The Inside Economics team assesses the inflation statistics, and why there is no going back to the where prices were prior to fallout from the pandemic and Russian war in Ukraine. And while inflation has largely been quelled, President-elect Trump’s tariff, immigration and other policies threaten to fan inflation anew. There is also the stats game and listener questions.
The Inside Economics team assesses the inflation statistics, and why there is no going back to the where prices were prior to fallout from the pandemic and Russian war in Ukraine. And while inflation has largely been quelled, President-elect Trump’s tariff, immigration and other policies threaten to fan inflation anew. There is also the stats game and listener questions.
Guest: Matt Colyar - Assistant Director, Moody's Analytics
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi,the Chief Economist of Moody's Analytics, and I'm joined by a few of my colleagues. My two trustee co-hosts Cris deRitis deRitis and Marisa DiNatale DiNatale. Hi guys.
Cris deRitis: Hey, Mark Zandi.
Marisa DiNatale: Hi, Mark Zandi.
Cris deRitis: Welcome back.
Mark Zandi: It's good to be back. I've been away two weeks in Europe. Learned a lot. Really a fascinating trip. Everyone got pretty nervous about the new administration and what it means, particularly around tariffs, but we'll come back to that. And Marisa DiNatale, you're on vacation?
Marisa DiNatale: I am. I'm in Florida, one of your home states here and home state of President-elect, Donald J. Trump, and my mother.
Mark Zandi: Are you on the West Coast?
Marisa DiNatale: Most importantly.
Mark Zandi: Or on the East Coast, or?
Marisa DiNatale: She's in Southwest Florida in Naples.
Mark Zandi: Oh, okay. Nice spot.
Marisa DiNatale: Yeah, it's beautiful.
Mark Zandi: Was Naples spared the hurricanes? I think it was.
Marisa DiNatale: It was, yeah. I mean, she lost power for about a day during Milton, but no damage or anything,
Mark Zandi: Right. Yeah. I can't wait to get down there. Weather's good?
Marisa DiNatale: It's beautiful. It's about 82 and sunny, and we went to the beach yesterday. And it's lovely.
Mark Zandi: Very, very nice. Well, thank you for doing this. I appreciate it.
Marisa DiNatale: Of course, yeah.
Mark Zandi: Yeah. And we've got Matt Colyar, Matt Colyar Colyar.
Matt Colyar: Hey, Mark Zandi.
Mark Zandi: I got that right, Matt Colyar.
Matt Colyar: You did.
Mark Zandi: Naples is in Collier County, so I had a bit of a hint there.
Marisa DiNatale: That's right.
Matt Colyar: How about that?
Marisa DiNatale: Yeah, I'm in Collier County. That's right.
Mark Zandi: Collier County.
Matt Colyar: Nice. That's good. I didn't put that together. Nice to be here.
Mark Zandi: No?
Matt Colyar: No. Yeah. I don't have Florida's geography well.
Mark Zandi: You should know the counties. I'm just saying, Matt Colyar.
Marisa DiNatale: You should know all the counties, Matt Colyar.
Mark Zandi: You should know all the counties. How many are there, Marisa DiNatale? Like 3000?
Marisa DiNatale: 3,200 or something like that.
Mark Zandi: Something like that, yeah. It's my mission in life to learn. Remember all the capitals around the world and memorize many counties across the country. So test me out.
Matt Colyar: All the Collier counties.
Mark Zandi: Test me out. Give me a country quick.
Matt Colyar: Azerbaijan.
Mark Zandi: Baku.
Matt Colyar: Wow.
Mark Zandi: See that? Isn't that? Matt Colyar, are you impressed?
Matt Colyar: Uzbekistan was mine. I'm already onto the next one. Are you?
Mark Zandi: Oh, Tashkent.
Matt Colyar: Okay.
Mark Zandi: Oh, I don't know if that's right.
Matt Colyar: Oh, it is. It is.
Mark Zandi: It is right. Okay. Cris deRitis, are you impressed? Duly impressed.
Cris deRitis: I'm duly impressed.
Mark Zandi: Okay, very good. Okay. That's my whole goal here to impress. I impress my co-host.
Cris deRitis: We'll do flags next week.
Mark Zandi: That's right.
Cris deRitis: Great for radio.
Mark Zandi: Yeah, dude. Yeah, exactly. Where are we? Oh, we're going to talk about inflation, right? I mean, this is a week chock-full of economic statistics, mostly centered around inflation. We've got the Consumer Price Index, CPI, and the Producer Price Index PPI. And we'll talk about that with Matt Colyar. And I do want to talk about inflation more broadly. I'm getting a lot of questions regarding why don't prices fall back? Yes, inflation, the rate of growth in prices has slowed and it's back closer to something the Fed's comfortable with the 2% inflation target. But why don't they fall?
I mean, food, rent, even gas to some degree are still well above where they were three, four years ago. So I want to talk a little bit about that and then talk about the potential for inflation in the future given President Trump's espoused policies, tariffs, and the like. So we'll talk a little bit about that. We'll play the game, the stats came along the way here, and we've got some listener questions. We took a few last week. We'll take a few more this week. Sound good? Like a good game plan? What do you think, Matt Colyar?
Marisa DiNatale: Great.
Matt Colyar: For sure. I like it.
Mark Zandi: Okay, Cris deRitis, anything else?
Cris deRitis: Yeah, sounds great.
Mark Zandi: Okay, very good. Okay, let's go to you, Matt Colyar. You want to give us a bit of a rundown on the CPI? I have to say, if you go back six, 12 months ago, I waited with bated breath for these CPI reports, but now feels a little less pressing, doesn't it? A little less urgent. Get the same feeling?
Matt Colyar: Yeah. I'm waiting for the time you stop inviting me on the podcast.
Mark Zandi: Never. Never, never.
Matt Colyar: Yeah. I think about just adjectives for this report and boring kind of came to mind. So I think we're thinking some of the same things. There's a range of expectations for where price trends are going, and for quite a while, most of 2024, it's been unsurprising. So October we got the Consumer Price Index, as you alluded to, 0.2% growth from the month before. It's in line with expectations, year over year rate 2.6%. That's still a little bit above where the Fed would like to see it. I mean, it's not the inflation measures that they target. But yeah, unsurprising. This number was rounded down from 2.24%. It's the strongest monthly gain since April, but again, unconcerning underneath the hood. The major components that we always touch on, energy prices, neutral contribution in October. Energy had been a drag for most of late summer or most of summer as energy prices, oil, gas, those prices fell in October. There was a run-up in the middle of the month, but ultimately most of your key energy prices end of the month where they started. So not a whole lot going on there. Food is...
Mark Zandi: Can I ask on the energy real quick? There's a lot of hand wringing about the cost of electricity because demand feels like it's on the rise here, data centers being the obvious source of that demand to drive AI. Is that showing up yet or is that to come?
