Colyar: No? Okay.
Cris deRitis: Well, very indirectly.
Mark Zandi: I feel like a random question, but there's [inaudible 00:42:08]-
Marisa DiNatale: Is it a price? Is it the price of something, Cris? A price measure?
Cris deRitis: Not specific... Well-
Mark Zandi: Did you say a percent, 2.7?
Cris deRitis: It's percent, yes.
Marisa DiNatale: [inaudible 00:42:25].
Cris deRitis: It is inflation related. How about that?
Mark Zandi: Inflation expectations?
Cris deRitis: Yes.
Mark Zandi: I know the New York Fed came out with a survey. No? Is it bond markets?
Marisa DiNatale: It's Michigan one year ahead.
Cris deRitis: You got it.
Mark Zandi: Michigan one year ahead.
Cris deRitis: Well done, Marisa.
Marisa DiNatale: Thank you.
Mark Zandi: Oh, come on. I did the heavy lifting there.
Marisa DiNatale: No. No, you didn't.
Mark Zandi: I said inflation expectations. No?
Marisa DiNatale: That's true. Okay, you did.
Mark Zandi: Okay, all right, okay. It was just a question of which one. Did the University of Michigan just come out or something?
Marisa DiNatale: Yeah.
Cris deRitis: Yes.
Mark Zandi: What did it say exactly?
Cris deRitis: 2.7%, so it's trending down. That's the news item. Consumers are also on board with the idea that inflation is coming in.
Mark Zandi: I missed the release. What did it say about confidence? Anything in particular or still low?
Cris deRitis: It did, what, increased a point or so.
Marisa DiNatale: Yeah, but it's still-
Cris deRitis: It's still relatively low.
Marisa DiNatale: ... terrible.
Cris deRitis: Yeah.
Mark Zandi: Just quick question aside, do you guys still look at the University of Michigan survey at all in terms of sentiment? Is it [inaudible 00:43:32]?
Marisa DiNatale: I look at it, but take it with a big grain of salt.
Mark Zandi: Yeah, okay. You, Cris?
Cris deRitis: I do, but I take all of them with a big grain of salt, even the confidence one.
Mark Zandi: Even the conf... But that feels more consistent with what consumers are actually doing, doesn't it?
Cris deRitis: Yeah, but I don't know. I think across the board, these sentiments-
Mark Zandi: All surveys.
Cris deRitis: ... [inaudible 00:43:54] suffering.
Mark Zandi: All right, let's turn to the Fed, the Federal Reserve. It meets next week. The FOMC, the operating committee, the Fed meets. They're now widely anticipated to cut interest rates. I guess there's a bit of a debate about whether it's a quarter point cut or a half point cut. Correct me if I'm wrong, but it feels like consensus is now half, excuse me, a quarter point cut at the September meeting. Then there's some debate about how quickly they will cut after that. In our own forecast, we have a quarter point cut each quarter going forward until the federal funds rate, the interest rates that controls, falls from its current just under 5.5% to closer to 3.0%. That's going to take a while to get there, sometime in 2026. That's our forecast.
The markets are expecting rate cuts that are more aggressive than that getting rates down. I think the markets are also expecting something... thinks the rate's settling in somewhere around 3%-ish, but getting there faster, six, 12 months faster than we have. I don't know that I'd debate too much about that. I guess the first question is, just to level set, is everyone on board with our forecast or would you push back? Do you think your views are more consistent with the market expectations, more aggressive rate cuts? Marisa, are you [inaudible 00:45:17]?
Marisa DiNatale: I'm sort of agnostic about whether or not they cut at each meeting for the rest of the year. There could be three quarter point cuts instead of the two that we have, but I don't feel strongly enough about it to change the forecast. I think it's very data dependent. I think after the CPI report this week, they're definitely going to go a quarter point, not 50 basis points, just given the uptick in shelter inflation. And the job's data has been really solid, so there's probably less of a worry on their part there. So I like our forecast is the bottom line, yeah.
