After congratulating the Philadelphia Eagles on their dominant Super Bowl win, the Inside Economics team breaks down the week’s inflation data. Moody’s Analytics colleague Matt Colyar joins to help unpack the details behind January’s hotter-than-hoped-for CPI and then the group discusses whether their outlooks for 2025 have changed. Predictably, this evolves into a discussion about tariffs. Finally, they play the numbers game. Objectively, Marisa’s number was best.
After congratulating the Philadelphia Eagles on their dominant Super Bowl win, the Inside Economics team breaks down the week’s inflation data. Moody’s Analytics colleague Matt Colyar joins to help unpack the details behind January’s hotter-than-hoped-for CPI and then the group discusses whether their outlooks for 2025 have changed. Predictably, this evolves into a discussion about tariffs. Finally, they play the numbers game. Objectively, Marisa’s number was best.
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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' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusted co-hosts, Cris DeRitis and Marisa DiNatale. Hi guys.
Cris DeRitis: Hey, Mark.
Marisa DiNatale: Hey, Mark.
Mark Zandi: And we got Matt Colyar. Matt, good to see you.
Matt Colyar: You too, Mark. Cris, Marisa.
Marisa DiNatale: [inaudible 00:00:33], Matt.
Mark Zandi: Matt's always here because this is Inflation Week. We got the Consumer Price Index, the Producer Price Index. All of that adds up to telling us what the Consumer Expenditure Deflator... We'll get into that, but when it's Inflation Week, we've got Matt. Matt's all thing inflation. So we talk about that. Might play the game here a little bit, but I guess before we dive in, though, we have to acknowledge the Eagles' victory in the Super Bowl. No?
Marisa DiNatale: Absolutely.
Cris DeRitis: [inaudible 00:01:03].
Mark Zandi: Cris, you going to go to the parade tomorrow? What about you, Matt?
Cris DeRitis: The parade?
Mark Zandi: Going to the parade?
Matt Colyar: I hate to admit it, but no, I'm not going. Which is pretty wild to think about. But there's already been one. Growing up, the idea of missing an Eagles Super Bowl parade is insane. But logistics, I don't know. Pretty tough.
Marisa DiNatale: Life has changed for you.
Matt Colyar: Life has changed, yeah. Traffic, the kind of things you think about. I guess.
Mark Zandi: You've grown up, Matt.
Matt Colyar: I know.
Mark Zandi: That's what it is. You're getting old.
Matt Colyar: I feel old sometimes.
Mark Zandi: Cris, you're not going? I know you-
Cris DeRitis: I was not aware of a parade.
Marisa DiNatale: That's so-
Mark Zandi: That is hard to fathom. Is that true?
Cris DeRitis: It's true.
Mark Zandi: You're not paying attention to the...
Cris DeRitis: I'm not paying attention.
Marisa DiNatale: Wow.
Cris DeRitis: I watched somewhere.
Mark Zandi: [inaudible 00:01:48].
Marisa DiNatale: Did you watch the Super Bowl, Cris?
Cris DeRitis: What's that?
Marisa DiNatale: Did you watch the Super Bowl?
Cris DeRitis: Are you putting me on the... I did watch and then I didn't watch all of it. I fell asleep.
Mark Zandi: Well, I'll have to say, if you're not an Eagles fan, that game must have been pretty boring, right?
Marisa DiNatale: Yeah.
Mark Zandi: Because it was never close. It was never. For an Eagles fan, couldn't have better.
Marisa DiNatale: That's right.
Mark Zandi: There was always tension. I always kept thinking they'd come back, that the Kansas City Chiefs would come back, but we were leading by so much the whole way, so it was really pretty cool.
Matt Colyar: It was exciting.
Mark Zandi: Yeah, pretty cool. And they got a good team. Anyway, we're not here to talk about the Eagles. We're here to talk about the economy and inflation. Matt, do you wanted to give us the rundown on the CPI, Consumer Price Index?
Matt Colyar: Yeah, for sure. In a word, bad, not a great report. The January Consumer Price Index came out Wednesday and the headline CPI, so the basket of goods that the government puts together to estimate, a price index of the things we spend our money on, it rose 0.5% from December to January. That's above expectations of 0.3%, so not a small miss. That's strong. That lifted the year ago rate from 2.9% in December to 3% in January. Fastest monthly increase since August of 2023. It's also now four months in a row that year-over-year-rate has ticked up. Certainly what I didn't expect. We'll touch on the underlying components and what's going on there. Right off the bat, there's some discussion about seasonal adjustment factors, can get technical there. Whether some measurement issues were driving this inflated increase in January, I think there's a story there, probably less so for this figure than core CPI, which we'll get to. But all in all, bad report. You can put some optimistic spin on it, but it's not what anybody wanted to see.
Mark Zandi: So what you're saying is that, usually when you see an economic report that's out of bounds compared to expectations... And expectations are based on some pretty hard work. I know you dig deep into the bowels of all kinds of economic statistics to get a sense of what is going to happen with the CPI. You break it down by component. You use new car prices, medical care inflation, you're really digging deep, and for us to miss and for everyone else to miss by this much is, it happens. There's times when that happens, but it's unusual. Usually when it happens it's because there's some kind of measurement problem, and one intuitive measurement potential issue is that this is January.
In January, businesses raise prices typically for the year, many of them, and of course the BLS, the Bureau of Labor Statistics knows this and tries to adjust for it. It's called seasonal adjustment, but in the wake of the pandemic, because that scrambled the economy throughout the year, those seasonal adjustments are much more difficult to do. And it could be that this go around, they just got the seasonal adjustment right. So January is bad as you say, but it's bad because of measurement issues. If it's because of measurement issues, particularly seasonal adjustment, that doesn't suggest anything about the future. If anything, it means we'll get a report down the road here, or two, where it surprises on the good side of things because it all balances out. But you're saying, what I think you're saying is, no. Maybe if you stretch it, you can see a little bit of what they call residual seasonality, but it's a stretch.
Matt Colyar: I would soften it a little bit. I think there's something there.
Mark Zandi: Something there.