Matt Colyar: It is, and I think that's a sound argument. So electricity prices rose 1.2%. A lot of electricity production comes from natural gas prices. Natural gas prices are low. So why is that relationship a little bit decoupling slightly? I mean, it's nothing dramatic. And I think an increased demand that something like data centers would create, I think is interesting. I don't have the year-over-year rate in front of me, but yeah, electricity prices rose 1.2%, but that was offset by or about a 1% decline in gasoline prices. So kind of countervailing forces there. But the energy consumption data centers something to keep an eye on moving forward but nothing yet that I think is manifest.
Mark Zandi: It's an add, but not a big add, at least at this point to inflation.
Matt Colyar: I think that's fair.
Mark Zandi: Yeah. Okay. But it may be coming. Yeah, food prices?
Matt Colyar: Next big component. And I've been focusing more on food prices than we have over the past few years. I mean, there's been other stuff to think about and grocery prices got a lot of attention, but for the most of the past 12, 18 months, grocery prices, grocery inflation has been pretty mild. But we got a 0.4% increase in September that drew a lot of attention that was stronger than expected. So it was a lot of focus on this month's data and their food prices were mild. So food at home, the CPI for food at home, which is our proxy for grocery prices, that rose 0.1%. It's now 1.1% higher than a year ago. So in isolation, that's a good story. But as we talk about a lot compared to 2019, that's one of the things that people point to say, look how painful inflation has been. Grocery prices are up 18% over the past four or five years, but recent trend encouraging and a little bit softer in October than we expected, than I expected. And then food...
Mark Zandi: There's a lot of idiosyncratic things going on there like egg prices because of avian flu. I guess there's been a problem with blight in the orange crop and that's affecting orange juice prices.
Matt Colyar: That's right.
Mark Zandi: A bunch of stuff like that. Is that right?
Matt Colyar: That is. And there's some commodity indexes, especially in Europe that just seem a little bit unusually elevated. So is it an environment where prices are a little stickier, inflation is a little stickier than we expected? Again, it's a story of nothing sounding the alarm as much as it's just something to monitor now as we're waiting for the last little bit more disinflation to get to the fed target.
Mark Zandi: Now, the real sticky part on inflation, why CPI inflation came in a little stronger than anticipated and it feels like it's kind of hanging around just north of 3%, which is just above where the Fed would like to see it. So the so-called last mile here is to get inflation back all the way into the Fed's targets becoming a little difficult to navigate, goes to service price inflation and mostly still the cost of housing. Is that right?
Matt Colyar: That's right. So owner's equivalent rent, we've talked quite a bit about 0.4% rise. It's the heaviest weight given. It's the item within the CPI, the basket of goods and services that make up this inflation measure. It's the heaviest weight. So kind of as it goes, it really does dictate what a month-to-month reading looks like. And LER rose 0.4%. That's on the higher side, but about where it's been for most of 2024. We'll get a 0.3, we'll get a 0.4, and that's enough to dictate headline CPI and core CPI. And this month I went back and where we thought shelter inflation would be now this time a year ago, and it's slow, but it's about a half a percentage point slower. We thought we'd be closer to about four four now, 4.4% year-over-year growth in shelter inflation and it's closer to 4.9. So in general, our inflation forecast has been spot on, but that's been an element that's been slow, and it's about a half a percentage point slow and a lot of measurement quirkiness that we've discussed.
Mark Zandi: Yeah. In my mind's eye, I've made this point before. I'll make it again. The only difference between current inflation and the Fed's target is this still elevated growth in the cost of housing, correct?
Matt Colyar: Yeah.
Mark Zandi: The owner's equivalent rent in particular. Yeah, because in fact, I was looking at, and I hope I don't take anyone's stat for the game, but if I look at the CPI Consumer Price Index X shelter and that's a little bit more than just OER, that also includes rent of shelter, but that I could easily get, it shows that year-over-year growth is 1.3%. Year-over-year 1.3, and it's been well below 2% for about a year and a half. So it really feels like the last mile here is about the cost of shelter, particularly the cost of home ownership, OER Owner's Equivalent Rent. Would you agree with that?
Matt Colyar: Yeah, and if you take it a step further, that harmonized measure that really isolates plucking out the OER, that's been in that 1.5, it's that 1.9% year-over-year now, but been below 2% for quite a while.
Mark Zandi: Right, okay. The other thing that I think maybe we can focus on for just a minute is vehicle prices and everything related to vehicles, repair and maintenance and insurance. And it feels we're at an inflection point there. No?
Matt Colyar: For sure. Used vehicles big jump in October, still down relative to a year ago, but 2.7% increase in October. There was a slight uptick in September, but that's two months in a row of increases for the first time in a year, which that was a secular decline in the used vehicle that I think we can pretty confidently say has bottomed out. So we look at wholesale auction prices, they flow through to what consumers end up paying for used vehicles. They rose in the middle of 2024 and have since moved flat, but we're not expecting any more declines.
Mark Zandi: What's going on there? Is that simply that there was fewer new vehicles sold in recent years, therefore few coming off lease going into the used car market and that's now just supply and demand. There's less supply, that means prices are firming, is that right?
Matt Colyar: That balance makes sense to me. I know I usually meet with Mike Brisson each month, and that's a lot of the same language that he's putting forward.
Mark Zandi: Okay, fine. Okay. I did notice vehicle insurance prices though, right?
Matt Colyar: Tick down, yeah.
Mark Zandi: Tick down. That's something.
Matt Colyar: Yeah, 0.1% decline in October, still 14% higher year over year. Repairs, which they've kind of moved in tandem to a degree, they rose strong, 1.1% on the month. So I think there, it's reasonable to expect that things have turned over, and increases are going to come at a much slower rate. But yeah, encouraging to see auto insurance that had run over a percent growth each month for quite a while, tick down even.
Mark Zandi: So broadly speaking, what you're saying is the declines in new and used vehicle prices may be coming to an end. We've been seeing that over the last year or more, but the strong increases in repair and maintenance and now vehicle insurance costs may be also coming to an end. So cross currents here in terms of what it means for overall inflation.
Matt Colyar: Yeah, I think that the drag on inflation from falling vehicle prices can't be relied on anymore. But auto insurance repairs, given what we've seen over the past 18 months, 24 months with vehicle prices, that growth has to wrap up as well and no longer deliver that upward pressure that it has.
Mark Zandi: This may sound weird to people, why are they on such different dynamics? But it just goes to the lags. It just takes a long time before changes in vehicle prices show up in terms of what it means for repair and maintenance costs and then what it ultimately means for vehicle insurance. That lag could be more than a couple, three years. So they're kind of on different dynamics. And that's what we're observing here.
Matt Colyar: Yeah, and I think that's a great segue to medical care services, which is another. It's a component that operates on a lag. You're talking about healthcare providers negotiating prices with insurers, and those things all happen every day. They're set out in advance. So we're still seeing medical care inflation be digested by that sector. So in October we have a 0.4% rise in the CPI for medical care services that follows 0.7% growth in September. So it's a pretty strong relative to a year ago, this component is up 3.8% and rising steadily. Again, given the nature of the sector and how these prices are determined, it was relatively expected to expect that inflation was going to rise. We don't expect anything off the charts here, but it's the kind of dynamic that's moving in the opposite direction of a lot of other components.
