Jonathan Smoke from Cox Automotive and Mike Brisson of Moody’s join the crew for a discussion of inflation and autos. The team dissects this week’s CPI report, which while not great, at least wasn’t worse than expected. Mark argues that the Fed should be looking through the inflation data that’s mixed up with the problematic measures of housing inflation and start lowering rates immediately. The team is mostly on board with this view although Mike convincingly argues that it may be better for the Fed to be “credibly wrong” than incredibly right.
Jonathan Smoke from Cox Automotive and Mike Brisson of Moody’s join the crew for a discussion of inflation and autos. The team dissects this week’s CPI report, which while not great, at least wasn’t worse than expected. Mark argues that the Fed should be looking through the inflation data that’s mixed up with the problematic measures of housing inflation and start lowering rates immediately. The team is mostly on board with this view although Mike convincingly argues that it may be better for the Fed to be “credibly wrong” than incredibly right.
Guests: Jonathan Smoke – Chief Economist, Cox Automotive, Michael Brisson – 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 for additional insight. For more on Jonthan Smoke Click here
Related Research: The article referenced in today’s episode Lags and measurement issues with OER is available on Economic View: Real Time. The Economic View-Real Time information service is the single web-based source that covers the global economy and financial markets around the clock. The service provides real-time analysis of key economic and financial market developments along with analysis of more than 250 economic releases. Economic View enables users to easily access data, analysis of economic events, trends and risks. Read Full Analysis With A Free 14-Day Trial.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Marisa DiNatale, and Cris deRitis. Hi, guys.
Cris deRitis: Hey, morning.
Mark Zandi: You guys notice I've got a formula now for starting the podcast. What do you think?
Marisa DiNatale: Yes, we're trusty co-hosts.
Mark Zandi: Trusty co-hosts, as opposed to untrusty co-hosts.
Marisa DiNatale: That'd be a problem.
Mark Zandi: Yeah. How are things going? Anything going on this week?
Cris deRitis: A lot going on the economic front, but yeah, lots to talk about. Good to go. Okay.
Mark Zandi: Good, and we've got two guests. We've got one of our colleagues, a regular, Mike Bisson. Hey Mike, how are you?
Mike Bisson: Good, Mark. How's it going?
Mark Zandi: Good, good. Are you hailing from...? I keep saying Rochester.
Mike Bisson: Syracuse.
Mark Zandi: Syracuse, damn.
Mike Bisson: Spring is in the air. It's Friday, it's beautiful.
Mark Zandi: Does make you upset, when I say Rochester and you're from Syracuse? Is there some rivalry between those two places?
Mike Bisson: There is, but I used to live in Rochester, so I have love for the area.
Mark Zandi: Oh, maybe that's why I keep saying Rochester. You look like you're from Rochester.
Mike Bisson: Oh, that's what it has to be, yeah. We have a look.
Mark Zandi: It's got to be. Yeah, spring is in the air, really? In Syracuse?
Mike Bisson: In Syracuse, it got up to 70 yesterday. Oh, we're heating up.
Mark Zandi: Well, I take that in Philly. I mean, we've had kind of really cold, wet. Right, Cris?
Cris deRitis: Rainy.
Mark Zandi: Rainy, yeah. I'll take the 70. And we've got Jonathan Smoke. Hey, Jonathan, how are you?
Jonathan Smoke: I'm great, Mark.
Mark Zandi: It's good to have you on. We were just chatting, you, I think, are the most popular guest of all our Inside Economics.
Jonathan Smoke: All of your outside guests, maybe.
Mark Zandi: Outside guests, yeah.
Jonathan Smoke: That's an honor, if that's the case.
Mark Zandi: That is indeed the case. I think you've been on a number of times now.
Jonathan Smoke: Maybe it's because there's been more questions about the automotive sector than anything else, but I'll take it.
Mark Zandi: No, I think it's your scintillating analysis. That's what it is. Yeah, cogent, scintillating, insightful. And of course, you're with Cox Automotive.
Jonathan Smoke: Yes, that's right. Actually since I was last on, my scope has been expanded to, I oversee all of Cox's businesses. So I'm having to dust off some understanding of other sectors, like communications. And we have a lot of very interesting clean energy and farming-controlled agriculture. There's a lot of new things I'm learning, so there's nothing-
Mark Zandi: Wait, wait, wait. That sounds like a massive, I'm running the entire show. That's like a big deal. Are you CEO of Cox?
Jonathan Smoke: No, no, no, no. I formally got added, economic advisor, for all of that.
Mark Zandi: Cool. So your portfolio has expanded quite dramatically there.
Jonathan Smoke: My portfolio has expanded, but my team has not yet.
Mark Zandi: Oh, well, that's corporate America. They're used to it. Suck it up.
Jonathan Smoke: Right.
Mark Zandi: Yeah.
Jonathan Smoke: I demand more of my partners now.
Mark Zandi: All right. Are you in Atlanta? I can't remember.
Jonathan Smoke: Yes.
Mark Zandi: You are in Atlanta?
Jonathan Smoke: That's right.
Mark Zandi: Yeah. Well, very good. It's good to have you on. And obviously with Mike and Jonathan, we're going to be talking about the vehicle industry. Lots to talk about, particularly in the context of vehicle prices. They finally seemed to have rolled over. Guys, am I right about that? They've rolled over, they're starting to decline?
Jonathan Smoke: Yes. Yeah. One could say that we're on the precipice of maybe a deflationary spiral, in fact.
Marisa DiNatale: Ooh.
Cris deRitis: Whoa.
Mark Zandi: Ooh, we're not fighting for that. Actually, that's music to my... Well, I guess you're in an industry, it doesn't sound so good. But if you're trying to get inflation back into the bottle, that sounds pretty good.
Jonathan Smoke: It does.
Mark Zandi: All right, let's come back to that. Okay, well inflation is on the mind, a big week for the inflation statistics. We got the consumer price index, PPI, I think we got import-export prices, a bunch of price information. We usually have Matt Collier. Matt Collier, another one, I always get his last name wrong. I got to remind myself, it's Collier County and then I get his name right. But Matt Collier, he's out today. So Marisa, would you mind doing the honors? Would you give us a rundown on the numbers?
Marisa DiNatale: Sure. Big shoes to fill, but I'll try.
Mark Zandi: Yeah, try.
Marisa DiNatale: All right. So yeah, as you mentioned, we got several different reads on inflation. Obviously the biggie was the consumer price index for the month of April, came out the other day. Good news for a change, it did not surprise to the upside for the first time in several months. So headline, CPI rose 0.3% over the month, which is what we were-
Mark Zandi: Can I say Marisa, as per my normal working arrangement, I just interject what I will here, but I find your introduction so interesting. Because you said it was, what was the word you used about the report? It was good?
Marisa DiNatale: I don't even remember what I said two seconds ago.
Mark Zandi: Yeah, very good report.
Jonathan Smoke: No surprise for the upside.
Mark Zandi: Yeah, but it's not because it was a great report, it was only because it wasn't a bad report. I guess that's what it sounds like.
Marisa DiNatale: Right.
Mark Zandi: Right?
Marisa DiNatale: That's right, yeah.
Mark Zandi: Right? It wasn't like it was showing inflation's coming in in a significant way, it's just that it wasn't a negative surprise. It didn't come in stronger as it happened in January. Okay. Okay, continue on.
Marisa DiNatale: Right. So yeah, it wasn't worse than we were expecting for the first time in a few months. So yeah, headline inflation was up 0.3%, which was in line with our expectations that follows two consecutive months of 0.4% increases. This puts year over year total CPI up 3.4%, which is actually 3.36% unrounded, so really under 3.4%, and that's down from 3.5% in March. Core CPI, so excluding food and energy, did the same thing, rose 0.3%, after rising 0.4% for three consecutive months. It's up 3.6% year over year, which is the slowest pace of core inflation since April of 2021. And that follows a 3.8% rise in March. So we'll get into some of the components of what's going on there.