Matt Colyar: But it didn't make an okay report a bad report or a good report a bad report. It's a bad report and that residual seasonality is on the margins and wouldn't really change anybody's perspective if it were not the case.
Mark Zandi: So on the face of it, it's bad. With making this adjustment for the measurement issues, the residual seasonality that we're calling it, is it still bad or is it okay or how would you characterize it?
Matt Colyar: I would still characterize it bad just based off of the array of underlying components being a problem.
Mark Zandi: Different shades of bad. It's just not the dark shade. It's a light brown shade of bad?
Matt Colyar: That works.
Mark Zandi: That works for you, Cris, that description? I don't know.
Cris DeRitis: Well, now my interest is piqued. So where did we miss? What did the market miss? What were the components that were all even stronger than expected?
Matt Colyar: Used vehicles. I think used vehicles is interesting for a lot of different reasons, but if you want to make the residual seasonality case that behavior has changed in the wake of the pandemic, whether that's permanent or whether that's just a near term behavioral shift that seasonal factors of previous years aren't catching, I think we can see some of that in the automotive market. I think that's the strongest case. So used vehicle prices jumped 2%. I have that right. Maybe it's 2.2% they jumped in January and that's strong. And there's maybe some strong demand getting ahead of tariffs before vehicle prices start to rise. That's again an idiosyncratic effect now that is happening this January that seasonal factors wouldn't capture from last January or January before that. So there's an argument there.
Cris DeRitis: A lot of hurricanes or wildfires?
Matt Colyar: The BLS say that what was going on in California wasn't a dramatic... Or it didn't have any kind of meaningful impact. I don't don't know how much confidence I can say that with. I think there's a good argument that cars are destroyed, people have to go buy cars. That's a run-up in demand. Same upward price pressures. Probably is some of that going on, but I haven't seen anything that's particularly conclusive or points to that as why the vehicle market was rising. Talking to our resident guru in the automotive market, Mike Brisson, he's persuaded me that it's more of the getting ahead of tariffs. Dealers know that, dealers have some interesting things-
Mark Zandi: Oh, interesting.
Matt Colyar: That they're doing and big drop in incentives this month, which is what dealers are able to do when they feel that demand is strong.
Mark Zandi: So what you're saying is, people are out buying cars in anticipation of tariffs. They want to get a car before the tariffs and the dealers know this, therefore they're pushing up the price?
Matt Colyar: And they don't have to offer as much incentives and just-
Mark Zandi: That's pushing up the price effectively, right?
Matt Colyar: Right. So... Yeah.
Mark Zandi: That is fascinating. That's fascinating.
Marisa DiNatale: Wouldn't that be more on the new vehicle market than the used field? If people are trying to get ahead of tariffs, they'd be buying new, that would apply to new cars. Unless it's a downstream effect where inventory for new cars is being...
Matt Colyar: No. That argument, which was a very intuitive first step that I'm thinking is... Well, according to Mike what's happening is there's kind of a compositional shift, which is these higher model new cars aren't actually what's being sold. Dealers are holding on to them, they're more profitable, and instead it's the lower like... I'm going to really struggle to come up with a car example. From a premium model to the lesser model, there's a lot of incentive for the car dealerships that know... Rhe car dealerships know these tariffs are coming, prices are increased. They have inventory of those things before tariffs are applied and prices have to rise. They hold onto them, they sell them later. Ostensibly, with the tariff increase, they can apply that and increase margins even more. But right now, it's been a shift to selling lower models, cheaper models. So new vehicle prices, if you look at what's actually being sold, that compositional shift is keeping new vehicle prices relatively flat in the way that the BLS measures them. That's slightly conjecture from Mike, maybe [inaudible 00:10:22].
Mark Zandi: I'm laughing because this is mind-numbing. This is mind-numbing.
Matt Colyar: To be fair.
Mark Zandi: This goes to a broader point. The effects of tariffs are so multifaceted and cross currents and all kinds of things to consider. Just think about what you're saying here, all the different effects this is having on the marketplace already. Amazing.
Matt Colyar: And conjecture is, a lot of inventory data says that those lower models, even if they're new or being sold, it's slowing the average sales price.
Mark Zandi: Before you go on and give us any other things that were affected by so-called potentially residuals, what have we missed? Just the residual seasonality, I'm going to try to explain it, but I may botch it and you can take a crack at it. But basically, the Bureau of Labor Statistics and other statistical agencies they have, it's really a statistical algorithm from decomposing movements in things like prices or jobs or whatever it is into different components. A cyclical component, a trend component and a seasonal component. This happens every year and we account for it.
So they seasonally adjust based on that kind of algorithm and calculate a seasonally adjusted series, so stripping out effectively the seasonality and leaving the trend in the cycle in the data. And you do that, because you want to get to the underlying trend, you get a sense of what's actually happening that's not seasonal. But to calculate residual seasonality, you run that algorithm again on the seasonally adjusted data and you see if it teases out more of a seasonal factor. There's still seasonality in the data after the BLS is seasonally adjusted, that so-called residual seasonality. Did I get that roughly right?
Matt Colyar: Yeah, that's how I would describe it, for sure.
Mark Zandi: Were you impressed by that, Marisa? No?
Marisa DiNatale: Very.
Mark Zandi: Okay.
Marisa DiNatale: Yeah.
Mark Zandi: Thank you. I appreciate it. So what else did we get surprised on? Used vehicle prices, what else?
Matt Colyar: Food was a bit stronger.
Mark Zandi: What was?
Matt Colyar: Food. Food at home, grocery store prices. So look, 0.5% increase in January. We were-
Mark Zandi: That's not just eggs?
Matt Colyar: It's not just eggs, though. Eggs rose 15.2%, which I think is probably-
Mark Zandi: For the month?
Matt Colyar: Too obvious for somebody for the numbers game, but yeah, for the month, from December to January 15.2%. Cris threw his hands up. So that's 53%, 53% year-over-year. A lot of media coverage there. Outbreak of avian flu, likely everybody's come in contact with that. Not the flu but that story driving eggs.
Marisa DiNatale: We have egg rationing lines now out here I saw at-
Mark Zandi: Wow.