There's a methodological change for how they look at this too, which leading up to this report, I didn't know exactly how it would shake out. 0.4% growth isn't anything too volatile, but it'll be interesting to watch moving forward as the BLS now looks at actual insurance claims data to see what prices are being charged rather than calling your physician and saying, hey, what did this procedure cost compared to last month? So yeah, they run into some, you can imagine that the latter is a little bit trickier with responses and getting somebody on the phone and kind of privacy issues.
Mark Zandi: Well, I think the response rates from physicians in hospitals were collapsing, wasn't it? They had something...
Matt Colyar: That's the impetus, yeah. And now they can look at claims data that are easier to aggregate and look at real numbers.
Mark Zandi: So you've got all these cross currents, but generally don't mean to put words in your mouth, but generally inflation is moving in the right direction here. It's slowly going back to the low and stable inflation, the 2% inflation target that the Fed wants. We're not quite there yet. It's a little sticky. It's not getting there quite as fast as we thought it would because of the cost of shelter. But all the trend lines here look like they're on track. Right?
Matt Colyar: I think it's hard to argue that. I think that's been a story for a while and what we're seeing still.
Mark Zandi: Okay. Cris, what do you think? Anything else to add on that?
Cris deRitis: Yeah. No, I agree.
Mark Zandi: You agree, okay.
Cris deRitis: Trend is downward.
Mark Zandi: Yep. Marisa?
Marisa DiNatale: Yeah, and we got PPI data too. I mean it's all kind of in line, right? We got import export data. Yeah, I mean it's stickier than we would've hoped, but going in the right direction.
Mark Zandi: And not sticky enough to cause the Fed to stop what it's doing, meaning lowering rates.
Marisa DiNatale: We'll see. I mean maybe next year as we get into 2025 and we see what policy will be and how that might shape inflation going forward. I think they very well may pause at some point, but not next month. Next month I'm sure they'll go again.
Mark Zandi: Okay. Okay. And on the PPI, that's the producer price index, that's sort of wholesale prices. Just for sake of completeness, Matt, anything there that stood out for you?
Matt Colyar: 0.2% increase as expected. Nothing jumped out. I quickly look at the components that feed into the PCE deflator, which we get in a few weeks. There you see a little bit of strength. So airfare, portfolio management, those are kind of in getting into the weeds, but those items inform the PCE deflator, which is what the Fed actually targets, and they were a little bit stronger. So we're expecting the PCE deflator when we get that at the end of the month to be 0.3% as well. So even though shelter inflation was a primary cause of CPIs, elevated still strong reading. There are some factors that are going to keep the PCE deflator elevated as well. But yeah, again, in the range of expectations and nothing too surprising,
Mark Zandi: What you're saying is the CPI, the Consumer Price Index and the PPI, the Producer Price Index, both are used to construct the PCE deflator, which is the Consumer Expenditure deflator, which is actually the inflation measure of the Fed's targeting. They're not targeting CPI, they're not targeting PPI. They want a 2% inflation rate as measured by the PCE, the consumer expenditure deflator. You're gleaning what that is going to be. That's going to be released in a couple of weeks, I guess around Thanksgiving from the CPI and the PPI. And you're saying it's going to come in at 0.3. Let's turn to this question about why prices for various food rent, gasoline remains sticky. The rate of inflation, the rate of increase in the prices for these things has slowed dramatically. Food inflation is, grocery prices are basically flat, maybe up a little bit in aggregate.
Rents have really gone nowhere for the last year or two. Gasoline prices are down from where they were, but they're still way up from where they were three, four years ago, 20, 25%. So what is it that results in this kind of price stickiness? Why don't we see prices actually fall? And by the way, we may also want to talk about whether declining prices might actually be a macroeconomic issue. If it's broad-based, that's called deflation. And that never actually works out very well for anybody. So we don't want to see broad-based price declines, that so-called deflation that's consistent with depressions in the past. But if you look at specific items, why, for example, grocery prices or the cost of housing, why is it so sticky? Cris, do you want to take a crack at that? Do you have a view on that?
Cris deRitis: Yeah, well, I guess I'd push back on the premise a little.
Mark Zandi: Premise, okay.
Cris deRitis: If you look at the CPI report and look at some of the details, there are quite a few prices that are falling on a year-over-year basis. So it's not entirely true that all prices just go up. There is a reaction. There is volatility.
Marisa DiNatale: But they're still higher than they were in say 2020. Even if things are falling on a year-over-year basis now, they're not back to where they were four years ago.
Cris deRitis: Except for smartphones. But yeah, in general I'd say that's the case. But there are some that actually, that have been falling fairly rapidly. So yeah, they're still higher. But many prices I would argue are actually on trend. If you would've looked at the trend in 2019 and extended it going forward, probably not all that far off from where we would be anyway, given that 2% inflation we were looking at.
Mark Zandi: Well, I guess maybe it's more housing and rents, right? Lesser degree gas, gasoline prices.
Cris deRitis: Right.
Mark Zandi: Because they've come down. So let's just take grocery prices and maybe it's just idiosyncratic specific to each of these items, but grocery prices, as I said, they've gone nowhere over the past year, up a little bit, but they're still up 20, 25% from where they were four years ago. So if I go look at October of 2024, the latest data point compared to October of 2020, they're up 20, 25%. Same with rents, same with rents. And that's what I think most people are focused on because you got to buy groceries, and you got to live somewhere. And particularly for lower middle income households, it's such a large share of their budget that it really matters. Why wouldn't they go back to where they were or anywhere close to where they were before this run up over the past four years?
Cris deRitis: Yeah, I'd say first of all, there is some idiosyncratic movement here.
Mark Zandi: Okay.
Cris deRitis: In some of the prices. So if we think about housing and rents, we have a very large amount of pent-up demand. We already had a lot of pent-up demand even before the pandemic. And then that has increased. We've had a large, the millennial population has aged into their prime home buying year. So there's just a lot of demand out there for housing. And we haven't been supplying, we haven't been building. So there's a dynamic here that maybe was enhanced by the pandemic itself, but that hasn't gone away. It's not as though those demographic trends have receded along with other supply chain issues in the economy. So that would be my first argument is that the price of housing was likely to go up anyway because there was this demographic wave, and then it just got enhanced by the pandemic itself.
Mark Zandi: We had this very shortage of housing developing since the financial crisis. And that's represented in low vacancy rates. I mean, you look at the vacancy rate for home ownership, it's still pretty close to a record low. Started to push up a little bit for rental, but that is mostly at the high end of the market. The lower end of the affordable part of the market still very low.
Cris deRitis: Right.
Mark Zandi: And so you're saying we have this physical persistent shortage that if anything, certainly hasn't gotten any better, and therefore, why would you expect the price for housing to go back down to where it was given the shortage?
Cris deRitis: That's right.
Mark Zandi: And regardless of anything, there's no way we could have expected that to the cost of housing to come back down in the context of this shortage. Yeah, okay.
Cris deRitis: That's right. And then you throw on top of that the lock-in effects of homeowners, and I think prices certainly have gotten ahead of themselves over this period, but the retreat in prices is going to be delayed because of the lock-in effect because of the finance.