Mark Zandi: Yeah, so I think if you do a chart of the consumer price inflation, CPI inflation for the last, well, since before the pandemic till now, you saw obviously the surge beginning in 2021, kind of peaking on a year-over-year basis in the middle of 2022, that's when Russia's invasion of Ukraine pushed oil and gas prices to record highs. It's been kind of moderate all the way back into a few months ago. And the last, I don't know, three, six months, the rate of inflation is kind of leveled off. It's come in a little bit, but it's kind of leveled off. That's kind of the picture you get. At this point, on a year-over-year basis, it feels like it's not really moving to any significant degree basically.
Marisa DiNatale: That's right, yeah.
Mark Zandi: Okay.
Marisa DiNatale: Yeah.
Mark Zandi: Let me ask you a couple questions around the CPI report, just to provide context. Of all of the components of the CPI, which have you found most encouraging in the report, in terms of what it means for the outlook for inflation?
Marisa DiNatale: Well, I think we have to talk about shelter, because it's-
Mark Zandi: That's the thing that makes you... That's the one component that you find to be the most encouraging?
Marisa DiNatale: Yeah, that it didn't accelerate again. Yeah, yeah.
Mark Zandi: She's so weird, guys.
Marisa DiNatale: Well, I have two answers, I guess. There's something else. There's something else. But I think we have to talk about shelter simply because it's the biggest component driving inflation right now. So the fact that it didn't accelerate, is good news. And in fact, when you look year over year now and you look at primary rents and you look at OER, it's actually moderating.
Mark Zandi: OER?
Marisa DiNatale: That's good.
Mark Zandi: What's OER?
Marisa DiNatale: Yeah.
Mark Zandi: OER, some disease or what is that, OER?
Marisa DiNatale: In a way, it is a disease. It is owner's equivalent rent. So it's the implied rent that homeowners would pay to themselves. It's imputed by the BLS. So they look at rental properties in an area and they look at people that own their home and basically assign them an equivalent rent for the home that they own. That's a big part of shelter inflation, and that has been increasing more than actual rents, people that primarily rent their home. And we've talked about this a lot, about the problems of estimating. It is completely estimated. Cris can probably go on about this, he just wrote a paper about how problematic it's been. And this has been a big part of what's been driving inflation over the past.
Mark Zandi: Okay, but why is that the most encouraging aspect of the report? I mean, it was 0.4 and it was 0.4 before. 0.4 is pretty high, it's a third of the total CPI. I look at that and I get discouraged. I don't think of it as, this is good news.
Marisa DiNatale: Yeah, I guess I'm looking at it like it's not worse news. So that's good.
Mark Zandi: Oh, that's the theme here, it could be worse. It could be worse. Actually, that may be the title of the podcast, It could be worse. Yeah. Okay. Got it. Got it. Hey, while we're on that topic of CPI, Cris, do you want to describe the work that, unfortunately Matt's not here, but Matt has been doing with the so-called harmonized consumer expenditure affiliate, or CPI? Because this gets to the point that Marisa is making around rent, and particularly OER, owner's equivalent rent.
Cris deRitis: Sure. So we've discussed it a little bit in the past, that there are several ways to measure inflation, right? There are lots of ways to select the weights or make different assumptions. The harmonized index of consumer prices basically excludes the owner's equivalent rent. It does a few other things, but that's the big difference between that version of inflation and the CPI that Marisa mentioned. And the idea there is that, well, we can't really measure this OER, owner's equivalent rent, concept very well. It has such a big weight in the index, that if we get it wrong, it has a big influence, so maybe best just to exclude that. We'll look at the rents that we can measure, the rental properties where we do see the price changes, but we're not going to use this imputation.
So this is the way that many other countries do their inflation analytics. Europe, for example, UK, they use this harmonized type of index. The BLS does produce a research version of this harmonized index, typically along with the CPI. I noticed on their website, though, that this month there's a delay in reporting the harmonized CPI. So the harmonized index. So that should be coming out soon, I suppose. But it didn't come out-
Mark Zandi: Watch it come out with all these big revisions, and the whole thing changed. The whole story changes.
Cris deRitis: Maybe, possible.
Mark Zandi: Geez, that would be awful.
Cris deRitis: But we had an idea that, well, if there's this harmonized CPI version, why not a harmonized PCE version? We've discussed in the past that it's the personal consumption expenditure index that the Fed actually focuses on primarily when they're making their monetary policy decisions. So we have the core, which excludes food and energy for both. We have, of course, the headline. We searched around for the harmonized version of this, we couldn't find one, so Matt has been steadfastly working on a harmonized PCE for us to consider. I think he's either posted something or he'll be posting something.
Mark Zandi: I tweeted.
Cris deRitis: You tweeted it out
Mark Zandi: @Markzandi, just saying, @Markzandi.
Cris deRitis: Okay, just saying.
Mark Zandi: A nice tweet, actually. Obviously you're not looking at my Tweater. Tweater?
Cris deRitis: Tweater?
Mark Zandi: Twitter, I guess. What do you say these days?
Cris deRitis: X.
Mark Zandi: Xer. You're not looking at my Xer Feed.
Cris deRitis: I'm off the X. I'm off the X.
Mark Zandi: Oh, you're off the X.
Cris deRitis: Okay. All right. Once you post it on LinkedIn, I'll take a look, but-
Mark Zandi: Okay, fair enough. Sorry, I interrupted.
Cris deRitis: So there you go. I think that's what he's been working on, he's published something there. In terms of the trends, it's showing a similar trend in terms of a much steeper drop in harmonized inflation versus what we see from either the headline or the core.
Mark Zandi: Okay. Okay. I'm really getting bugged by this whole thing now because this whole inflation thing.
Cris deRitis: You go down too long.
Mark Zandi: Yeah, in the context of what it means for what the Fed's doing here, the Fed's like, "I'm not cutting interest rates until I got clear evidence that inflation is back to my target." Well, if I look at harmonized core CPI or harmonized core PCE, core X food and energy, which is what they do, because they're trying to get to the underlying inflationary trend, and food and energy prices go up and down and all around. And I would argue now in the current context, given that the housing market is a complete basket case, it's a complete mess, for lots of different reasons, that we should exclude owner's equivalent rent when we're trying to understand what the underlying trend in inflation is. Because OER, as Marisa said, it's implicit, it's made up. Even in the best of times, I'm not sure we measure it well, but in this time we definitely don't.
It's not providing any information whatsoever, in my mind, with regard to the underlying rate of inflation. So you buy into that, and I look at... And by the way, as you said, this is the way much of the rest of the developed world looks at inflation, harmonized, because they say, "What is this OER? What is this? I can't measure this thing. I'm not even going to include it in my calculation." So we do that, and you look at it, and on a percent change year ago basis, the harmonized core CPI has been below or equal to 2% for nine straight months. Now you said, "I haven't seen the April data yet." Well, BLS better not wrong foot me here, I would say, or want to do, but assuming they don't, then nine straight months. And then I go look at the core consumer expenditure deflator, the PCE deflator, harmonized core PCE, best measure underlying inflation, it's been below 2% for five months in a row.
And by the way, if you take the CPI and the PPI numbers that came out for the month of April, and you use that to forecast what the PCE is going to be when it's released for the month of April, at the end of the month, it's going to be a 0.2% month to month increase. And year over year, the harmonized core PCE is going to be below 2% for six straight months. This is year over year. It's not three month annualized, it's not six month annualized, this is year over year. Okay. You're with me so far? So here's the concluding statement. Aren't we at target? Haven't we accomplished what we need to accomplish? Aren't we back to underlying rates of inflation? Why do we need to wait around to cut interest rates? For what reason exactly? Okay, I'm going to stop. Cris, do you want to answer those questions, please?
Cris deRitis: Credibility.
Mark Zandi: Okay. Is that it? That's your best answer. That's all you got for me.
Cris deRitis: That's the answer I would give. I'm with you. I've been an advocate of this for a long time, as you know, of moving to a harmonized index.
Jonathan Smoke: Mark, I'll add to it.