Marisa DiNatale: Some Costcos where you have to actually get in a line early to get eggs.
Mark Zandi: And how much do you pay? You pay, I don't know, eight bucks for a dozen eggs or something in California? Did I read that right? Some outrageous number. Nationwide, I think it's four bucks something for a dozen eggs.
Marisa DiNatale: I don't know. I buy expensive eggs as it is that are normally eight bucks, so I don't even know what they are now.
Mark Zandi: There's all kinds of expensive eggs. You buy the primo. You and the crypto boys-
Marisa DiNatale: I buy these organic-
Mark Zandi: Are out buying your-
Marisa DiNatale: Green, the chickens get a spa treatment before they're slaughtered kind of eggs and they're really expensive.
Mark Zandi: Got it, got it. All right. So what else in food was a surprise other than eggs? It was just across the board?
Matt Colyar: Yeah, because there's some fruit, citrus stuff going on, whether it's weather related. There's an invasive bacteria that messed orange crops in Florida later last year. Inflation is hot there, but nothing that you can singularly point to and say, "Okay, it's eggs and this," that are driving food prices up broad based within food. But that explains a little bit more of our miss and acceleration from December's pace. Year-over-year, still relatively mild for grocery prices, 1.9%, but that's ticking up.
Mark Zandi: How [inaudible 00:14:35]. That was close to flat not long ago, six, 12 months ago it was basically flat, so it's re-accelerating. Any other product that surprised you on the upside in terms of the price increase?
Matt Colyar: Energy slightly. We thought it was 1.1%, weaker increase than December, but a little bit stronger than we expected. So that's not a terrible miss.
Mark Zandi: Anything surprise you on the positive side, it came in weaker than anticipated?
Matt Colyar: Healthcare.
Mark Zandi: Healthcare.
Matt Colyar: So I think there's more and more evidence, and maybe this time last year or mid-2024, it was healthcare, it's slower moving, it's digesting these input cost increases, like nurses negotiating salaries in a tight labor market. All those things were going to take time. So it was a matter of how high is that year-over-year growth rate in healthcare inflation going to go? And I think we can be confident that it's rolled over and it was 3.5, 3.6 at its highest. So medical care services was flat in the month for January. It's at 2.7% year-over-year and that's two or three months now that year-over-year rate declining. It's a big input in the CPI, even bigger in the PCE, and inflationary pressures there look at least under control, in a way sooner than I would've anticipated.
Mark Zandi: And maybe this gets to the Producer Price Index, the PPI. And we're recording this a day early. I don't know why. Why did we do it a day early?
Marisa DiNatale: Because I'm traveling tomorrow.
Mark Zandi: Oh, oh it's you.
Marisa DiNatale: To accommodate me.
Matt Colyar: For the Eagles parade from California.
Mark Zandi: Oh, Eagles' parade.
Marisa DiNatale: Yeah, I'm flying to the Eagles' parade.
Mark Zandi: Oh, I see. Got it, got it. But was it this morning PPI came out?
Matt Colyar: That's right.
Mark Zandi: Yes, Thursday morning, PPI, and that's wholesale prices. And that showed some pretty... And you showed them to me in an email... Some pretty substantive declines in various types of healthcare, physicians, dental offices, hospitals, it looked like, if I got it right, pretty much across the board, some actual declines in price in the month?
Matt Colyar: Yeah, across the board for PPI, Producer Price health care-related indexes that we look at, all of them were down. And if you saw the top line PPI number that came out this morning, and it was also strong, it was 0.4% and December's number was revised upward significantly. Certainly surprising. Initially looking at it, first reaction was that this was another bad data point when it comes to inflation, but bond markets, you see investors didn't have that reaction and instead felt pretty good. You saw 10-year treasury yield drop 10 points, 10 basis points and that's about what it rose the day before and why? Long-winded way of getting there, for that exact reason. Those healthcare components are what bleed into the PCE Deflator, the Fed's preferred inflation metric. They were all soft. So what that portends is yes, the CPI was strong in January, but the inflation measure that the Fed cares the most about actually won't be so hot. This is more of a measurement difference between the two, and there's actually some good for the Fed to look at when it comes to inflation.
Mark Zandi: So we have the CPI, the Consumer Price Index, bad.
Matt Colyar: It's good.
Mark Zandi: Bad. The PPI, Producer Price Index comes out today, not so bad, maybe good. And the two of those things together go to make the Consumer Expenditure Deflator, which we're going to get I guess in a week or so, which is the key inflation measure for the Fed. That's the inflation measure they target. It's got these cross currents from the CPI, strong and bad, and the PPI weak and good. So what is the PCE going to show?
Matt Colyar: Point three percent is the forecast and that's for both headline and core PCE. There's-
Mark Zandi: So still pretty strong. Still pretty strong?
Matt Colyar: Strong, but you'll see, just based off of the base effects, that year-over-year rate is what draws a lot of eyes, that's going to fall for both. If those forecasts are right and they usually are much more accurate because we have so much input data at the time that the PCE Deflator is released, that's a decline from 2.6 to 2.4% in the headline PCE Deflator and from 2.8% to 2.6% in the core PCE Deflator, which that's what markets digest immediately. That's the kind of good news that we were expecting as these base effects that I drone on a lot about start to come into effect in 2025.
Mark Zandi: So on a year-over-year basis, Consumer Expenditure Deflator, the top line is going to be 0.3 on the month and you said 2.4% year-over-year and on the core, excluding food and energy, that's 0.3 on the month and 2.6, did you say?
Matt Colyar: That's right.
Mark Zandi: And of course the target is two. So we're still... As I've been saying and what I've said in the past, within spitting distance but not quite there. Would that be fair characterization?
Matt Colyar: Yeah, that's right.
Mark Zandi: I want to now think about the forecast, but before I do, let me just turn to you, Marisa first, and then Cris, anything you want to add on the inflation front, on the inflation statistics? We're going to talk about inflation expectations and the things, but in terms of the CPI, PPI and the Consumer Expenditure Deflator, anything you want to add?