Mark Zandi: But the impact of that on measured inflation is indirect and smaller, right?
Cris deRitis: That's right.
Mark Zandi: That affects house prices which are ultimately related to rents, but it's really the rents that drive the measure of cost of housing in the CPI.
Cris deRitis: Absolutely. Absolutely. It has this indirect effect though, in terms of locking up some inventory that may otherwise be available or the inventory is unevenly distributed. So the rental prices may be distorted by that as well.
Mark Zandi: Okay. What about food prices? Marissa, do you have any perspective on same deal? It's up 20, 25% from three, four years ago, the cost of housing, any reason why? And they've gone flat over the last year, year and a half or so, but why aren't they going back down? And again, the individual food items, they do go up and down and all around for lots of different reasons. Egg prices last month went way down because they'd gone way up before because of the avian flu effects. But in aggregate, if I look at grocery prices, they remain elevated. Any thoughts as to what's going on there?
Marisa DiNatale: I do think that there's a lot of nuance in these things. So take eggs, they're up 30% over the year, but that's mostly because of something going on with avian flu, as you said. I think that there's pricing power in some of these industries, and I think that companies look at what their competition is doing and they try to keep up with what their competition is doing. We know that in grocery stores, for example, there's some big players in those markets. There's a few big players, particularly if you look around different geographies of the country. So where I live in southern California, there's maybe three or four big grocery stores in the whole Southern California area. So they're going to look at their competition and they're going to say, what's my competition charging for this product? I think this happens in every industry to some extent, and how can I be competitive with that?
So I do think that there's some marketpower in a lot of these industries, and companies are not willing to necessarily slash prices unless it's their interest to do so, unless they think they can get some market share by doing that. And then there's input costs. So go back to housing or go to food. And yes, diesel fuel and energy prices have been falling recently, but they're also still higher than they were five years ago. That's a major input into food. There's a lot of things along the supply chain that are more expensive. I mean, even just labor. So in a lot of these industries, so if you look at farm prices, if you look at the cost of labor in agriculture, certainly if you look at the cost of labor and construction and housing, that's all gone up too. And that's going to be one of the biggest input costs here.
So I think because of all these shocks we had during the pandemic, input costs for a lot of this stuff is higher. So just to make any margin, companies need to at least recoup what their cost structure looks like now relative to what it was four years ago.
Mark Zandi: Yeah, I think you make a great point. You're not arguing price gouging.
Marisa DiNatale: Yeah, I'm sort of tiptoeing around saying that because I don't think it's that. I don't think it's that. I think this is sort of normal business practice.
Mark Zandi: It's still that prices rise like a rocket and fall like a feather. For some reason, they rise like during the pandemic when you had supply disruptions and labor market disruptions. The competitive pressures have to drive back down those margins, but that takes time. It doesn't happen quickly. And what you're saying is in many markets, particularly in the grocery business specifically, the competitive pressures may not be what they used to be, that they're not quite as intense. So that feather is taking a longer time to come back to earth. And margins are actually quite wide. If you look at corporate profit margins, the price they charge relative to their costs, they are extraordinarily wide by historical standards and they jumped during the pandemic. Again, I don't know, maybe this is just a matterof degree, it's not gouging per se, it's just this is what you would expect. But it goes to potentially not the lack of, but the soft competition in a lot of these markets, we're not seeing these prices come in as much as they would've otherwise. That's what you're saying.
Marisa DiNatale: Yeah. Then take a very competitive Market like gas stations. So if you think about a gas station, there's usually one on every single corner of a major intersection. There might be one here and then one right across caddy corner from that gas station. That's a Market where every single day you can see the price that your competitor is charging. And you absolutely have to be competitive and shift depending on what your competition is doing. And gas stations have very little pricing power when it comes to what they're charging for the cost of fuel. They make most of their money from what they sell in the convenience store when you go in after you pay for your gas, and you buy a bag of chips and a soda or something like that. But that's a Market where you do see prices fluctuate up and down very, very quickly and very dramatically. And you could see those prices easily fall back because they're really price takers, and it's a very competitive landscape when it comes to that product, unlike some of this other stuff we're talking about.
Mark Zandi: Yeah. Okay. Good point. I got one other explanation, but before I give mine, maybe Matt, do you have any other thoughts on this?
Matt Colyar: I think a lot. There hasn't been the pressure. Consumers are upset, but they are still spending. And I don't think businesses have the impetus just to get out ahead of it and to be nice. I don't think they've had to do that. And certainly that had to matter a lot based off the Market's competition, that specific industry, but yeah, that's how you get prices to fall is if consumption drops. So I think that's a really important dynamic.
Mark Zandi: And actually just a factoid, CPI prices, consumer price inflation, prices are up. Prices measured by the CPI are up 20, 25% from where they were four years ago. So are wages. Wages are also up by 20, 25%. So less impetus for consumers to fight, and maybe they got out of the habit of fighting, right? Because we hadn't been through for decades any high inflation, consumers kind of got out of it. When I was a kid, my mom was clipping coupons from the newspapers because prices were high and that was a way to cut your grocery bill. I'm like, does anyone do that anymore? I don't know but I don't think. They're just out of practice fighting back and shopping better, buying this kind of brand of jam as opposed to that kind of brand or in my case, peanut butter. I haven't been looking at the price. I just need to look at the price of peanut butter. I'm sure I could get a better deal. Although once I get on one kind of brand, I can't get off of it. It's like I'm hooked. Maybe they're doing that to me.
Marisa DiNatale: Yes, you'll pay whatever they ask you to pay for Jiff.
Mark Zandi: It's not my fault. It's their fault of course. Well, and that goes to the other explanation, wages, right? In the service side of the economy, the cost is largely the cost of labor. So what happens? Prices go up like what happened during the pandemic. Businesses then because the labor Market was tight, had no choice but to raise wages. But there's no possible way business can go back and say to their workers, I'm cutting your wage. They can't do that. Therefore, they can't cut the price. They can't cut the price. So that's why very difficult on the service side of the economy, never have... On the good side with regard to food and gas, and you do see prices go up and down, but on the service side, that's incredibly rare for that to happen. You have to have a rip-roaring recession for that to happen. So I think that's the other reason why prices are sticky. They don't fall because wages don't fall. Wages are so-called sticky as well. Okay, good. Do you think we explained it pretty well?
Matt Colyar: You also allude to the fact that we actually don't want prices to fall broadly.
Mark Zandi: Yeah, broadly.
Matt Colyar: Broadly. If you enter into a deflationary cycle, the issue is you don't know where the bottom is and that starts to feed on itself in terms of consumer behavior. And that could be very, very damaging to the economy. So that's the risk we run as well, right? Where it's asymmetric.
Mark Zandi: Yeah, because once prices for things start to fall, going back to labor, what do businesses do? They can't cut wage. So then they cut workers, and then that's when you get recession. That's how you got into depression. And of course, if you owe anything, if your wages or profits are falling, it's not like your debt is going to be any lower. So your debt service rises, the percent of your income or corporate cash flow that goes to serving debt rises, you get more defaults. And then you can easily construct a pretty dark scenario. So you really don't want broad-based deflation. So okay.