Mark Zandi: Okay. Jonathan, you weigh in. Yeah.
Jonathan Smoke: I'm definitely on your side on this because I believe it also really obscures what individual consumers are experiencing in the economy.
Mark Zandi: Great point.
Jonathan Smoke: And we do a little exercise where we take the CPI numbers and we apply it to the basket of goods in the consumer expenditure survey, for the income quintiles, to estimate what the CPI is per income quintile. And I believe we're vastly overstating the level of inflation for homeowners, which is 66% of the population, who in fact are enjoying much lower inflation because they are not paying themselves owner equivalent rent. And by the way, they happen to be the households that are invested in the stock market, enjoying strong dividends and interest, and are driving the vast majority of consumer spending. Yet, what does the elevated level of interest rates not coming down prevent us from moving forward on, is very expensive real estate investments, like multifamily construction, that we are in such a need of in the country. So I would argue that leaving rates higher for longer is actually flirting with making the situation far worse.
Mark Zandi: Okay. Excellent. You make two really fascinating points. One is that homeowners aren't actually seeing their housing costs rise, right? Almost every American with a mortgage has a thirty-year fixed-rate mortgage, maybe 15, and their monthly payment hasn't moved one iota. We discussed iota, that's a word, right? I know that's a word, iota. Has not moved one iota.
Jonathan Smoke: Home insurance and property taxes, maybe, are-
Mark Zandi: Yeah, okay. Exactly. But the actual mortgage payments are the same as they were. So we're saying with the implicit rent that the cost of living in the house is rising actually 5, 6% on a year-over-year basis. And the reality is, from a cash perspective, it's not rising at all for many homeowners, in terms of their mortgage payment. And that's kind of weird compared to other goods and services in the CPI, right? Is there any other... I guess like financial services. There are some implicit costs in the CPI that, there's not cash outlays, but this is the biggest one by far. And the other point you're making, really interesting point, you're saying, "Look, if we want to get the growth and the cost of housing down, we need more supply. We need more homes". And if you keep interest rates high, you make that more difficult for multifamily developers to get the capital they need to go out and build more rental units.
Also, it contributes to the so-called lock-in effect that homeowners with mortgages, at a mortgage rate at 3 or 3.5 or 4%, they're not going to sell and go buy another home, get a mortgage at a 7%, where the current mortgage rate is. So it's affecting the supply in the existing market too, both in the new market for rental and homeownership and in the existing market. And all the Fed's doing by keeping rates up is exacerbating the very problem they're trying to solve. That's what you're saying?
Jonathan Smoke: Yes, absolutely.
Mark Zandi: Marisa, do you want to...? Now I'm doing a poll. I'm going to try to identify a person who disagrees with me, and give me a reason.
Marisa DiNatale: I don't, unfortunately.
Mark Zandi: You agree?
Marisa DiNatale: No. Yeah, I agree with you.
Mark Zandi: Okay. Agree with you. Okay, Mike. Before Mike answers the question, if Mike disagrees with me, or us, he's probably right. We are going to have to rethink. Because generally when he disagrees with me, he's right. He's right. But go ahead, Mike. Go ahead.
Mike Bisson: I fall on the side of the credibility issue, and because-
Mark Zandi: We'll come back to that.
Mike Bisson: This is just changing the goalposts. If everyone is looking at the CPI and you say, "Oh, the CPI is not right now. We want lower rates. We're not looking at the CPI anymore." Everyone, they published these CPI reports. I know the Fed always says they're looking at the PCE, but everyone else looks at the CPI. And if you're saying, "Oh, the CPI is not right when we don't want it to be right, so now we can lower rates."
Mark Zandi: Not CPI, it's the PCE. They say PCE.
Mike Bisson: They say PCE.
Mark Zandi: The core PCE.
Mike Bisson: The public looks at the CPI.
Mark Zandi: Yeah, but they're not setting the goalpost. If they step to the core PCE, that's their goal. That's their goalpost, core PCE. Right. Okay. I hear-
Mike Bisson: On the credibility issue, I don't think that they can... If we're still at 3.5% year over year, it's really hard to say, "Oh, let's lower rates. And maybe it's a change in the R-star. What's to say that it's really hurting the labor market right now? Labor market still seems hot. It's low unemployment." There's reasons to think we don't want to go into that stagflation type of scenario. And keeping it here rather than pulling back on interest rates too soon, I think, might not be the wrong play at this point.
Jonathan Smoke: Okay. So we're basically saying it's better to be credibly wrong?
Marisa DiNatale: Than right.
Mark Zandi: Well said. I wouldn't have thought of saying it that way, but that's well said.
Mike Bisson: But if it's 50/50, credible wrong, credible right, I'll rather be credible than be that 50% chance.
Mark Zandi: And Mike, I sympathize with this argument. I do. I do. I think credibility is critical, because that goes to inflation expectations, and we need to make sure that inflation expectations remain anchored because that's key to everything. If they don't, then we got a problem. So I totally get you on that. I am on board with that. But I would say this, why couldn't Fed Chair Powell, instead of calling out super core service inflation, "Oh, I'm looking at super core service inflation," which by the way, is completely bogus, in my view, as a measure of inflation, and say, "Hey, guys, there's this thing called the harmonized CPI, the harmonized core PCE. I think we should be looking at that because that's a better measure of underlying inflation."?
And by so doing, he takes our eyes off of this bright shiny thing over here that means nothing, to a credible thing over here that means something. And get people thinking in the right direction, as opposed to not thinking in the right direction. And therefore, it makes it a lot easier for him to maintain credibility, and he can actually ease more quickly than he otherwise would have if he sticks with this super core thing over here. And super core is totally bogus because it's a narrow piece of the pie and it's got all kinds of imputed stuff in there that are just very difficult to measure. So what do you think of that argument?
Mike Bisson: I agree with changing the lip service, but changing policy, I wouldn't say now is the time.
Mark Zandi: And I wouldn't change the policy either at this point. I'd say let's get... But I would say two things. One, if we change what we're focused on, then it makes it easier to start easing sooner than otherwise would be the case. And the second thing I'd say is, I would not sacrifice the economy to the altar of that 2% on core PCE, if push comes to shove. If something's breaking somewhere... And by the way, if you listen to the last couple podcasts, we've been talking about things that could be breaking under the weight of too high for too long, then they should not sacrifice the economy to that. Agree? Disagree?
Mike Bisson: Agreed. We should not be sacrificing the economy. But I'm not on the couch, so I'm living in...
Mark Zandi: Oh, yeah, making a reference to the previous podcast. Yeah, very good.
Mike Bisson: Yes.
Mark Zandi: Okay. I'm going to ask the question again to the group because Marisa did not give me a satisfactory answer. It was, what, in the report, made you feel better about inflation? Is there anything in that report? And you can't say vehicle prices because we're going to come back to vehicle prices in just a minute. But anything else?
Marisa DiNatale: Food prices.
Mark Zandi: Oh, that's the answer. That was the answer I was looking for. That was the answer. Anyway, do you want to explain?
Marisa DiNatale: Yeah. They were flat over the month, and if you break apart, there's basically two segments within food. There's grocery prices, food at home, they call it, and food away from home, everything you buy in a restaurant, a fast food, a vending machine, a college dorm cafeteria. So grocery prices, which have caused much angst over the past several years, fell over the month. And it's the third consecutive month with either negative or no price growth. Year over year, grocery prices are up just 1.1%, which is not much in the grand scheme of inflation that we see in other goods. And just for a little bit of context, the post pandemic peak in grocery prices was 13.5% in August of 2022. Grocery prices were rising 13.5% just two years ago. So there's all different components that fell over the month.