Mark Zandi: Good. Matt, you? Do you have a view?
Matt Colyar: I think three. I think they cut each meeting in 2024-
Mark Zandi: You do?
Matt Colyar: ... by a quarter point. Yeah. That's not a massively strong conviction, but I think they do.
Mark Zandi: Cris?
Cris deRitis: I like the two cuts at this point that we have. I like our forecast. I was a bit surprised... You mentioned that, for next week, we have a quarter point cut, and I think most professional forecasting outfits are also on board with a quarter point. But I looked up the market implied [inaudible 00:46:32] and it's 50/50-
Mark Zandi: Is it really?
Cris deRitis: ... even just a few days out.
Mark Zandi: Wow, okay.
Cris deRitis: I'm a bit surprised there.
Matt Colyar: It's swung dramatically since yesterday. I don't understand why. I'm like-
Cris deRitis: Yeah, I'm not-
Mark Zandi: Oh, really?
Cris deRitis: Yeah, I'm not sure why.
Matt Colyar: It was over a 70% chance of a quarter point cut yesterday. Now it's a coin toss. So I'm googling which Fed governor said something, but I can't find anything.
Mark Zandi: Interesting. Well, the quarter point cut each quarter has been our forecast for quite some time, and the bar for us to change it is, as Marisa said, is relatively high. But if I were doing a de novo right now, I'd probably have three rate cuts this year: September, November, and December. I don't say that with enough confidence that I would go ahead and change the forecast at this point. We may change it after the meeting because after the meeting... This is the September meeting, we get obviously the press release, we get the press conference, and then we get the summary of economic projections, which give us a more sense of how the Fed members are thinking about the outlook and the forecast. They might give us some stronger guidance with regard to where they're headed and how fast they're going to cut rates. So based on that, it might be enough to... if we'd want to change, that would be a place to change. But at this point, I think a quarter point each quarter makes the most sense.
The question I'm getting in my travels and talking to clients and others is, how big a deal is this for the economy? If I'm going from 5.5%-ish to 5.25% to 5% to 4.75% over a period of even six months, is that a big deal, Cris? Is that a big deal?
Cris deRitis: I'd say not directly, but indirectly the psychological impact here, I think, is greater than the direct impact. If you think about the credit card borrower, I get this question all the time, the rate goes from 23% to 22.75%, does that change their behavior? No. Well, it helps a little bit around the edges. But it's more that psychological barrier that the Fed thinks, mission accomplished, things are moving in the right direction, inflation's under control, that then may lead to more spending, more comfort to go ahead with an investment. You're seeing the light at the end of the tunnel. So that's how I view the impact. It's a big deal indirectly. At least the first 25 basis point cut, I don't see that as a big deal in terms of a direct impact on the cost of funds for either households or businesses. In the margins, sure, but it doesn't dramatically change things.
Mark Zandi: It's interesting. There's lots of different channels through which movements and interest rates Fed policy affect the economy. It seems like the one you went to immediately was the impact on people's interest expense, what they're paying on the existing debt. You mentioned credit cards. That's an obvious one because I think the rate on cards is as high as it's ever been, 22%, and the spread off of the bank's cost of funds is the widest it's every been, again, going back to, dare I say, price gouging. It's not price gouging, but those margins are pretty damn wide. There's a lot of evidence that the competition in that market may be not what it was historically for lots of different reasons, and so that allows the spread to be wider. But that's where you went first. Do you think that's the most significant, most immediate link between what the Fed's doing or not doing in the economy through the interest expense that households and businesses are paying?
Cris deRitis: I went there because that adjustable debt is tied to the prime rate, which directly backs into the Fed fund. So it's a very direct channel in terms of where does that 25 BPs. I think you can see it there pretty quickly. It does affect other rates as well but to a lesser degree.
Mark Zandi: Right, okay. Marisa, of all those, the channels through which monitoring Fed policy can affect the economy, which is the most potent here, and in the context of the question, is this a big deal? Are these rate cuts a big deal for the economy? Will it help the economy out here going forward?