Matt Colyar: You have consumers also pulling back on their spending thinking they're going to get a better deal tomorrow.
Mark Zandi: Yeah, that too.
Matt Colyar: Right.
Mark Zandi: Yeah. Where was I? In some of my travels, oh, I was in Europe. And one of the people I was talking to wasn't going to buy a car because they're just waiting for the price to get cut before they buy it. Yeah. Okay, let's play the game, the stats game. We each put forward a stat. The rest of the group tries to figure that out through clues and questions to Dr. Reasoning. The best stats 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, all the better. And we always begin with Marissa. Marissa, you're up.
Marisa DiNatale: Okay, 4.4%.
Mark Zandi: 4.4%. A stat that came out this week?
Marisa DiNatale: Yes.
Cris deRitis: Supercore.
Marisa DiNatale: No, but I was going to ask you what supercore was. Was that supercore?
Cris deRitis: 4.38, yeah.
Marisa DiNatale: Oh, interesting.
Cris deRitis: I was so confident that I was going to nail it.
Marisa DiNatale: It's not supercore.
Cris deRitis: Are you sure it's not? Okay.
Mark Zandi: Supercore services, X housing and energy services?
Marisa DiNatale: Yeah.
Mark Zandi: That's what Chair Powell called out, right? To follow. And that was up. What was that up? 4%?
Marisa DiNatale: Sounds like 4.4.
Cris deRitis: 4.4%. Year over year. Yeah.
Mark Zandi: Year over year, okay. That's relatively it. So it's in the CPI report?
Marisa DiNatale: It is in the CPI report, yeah. But it's not supercore.
Mark Zandi: And it's year over year.
Marisa DiNatale: It's year over year.
Mark Zandi: The housing is like... Was it rent of shelter?
Marisa DiNatale: No.
Mark Zandi: Okay. It's a component though. You're focused on a component of...
Marisa DiNatale: It's a particular product in the CPI report.
Mark Zandi: Okay.
Marisa DiNatale: That I'm highlighting, because I think the conversation is going to go toward what inflation could look like over the course of the next two years with some of the policies that the new administration is putting in place.
Mark Zandi: So you're talking about tariffs.
Marisa DiNatale: That's a big hint.
Mark Zandi: You're talking about tariffs, I assume.
Cris deRitis: Imported product.
Mark Zandi: But 4.4. is... Because goods prices have been really soft, right? They've been even falling.
Marisa DiNatale: This is the good.
Mark Zandi: Import prices?
Marisa DiNatale: No.
Mark Zandi: No, not import. Oh, because it's CPI. What do you think, Matt?
Matt Colyar: Some commodity? Let's narrow it down.
Cris deRitis: No, not a commodity.
Marisa DiNatale: It's a good, it's a good.
Matt Colyar: A good, good.
Mark Zandi: French wine?
Marisa DiNatale: No.
Mark Zandi: No. I don't know. I give up, what is it?
Marisa DiNatale: It's washing machines and dryers.
Mark Zandi: Oh, yeah. Should have known. Explain to the listener why washers and dryers.
Marisa DiNatale: So I picked this because if you recall, when President Trump came into office in 2016 and started putting broad-based tariffs on Chinese imported goods, this was one of the products that had a very high tariff rate and was always called out as an example of how tariffs were driving prices of imported goods up in the U.S. Right? So a lot of washers and dryers are made outside of the United States, and this was a product that really got hit with tariffs. And it was one where people have been speculating recently. Given that we know that there is going to be higher tariffs on imports over the next couple years, at least, should people be sort of buying in anticipation some of these big ticket items before there are tariffs slapped on them? And washing machines is always one that gets mentioned.
Mark Zandi: Where are washing machines made? Are they made in China? Do you know? I don't even know where they're made.
Marisa DiNatale: Well, so a lot are made in South Korea, other Asian countries. I think that there are components of them that are made in China. Even the ones made in the US, I would presume, I have to do a little research on this before I speculate too much, but I would presume that a lot of those parts may come from Asian economies. And we know in terms of tariffs that it's not just going to be China, right? It's going to be fairly broad-based likely and will be spread across a lot of these economies that we import from.
Mark Zandi: That's a good one. So up 4.4%, already, that seems high for a good.
Marisa DiNatale: For a good, that's right. Yeah. Which is sort of surprising, right? And that's just in the last year. Yeah.
Mark Zandi: Yeah. That's surprising. Okay. Matt, you want to go next?
Matt Colyar: 2.3%.
Mark Zandi: CPI?
Matt Colyar: No.
Mark Zandi: PPI?
Matt Colyar: No.
Mark Zandi: A stat that came out this week?
Matt Colyar: Yes.
Marisa DiNatale: Imports?
Matt Colyar: Marissa onto it.
Marisa DiNatale: Imported goods?
Mark Zandi: Imports x petroleum products.
Matt Colyar: Yes. Yeah, import X fuel. Yes.
Mark Zandi: X fuel.
Matt Colyar: Year-over-year growth.
Mark Zandi: Marisa gets credit for that.
Matt Colyar: Yeah. Same story as Marisa. Something we're going to be watching in the coming years that I haven't spent a ton of time thinking about.
Mark Zandi: Coming years. Oh my gosh, really? You think it's going to be years? I thought if you said followed in the coming year, I'd be depressed. But you're saying coming years?
Matt Colyar: Yeah. I don't want to be overly pessimistic. That's a realistic expectation, right?
Mark Zandi: All right.
Marisa DiNatale: Absolutely. It's going to drag out For a long time.
Matt Colyar: I don't think a change of heart is coming. Yeah, unfortunately. So import prices, X fuels. It's big, can distort things and import prices, including fuels aren't up as much. So looking at this, it's kind of a harbinger of inflationary pressures coming from trade restrictions that we expected to see in the next coming years. So yeah, something I'll watch that I haven't watched all that much in recent years.
Mark Zandi: So you're saying import prices, X petroleum products are up, you said 2.3% year over year?
Matt Colyar: I have it as X fuels. I don't know if there's an...
Mark Zandi: X fuels, okay.
Matt Colyar: X fuels. So that's 2.3% over the past year. And that's on the rise. So it was down a little bit throughout most.
Mark Zandi: Yeah, because the dollar is strong, what is that all about? I wonder why already we're seeing that kind of strength. That's just...
Matt Colyar: Washers and dryers.
Mark Zandi: Washers and dryers. All right. Okay, that was a good one. Cris?
Cris deRitis: Okay, my number is $608.04.
Mark Zandi: $608.04 it is the monthly payment on an auto loan.
Cris deRitis: No.
Mark Zandi: Is that close?
Cris deRitis: I think it's a bit higher than that, isn't it?
Mark Zandi: It's probably closer to $700, isn't it?
Cris deRitis: But that's not it.
Mark Zandi: That's not it. That's not. Is it related to the cost of living?
Cris deRitis: No, no, not.
Mark Zandi: Not really.
Cris deRitis: Very indirectly.