Somehow the discussion always turns to eggs, for some reason. Egg prices were down over 7% over the month. There's been these outbreaks of avian flu, which have whipsawed egg prices over the past several years. Food away from home, so the stuff you buy outside of the house, those prices rose 0.4% over the month. That was an acceleration over the prior two months. And over the year, they're up 4.2%, which is high, but they're also coming down. The peak there was 8.8% in March of last year. So food, at least grocery prices, look like they're actually deflating over the past several months, which is really good news for your average consumer that's consuming food and gas, and these kinds of things. So that was going to be my second bright spot in-
Mark Zandi: Yeah, no, I think that's the one I would've focused on. I think that food at home, groceries, year over year, they're basically flat. They're zero. I mean food away from home, restaurants, that's up, you said 4%, I think, year-
Marisa DiNatale: Yeah, over 4%. 4.2%.
Mark Zandi: And that goes to mostly, I think, strong demand, because people have been going to restaurants in the post pandemic period, and the labor costs.
Marisa DiNatale: And wages.
Mark Zandi: And minimum wage hikes. And you saw the ones in California for fast food restaurants, that's adding to it. Here, I have a question for you though. So if you look at food at home... And I think this is the thing that really causes the disconnect between economists like me. With all this happy talk in how Americans feel about the economy, because many of them are focused on food items that they buy on a regular basis, and if you look at food at home, it's flat on a year-over-year basis, but it's up 25% from where it was three years ago. That's a big increase. So here's the question to you, and maybe to the group, should we expect food prices, in aggregate, I know there's different food items that go up and down and all around, but in aggregate, should we expect food prices to actually fall? Hey, Marisa?
Marisa DiNatale: Well, I think a lot of this hinges on what energy prices do and what gas prices do, right? They're very correlated. And when we saw the peak in food prices, it was right after Russia's invasion of Ukraine. It was right when oil prices peaked, because this is how food is transported around the country, it's mostly by truck. So it really depends on what diesel and gas prices do. And energy prices have been rising, so I'm not quite sure that we should expect a spike or a major reversal in the trend. But this might be a bumpy road, I think, for the next month or two. It may not be a linear coming down, like we see in some other components.
Mark Zandi: Jonathan, do you have a view on that question? Should we expect food prices, at least in its totality, to come down? Or is it a case where food prices go sideways for a long time, let wages and incomes catch up?
Jonathan Smoke: I suspect it's more of that, although I've heard some interesting talk about the... I'm trying to remember what the class of drugs is, related to Ozempic. But there's actually a decline in demand for food that's correlated with that. And that too could help keep food prices contained.
Mark Zandi: Oh, that's an interesting point.
Jonathan Smoke: Yeah, there was one other thing that I would point out as encouraging in the CPI data, and that was motor vehicle maintenance and repair was unchanged because we've been dealing with that component, really, following the early surge in vehicle prices. And I would argue that is a huge part of the motor vehicle insurance, which is the other kind of problem in the CPI data so far this year.
Mark Zandi: Before we go to vehicle prices, let me just turn to Cris quickly. Do you think we should expect food prices to come down, Cris, or is it more a question of they just kind of hopefully go sideways here?
Cris deRitis: Yeah, I'd expect more flattening than outright deflation.
Mark Zandi: Yeah, other than the Ozempic argument, which that's a pretty interesting argument. The only other argument I've heard where you might see, I don't know if you see actual prices come in, but it keeps a lid on the inflation in the food, is margins are now, for grocery stores, are actually pretty wide. That grocery stores have taken advantage of the run-up in price and now a more moderation in their cost structure, so that their margins are extraordinary. And it could be over time, as competitive pressures kick in, that that will put downward pressure on price increases. I don't know that even competitive pressures, I don't think businesses will cut price, generally, but they may not be able to raise price quite as much.
Cris deRitis: Yeah. Okay.
Mark Zandi: All right. Let's turn to vehicles. And that's good news, right, Jonathan, what we got with regard to new and used vehicles? It seems like it's moving in the right... Again, from the perspective of getting inflation back in the bottle.
Jonathan Smoke: Yes. Both vehicle price components of the CPI were negative in April. So we've had several months of used vehicle prices being negative and new vehicles, largely, have been negative over the last year. I don't recall what the CPI is year over year on new vehicle prices. I always have an issue of, will the CPI make sense in the vehicle prices relative to what we see in the real world? And actually, in April we saw a slight uptick in average transaction prices. And that's a part of our vehicle affordability index. And I think it largely represents, there's periodic pressures in vehicle sales, and associated with that, there is strong trends and incentives and discounting.
So April followed the end of a quarter, in March, which happens to be the fiscal year-end for a large number of Japanese manufacturers. So we've had the highest in multiple years of discounting and incentives in the month of March. And they just kind of laid back a little bit in their aggressiveness in April, that I think was behind our numbers. But when you add the quality adjustment and other things that the BLS does with the numbers, that's probably why we still had a down number in April.
Mark Zandi: But broadly speaking, used vehicle prices, correct me if I'm wrong, Mike, have been falling for better part of the past year, right? And new vehicles really in the last 3, 4, 5 months, where we've seen some weakness in new vehicle prices. Is that actually correct, Mike?
Mike Bisson: Yes. So separating the CPI from the, which tracks retail prices versus our index, and the Manheim Index, which tracks wholesale prices and the used side of the equation, the wholesale prices have been coming down for a couple of years now. And they peaked early 2022, they've come down over the past couple of years, and this is just a continuation of that, on the wholesale side. On the retail side, it's lagged, but it's continued to track that wholesale side of the equation as the lower prices for dealerships at the wholesale market go into the consumer side of things on the retail side. So the CPI set us down 7% on the year, for used vehicles, and that's been going down. We saw a jump from the first quarter of '23, but since that point, which was lagged out until June of '23, so since June of '23 till current, we've seen continuous drops in used vehicle prices.
New vehicle prices have been flat, or so, since that point. We saw, I think, the largest monthly drop was this month. It dropped 0.4% month over month. So I think that's the yearly change too, because it's been pretty flat over the past year. I would expect that CPI to continue to come down on retail too, despite what Jonathan said with the transaction price. But we still have pent-up prices from the real side of the economy. So the numbers that Jonathan and I look at in transaction prices, we've seen four or five months of decreases in those transaction prices, which are starting to move into those CPI numbers. And so we should expect, not that jump that we saw in the one month that Jonathan talked about, but more of a consistent decline, I would expect, in those new vehicle CPI numbers over the next coming months.
Mark Zandi: So prices are declining, and how much longer do you think that'll continue? Is that through the end of the year or is that through this time next year? Jonathan, do you have a view on that?
Jonathan Smoke: I think it will at least be through this year and most likely through next year as well, because precisely what you were bringing up about grocery retailers. Most of the declines that we're seeing are really a result of margins declining. Or put another way, discounting is returning to a market that actually was pricing above sticker, back in the early parts of the pandemic, through 2021. So as discounting returns we're about halfway back to the level of discounting we had, which means we've got another 2% to 3%, and incentives also play a role in that. That's the amount of money manufacturers are putting in to make it more urgent for you, and interesting for you to buy a vehicle. And both of those things mean that average transaction prices are going down and should continue to go down until we are more in normal territory. But interestingly, the vehicle itself is not getting cheaper.
The stickers are still seeing inflation, the invoices what dealers pay, are seeing even greater inflation. And that's reflective of, "Well guess what, guys? We're paying more in labor. We've got more expensive technology and regulations." We've got a general skew towards vehicles that are much more expensive because you're catering to who's left and capable of buying new vehicles, which tends to be high income, high credit quality consumers. And it sort of reinforces that. And, "Oh, by the way, we're preventing any inexpensive vehicles from entering the country with 100+% tariffs. So we're ensuring that this regime of more expensive, but maybe lower volume vehicles, is really what's going to be the nature of the US vehicle market for the foreseeable future."
Mark Zandi: Oh, interesting. So even with the pickup in global vehicle production, which was significantly impaired during the pandemic, and correct me if I'm wrong, but I think has largely normalized at this point, around the world?
Mike Bisson: Yes. Let me correct you, one thing on that, the Japanese production was way down over this first quarter. There was a big quality issue at a Toyota supplier, so their production was down about 15% in this first quarter. So we saw Australian prices pop over the first quarter, unexpectedly. So it's not all the way back, there's still some supply chain issues, but US is back, right where it was pre-pandemic.