Marisa DiNatale: Yeah. I think the biggest channel is just the signal of confidence that it sends to investors and to consumers and to borrowers and would-be home purchasers. The Fed hasn't even done anything yet, and the mortgage rate is already down to 6.14%.
Mark Zandi: Pretty amazing, right?
Marisa DiNatale: Yeah. So they don't even have to do anything. They just have to talk about it and signal that it's going to happen, and you see inflation expectations follow along, and that already moves economic variables and confidence and expectation. So I think it's more of a signal. Like Cris mentioned, it's a signal the Fed thinks the economy's doing okay. They have enough confidence to start lowering interest rates, which tells everyone inflation is under control. We're not worried about the job market maybe as much as we were before. So I think it's more the confidence signal that it sends, which actually directly influences other rates along the curve without them even having to [inaudible 00:52:20].
Mark Zandi: Let me push back a little bit on that. What evidence do you have of that? We just talked about the University of Michigan survey. It's still very depressed, and obviously, it should be reflecting the expectation for the rate cut. So why do you say the confidence effects? What are you pointing to?
Marisa DiNatale: Well, even within the University of Michigan, the statistic Cris just said, which is that consumer's expectations of what inflation is going... Yeah, they're still saying the economy's crappy. But if you look at the inflation expectations question, their expectations for inflation seem to be more aligned with market expectations than what the Fed is saying. Another reason why this survey is not that helpful because there's all these disconnects even within-
Mark Zandi: Wait, wait though, wait.
Marisa DiNatale: ... the survey itself.
Mark Zandi: I'm going to keep pushing just to have some fun.
Marisa DiNatale: Yeah. [inaudible 00:53:16].
Mark Zandi: You're reversing causality here a little bit. It's generally the case, the Fed's looking at inflation expectations for setting monetary policy. But what you're saying is the inflation expectations are being affected by the expectations of monetary policy. It's kind of-
Marisa DiNatale: Well, in this case [inaudible 00:53:34]-
Mark Zandi: And maybe it's both.
Marisa DiNatale: In this case, I'm just talking about this consumer survey, not market expectations. I'm talking about the average Joe on the street who's being asked by Michigan what they think about inflation.
Mark Zandi: But the Fed says, and actually Powell called it out long ago, I'm looking at the University of Michigan one year ahead, maybe it was three years ahead, inflation expectations to gauge whether monetary policy is in the right place or not. So the Fed's looking at that measure to gauge monetary policy. You're saying people are taking cues from the Fed, and therefore, their inflation expectations are lower. You see what I'm saying?
Marisa DiNatale: But I do think it's circular, though.
Mark Zandi: Well, [inaudible 00:54:14].
Marisa DiNatale: I do think it works both ways.
Mark Zandi: This is how your mind works, not how my mind works.
Marisa DiNatale: It's the chicken and egg.
Mark Zandi: The chicken and... Oh, back to the egg, again, back to the-
Marisa DiNatale: It always comes back to eggs and chicken.
Mark Zandi: It always comes back to the damn egg. But if you had asked me that question about sentiment, I would've gone somewhere else. I would've said go look at stock prices. Go look at bond yields. Bond prices have gone up. Bond yields are down. The 10-year Treasury yield, as you pointed out in the context of the fixed mortgage rate, 3.7% on a 10-year Treasury yield, that's pretty low in recent historical context. That's why mortgage rates have been able to come in as fast as they have. I just looked. It's 6.15% on a 30-year fix.
Marisa DiNatale: That's right.
Mark Zandi: We didn't expect to get this low for six months from now.
Cris deRitis: Right, yeah.
Mark Zandi: And the stock market is flirting with record highs here. It's kind of stalled out a bit in the last couple three weeks. Nonetheless, it's risen to the degree it has because of the expectation that the Fed is going to start cutting interest rates. It's the stock market, it's the bond market, it's the credit spreads in the corporate bond market that reflect the expectation of what the Fed's going to do here, and that generates all kinds of positive economic impacts, wealth effects, that kind of... Makes sense?