Marisa DiNatale: The cost of a Bitcoin.
Cris deRitis: No.
Mark Zandi: Are you kidding me? Bitcoin's like what is it? $100,000?
Marisa DiNatale: Is it 1000? Is it really?
Mark Zandi: 100,000.
Marisa DiNatale: Oh, wow.
Mark Zandi: See?
Marisa DiNatale: That shows you how much I pay attention to Bitcoin.
Mark Zandi: I'm surprised Percy even shows up to work anymore given the price. I mean, he's at least flying around in his own private jet now, the last I heard. So he can go to these bocce ball tournaments all over the world, drink his Chianti.
Cris deRitis: Yeah.
Mark Zandi: He needs to have a different balcony every weekend to drink his Chianti on.
Cris deRitis: This is just a cover.
Mark Zandi: Okay, so...
Marisa DiNatale: $600?
Cris deRitis: $608.07 now.
Marisa DiNatale: So it...
Mark Zandi: Oh, I know what it is. I know what it is. Oh no, I don't really. I was going to say it, but now that I thought. The cost of a Thanksgiving dinner for a family of four. That can't be right. That's like...
Cris deRitis: Coastal elite talk, right there.
Mark Zandi: That's elite. That's right. That's like gold dusted.
Marisa DiNatale: I don't know.
Matt Colyar: This is...
Mark Zandi: Yeah, can you give us a hint?
Marisa DiNatale: Is it a commodity price?
Cris deRitis: It is a commodity. An important commodity.
Marisa DiNatale: Gold?
Cris deRitis: No.
Mark Zandi: Gold is $2,500 or something.
Cris deRitis: It's an important commodity for housing.
Mark Zandi: Platinum? Not copper?
Cris deRitis: For housing.
Mark Zandi: For housing? Copper?
Cris deRitis: Not copper.
Mark Zandi: Wait, copper's four bucks down though.
Marisa DiNatale: Chips?
Mark Zandi: Copper's down.
Cris deRitis: Chips, no. What do you put in a house?
Marisa DiNatale: Remember we used to talk about chips all the time?
Cris deRitis: What do you make a house out of?
Matt Colyar: Lumber.
Cris deRitis: Lumber price.
Mark Zandi: Lumber. Oh, lumber. Oh, yeah. We used to talk about this all the time during the pandemic.
Marisa DiNatale: Yeah.
Cris deRitis: Exactly. That's why I brought up, I thought you'd get it right away.
Mark Zandi: That's a good one. That's a really good one.
Matt Colyar: It is.
Cris deRitis: It's shot up. Just over the last year. It's up 13% and just over the last week it shot up.
Mark Zandi: Does that reflect tariffs because the softwood lumber tariffs?
Cris deRitis: I think so. I think that is refactoring into the calculus.
Mark Zandi: Because tariffs did rise in August, I believe, on Canadian softwood lumber Imports, I believe, right? I think so.
Cris deRitis: Did they change? I thought...
Mark Zandi: Yeah, they rose. I think they increased.
Cris deRitis: Okay. Well, that must be it. A contributing force here. Contributing factor.
Mark Zandi: We'll hear from folks out there if not.
Marisa DiNatale: And that was the result of these were the Biden administration tariffs.
Mark Zandi: They were, yeah. Under Biden, yeah, in August. Yeah, I think it's, I don't know the particular, so probably shouldn't say, but yeah, they increased in August.
Cris deRitis: Those tariffs, these are the tariffs on Canadian softwood lumber. Right?
Mark Zandi: Yeah.
Cris deRitis: Those have been in place for a long time now. They predated Biden, right?
Mark Zandi: Yeah, they predated him.
Marisa DiNatale: But he didn't get rid of them.
Matt Colyar: He didn't get rid of them, they actually increased. Yeah.
Cris deRitis: I thought they went down. And maybe now he's brought them up.
Mark Zandi: I'm pretty sure they rose in August. Maybe increased.
Cris deRitis: Yeah, I think previously.
Mark Zandi: Oh, previously, yes. Were cut.
Cris deRitis: They were still positive, they were still there. And maybe now they are just bringing them back up. I don't know, we'll take a look.
Mark Zandi: Take a look. Yeah. Well that was a good one. Can I ask how low did they go? How low were they in recent history?
Cris deRitis: Back in July they were down to 425.
Mark Zandi: Okay, that's significant.
Cris deRitis: It's a pretty big jump.
Mark Zandi: Yeah, that's pretty significant. All right, I'm going to give you a statistic. It's a good segue into the next part of the conversation around President Trump and his policies and inflation. And you may not get it, so I won't keep you in your misery for very long. 2.42%. 2.42%. It's a interest rate. It's related to inflation expectations. That's a pretty big hint.
Marisa DiNatale: The five year, five year forward?
Mark Zandi: It's five year break even. So you take a look at the five-year treasury yield, compare it to the five-year yield on tips, inflation protected securities, and that gives you an estimate of what investors think inflation will average over the next five years. And that's 2.42%. That's up from 1.8% back in September. And back in September, that's when Vice President Harris was at the peak of her popularity, at least in the polls and in the betting Markets that thought she was going to win the election. Since then, obviously her polling numbers declined, and by the time of the election, the Markets strongly expected Trump to win. And post-Trump of Trump's victory inflation expectations have continued to rise.
So we've gone from 1.8, roughly speaking to 2.4 up 60 basis points or so, 0.6 percentage points. And that goes to inflation expectations. Investors are beginning to, have already and are beginning to discount some significant pickup of inflation down the road related to President Trump's policies. I can think of four policies, most obviously being tariffs, but there's three others that come to mind when thinking about the policies he espoused on the campaign trail and the potential for future inflation. You guys want to take a crack at those? So the first one's tariffs. What's the second one?
Marisa DiNatale: Immigration.
Mark Zandi: Immigration, deportation.
Matt Colyar: Corporate tax. Or just lower tax rates for increased spending that's inflationary.
Mark Zandi: In a full employment economy if you get deficit financed tax cuts, then that would juice up demand in inflation. And what's the final, the fourth one that I think is important?
Matt Colyar: Compromised Fed.
Mark Zandi: Yeah, right. You want to explain that one?
Matt Colyar: Throughout the campaign, different times and there's different policy documents that the Trump campaign had that suggested that basically that the White House should have some kind of influence or some say in rate decisions at the Fed. There's different theories put forward as to what that would look like, whether it's like a shadow president at the Fed that would have a say and be a proxy for the White House. But ultimately, independence of the Central Bank is important because without it you have politicians that's electoral chances matter based off are determined by the economic environment that they're running in. And then that gives a really strong impetus to ease policy, keep things loose. And that's inflationary. That lifts inflation expectations. Over the long run, imposes a lot of other problems, especially if you're running deficit financed tax cuts. There's an impetus there to keep interest rates that you're going to have to pay on that debt low. Very proven vulnerabilities to that method, but yeah, it's generally how I think about it.