Marisa DiNatale: I think I noticed, Matt, tell me if I'm wrong, that auto insurance was back up and reaccelerated again and that was something that stood out to me. I think it's up almost 12% just over the year. Some of the personal services and goods seem to be either deflating or not really inflating. I remember when we did, I don't know when we did that webinar, Mark and Cris, six or nine months ago about inflation and we looked at all these different components within services and personal services were a big part of service sector inflation back then and that looks like it's coming in a bit more. I see a lot of negatives there just over-the-month changes and even the year-over-year changes and some of those things are down. Things like recreation services, subscriptions, pet care, those kinds of things look like they're coming in relative to where they were.
Matt Colyar: To your first point, the insurance, I should have mentioned in my convoluted vehicle description, there was a 2% increase in motor vehicle insurance in the month. And again, it's been a hot button topic. Previously, vehicle prices have largely stopped increasing after 2022. Why are insurance premiums still going? I think the argument there is noise. I think insurance premiums, that inflation has rolled over. Did get a big jump in January. It's come after a few months of slower growth and I think that's probably the trend. Repairs were a little bit stronger too, but I think it's the same story. So, as far as personal services, that's not something I've spent a ton of time focused on. That's interesting. It's really demand driven things that suggest a pullback by consumers, which is certainly interesting.
Mark Zandi: Cris, anything to add?
Cris DeRitis: I just want I guess point out that the housing cost growth is stabilized. We did get a little bit of a pick-up in hotels. So is that a one-time Bills game type of event or is it something that would persist? I don't think so, but something to watch.
Matt Colyar: The lodging away from, the hotel prices is volatile. It has jumped around a bit, but perhaps the BLS is listening to the podcast because OER, the owner's equivalent rent that we don't like, they re-weight everything and that actually has a lower weight, now very, very slightly, but it is diminishing as a weighted component in the CPI in terms of its importance. It's small, but it was adjusted. So not as important moving forward.
Mark Zandi: Because on the Inside Economics podcast, we are not fans of OER. Never have been and never will be.
Matt Colyar: Never will.
Mark Zandi: At least it's behaving like you would anticipate or close to. It's moderated.
Cris DeRitis: Getting better.
Mark Zandi: Consistent with the events we've observed.
Cris DeRitis: Right.
Mark Zandi: Let's talk about the forecast and our baseline forecast in the middle of the distribution of possible outcomes has been that inflation would continue to moderate and ultimately get back to the Fed's target. It's taken longer than anticipated to get there, but even in our current baseline we have it getting there by the next few months, certainly by the spring, get from that 2.4, 2.6 on the top line core really down to two on a year-over-year basis. I'm beginning to wonder whether that's at all possible now, in part because these numbers are a little stickier than anticipated. But a bunch of other reasons have come to the fore, least of which is this recent increase in inflation expectations. I'm not sure how much weight to put on it, but it does feel like, to the discussion we had previously about the tariffs and the impact on people's behavior in terms of vehicle purchases, it also feels like people are starting to anticipate higher inflation because of the tariffs, and that's starting to show up.
You saw vividly in the University of Michigan survey, and I don't know how much weight to put on it, because it's affected by people's political prism. Republicans think something very different than the Democrats. But it feels like in some of the other surveys, the New York Fed survey, and certainly in the bond market, if you go look at inflation expectations in terms of what bond investors think, that has risen since it became clearer that we're going to have tariffs and some of the other policies that might lead to inflation. And if you have higher inflation expectations or maybe better put, fragile inflation expectations, they just feel very sensitive to me to any news or any actual increase in inflation, that that makes it less likely that we're going to get back to the target. That it's going to be increasingly the case that those expectations are going to be embedded in people's wage demands and how businesses price and how aggressive they are in their pricing.
And again, going back to the example of the vehicle industry, the dealerships are already responding to the potential tariffs in able to charge a higher price. It's already having an impact on pricing. I don't know, what do you guys think? We haven't changed the forecast, but my sense is that we may not get back to target here, certainly not in the next year or two as we work through these higher tariffs, immigration policy and other things that could potentially lead to higher inflation and higher inflation expectations. Cris, what do you think of that?
Cris DeRitis: I certainly agree.
Mark Zandi: You do agree?
Cris DeRitis: I think at least the risks are in that direction. If anything, inflation may come in stronger than what's penciled in our baseline. And I think that's consistent with our evolving view here in terms of the Fed and the number of potential rate cuts. There too, I think the risks are fewer, not more, given that all these factors that could influence inflation. There are very few that you can point to on the other side that actually would lead to more disinflation.
Mark Zandi: So you would concur that when we sit down and do the forecast for March, we may end up in a different place, that we may not end up back to the Fed's target. In fact, the disinflation, the slowing in inflation that we've enjoyed now for what, two and a half years, inflation peaked in the summer of 2022, that is now over, at least in the near term, in the next year or so?
Cris DeRitis: At least in the near term. And again, there's lots of uncertainty here, of course, on the policies and whatnot, so things could happen. You could play in a scenario where this inflation does accelerate, but given all the factors that we've identified in terms of policies, it's more likely than not that it's going to be stickier inflation for an extended period.
Mark Zandi: What do you think, Marisa? What's your perspective on that? [inaudible 00:27:06].
Marisa DiNatale: I think I agree with that. I think the odds are rising that we're not going to get back there and we may not get two rate cuts this year either. I think markets are now expecting one rate cut.
Mark Zandi: Is that right?
Marisa DiNatale: Yeah. I think you have to think about well, what are the major sources of inflation now or to this point? So we're still watching shelter and that looks good. That is one of the single largest components in the CPI. It's less of a big component in the PCE, which is what the Fed is looking at. But I think if shelter prices can continue to come in, then we can make some progress there. We have to see how much of this theory about residual seasonality is true. We'll find that out in a couple months after a couple more CPI readings I think. The thing with food is tricky because a lot of that is just being driven by various viruses and shortages and weather, and that is very difficult to predict.
So I do think that tariffs represent the biggest threat here to getting inflation further under control. We now have tariffs on steel and aluminum imports, broad based. We don't know what's going to happen with Mexico and Canada. Especially with Canada has the potential to raise housing prices even more. We get a lot of Canadian lumber and other inputs, a lot of metals from Canada. So the risks are certainly on the upside. I think there is a greater and greater chance that we don't get back there. We're far enough away. It seems like we were right there, and I think we're far enough away that it's possible we don't get to 2% by the end of the year.