Marisa DiNatale: Yeah. But I don't think that that's radically different from what I was maybe trying to say. I think it is the expectation of rate cuts. Again, even before anything has even actually happened, that you already see this collective sigh of relief wherever you look. Maybe my example of a consumer confidence survey wasn't a great example, but, sure, you see it in other interest rates throughout the economy already.
Mark Zandi: Got it, got it. So one channel is on the interest payments and interest expense that particularly low-income household, stressed businesses are under, so they're much more sensitive to any decline in their interest expense. Because you also get decline in interest income, right?
Cris deRitis: Yes.
Mark Zandi: The interest income goes to folks that are in a pretty good spot. It doesn't really matter to them. It's not going to change their behavior that they're going to get a little less or a little more in interest income. Then the other [inaudible 00:56:33]-
Cris deRitis: And retirees.
Mark Zandi: Say that again.
Cris deRitis: Retirees, older, [inaudible 00:56:35]-
Mark Zandi: Retired, yeah, maybe.
Cris deRitis: ... there's some impact.
Mark Zandi: Yeah, some impact. But the net of that is going to be positive because the people are paying the interest expense is in a more fragile situation than the people who are getting the interest income. We also talked about the confidence effect, but I think of that more of as the wealth effect. It drives up equity prices and bond prices, and you get a wealth effect. That's the second channel. I guess we mentioned a third channel, and that's the lower cost of borrowing. Mortgage rates are down. So presumably that should have some positive effect on the real estate market, the housing market. Home sales should start to pick up a little bit. Matt, what do you think? Is this a big deal or not? How do you think about the links between what the Fed's doing and the broader economy?
Matt Colyar: I wouldn't add anything. I would prioritize in the same way. I think it's psychological, not because there's a huge jolt, but because it's already priced in to all the interest rates that actually matter and affect the real economy.
Mark Zandi: By the way, I'm not sure it's psychological. I keep pushing back on it. It's got to be somewhat psychological.
Matt Colyar: You don't think the announcement of "Hey, mission accomplished" is going to have a positive [inaudible 00:57:48]?
Mark Zandi: I'd say it's mathematical. A stock price is equal to the earnings stream of future earnings, which by the way is a function of the lower interest rates, divided by a discount rate, which is the interest rate. If I think the Fed's going to be cutting interest rates, the discount rate falls, the stock price rise, that's math. That's not necessarily confidence. You see what I'm saying?
Matt Colyar: Mm-hmm.
Cris deRitis: What about the consumer spending decision though, or a saving decision? You don't see that as being influenced by, "Hey, oh, it looks like mission accomplished, dual mandate"? [inaudible 00:58:23].
Mark Zandi: I don't know.
Cris deRitis: Why not?
Mark Zandi: In fact, there's also a counter to this, at least a temporary counter, is people stopped buying cars and homes because they're waiting for interest rates to come down. If you look at vehicle sales, they've kind of gone soft here. The thinking is not because there's any fundamental problem, but everyone's waiting for the decline in vehicle prices the [inaudible 00:58:49], and also see where interest rates bottom out. Same potentially with housing. If I'm a buyer and I'm seeing rates go south, at 6.15%, I go, "Great, but maybe I'm going to get into the 5% range," I'm going to hold off a little bit here and wait until I make sure that prices are going to settle in. Does that resonate?
Matt Colyar: I think so. I think that's what maybe mortgage lenders are... They've been so quick to respond to doing just that much. It's interesting to think about. I think that delta between the Fed funds rate or the 10-year Treasury and the 30-year mortgage, I wonder if that's going to squeeze in the coming years just as lenders finally try to get people out of their house and finally list to sell as the market becomes a little bit better balanced. The only other element I would add is the weaker dollar for trade.
Mark Zandi: Oh, that's a good one. That's a really good one.