Mark Zandi: And inventories on dealer. Lots have, this is a statement and is actually a question, they've normalized as well?
Jonathan Smoke: They're rapidly growing in recovering. We're not back to 2019 levels, either in absolute inventory levels or day supply. Our metrics of supply show we're approaching 3 million units on dealer lots, and we were around 3.5 million back in 2019. But on a day's supply we're within 10 days of what the day's supply was in 2019, because the sales pace is lower even though the inventory levels are lower [inaudible 00:39:20].
Mark Zandi: So not quite there?
Jonathan Smoke: We're rapidly moving in that direction. If you look on the year-over-year change, we're increasing inventory levels by about a million units. So most of the recovery in production, with the little kinks here and there, like Mike was mentioning, has really been in the last 12 months.
Marisa DiNatale: All the latent supply chain issues are mostly worked out, Jonathan?
Jonathan Smoke: Yes, knock on wood.
Marisa DiNatale: Yeah.
Jonathan Smoke: Nothing new.
Mark Zandi: And despite that prices coming from the producers, they're still moving higher because the cost of production has moved up. But what's happening is that the retail price is coming in, in part because the margins that the dealers have are narrowing. And I guess also, as you mentioned in passing, the so-called quality adjustments in the consumer price measures. The CPI tries to account for the improvements in the quality of the car as well.
Jonathan Smoke: Yes. And arguably the quality is tremendously better.
Mark Zandi: Tremendously.
Jonathan Smoke: Vehicles are lasting much longer, clearly more fuel-efficient, even if you ignore the EV component. So lots of improvements in that space.
Mark Zandi: Okay. So it sounds like we can count on continued actual price declines in the new and used vehicle market for the next 6, 12, maybe 18 months, something like that. Not to put words in your mouth, but yeah. Okay. And that then leads to, if that's happening, then we should start to see some, with the lag, relief with regard to the increase in the cost of maintenance and repair. And you mentioned in this month's consumer price report, there was no increase in, that's the CPI for maintenance and repair. And do you think that's the beginning of a trend here?
Jonathan Smoke: I do, there's components of maintenance and repair, on the service side, that probably still has an inflationary bias towards it, but the parts' shortage and the amount of inflation that's happened in parts, I think is reaching the end of its cycle. But even with April flat, it was still up 8% year over year. So it's clearly been driving a lot of the insurance uptick. And insurance, it was still up, I think it was 1.7% month over month, which was a major deceleration from the two handle in March. But it's really been an area that's been hurting average Americans, no question.
Mark Zandi: And that's next then, because first it's the vehicle price, the direction that that's headed, then it's repair and maintenance, and then the next step on the process is insurance, because insurance is the last thing. Because the insurance rates go up because insurers have to shell out more cash to repair a car that's hit in a traffic accident because the vehicle price is so much higher. So you're saying we should expect to see over the next 6, 12, 18, and in the case of vehicle insurance, maybe the next couple of years, at some point, some significant moderation, maybe even some declines?
Jonathan Smoke: I wouldn't necessarily think we're going to see declines because we've got some technical reasons that vehicles are more complex, and battery electric vehicles are more likely to be totaled. And there's a lot of variables there that suggests that insurance is never going to get cheaper, but hopefully it won't go up as much as we've been experiencing.
Mark Zandi: Well, I won't recount again my own personal vehicle insurance experience, but I just had that with my homeowner's insurance too. I got kind of a bill the other day, and the interesting thing that's happening is, I'm reducing my coverage, because the sticker shock. The price on the insurance makes me call the broker and say, "Hey, what's going on? Can we get a better price?" And the broker says, "No, that's the best price, but you could change your coverage." And then I really look at the coverage and I go, "Well, I don't need that." So the price is up, but the actual amount I'm spending in the case of both the vehicle and the homeowner's insurance is, I wouldn't say it's less, but it's certainly not more. It's certainly not more, which obviously I'm getting less for it, but nonetheless.
Anyway, it's all about me, Jonathan, it's all about me. Okay. Was there anything else? Oh, just a factual question. If I towed up the share of the consumer price index that's in new and used vehicle purchases, maintenance and repair and vehicle insurance, approximately what is that? Does anybody know offhand?
Cris deRitis: 5% to 6%.
Mark Zandi: 5% to 6% of the CPI index?
Cris deRitis: Yeah.
Mark Zandi: Overall CPI?
Cris deRitis: Yep.
Mark Zandi: Yeah. Okay. So that's not inconsequential, that's consequential.
Cris deRitis: Yeah.
Mark Zandi: Okay. Okay. There's so much to talk about. I do want to come back and talk about the, I'm not sure if this is right, nomenclature, the real vehicle industry. Meaning, what's going on with sales, and EVs and that kind of thing. But before we do that, let's play the stats game, unless there's anything else on inflation that anybody wants to say? Any other pearls of wisdom there? I think, generally, the bottom line is this conversation is making the case that inflation, if it's not already back to the Fed's target, it's pretty close. And all the trend lines here, or at least most of the trend lines look pretty good. Is that a reasonable summation of the conversation up to this point? Anyone disagree with that? Okay. Hearing none.
Okay, let's play the game, the stats game. And Jonathan, are you going to play this game?
Jonathan Smoke: Absolutely.
Mark Zandi: Okay. Yeah. Good. We each put forward a statistic, the rest of the group tries to figure that out with clues, deductive reasoning and questions. And the best stat is one that's not so easy to get it immediately, one that's not so hard we never get it. And we always start with Marisa. Marisa, you're up.
Marisa DiNatale: Okay. Very relevant to this conversation. I have two numbers, +20% and +46%.
Mark Zandi: Measure, price increase?
Marisa DiNatale: Yes.
Mark Zandi: A certain product or products? Services?
Marisa DiNatale: Uh-huh.
Jonathan Smoke: Used vehicle prices, new and used, I'm wondering.
Marisa DiNatale: One of them is-
Mark Zandi: She said plus, they're up 20%.
Marisa DiNatale: One of them is new.
Jonathan Smoke: Compared to February 2020?
Marisa DiNatale: Correct.
Mark Zandi: Oh.
Marisa DiNatale: So new vehicle prices are up 20% since February 2020. What's the 46%?
Jonathan Smoke: Is that insurance?
Marisa DiNatale: Yes.
Jonathan Smoke: Okay.
Mark Zandi: Wow. That's-
Jonathan Smoke: Perfect.
Mark Zandi: Yeah. Perfect.
Jonathan Smoke: Yeah.
Mark Zandi: So what you're saying is, if I go back to February of 2020, right before the pandemic hit and I look at the new vehicle price index from the CPI, it's up 20%?
Marisa DiNatale: That's right.
Mark Zandi: Even with the recent declines.
Marisa DiNatale: That's right.
Mark Zandi: And vehicle insurance is up 40-
Marisa DiNatale: 46%.
Mark Zandi: Wow.
Marisa DiNatale: Since February 2020, and then half of that is in the last year.
Jonathan Smoke: The CPI index is up 21, so vehicles are less than inflation overall. Wow.
Mark Zandi: Yeah, interesting.
Jonathan Smoke: If you believe in the vehicle component being accurate, but that's another topic.
Mark Zandi: Yeah. We've talked about it in the past, how wacko...
Jonathan Smoke: The new one is actually done quite well now.
Mark Zandi: Is that right?
Jonathan Smoke: They moved to transaction prices and it's more immediate, the used one still takes a little bit of belief.
Mark Zandi: Yeah, belief. Yeah. Okay. Mike, you want to go next?
Mike Bisson: Sure. 3.3 trillion. It's not dollars.
Jonathan Smoke: 3.3 trillion.
Mark Zandi: It has something with the vehicle industry.
Mike Bisson: Correct. Vehicle demand.
Mark Zandi: Does that make a difference?
Mike Bisson: Nope.
Mark Zandi: 3.3 trillion is a lot of... That's a lot of something. That's a lot of something. Is that to do with EVs?
Mike Bisson: No.