Mark Zandi: And on tariffs, and obviously a boatload of uncertainty here, who knows how the president is going to play this? But it does feel like he's more serious about broad-based tariffs, doesn't he? Today, the news is around reciprocal tariffs. So if a country has a higher tariff rate than we do, then we raise our tariff to be consistent with that, which our tariff rate is low. So that would suggest tariff rates are going to go up on lots of different countries and lots of different products here in the not too distant future. It feels like at least directionally it goes to, if not universal tariffs, across the board tariffs, pretty clearly in that direction, doesn't it? Feels that way. Cris, what do you think?
Marisa DiNatale: Yeah.
Mark Zandi: Marisa, you agree with that? Okay.
Marisa DiNatale: Yeah.
Mark Zandi: Cris, and what do you think?
Cris DeRitis: [inaudible 00:29:53]. I don't know if the plan calls for matching lower tariffs is that to an extent that a country has a lower tariff, would we match it?
Mark Zandi: Oh, that's a great point.
Cris DeRitis: No?
Mark Zandi: Oh, it can't be too many of that, but that's interesting.
Cris DeRitis: No. I'm curious. I haven't heard anything along those lines.
Mark Zandi: Oh, that's a great... It took me a second to understand what you were saying. That's pretty funny. Well, the president argues, I'm just curious how you would respond to this, that it's just fair. Look, the other countries are charging us a higher tariff. There's developing countries, but there's also developed economies like the Europeans, I think our effective tariff rate is 3%-ish. Theirs is, I'm making this up, but 5%-ish, so it's not apples... It's not widely off, but still, they're still a little bit higher. How do you respond to that logic, that argument, or how do you think about it? That it's just fair, it's just plain fair that we should have reciprocal tariffs.
Cris DeRitis: On the surface it sounds somewhat logical.
Mark Zandi: Intuitive.
Cris DeRitis: But it goes to the comparative advantage of the different countries. We may not be exporting or importing the same good, we're competing in different markets. I think this is right, we import more from Europe in terms of goods, but we actually export more in terms of services. So what does it mean to tariff the products or the services equally? I don't see how that is optimal or it certainly is enhancing the trade, if you will. I think, at the core, there's a legitimate argument. If there are vast differences in trade practices, tariff practices, if there's dumping, there are clearly cases where it's certainly justified, but, I don't know, I think those are few and far between when it comes to Europe. I think there are certainly greater grievances as we think about China and some of the imbalances there.
Mark Zandi: I think it's easy to say, it's incredibly difficult to actually measure because there's so many different ways that countries affect and restrict trade beyond tariffs. There's tax subsidies. Think about the Inflation Reduction Act tax subsidies that are made in America. There's non-tariff trade restrictions. There's movements in the currency. There's a gazillion different elements to the calculation of, is a tariff fair or not fair? That's why we had the World Trade Organization to adjudicate those things because that's a difficult question, just to say, "Oh, they're 3%, our 1%." By the way, as you point out, these may not be the same products at all because in all likelihood they're not. There's all kinds of differences between the two. To say that, it's just easy to say, intuitive to many people, but I'd say a complete mess to try to implement. A complete mess. Anyway, Matt, I want to give you a shot at the question about whether we're going to get back to target here on inflation anytime in the near future. What do you think?
Matt Colyar: I wouldn't call myself a convert, but in the past few months, I've said shelter is moving in the right direction. I understand goods prices are going to go up a little bit. We can live with that. It's a little bit of a mismatch on timing, but we'll get there. But I'm just surprised just that it's inflation expectations manifesting as higher goods prices already. To the extent that that's happening, I could see that I've maybe underestimated goods inflation and that 2% is going to be more elusive than I previously anticipated. I still feel relatively okay that shelter is coming down. I think the car example is a good one. We even saw some of it in Q4 GDP data, the behavioral changes are maybe underway since the election. And those are inflationary as a lot of the policy proposals that the campaign put out were determined to be.
Mark Zandi: Just to restate a point, because I'm not sure I said it explicitly, clearly enough. You've got this view that tariffs are a one-off increase in prices, just a one-off pop to inflation. The tariff goes into place, the retailer jacks up the price of the product to compensate for the tariff, the consumer pays it, and that's the end of the story. That may be the case back in 2018, '19, and it wasn't, because I think there was some pass-through, but more so back then because inflation expectations were very, very different than they are today. If you go back then, no one even... Well, what is inflation exactly? No one even knew what that meant because inflation had been so low for so long, well below the Federal Reserve's target. It was suboptimal. The Fed had been fighting for, well since the financial crisis, to get inflation back up. Inflation expectations were dead as a doornail. People didn't react.
This go round, it just feels like that people, they're uber sensitive to inflation. Any sign the price is going up for anything, their inflation expectations are jumping and they're going to ask for higher wages, and businesses are going to jack up prices because their expectations are rising that they're going to have to pay more for everything. So if you're in that kind of a world, a world with more sensitive and higher inflation expectations, you get more pass-through. You get more pass-through.
And here's the other thing, if you have tariffs that are very narrow, like the tariffs that President Trump imposed in his first term on China, that's one thing. But if you impose it across lots of different countries and products, that's a totally different thing in terms of what it means for retaliation, what it means for investment decisions and hiring decisions, it's a whole different ballgame, I think, in terms of inflation. So this argument that this is one-off, maybe, but I'm increasingly of the mind that that's not going to be the case here. This could potentially set off a chain of reactions that means that inflation is going to be higher and more sustained as a result of the tariffs. Does that resonate, Marisa? Does that resonate? Would that argument resonate with you?
Marisa DiNatale: Yeah, I think it's totally different from his first term. I think we're in a different environment and the tariffs seem to be way more broad-based than they were back then when they were very specific. Yeah, I agree. Are you thinking about changing the outlook for the Fed, what the Fed's going to do? We have two cuts toward the end of the year. Are you sticking with that?