Mark Zandi: Right. Of course, that plays out over a period of time. That's not next quarter or even next year, but over a period of years. And I don't know that that matters a lot in a declining interest rate environment like the one we're in now. It's just when it gets to a point where the Fed should be raising rates and it is not able to, then it becomes an issue, potentially an inflationary issue. So something down the road. Well, Cris... Oh, go ahead.
Cris deRitis: If all the other policies are inflationary that you ticked off, then this becomes a real issue.
Mark Zandi: Soon, sooner rather than later. Well, I don't know. It takes a little while for tariffs to kick in and for deportations to have a bite. And the tax cuts probably won't be implemented until 2026 probably. Right?
Cris deRitis: So I've been giving this some thought. I think in our last podcast we even mentioned, well, the Fed has to look at the data. They have to be data dependent. They have to take one step at a time. They shouldn't be in the business of trying to anticipate where the government policy is headed and how that might impact inflation. They should be neutral. Just avoid that speculation when making their decisions.
Mark Zandi: And I think Powell said that, didn't he?
Cris deRitis: And he said that as...
Mark Zandi: Press conference last week in the wake of the FOMC meeting last week. He said that, yeah, we don't speculate. We don't forecast.
Cris deRitis: That's not our job.
Mark Zandi: We react.
Cris deRitis: Yeah, we stay in our lane.
Mark Zandi: Yeah.
Matt Colyar: To your point and in your statistic, I think it's the right one if investors are anticipate... If those inflation expectations are reacting or anticipating those policies, then the Fed has to react, should be incorporating that piece of information in their decision. So it may be an indirect way.
Mark Zandi: That's a really, really critical point because when you look at the Fed, so-called Fed's reaction function. What is it that they look at when they set the interest rate? And they lay this out in the statement every FOMC meeting, that federal open Market committee meeting, that's the committee that meets to decide interest rate policy. They say we look at where's the economy relative to full employment? What's the unemployment rate? We look at inflation, we look at inflation expectations, we look at international developments and financial conditions more broadly. And so inflation expectations is explicitly called out. They look at inflation expectations. So you're saying, look, he hasn't done anything but investors think he's going to do things that are going to lead to higher inflation. So that would argue all else equal that maybe you shouldn't be cutting interest rates at this point.
Matt Colyar: That's right.
Mark Zandi: Yeah, that's an interesting point. I have not heard that point, but that's a really, really significant one. But so far they haven't acknowledged that. I guess they may wait until it actually... The way inflation expectations would get into inflation lots of different ways, but one key way is through wages. So if wage growth started to pick up, maybe at that point, that's when they would react and actually respond. I'm not sure. Or maybe not. Maybe they go even more quickly than that. But that's interesting. That's very interesting.
Matt Colyar: Yeah. I don't know what the threshold is, right? You mentioned 2.4%. That's rising, but maybe it's not at the level of panic.
Mark Zandi: It's actually pretty high. I looked at it in terms of the five-year break even. I mean, if you go back before the pandemic, it was hovering somewhere between one point a half and 2%, which was arguably too low. The Fed thought that inflation then was too low. Obviously took off during the pandemic and Russian war. Peaked when Russian war was at its apex in the summer of 2022. It has come back in. But 2.42 is on the high end of the range that between two and two point half percent that it's prevailed since that time. And that's above target. That's above what they want. I think. So you make a great point. On tariffs, that's that's pretty straightforward. Understand the connection between tariffs and inflation. Tariffs are a tax on goods and based on experience, that tax is paid by the consumer largely. Some of it's borne by retailers and distributors, some of it borne by the producer of the product overseas.
But the vast, vast majority of it is borne by the consumer so at least higher inflation. It also leads to higher inflation through the impact it has on investment and supply chain decisions because tariffs are very messy to implement which product, which country, which period of time, and businesses get exemptions. Certainly, it was the case when Trump won, got a lot of exemptions for various reasons. So it generates a boatload of uncertainty, which affects investment in near shoring and other decisions. And so therefore, adds to costs and lowers productivity and adds to inflationary pressures long run. So I think it's a little easier to understand the link between tariffs and inflation. A little harder to understand the link between immigrant deportations in inflation. Right? Do you have any perspective on that, Cris or Marisa?
Marisa DiNatale: Well, we know. We've talked about this a lot, that the surge in immigration over the past couple of years has provided a ton of supply to the labor Market. It's why we've seen very high labor force participation rates and very strong job growth month after month after month, despite the fact that we did have high inflation, and the rest of the economy was kind of slowing, not slow, but slowing. And we were getting extremely strong job growth. And a lot of that we now know is because of the surge in immigration supplying labor in particular to industries that were hit by labor shortages coming out of the pandemic. So if you think of things like construction, leisure, hospitality, restaurants, a lot of healthcare jobs are filled by immigrants. So if you remove that supply from the labor force in the quantities that we're talking about, which is potentially a million or more people, then you in some industries may create a supply shortage for labor, which means that businesses will respond by having to raise wages to attract people to these jobs.
And then you go down this path of higher wages being passed on to the consumer in the form of higher prices for goods. So Criswas talking about the construction industry and costs for housing, immigrant labor, and often undocumented labor. A lot of it goes in the construction industry. So that certainly has a direct impact on the cost of housing, on the cost of constructed goods, whether it's residential or non-residential. So that's the way I think about how immigration policy would have a direct impact on inflation is through higher wages.
Mark Zandi: I think the academic literature on this comes down on it doesn't have a big impact on inflation. Immigration policy doesn't one way or the other. It has supply side effects, the ones you just described. So if I'm reducing immigration or flows into the country, or I'm deporting people, it does have a negative impact on supply and prices are supply and demand. So I have less supply, higher prices. But it also has a demand side effect too, right? Because immigrants are consumers.
Marisa DiNatale: That's right.
Mark Zandi: They're gone so it then becomes a question of supply and demand. And I think the literature has said generally it's kind of a wash ultimately, which I think is right. But I do think in the current context, given how tight the labor Market is, the supply side, and also the fact that the immigrants coming into the country, particularly the folks that are coming across the southern border, which is where a lot of them have been coming, they're very low income, few resources, their spending is really on the margin. So it's more a supply side effect than a demand side effect, at least here in the next year or two, given the tight labor Market.
So I think the academic literature probably right over a sufficiently long enough run than supply and demand effects net out and the inflationary effects are on the margin. But here in the near term, in the next year or two when we're really focused on this, of course voters really are focused on this. The Fed's very focused on this. This is going to be more of have an inflationary effect. The supply side impacts are going to dominate the demand side effects. Does that sound right, Cris? The way I articulated it?
Cris deRitis: It does. One of my concerns is that... And I think that's right in terms of the general fit, but there are certain industries like construction, and particularly I identify agriculture.
Marisa DiNatale: Yeah.
Cris deRitis: And I worry that that's where you'd see the effect almost immediately. There's no lag with construction. There maybe are some substitutes and there are naturally lags in that industry, not that they wouldn't be affected, but ag I can see as being directly affected. And given how sensitive consumers have been to food prices, if we start to see food prices jump up even a little bit because of this, I wonder what the ramifications of that would be if indeed consumers continue to really measure inflation through those food prices. Does that cause a reversal on the policy or other changes here in order to get those food prices back down?