Jonathan Smoke: Is it total value of retail sales?
Mike Bisson: Nope. Not dollars.
Jonathan Smoke: Not dollars.
Mark Zandi: Not dollars. 3.3 trillion. And it has to do with a vehicle industry.
Mike Bisson: Yep. It's one of-
Mark Zandi: Is that how many people drive... I was going to say drive a car, but that's...
Jonathan Smoke: Mileage driven.
Mike Bisson: There you go.
Mark Zandi: Oh, mileage driven.
Mike Bisson: Total miles driven in the past 12 months, the highest 12 months in the history of the United States, showing that this work from home isn't impacting significantly the amount of miles driven. The amount of miles driven directly impacting the amount of vehicles demanded in the auto industry.
Mark Zandi: Oh, so 3.3 trillion was 2023?
Mike Bisson: March of 2024 is the last. So over the last 12 months, spent 3.3 trillion miles driven in the United States.
Mark Zandi: And you're saying that's a record high?
Mike Bisson: Record high.
Mark Zandi: Which is really surprising to me. How is it that our oil consumption, this is probably not a fair question, but oil consumption in the US is down about a million barrels a day?
Cris deRitis: Fuel efficiency.
Mike Bisson: Fuel efficiency.
Jonathan Smoke: Dramatic improvement.
Mike Bisson: Fuel efficiency.
Mark Zandi: Right, right. The EVs and the hybrids.
Jonathan Smoke: Even before EVs-
Mike Bisson: Even before that.
Jonathan Smoke: The change for the decade leading up to the pandemic was enormous in terms-
Mike Bisson: Trucks getting 20 instead of 12 miles per gallon.
Mark Zandi: Okay. And what you're saying is, at the end of the day, and this is a lesson I learned from you when we were debating vehicle sales back in the teeth of the pandemic, what really matters to demand for cars is the amount driven, and we're back to driving-
Mike Bisson: And scrappage.
Mark Zandi: And scrappage, of course, scrappage. Right.
Mike Bisson: Right.
Mark Zandi: Okay. Well, I want to come back to sales after this conversation, but that's a good segue into it. Okay.
Mike Bisson: 3.3 trillion.
Mark Zandi: Any granularity around that? I mean in the sense that, is it across the country?
Mike Bisson: They do have it regionally? I don't have it broken up in my mind, but I could say it's South/Southeast. They drive a lot more in the Northeast.
Mark Zandi: Right.
Marisa DiNatale: Where's everybody going? It's not to work.
Mike Bisson: There's studies out there that show that you drive just as much because you're not going to the city center. So if you need to pick up flowers or you need to get a haircut, you still need to drive from your house to do those things. Whereas if you were going into work, you just get the flowers on the way home from work, you just get your haircut while you're at your lunch break, you go to the gym. And I see Cris at the gym every day, at the Y across the street, but now you got to drive to the gym, so you're doing-
Mark Zandi: That blows my mind. Cris goes to the gym?
Cris deRitis: I actually ride my bike now, by the way.
Mark Zandi: I thought he was just a bocce ball player. What's his whole-
Mike Bisson: Got to get in shape for bocce ball season.
Cris deRitis: Highly competitive.
Jonathan Smoke: I think the overall data also reflects that the way that the miles are being delivered may not be the historical way that we had an average of 12,000 miles per car. Because when we look at vehicles, like at Manheim, that are coming through, what I would say, the average household vehicle is actually accruing slightly less mileage than it used to. And it's because we effectively are outsourcing some of our miles traveled to ride hailing services, goods delivery. So those miles actually also represent more vehicles coming to our homes and having to drive in two directions to the home and back, where your prior trips may not have incorporated that. So we've got some changes going on in miles.
Mark Zandi: Fascinating. Well, maybe since we're here, let's talk about it. The thing that confuses me a little bit, if I look at new vehicle sales in the US, I believe, and correct me if I'm wrong, in the month of April, it was 15.7 million units, at an annualized rate, correct?
Jonathan Smoke: Yes.
Mark Zandi: Okay. And if I go back before the pandemic, it was a consistent 17 million per units per annum, give or take. But for at least a few years, it was almost like the industry was targeting 17 million units. They wanted 17 million units in sales. How come we're still, given the increase in mileage, I guess maybe the answer is scrappage and the point Jonathan just made, but why is it that we're stuck in... Affordability is a problem, but why are we at 15.7 million, why not back to 17 million units? Jonathan, you want to take a crack at that?
Jonathan Smoke: Sure. I principally point to affordability.
Mark Zandi: Affordability, okay.
Jonathan Smoke: We've effectively, when you look at the credit tier and income distribution data of who buys new vehicles, we've skewed to even higher credit quality and higher income, that, based on my math, has eliminated about 10% of what was the market in 2019. It's impossible for that 10% to buy today. So the market has shrunk. And I think we're struggling with the 16 million level because clearly the industry is not able to deliver there. If you plot the long-term trend of light vehicle sales for the full history, this is the only period in time where we've not been above the long-term trend, a simple linear trend, without a recession. And I believe it's mainly affordability. But to Mike's point, scrappage plays a role in that too, vehicles are lasting longer. So the good news is, from an affordability standpoint, vehicles last longer, the used car market is bigger and more important. And increasingly more people are principally buying used when they may have considered new just five years ago.
Mark Zandi: Do you concur with that, Mike? That assessment?
Mike Bisson: I do. And then that goes right into driving up repair and maintenance. The older the car is, the more expensive the maintenance drives up prices for maintenance.
Mark Zandi: So the same kind of dynamic is playing out in the housing market, and Cris has come up with this concept of pent-up households. We've got households that haven't formed because they can't afford to either rent or to purchase a home. So if they can't do that, you got to stay with your parents or double up with your friends. In that field, we call that pent-up demand, meaning that's kind of latent demand. People want to strike out on their own, they just can't afford to. And once affordability improves, and it will eventually, interest rates will come down and incomes will continue to rise.
And we are talking about falling prices. And so assuming gasoline doesn't go higher and we continue to move over to hybrids and EVs, and there's tax subsidies there, so we should see improved affordability. Does that mean, if that's the case, then we should see an improvement in sales and that there's pent-up demand for vehicles and that will ultimately, let's call it, say, unleashed, and that will lift the demand and we'll get back to 17 million units a couple, three, four years down the road, when affordability is restored?
Jonathan Smoke: We definitely believe that there's long-term growth potential in the market. And the principle thing holding back the market today went from being supply to being affordability. So as prices and rates start to come down, you really start to improve that potential. But I am worried that the new vehicle market could be constrained by affordability for the foreseeable future, because the technological change and the shift to the industry to, principally, selling much more expensive vehicles, it self-reinforces. And so it may be worth a pause for you to take a look at your medium-term forecast for light vehicle sales, because you have a trajectory.
Mark Zandi: Now you're talking to Mike, because I learned my lesson, that's his forecast. I'm just saying.
Jonathan Smoke: He tells me it's your forecast.
Mark Zandi: Oh, geez.
Mike Bisson: Short term's definitely mine.
Jonathan Smoke: I'm not questioning the short term. It's the 17-7 handle in five years that looks-
Mark Zandi: Looks high.
Jonathan Smoke: Without the Chinese actively delivering sub-20,000 units in this market, it looks really impossible.
Mark Zandi: Yeah. Okay.
Mike Bisson: That's the exact point I wanted to make, that getting up higher than 16, isn't the question, it's, is there pent-up demand?
I don't think we need pent-up demand to get to 17 million, but if you want to get above 17, 17.2, 17.5, once you start getting that, you're going to need a pent-up demand. I don't believe that there is pent-up demand in the market. I think we drive through demand through increased repairs, aging of the vehicle stock. It's not like the housing market where there's new families that need to be made, it means there's new vehicles that need to come onto the market. You can drive through that demand by having more miles on a single car. That being said, I don't think we're going to get above 17.5/18 in the next three to five years, just because I don't think that we're going to have an explosion as prices come down.
Mark Zandi: Oh, okay. So because we're on the high side then, you're saying?