Mark Zandi: Well, I'm very close to concluding that we need to raise our inflation forecast here because we have assumed some significant increase in tariffs in 2025, but I'm beginning to think that this may end up being more of a problem in terms of inflation. Not percentage points difference, but tens of basis point different. But there's also going to be growth effects. This is going to hurt the economy, and that's going to show up by the end of the year, I think, in manufacturing, in agriculture, transportation, distribution, retailing, it's going to show up. And so you're going to get towards the end of the year and the Fed's going to say, "Oh, this doesn't feel very good." But I think the growth effects... And I haven't made up my mind, I'm just talking thinking out loud, that the growth effects by the year will still outweigh the inflation effects. Even though inflation is higher, the growth effects will still be more pronounced and win the day and the Fed still begins to cut interest rates.
And I still am of the mind that the so-called equilibrium rate, we talked about this a couple of podcasts ago, the R-star, the federal funds rate, the rate the Fed controls that's neither supporting or restraining economic growth is elevated, but it's coming in and will be meaningfully lower by the end of the year, so giving the Fed more room to ease. So I'm much more confident in inflation is going to be higher than what we have in the baseline, but I'm not nearly as confident with regard to a shift in Fed policy at this point. And that gets to another set of concerns around inflation, and that is the economy's potential growth rate, which goes to the equilibrium rate, is slowing. It's going to slow, right?
We've had this very exceptional period over the last couple, three years where the economy's potential growth, that rate of growth, which is consistent with stable unemployment and inflation has accelerated. And that goes to labor force growth, that goes to all the immigration that has come into the country, that has put a lot of pressure on communities across the board. But one of the benefits of that is it's increased labor supply in employment. Those immigrants that came, many of them, most of them applied for work authorization. They got it within nine, 12 months and they went to work. And that took a lot of pressure off labor markets, and of course you had a surge in... A surge might be too strong a word, but a strong period of productivity growth for lots of different reasons we've discussed. So when you're in that environment of strong potential growth, that really eases the pressure on inflation, and that's been really critical to the disinflation that we've enjoyed.
So if you buy into that story, and then you think, "Oh. Oh, no, the economy's potential growth rate is going to slow here." It already is. We can see it in the immigration statistics. There's a lot fewer immigrants coming across the border, and there will be a lot fewer than that in the not too distant future given immigration policy. And that's going to hurt labor supply and potential growth. And then productivity growth is also slowing because some of the reasons behind the pickup last year or two are proving to be temporary. And so the economy's potential growth rate is coming back in, and that creates an environment where you can't grow as much without generating inflationary pressures when you're in a full employment economy. I just said a boatload right there. Cris, what do you think?
Cris DeRitis: The framework makes sense. Now, will AI pay off here and we'll get some productivity gains?
Mark Zandi: Not in the next six months, I don't think.
Cris DeRitis: Well yeah. Well-
Mark Zandi: Is that your hope? You hope. You're pulling out the AI rabbit?
Cris DeRitis: Well, the productivity has to come from somewhere, right? So you got some small businesses, so small business formations were still high last year. So that could [inaudible 00:41:20].
Mark Zandi: You see, I put Cris in a very awkward position because he's a... Oh, you're the productivity bull.
Cris DeRitis: Yes.
Mark Zandi: Oh, so you're defending your... I didn't put you... You're defending your productivity story. I got it. Got it.
Cris DeRitis: But is it enough? Even if the productivity growth accelerates a bit, is that enough to offset the labor force drag that you're talking about? That's a legitimate question.
Mark Zandi: And you can be a productivity bull longer run, but in the near term...
Cris DeRitis: Yeah, exactly. And I am.
Mark Zandi: Near term, it is slowing than we've seen it in the last few years
Cris DeRitis: Yes.
Mark Zandi: And we have been arguing, one reason for the pickup in productivity growth back a year or two or three ago was all the folks that quit and took on other jobs-
Cris DeRitis: Quit, yeah.
Mark Zandi: That were better suited to their skills. And that's a one-time pop that goes away, and it feels like we're on the other side of that pop right now. So you could have a lull in productivity growth even though you could be, like I am, a productivity bull, longer run. AI whatever.
Cris DeRitis: Yes, that's right.
Mark Zandi: But see, you get my point here though, right? Broadly speaking, we got really lucky in this period of high inflation because of this surge in the supply side of the economy, the supply side of the economy, which got crushed by the pandemic and the Russian war revived, and then some, because of the surge in immigration and the factors that drove that surge in productivity growth. And that came at an incredibly fortuitous time when the economy was definitely overheating, inflation was an issue, and the Fed was jacking up interest rates. But because of the improvement in the supply side of the economy and the improvement in potential growth, they didn't have to raise interest rates as much as they might otherwise would have.
And maybe that was one of the reasons why we didn't suffer an economic downturn when everything said that we should have. We actually got lucky in some respects, but now we're on the other side of that luck. We are definitely, and some of it's by design. That goes to immigration policy. Some of it's just part of the dynamics that play out with regard to productivity growth. But if you go from this rule of the supply side helping you out to an environment where it's not, that's another reason to think, "Oh, my gosh, inflation could be more of an issue here than I'm thinking." Matt, what do you think of that argument?
Matt Colyar: I think it's a sound argument. We'll see. I don't know what your timeframe is. I know what the current baseline looks like, but are you adjusting when you think we really... Is it nearer term that you expect inflation to start picking up? And is that inflection point in Q1 instead of Q3?
Mark Zandi: I don't know. I got to think about that. The thing that really I found fascinating was your vehicle story, the dealerships. That is a fascinating story. I got to talk to Brisson about that. I got to make sure [inaudible 00:44:10].
Matt Colyar: He'll articulate it better than I did.
Mark Zandi: Well, and I never disagree with Brisson. Brisson is always right.
Matt Colyar: Sharp.
Mark Zandi: He's just, the guy's a god when it comes to vehicles, somehow, some way. But I'm going to talk to him. Marisa, what do you think? Buy into it?