Mark Zandi: Yeah, you make a great point. I mean, the two sectors that are going to be affected the most on the supply side is housing because you can't build homes because you rely heavily on immigrant workers, particularly in the south and the west, where building is strongest and you have more immigrants. And then food, agriculture, and the tariffs are going to crush food as well, because a lot of imported product are vegetables and fruits and processed foods from overseas. So it feels like the two things that people are most focused on when it comes to their pocketbook, grocery prices and the cost of housing, those are the things that are going to feel the effects of these policies in a more pronounced way.
Marisa DiNatale: And I think the labor in those sectors. So if you think about agriculture in Southern California, it's the largest ag producer of all states in the U.S. It's where all the lettuce comes from, all the strawberries. We saw during the pandemic when a lot of workers voluntarily went back to Mexico and didn't come to the US because there weren't jobs and the economy was shut down. We saw that farmers were complaining that, look, vegetables are dying on the vine.
We saw that effect very, very quickly. Since that's come back and some of this labor has come back, I think this labor in particular, because it is more likely to be undocumented, these are often people that live in group housing, together in group quarters. They're not putting as much demand on the system for housing and other things. Like you said, Mark Zandi, their demand is not the same as say, an immigrant with a Ph.D. coming over from India to work at Google. That's a very different kind of immigrant. And under Trump's policy, that kind of immigration will be restricted too, right? He's not just talking about illegal immigration. He's also talking about restricting legal immigration to some extent. But those are very different Markets when you talk demand and supply. And so I do agree that this is where you're going to see it. And I think this is where the supply impact will outweigh the demand impact.
Mark Zandi: So here we are a long fight against inflation. Feels like we're just about slaying that dragon and put inflation back in the bottle. But what feels like dead ahead, given the shift in policy that's likely trade, immigration, tax deficit, finance, tax cuts, policies around the Fed, that inflation is coming back, that it's going to be an issue again here down the road. That's what it feels like to me. And that's sort of what investors seem to be saying or are actually saying in terms of inflation expectations, right? Anyone disagree with that? No. Okay.
Cris deRitis: Bond yields are up.
Mark Zandi: Bond yields are up. Long-term interest rates are up. Yep. Okay. Let's take a couple listener questions. I got one. I got one the other day. I'll pose it. But before I pose that, maybe Marisa, is there one you wanted to pose?
Marisa DiNatale: Yeah, there's actually, there's a lot.
Mark Zandi: There's a lot.
Marisa DiNatale: So it's a matter of picking one, but I think...
Mark Zandi: Pick a good one.
Marisa DiNatale: What about the dollar? The strength of the dollar going forward. So the dollar's been strong, right? That's been advantageous to US consumers. But what happens under all these scenarios we just laid out? What does the dollar do vis-a-vis other major currencies?
Mark Zandi: Yeah, we were just talking about this. At least initially, it means a stronger dollar. That if the US is going to be imposing tariffs on a wide array of countries, some developed countries and emerging Markets, it's going to put pressure on our economy. It's going to put even more pressure on those economies because they're more open and less diversified, more fragile, particularly emerging Markets like a Mexico would be a great case in point. So you get this kind of flight to quality. Capital starts flowing from Mexico into the United States, and that drives its value of the dollar up, the peso down. And I think Mexico is probably the poster child for that, but I think it applies to a lot of other emerging Markets. So I think there's other dynamics at play might affect relative interest rates, Fed policy versus policy overseas.
So I could see we were just talking about what all this means for inflation expectations in the Fed. So what Cris was sort of arguing at least implicitly, was maybe the Fed isn't going to cut interest rates quite as much as they would've otherwise. But if you go over to Europe, let's say to the European Central Bank, I think all these policies are going to be hard on growth. And we didn't even talk about the geopolitical dimension to this, which would really matter like what's going to happen to Ukraine and NATO and what kind of pressure is going to be put on the Europeans to put more resources into their defense, all those kinds of things. And it's not going to add to inflation, it's going to depress inflation in Europe. So it might mean the ECB European Central Bank is going to cut rates even more aggressively.
So you get this interest rate differential widening, and that attracts near-term capital into the United States and pushes up the value of the dollar. So I think net, net, net, net, a lot of cross-currents, but it means a stronger dollar. I don't think the dollar takes off here just because people are going to start worrying about the US and what this all means for the US economy. But I do think at least in the foreseeable future, puts upward pressure on the dollar. And by the way, that's one factor that would tend to depress inflation in the US, right? Stronger dollar, less inflation but I think that's more on the margin. What do you think, Cris? Did I get that right? Or roughly right?
Cris deRitis: You did. I think it's tough to forecast this one though.
Mark Zandi: Yeah.
Cris deRitis: It's all the dynamics. What is going to be the retaliation? What's that going to look like? Are we going to see other trading blocks form? Is this going to push Europe into China's arms? There are all sorts of other factors here that could influence the dollar strength in the long run.
Mark Zandi: Yeah, that was a good question. Okay, I got a question. This is around mortgage rates. Someone on Twitter on X, brought this up and I thought we just answer it on the podcast. He's a listener too of the podcast. He follows me on X and listens to the podcast. He's thinking about buying a home. He noticed there's seasonality, ostensibly seasonality that in the winter months rates are a little bit on the lower side. In the fall or summer, they're a little bit on the higher side. It feels like that's very consistent with demand. But I never noticed the seasonality. Cris, I know you follow this carefully. Is there seasonality in rates?
Cris deRitis: There is, although the extent of it is hard to parcel out. But yeah, and it does make some sense to your point though.
Mark Zandi: We're talking basis points though.
Cris deRitis: Yeah, we're not talking...
Mark Zandi: 0.005, not 0.5.
Cris deRitis: That's right. And it's also hard to tease out because the mortgage rate is so closely aligned with other long-term rates. So if the ten-year treasury rate is moving around for whatever reason, that's going to have an effect on the mortgage rate as well. So it's really you're trying to gauge what that additional spread is, and there is some effect, but yeah, it's basis points. It makes sense that it's tied to the housing cycle. If there's more activity in the summer, there's more competition, there are going to be more loans originated during that period. You may see a mortgage rate that is slightly higher than in the winter when maybe the lenders have more capacity. They may be more competitively bidding for whatever mortgages are being originated there. So it's there.
I guess my advice, and I think this is where this is going, is I wouldn't try to time this perfect. I think the bigger constraint today is just finding a home and the right home that you can afford overall. And if you could save that extra few basis point, that's great. But I don't think this really should be your major concern in terms of making a decision about when to buy. If you try to time this perfectly, you may miss an opportunity.
Mark Zandi: Yeah. Got it. Okay. All right. I think we're going to call it a podcast. I know Marissa wants to get back on the beach, 82 degree weather. Yeah, you can see her smiling. But any last parting comments? Mr. Collier, any words of wisdom?
Matt Colyar: I don't think so. I think it was all well covered.
Mark Zandi: Okay. Cris, Marisa, anything? No. Okay. All right. I think we're going to call this a podcast. Dear listener, I hope you found it informative, and we will talk to you next week. Take care now.