Mike Bisson: In the medium term, yes.
Mark Zandi: In our forecast we're on the high side. Okay, so we may want to reevaluate that. Okay. Okay. Very good. Jonathan, you want to go next?
Jonathan Smoke: Yeah. So I like the style that Marisa had with two numbers. So I'm going to give you two. They're two percentages, 6.58% and 23.25%.
Mark Zandi: Is there any meaning to going to the second significant digit or is that, you're just showing off? Is that what this is?
Jonathan Smoke: I think it's meaningful, this is a number that's quoted that way.
Mark Zandi: Oh, okay.
Marisa DiNatale: These are share. Are they-
Mark Zandi: Interest rates?
Marisa DiNatale: Interest rates?
Jonathan Smoke: They are interest rates, yes.
Mark Zandi: Say them again.
Jonathan Smoke: 6.58 and 23.25.
Mark Zandi: Interest rates. 23.2 [inaudible 00:58:45]. Is that prime?
Mike Bisson: Oh, sorry. Sorry.
Jonathan Smoke: You're going in the right direction. They basically represent the best and the worst average auto loan rate in the month of April.
Mark Zandi: Oh, cool.
Jonathan Smoke: So the best one, 6.58 was for people who have super prime credit. So that's a credit score above 760, and buying a new vehicle. So those are the lowest credit risk. Best possible rate today is 6.58, when the average is around 10. Then the worst rate, 23.25 is a used car buyer with deep subprime, so 590, or less, credit score. So you can imagine how difficult it is to get an affordable payment with that kind of interest rate.
Mark Zandi: Can't imagine anyone paying that. Geez. Wow.
Jonathan Smoke: The average used rate today is around 14%. So deep subprime is a full 10 percentage points higher.
Mark Zandi: While we're on the topic of lending, Mike, auto credit loan credit performance, I had thought, we get the Equifax-based data, credit file data, and we look at those delinquency rates, and it's a census of credit files, so it's good data. We get monthly data, we seasonally adjust. And I had been looking at it, and I'm looking at the entire loan market, superprime, primed, subprime, everything, it looked like the delinquency rates had stabilized. Then in April we saw a bit of a pop. Well, what do you think? Is credit quality still weakening or has quality stabilized?
Mike Bisson: Quality has stabilized, in general, from where we were with that huge increase from '21 through '23 where we were having 25%, 30% year-over-year change. The April pop, I think, is a little bit more noise and delinquencies. I'm more concerned with what's going on in charge-offs. Charge-offs and the auto delinquency rate are up 12% over 2019 levels, and they were staying pretty low, or stable, up until the past few months. So as you see these used vehicle prices come down, people have less equity in their vehicles, which means that this is going more towards charge-off in your loan rather than selling it and paying off your delinquent loan. So this is a little bit more concerning for me, I believe, on the auto credit side of things.
Mark Zandi: Go ahead, Jonathan.
Jonathan Smoke: We look at the same data from Equifax, but we narrowly look at 60 days plus for delinquencies, and we had two months in a row, March and April, of 60+ delinquencies falling. That's a usual seasonal tax refund season pattern. So we're thankful that that was the case. But even so, the percentage of seriously delinquent loans was the highest in the month of March and the month of April, in the history of the data series we have, which goes back to 2006. So it's actually, even though it's come down, it represents a level of stress in auto loans that is worse than in the Great Recession.
The big change I've seen, last year, the silver lining was, delinquencies were very high, but defaults didn't, correspondingly, reach even average territory. But in the first quarter of this year, the default rate has more than normalized. It was at an equivalent, if you do an annualized pace of defaults, or think of it as repossessions in the world of Mannheim, we were at the same level in March and April that we had in 2010, in almost the worst of the Great Recession. 2009 was a little worse. So there's a lot of stress on the loan side, and it's exactly why Mike explained.
Mark Zandi: Mike, though I listened to everything he said, and then I kind of went to the bottom line. But I think things have stabilized. I'm a little worried about chart repossession charge-off because the value of these vehicles are now falling. There's less or no equity in the car, and therefore people are more likely to turn the keys back. Do you concur with that view, Jonathan, or are you more pessimistic than that?
Jonathan Smoke: No, I concur with the view, because the market is very constrained in supply, and historically, auto loans are written for this. What we're seeing is, yes, a slightly elevated relative to normal, but it's definitely within the bounds of what the lenders are pricing for. And by the way, their yield spreads, even though the performance, their yield spreads are the widest, at least in the history of our data. So they are prepared for this. And by the way, it's why, even if the Fed starts cutting, we may not see substantial improvement on consumer rates until the loan performance starts to get better.
Mark Zandi: Okay, let's do one more, Cris, you're up. What's your stat?
Cris deRitis: Okay. Keeping with the theme, $50 billion.
Mark Zandi: Five zero?
Cris deRitis: Five zero.
Mark Zandi: Billion.
Mike Bisson: Auto industry profits?
Cris deRitis: No, but you're-
Mike Bisson: Subsidies, the value of the tax subsidies?
Cris deRitis: Nope. I'll say -50 billion, just-
Mark Zandi: Oh, okay.
Mike Bisson: Oh, gee.
Mark Zandi: I'll throw in. You're surprised that we're surprised. I see it on your face. Isn't that a big difference, 50 versus negative 50?
Cris deRitis: No, it's kind of along the lines of what Mike said, right? You could call something 50 billion of profit, you could call it 50 billion loss. Right? You wouldn't necessarily say-
Mark Zandi: Guys, do you know what the hell he's talking about? I have no idea.
Mike Bisson: $100 billion difference, that about sums it up.
Marisa DiNatale: Can we now put to rest you making fun of me with negative signs?
Jonathan Smoke: I was about to say, Marisa. Somebody needs to come to your defense.
Marisa DiNatale: Exactly. Thank you, Jonathan.
Mark Zandi: What the hell is he talking about? I'm totally confused now.
Cris deRitis: Mike's on the right track. It's not the auto industry, it's some-
Mark Zandi: Subset of the insurance industry?
Cris deRitis: Exactly.
Mark Zandi: Oh, okay. They lost 50 billion?
Cris deRitis: The auto insurance industry lost $50 billion over the last two years, 2022 and 2023. So a reason why I don't expect to see that insurance premium fall anytime soon, because they're still making up for the losses that they've incurred. I'm not even sure that they're appropriately priced at this level. They probably need additional premium hikes just to get back to any equilibrium.
Mark Zandi: Oh, that's a good one though. That's a lot of money.
Cris deRitis: It is a lot.
Mark Zandi: Explain a lot, yeah. Basically an insurance company, they do their probability assessment, actuarial assessment, and then they say, "Okay, this is what I'm going to lose, probabilistically, and now I need X return on top of that, and that's my premium." It's pretty straightforward actually.
Cris deRitis: Yeah.
Mark Zandi: Yeah. The probability and actuarial results could be different than what you calculated, but on average it's going to be right, generally.
Cris deRitis: Especially if you're driving more miles. That was an interesting piece, right? So I thought we were actually driving less, which would lower premium, but if we're driving the same, it's just redistributed.
Mark Zandi: Right.
Mike Bisson: Climate works its way in here too. How many vehicles did we lose from Hurricane Ian, two years ago? I think over 350,000. Hurricane Harvey, I think, was triple that. So I can almost guarantee we have a weather event between August and November where we lose more than 50,000 vehicles.
Mark Zandi: Also hail. Right? These hail storms are pretty bad. Here in suburban Philly we're not going to lose it to a hurricane, but we could lose it to hail, because the cars could get damaged by hail storms, no problem. Okay, very good. We're towards the end of the conversation. I want to end it this way. I want to give you kind of our forecast for inflation, and then I'll turn it to the group and see whether you think that's a reasonable forecast, or you think we're being too optimistic or too pessimistic. So in terms of the core consumer expenditure deflator, so I'm picking on that one, because again, that's what the Fed is focused on, in setting its 2% inflation target. That's through the month of March, growing year over year, 2.8%. And we have in our forecast that, coming back down to the Fed's target, by mid 2025. So a little over a year from now, within spitting distance, give or take a 10th or two.