Marisa DiNatale: I think most of what you laid out is mathematical. We know that immigration is going to... It already has slowed significantly from where it was back in '21, '22. And I was looking at our forecast yesterday, we have net international immigration lower than it was during President Trump's first term. We're talking very low levels of immigration. That is a huge shift to go from three million people coming into the country a couple of years ago to less than 500,000 over the course of the next couple of years. So just mathematically speaking, we're going to have a labor force that is depleted on that front. We're not going to have the supply.
And then, I don't know what's going to happen with AI. I can't be as bullish as Cris. He has to defend his position here. I think it's probably too soon right now to be seeing massive benefits from that. I think it'll be interesting to see too, what happens with, we're going to have a lot of unemployed federal government workers potentially hitting the job market here, and it'll be interesting to see what happens with those people. Will people truly retire or are people going to be entering into the private sector? What does that mean for productivity? What does it mean for the unemployment rate? I'm not quite sure yet. I don't think we know the full extent of the numbers that we're talking about here.
Mark Zandi: A lot of cross-
Marisa DiNatale: But they could be significant and that might be something to watch too.
Mark Zandi: A lot of cross currents. Well, stay tuned. We've got a few more weeks before we have to put pen to paper and produce our March forecast. So we've got to think about this more deeply, but I'm coming to the mind that inflation is going to be higher for longer than originally thought because of all these dynamics.
Let's play the game and we're going to end with the game. We each put forward a stat. The rest of the group tries to figure that out through questions, deductive reasoning, clues. The best stat is one that's not so easy, we get it immediately. One that's not so hard, we never get it. And if it's apropos to the topic at hand, inflation, anything inflation related, all the better. It doesn't have to be, though. Marisa, you're up, as tradition.
Marisa DiNatale: My number is 100.
Mark Zandi: Ohne hundred, ooh. That's a nice round number, 100. Is it related to inflation?
Marisa DiNatale: Not directly.
Mark Zandi: Is it a commodity price?
Marisa DiNatale: No.
Mark Zandi: Directly.
Cris DeRitis: Is it an index?
Matt Colyar: Is it the base?
Marisa DiNatale: It is an index value.
Cris DeRitis: It is an index value. Okay.
Mark Zandi: Oh.
Cris DeRitis: Base period for an index?
Mark Zandi: Yes. Yes, that's right. Some index is at 100?
Marisa DiNatale: Yes.
Matt Colyar: NFIB?
Marisa DiNatale: Yeah, it's in the NFIB.
Mark Zandi: Oh, NFIB. Oh, yeah.
Marisa DiNatale: It's in there. Do you know which one?
Cris DeRitis: That was 102, right? Or the headline. No?
Matt Colyar: Plans to raise prices, price related, I assume.
Mark Zandi: Well, it's in the National Federation of Independent Business, the Small Business Survey.
Marisa DiNatale: Yeah.
Mark Zandi: I just saw Dunkleberg yesterday. He's the keeper of the data from the beginning of time. And I don't know which component. Which component is it?
Marisa DiNatale: This is the NFIB's Uncertainty Index.
Mark Zandi: Oh.
Matt Colyar: Th uncertainty. Ah, okay.
Mark Zandi: Right.
Marisa DiNatale: It's for the month of January. And this is the third-highest reading on uncertainty ever in the history of the index going back to 1986.
Mark Zandi: Wow.
Marisa DiNatale: The index readings that were higher were in September and October of last year, so right before the election. And the uncertainty jumped from 86 in December to 100-
Mark Zandi: Oh, wow.
Marisa DiNatale: In January.
Mark Zandi: Wait, you said it... What-
Marisa DiNatale: The way they calculate this is the number of people that say that they don't know or they're uncertain about the answers to these questions about the future, like will the economy get better or will prices rise and these kinds of things. So it's just representative of, I think, what we've been talking about. How-
Mark Zandi: It's what we've been saying. Interesting.
Marisa DiNatale: How up in the air everything is. And these are small businesses that are trying to plan their operations, and they're very uncertain about what the economy is going to look like a year from now.
Cris DeRitis: I'm going to say that index tends to have more of a Republican slant. I was going to say that.
Marisa DiNatale: That's right.
Cris DeRitis: So this is even-
Mark Zandi: It's meaningful.
Cris DeRitis: More meaningful, yeah.
Mark Zandi: All these surveys, people are looking at it through their prism, you see it in the [inaudible 00:49:22] survey. I've always seen it in the NFIB survey, it's very politically dominated and things are great when you have a Republican in office. Things are terrible when a Democrat's in office. So I've always discounted it. But the fact that even this Republican dominated index is saying... You said there was two other times in histor. Which were the two other times, did you say?
Marisa DiNatale: September and October of last year.
Mark Zandi: Oh, going to the election?
Matt Colyar: Election.
Marisa DiNatale: Yeah, right before the election.
Matt Colyar: But it plummeted after the election result.
Marisa DiNatale: But then it fell after the election results. And now here we are in January, I think all of this back and forth and vacillating on tariffs and policy, and then it spiked up again.
Mark Zandi: And how long is that... That goes all the way back to the beginning of the survey. I guess it does?
Marisa DiNatale: Yeah, 1986.
Mark Zandi: Wow. Okay. I got to look at that. That's so cool. That's so interesting.
Marisa DiNatale: And I'll tell you, another really interesting thing I found in the NFIB that I never really looked at before, but they break out the Optimism Index into their hard components and their soft components. And the hard things are things that are measurable, like how many job openings do you have and your inventory level. The soft is all this expectations and how do you feel about the economy? And remember that this index surged after the election just in terms of the overall index, but that surge is purely because of these soft things. None of the hard index components really moved at all. It's all these expectations and how people are feeling that explains the increase in the index. It's not actual...
Mark Zandi: Matt knows that because he does that for the purchasing manager surveys. It's the hard versus the soft.
Matt Colyar: We've done it for both. You can back into the ISM Index and it's hard components that track government data historically, and then you can just look at the softer stuff and it's amazing how much of a deviation. It just combs out. It wasn't always the case. But the NFIB one, there's a political salience to that's... Which makes the January uncertainty thing really interesting. I didn't know that.
Mark Zandi: Very interesting. Is that in the data buffet, Marisa, the series? If not-
Marisa DiNatale: Yeah.