Matt Colyar: But I wouldn't put it at the top of the list as much as the more domestic stuff, but it's still important.
Mark Zandi: But actually, our trade deficit, if there's been a drag on the economy, it's been trade, right?
Matt Colyar: Yeah. It weakens imports, strengthens exports, and I think that's a boosted GDP. That's-
Mark Zandi: It can't hurt.
Matt Colyar: It can't hurt.
Mark Zandi: Cris, any other channels we're missing here? Maybe-
Cris deRitis: [inaudible 01:00:11] think of another channel. But I'm thinking as you go through the discussion, we don't want this to be a big deal, right?
Mark Zandi: No.
Cris deRitis: We don't want this, right?
Mark Zandi: That's a good point.
Cris deRitis: So, yeah, these are positive.
Mark Zandi: We argued that the higher rates wasn't a big deal. The economy was somewhat rate insensitive. So if it's rate insensitive on the upside, probably rate insensitive on the downside, right?
Cris deRitis: Yeah. If it did really take off all of a sudden because of the quarter point cut, now we're in trouble again. We're going to get another bout of inflation.
Mark Zandi: Good point.
Cris deRitis: So I think it's a good thing that it's kind of a modest moderated response here. It's not going to cause any of these markets we're talking about to really take off. It's good news. It's positive news. It moves things along, but doesn't lead to a sharp bounce back.
Mark Zandi: Right, very good. So we're kind of in agreement, quarter point each quarter, maybe a little bit more aggressive front-loaded this year. We'll see, after the Fed meeting, if we change our mind there. But the impact here is directionally positive for the economy, but it's a modest positive that plays out over a period of time. Everyone agree with that?
Cris deRitis: That would be the Goldilocks, right?
Mark Zandi: Well, that's the soft landing.
Cris deRitis: Yeah.
Mark Zandi: Yeah, right, okay. Okay, very good. Let's move on. Marisa, you've got a question or two from the listeners.
Marisa DiNatale: I do. This one relates to Fed policy actually. Remember we had Gus Faucher on a few weeks ago? He's the Chief Economist at PNC Bank. We were talking about the Fed then with him. This listener said that on that podcast you mentioned that the Fed should change its inflation target to 3%. Can you expound a bit more on why you think that's a more appropriate target than 2%? If he remembers correctly, he thinks one of your arguments was this dry powder argument, which is the higher the inflation target is, the more wiggle room they have, but he finds that argument not satisfying. Are there other reasons, or can you explain a bit more why you think the target should be higher?
Mark Zandi: If you have a 2% inflation target and the economy's underlying potential real growth is, say, 2%, which is kind of in the rule of thumb, it might be a little higher than that now, but, say, on average over time going forward, that gives you a nominal potential growth of 4%. That means that generally when you get into recessions, even a typical recession, high probability that you'll have to cut rates more and you'll end up hitting the zero lower bound. If you hit the zero lower bound, then you have to start... well, at least what the Fed's been doing over the last couple cycles, they'll start quantitative easing, buying Treasury bonds and mortgage-backed securities, and that's not desirable. It's a lot of uncertainty with regard to how QE really works and plays out.
There's a lot of angst around buying mortgage-backed securities because that feels like fiscal policy not monetary policy. So why not set the inflation rate a little bit, your target out higher so it makes it less likely than in a typical downturn and you hit the zero lower bound? It just gives you a little bit more room to maneuver going forward. So it's just a little more operational flexibility with regard to how you conduct policy. You really want to avoid QE if you can. That's kind of the argument.
In terms of investment decisions and what's going on in the economy more broadly, the level of inflation isn't what really matters. What matters is the stability of that inflation rate so that businesses and people can plan around that inflation rate and make appropriate investments and saving decisions. So whether it's two or three, going from two to three, I don't see any downside to that. Except, I guess and I only see upside, the only caveat here obviously is, how do you get from here to there in a reasonably graceful way? You don't want to upset the apple cart going from here to there because you got to convince everybody that you're... It was two. Now it's three. So you've got a bit of convincing to do. If I were king for the day, I'd probably go in that direction. Maybe it's not three, maybe it's two and a half.