And not that that means the Fed's going to wait until then to cut rates, because they just need enough evidence to know or feel confident that we're headed in that direction. So I would expect them to cut rates well before that. But that's the trajectory for the forecast. Marisa, what do you think? Would you take the high, the low, or are you on board with that forecast?
Marisa DiNatale: I'm on board with it.
Mark Zandi: You are?
Marisa DiNatale: I think if we're wrong, it's going to be later, right? It's not going to come down that quickly, but I think as the baseline forecast, I'm on board with it. As you mentioned, most things are on a downward trajectory here, so I'm with you, yeah.
Mark Zandi: Okay. Okay. And do you think people's perceptions about the economy are going to thus steadily improve here? Because inflation is coming in?
Marisa DiNatale: People's perceptions of the economy are very out of whack with the economy, I think, right? If you look at these sentiment surveys and you look at inflation expectations, ask people what they're going to be a year ahead... We saw that last week with the University of Michigan, they don't think inflation is going to change at all over the next year. They think it's going to be right where it is. So I don't think that people are accurately gauging what's going on with inflation. And that said, if you look at inflation expectations, you look at what the Fed says and what markets think, they're on board with the Fed's projections. But I think your average consumer is not well-tuned in to the overall inflation picture.
Mark Zandi: Okay. Johnny, what do you think about that forecast?
Jonathan Smoke: I'm on board, and in fact, using it for my forecast.
Mark Zandi: Oh, that's right. That's right.
Jonathan Smoke: Put it where it means something. I believe it makes sense, and I totally agree with Marisa, that, if anything, maybe there's some slight timing differences to it. But I will flag that the one thing that I'm becoming more worried about is, we do quarterly surveys of dealers and we did a corresponding survey of consumers this month that we're going to be releasing next month, and there is some irrational, crazy expectations of what's going to happen with rates and inflation, based on what people are assuming will be the outcome of the election.
Mark Zandi: Oh, interesting.
Jonathan Smoke: And if that's the case, even if it's irrational, those expectations could drive some realities that we have to deal with.
Mark Zandi: Are you at liberty to explain that a little bit more?
Jonathan Smoke: Yeah, basically it depends on your political perspective. For those that are skewing towards saying that they support Trump and they believe Trump is going to win, they believe that interest rates and inflation are going to fall dramatically as soon as he's in the White House. And all of our forecasts for rates and inflation suggests a specific trajectory. But if you think about that in the vehicle market, it relates to my deflationary spiral concern, then if it comes to a vehicle purchase or a home purchase and you believe that rates and inflation are going to be dramatically lower in 6 to 12 months, then the rational course of action is to stop purchasing and delay purchasing until that works its way through. And even if you're talking about less than half the population, it's enough to move what's happening in the auto market and housing and consumer spending.
Mark Zandi: That is fascinating.
Jonathan Smoke: And I've been through a few of these cycles before, and presidential elections should mean nothing to forecasts.
Mark Zandi: So you're saying, in the surveys, when people say, "I support President Trump for re-election," there's also the view that whatever the mechanism is when he's elected, soon thereafter, inflation interest rates are coming down in a meaningful way and therefore you're concluding for that?
Jonathan Smoke: Or if you ignore the political alignment, it basically says the majority of people think that the election outcome is going to have a significant impact on the economy. We in the profession don't believe that.
Marisa DiNatale: So the other side of that Jonathan, so do people believe that if Biden is re-elected, what happens? Interest rates go higher or don't change?
Jonathan Smoke: I think that they don't change. I think it's more the perspective that they don't change and we're still dealing with inflation at a higher level for a longer period of time, is probably the net conclusion. But frankly, I just started reviewing the data yesterday, and I've just been troubled by it ever since. So I had to share, I had to get on my own couch.
Mark Zandi: Yeah, that's pretty interesting. And this was a survey of dealers you said?
Jonathan Smoke: So we do a quarterly survey of dealers that we use for, what we call the dealer sentiment, but then our research team did a corresponding view of consumers of the same questions about interest rates, inflation, and the economy overall.
Mark Zandi: Interesting. Okay. Yeah, that's a little... Yeah. Okay. Hey, Mike, what do you think about the inflation forecast?
Mike Bisson: I think it works well with the employment forecast. Our outlook for employment's very strong going in the near future. So that's going to have the Fed be able to lower interest rates as CPI comes down. If anything, it'd be higher for longer, in my view, under our current employment forecast. But the risks are weighted, because in the case that there is a recession, we would be much lower, much faster.
Mark Zandi: Yeah, you're right. The forecast is based on the assumption the economy continues to do what it's been doing, meaning growing, low unemployment, jobs, and certainly no recession. Yeah. Yeah. Okay. Fair enough. Cris, what do you think?
Mike Bisson: Yeah, I think it's reasonable and it's consistent with the rest of the forecast.
Mark Zandi: So we're all going down then. That's what it means. We're all going to be wrong. No? Yeah, probably.
Jonathan Smoke: But we'll be credibly wrong.
Mark Zandi: We'll be credibly wrong, yes. Which is, according to Mike, the important thing, that we're credible.
Mike Bisson: That we're credible. Yeah, we're credible.
Mark Zandi: All right. Well, that was a wonderful conversation. Jonathan, I want to thank you for coming on again. We always learn so much, and I really appreciate it. Mike as well, I like teasing you, but I do it from a point of deep respect. And I'm not joking. I'm not joking. You see, Jonathan, early on when we were started working together, I would override him. He'd say this and I'd say that. And I learned quickly, everything he said was actually right. I'm not arguing anymore. I'm not arguing with this guy.
Jonathan Smoke: It's good to have people like that on your team.
Mark Zandi: I know. I know. It's pretty good. Okay. Anything else, guys? Marisa, Cris, Mike, anything?
Mike Bisson: No, we didn't get to Marisa's car. Next time.
Marisa DiNatale: Oh, yeah, let me just thank Mike. So I consulted with-
Mark Zandi: Oh, she has a new car, right?
Marisa DiNatale: Yeah. Yeah. And Mike, remember we were talking about it a month ago and I asked you what I should do, and he said, "Lease an EV." And so I did.
Mike Bisson: That's right.
Marisa DiNatale: I'm thrilled.
Jonathan Smoke: And by the way to that question of waiting, I get people asking me, is this a good time to buy? There's no question, it's a great time to lease an EV, for the brands that are providing some very attractive lease offers.
Mike Bisson: Incentives, cheap prices, you can't go wrong right now.
Jonathan Smoke: Tax credits. Yes.
Mark Zandi: Can I ask, maybe this is an unfair question, which EV would you... No, probably shouldn't ask you.
Mike Bisson: Oh, no, no, no.
Mark Zandi: But I'm not doing that. I'm known as a last mover, I move last.
Jonathan Smoke: I heard the podcast with your rental experience.
Mark Zandi: Oh, yeah.
Jonathan Smoke: A plug in hybrid, Mark. Plug in hybrid.
Mark Zandi: I know.
Jonathan Smoke: The opportunity's there.
Mark Zandi: You're right.
Jonathan Smoke: Baby steps. Baby steps.
Marisa DiNatale: It seems like they're making less of them though.
Jonathan Smoke: It's a very small portion of the market, but they're actually growing, so more are coming online.
Marisa DiNatale: Okay. Because when I was looking for cars, one of the cars I test drove was a Audi Q5, which is the plug-in hybrid, and they told me they're discontinuing it.
Jonathan Smoke: Oh, interesting. Huh? Really?
Marisa DiNatale: Which I was surprised.
Jonathan Smoke: Yeah.
Marisa DiNatale: Nice car, Audi.
Mike Bisson: I like it a lot.
Marisa DiNatale: Yeah, very nice.
Mark Zandi: Okay, I think we're going to call this a podcast. I want to thank the listener for tuning in and hopefully you enjoyed it, and we will talk to you next week. Take care now.