Mark Zandi: Can you send them to me?
Marisa DiNatale: Yes, it is.
Mark Zandi: Oh, they are? Okay, I'll go find them. That's very cool. That's a great statistic. Hey, Matt, you're up.
Matt Colyar: Marisa's is better than mine, 0.3%.
Mark Zandi: It seems like everything in that CPI survey was zero point.
Matt Colyar: That's the trick.
Mark Zandi: That monthly rent growth.
Matt Colyar: Yes.
Mark Zandi: Owners equivalent rent.
Matt Colyar: No.
Mark Zandi: [inaudible 00:52:07].
Matt Colyar: No. More-
Mark Zandi: Is it the CIS Super Core?
Matt Colyar: No, but it is a-
Mark Zandi: It's an amalgam?
Matt Colyar: Sub aggregate index within the CPI.
Marisa DiNatale: Is it minus shelter? No, that would be higher.
Matt Colyar: Not by much, but no, it's not that.
Mark Zandi: So some aggregate in the Consumer Price Index, CPI, the percent change on a month to month basis?
Matt Colyar: Yeah.
Marisa DiNatale: Month over month.
Matt Colyar: Don't overthink it.
Mark Zandi: Well, you're not going to say it's core CPI, are you?
Marisa DiNatale: Well, it's not core.
Matt Colyar: A step further.
Mark Zandi: Core ex... I don't know. Pick something out there.
Marisa DiNatale: Core ex shelter?
Matt Colyar: Core Goods. It's core goods 0.3% increase.
Mark Zandi: Oh, core goods. Okay.
Matt Colyar: Fastest increase since May of '23, goes to what we're saying. Tariffs don't get applied to services. They're going to be on goods. Are we seeing some preempting-
Mark Zandi: Ah, monthly.
Matt Colyar: Some early purchasing on stuff within core goods as vehicles? So unsurprising there. I referenced GDP data earlier. Q4, we had almost a percentage point added to growth from durable goods consumption, which was surprising. If it's happening, I think these are early indications that people are lifting their expectations for inflation and also acting upon that and trying to get ahead of price increases.
Mark Zandi: Great. Very cool. Let's do one more. Cris, you're up. What's your stat?
Cris DeRitis: $4.77.
Mark Zandi: That sounds like price of a dozen eggs. No?
Cris DeRitis: I think it's higher than that. It's higher at my local supermarket.
Mark Zandi: Oh, it varies a lot by across the country. I didn't know that. I guess the avian flu affects pricing in different parts of the country, so that's not what it is. So it's a price, no?
Marisa DiNatale: The price of gas now.
Matt Colyar: Does Wawa sell this item?
Mark Zandi: Does Wawa sell it?
Cris DeRitis: Wawa does not sell this item.
Mark Zandi: It's not copper, is it?
Cris DeRitis: It is. It is.
Mark Zandi: It's copper. It's a throwback. Wow. Is it that high?
Cris DeRitis: It's that high.
Mark Zandi: Wow.
Cris DeRitis: It's up. It was $4 at the start of the year. It's 4.77 now.
Mark Zandi: What's going on there?
Cris DeRitis: You tell me. It sounds like that's our Dr. Copper, all things clear. Growth is-
Mark Zandi: Growth is strong? Is that-
Cris DeRitis: What's the counter?
Mark Zandi: What's that? It's the counter?
Cris DeRitis: What's the counter argument to that?
Mark Zandi: Well, we're in a commodity price cycle and all commodities are rising.
Cris DeRitis: Are going up. Okay.
Mark Zandi: They're going up. It's a reflection... That's interesting.
Marisa DiNatale: Gold hit an all-time high earlier in the week.
Mark Zandi: What did?
Marisa DiNatale: Gold prices.
Matt Colyar: Gold.
Mark Zandi: Coal you said?
Marisa DiNatale: Gold.
Matt Colyar: Gold.
Mark Zandi: Old.
Marisa DiNatale: G-O-L-D.
Mark Zandi: Oh, gold. Gold, gold. As you could tell, I don't own any gold. We had a great question about gold. I won't go into it, but Cris and I were on a call with a bunch of risk officers and they brought gold prices and the Fed's ownership and the price. But we're going to come-
Cris DeRitis: We'll come back.
Mark Zandi: In a new podcast. Oh, so historically we've thought of copper above four is strong economy, strong global economy. That could be [inaudible 00:55:28]-
Cris DeRitis: Lots of demand for construction, manufacturing.
Mark Zandi: It's strong. Right now, the growth is strong, so it would be consistent with that, right?
Cris DeRitis: Yeah, I think so.
Mark Zandi: If you look at our business survey, when I would ask folks if you please contribute to the weekly survey, it's also strong and consistent with a global economy that's growing above its potential. And that would be consistent with copper prices at $4.70, $4.80 I think so. So maybe that's what it's reflecting, but interesting.
Matt Colyar: Has Trump tweeted at the Chilean president today about tariffs? Wouldn't that be where most copper comes from?
Mark Zandi: Yes, indeed.
Matt Colyar: I think it does.
Mark Zandi: It does. Yeah. In Chile.
Matt Colyar: It's huge.
Mark Zandi: I don't know.
Matt Colyar: I don't know how up-to-date Cris's prices are.
Cris DeRitis: They're real time. Real time.
Matt Colyar: Okay.
Mark Zandi: I'm going to call him Real-Time Cris. Ooh, I like the sound of that, Real-Time Cris. I think that should be on your LinkedIn page, Real-Time Cris.
Cris DeRitis: It's good. Real-Time.
Mark Zandi: Real-Time. Yeah. No, you don't like it?
Cris DeRitis: Real Time with Cris.
Mark Zandi: He's turning into [inaudible 00:56:42]-
Cris DeRitis: Real Time With Bill Maher.
Matt Colyar: That's good.
Cris DeRitis: Seems to be taken.
Mark Zandi: Anyway, we got to call it a podcast. This was fun. Very good, very informative. You could see how we think out loud about what's going on. Hopefully you found out of some value, and we'll talk to you next week. Take care now.