The other question is, should it really be the consumer expenditure deflator? Should we be really focused on one measure of inflation? Given that all we've learned in the current bout of inflation, how we measure things really matters a lot. So maybe it should be some combination of different inflation measures. I think we should consider all of these things when the Fed sits down again and rethinks its policy framework. Does that make sense?
Marisa DiNatale: Yeah, yeah.
Matt Colyar: [inaudible 01:05:21], yeah.
Marisa DiNatale: I like the averaging of a few different measures of inflation.
Mark Zandi: It just feels like you're focused on the consumer expenditure deflator. That's one measure and all kinds of potential issues with that. That's a good question. We'll take another one.
Marisa DiNatale: Here's another one that actually is a question we got back in January, and I think it's relevant to... I've been waiting for relevance to resurface to pose this, but it's good. We just talked about the price of gasoline and how it's down. Actually, it's down, what, 10% over the year or something like this. Can you talk about the effect of this being stimulus for consumer spending for the economy? I know you have a rule of thumb that, for a change in gas prices, that generates a certain amount of consumer spending. Should we be thinking about this as stimulus to the economy right now? We haven't really talked about that.
Mark Zandi: Cris, you want to try take a crack at, or you want me to go for it?
Cris deRitis: I'm trying to remember the rule of thumb. It's for every penny, is it a billion?
Marisa DiNatale: A billion of consumer spending?
Mark Zandi: It's closer to $2 billion at this point.
Cris deRitis: Oh, at this point?
Mark Zandi: Yeah, closer to $2 billion.
Cris deRitis: Maybe you can lay it out because-
Mark Zandi: It's rough, rough. This is what economists call it back of the envelope. Every penny change in the cost of a gallon of a gasoline results in about a $2 billion change in real income. So if it goes up a penny, that means I've got to put more money into my gas tank and have less to spend on everything else, and it's about $2 billion less on everything else. It doesn't mean that that spending will get cut by $2 billion because people will draw down savings and use other source of financing to help them continue to spend, but it'll have, over time, negative consequences or, conversely, when prices are falling, positive consequences on spending.
I don't know that we're in a kind of a place where this really matters to a significant degree. It's been hovering in the $3 range now for quite some time, and on a real after inflation basis, it really hasn't moved. It goes up, it goes down, and swings at times. When we had $5 a gallon back at the teeth of the Russian invasion, that's a big deal. When you're in the bottom of the pandemic when no one's driving and you're with a buck 50, that's a deal. That helps. But on average, it's in this range that we're in right now. So I don't think it really plays a big role in terms of consumer spending.
Having said that, the one caveat, obviously lower income households spend a much larger share of their budget on gasoline, particularly, interestingly enough in places in the South and in the West where people drive more. So they would benefit more in a declining gas price environment like we have right now. So it does matter. We need to go back to the election. It seems like everything revolves around election. This might have an impact on North Carolina. People think about things in North Carolina and Georgia, two key swing states where people drive a lot and this is a big part of their budget. Low-income households in those areas are getting the big plus from the lower gas prices. But in general, from a macro perspective, I don't know if that's a big deal, at least not at this point. We did promise we'd read a couple of reviews. Why did we say we were going to do this?
Cris deRitis: Because we're fully transparent.
Mark Zandi: Did I just make this up? Let's take a couple reviews. Matt, I understand you have been following the reviews.
Matt Colyar: Positive, negative? Do we want any kind of balance there?
Mark Zandi: Let's go positive, negative, then positive, if we could.
Matt Colyar: First one I thought was really nice.
Cris deRitis: The sandwich.
Matt Colyar: The sandwich.
Mark Zandi: The sandwich.
Matt Colyar: "Inside Economics is a great podcast for anyone interested in understanding the financial and current economic circumstances in the world and especially in the US. I've had a few econ classes, which are helpful but not necessary in gleaning the information presented. The moderators do a wonderful job at explaining unfamiliar terms and concepts that are used during the show. I'm quite impressed how patiently these concepts and specific situations are explained at length. Again, if you're interested in economics, both retrospectively and the possibilities in the near future, this show is for you."
Mark Zandi: Oh, wow.
Matt Colyar: A really nice endorsement.
Mark Zandi: What do you think? That was beautiful. [inaudible 01:09:45]-
Cris deRitis: Five stars. Five stars.
Mark Zandi: The only beef I have with that is they didn't mention me by name.
Marisa DiNatale: You can't critique the critique.
Mark Zandi: They said the moderators. They didn't say Mark Zandi, so I don't know.
Marisa DiNatale: [inaudible 01:10:03]. Now he'll read one where it mentions you.
Matt Colyar: Negative, negative.
Cris deRitis: Let's go to the next one.
Mark Zandi: Now, now we're going to get bad reviews because of that.
Matt Colyar: "I've been listening to the show since the show debuted and-
Mark Zandi: Oh, no.
Matt Colyar: ... haven't missed more than 10% of the episodes. Mark-
Mark Zandi: Oh, no!
Matt Colyar: ... has an exceptional facility for the stats, faculty for the stats, but also has no fear taking positions that contradict him when he feels they're wrong."
Mark Zandi: Oh, dude. Now, wait, wait, wait. Start over again. I'm having trouble with this one. Go ahead. Do it again.
Matt Colyar: You have an exceptional, I'm back and forth, that it should be faculty or facility, "facility for the stats, but also has no fear taking positions..."
Mark Zandi: Can you start again? Can you start again? Can you start again one more time?
Marisa DiNatale: Wow.
Matt Colyar: From the very beginning? "Mark seems like he has the... Cris is wonkier and always tempers Mark's animal spirits."
Mark Zandi: Oh!
Cris deRitis: That's fair.
Mark Zandi: I like that.
Cris deRitis: That's fair.
Mark Zandi: That's fair. That's fair. That's fair.
Matt Colyar: "Marisa, who replaced Ryan, is the true numbers thinker of the show."
Mark Zandi: That's true too.
Cris deRitis: That's true too.
Matt Colyar: "The collection of them almost always circle the truth, and they haven't missed a major call since I started listening. Admittedly, they may be a little less funny than they think-
Mark Zandi: Ah!
Matt Colyar: ... but they're sharpest economists out there."
Mark Zandi: That's me.
Matt Colyar: I forgot about that last sentence.
Marisa DiNatale: This is the negative review?
Matt Colyar: Yeah, that last sentence, I think, was probably sharper than it needed to be.
Marisa DiNatale: Okay.
Mark Zandi: It sounds good. That's a good one. That was thoughtful.
Cris deRitis: Fair.
Matt Colyar: I would say there's nothing outside of that. We can go, "Marisa, Cris, and Mark and the professional economists that you wish you could parse through the week's news with every Friday. They dedicate lots of their time and energy to share their disparate views on the week's happenings through the lens of their 50 plus years of joint experience along with their esteemed guests, which I think we can all agree are monthly.
Marisa DiNatale: [inaudible 01:11:58] Matt Colyar.
Matt Colyar: This is the best free news source that help the curious American makes sense of the often conflicting and confusing news and published figures measuring where the economy and the American zeitgeists are on any particular Friday. Longtime listener and appreciative fan of their work."
Mark Zandi: Wow, that's nice.
Matt Colyar: Glowing, right?
Mark Zandi: Yeah, very well written.
Matt Colyar: Yeah.
Mark Zandi: Yeah, I appreciate that. We all appreciate that.
Marisa DiNatale: Keep them coming.
Mark Zandi: Keep it coming. Yeah, keep those reviews coming, absolutely. Okay, guys, I think we're at the end of the podcast unless anyone has something else to say. All right, well, with that, dear listener, we're going to call this a podcast. Take care now. Talk to you next week.