As long as inflation remains above the Fed’s target, and the Fed maintains its higher for longer interest rate policy in response, it is premature to conclude the economy has soft-landed. This episode is a replay of the “Stubborn Inflation, Reluctant Fed” webinar hosted by Chief Economist Mark Zandi and team, as they discuss what it will take for inflation to abate, the Fed to ease, and the economy to soft-land, and what could derail this.
As long as inflation remains above the Fed’s target, and the Fed maintains its higher for longer interest rate policy in response, it is premature to conclude the economy has soft-landed. This episode is a replay of the “Stubborn Inflation, Reluctant Fed” webinar hosted by Chief Economist Mark Zandi and team, as they discuss what it will take for inflation to abate, the Fed to ease, and the economy to soft-land, and what could derail this.
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: Good afternoon everyone. I'm joined today by two of my colleagues, Cris deRitis. Cris is the Deputy Chief Economist. And Marisa, Marisa DiNatale keeps the trains on the tracks here in terms of all the work that we do in the research group. We're going to talk about inflation and obviously the broader economic outlook, but I think it's fair to say that the inflation outlook is critical to everything else. We have a relatively sanguine forecast. Inflation has been moderating since it peaked, hard to believe, but it's been two years since inflation peaked and we've been moderating ever since. And we have inflation going back to the Federal Reserve's target of 2% more or less by this time next year. So we're going to talk a fair amount about inflation. We're going to do a deep dive in the different parts of what's going on with regard to the inflation outlook.
Cris will talk about the cost of housing and homeownership, owner's equivalent rent. And then Marisa will talk a bit about all the other aspects of moving parts in the inflation statistics, and then I'll bring it home, trying to tie it back into why it's important to the economic outlook and some of the risks to the inflation and economic outlook. So with that, let's turn to the first slide. And just to give you this frame a little bit more concretely. This is inflation as measured by the core consumer expenditure deflator on a percentage year ago basis. It's monthly data, January of 2018 through April of 2024, and you can see that inflation peaked just a couple of years ago on a, this is course, this excludes food and energy. If you look at the total consumer expenditure deflator including food and energy, I think I'm speaking from memory, I might not have this exactly right, but I think it peaked exactly in June of 2022 at 7%, and now we're down below three. Of course, this Fed's target by this measure is 2%.
A lot of debate about what's behind the surge in inflation back in 2021, '22 going into '23 and the subsequent disinflation demand or supply. And I think it's fair to say it's both demand and supply. Early on when inflation took off, it was mostly demand. The economy reopening from the pandemic shutdowns in late '20, early '21, the vaccines, and of course the American Rescue plan. That was the $2 trillion deficit-financed COVID relief plan that put a lot of cash into people's pockets. And you can see inflation did take off at that point. It's hard to remember back, but at that point that was deemed to be good inflation. As you can see, the inflation had been suboptimal below the Fed's target for an extended period really since the financial crisis back 15 years ago. And the Fed had been struggling since the crisis to get inflation back up.
And here we were with the ARP inflation was above target and that's exactly what the Fed was hoping for. But then the principal causes of inflation shifted and or became supply-driven. And of course the pandemic itself and the disruptions to supply chains, labor markets, and the Russian war in Ukraine, which caused oil, natural gas and agricultural prices to jump were behind the effects, behind the inflation, the undesirable inflation that occurred in the latter part of '21, and throughout most of 2022 going into 2023. The good news, those negative supply shocks, the pandemic and Russian war are fading into the background. The fallout is becoming less significant. Although I will say there's still residual effects. I don't know if you have anyone here got a motor vehicle insurance bill this year. I did. And it was pretty eye-opening, a big increase in the premiums.
I got them down, but only after giving up some tort protection. And that goes right back to the pandemic. The higher vehicle insurance premiums are due to the higher repair costs of vehicles, which goes back to the surge in vehicle prices, which goes all the way back to the delta wave of the virus, which shut down chip plants throughout much of the world, particularly in Southeast Asia. Without chips, vehicle producers couldn't produce. And we saw vehicle prices go skyward. And here we are still paying the price for that. But nonetheless, things are moving in the right direction and the negative consequences of the supply shocks are beginning to fade. And unfortunately, we've been the beneficiary of a number of what I would call positive supply shocks here over the last year or so, the immigration surge. Clearly the surge in immigration at the southern border has presented enormous challenges to many communities across the country.
But the clear benefit of that is that it has added to the labor force just at a time when the labor force was very, very tight, particularly in industries where the labor shortages were most acute at restaurants, retailing, leisure, hospitality, construction, transportation distribution. And that's taken the edge off the labor market tightness and allowed growth to moderate and allowed inflation to move in the right direction. The productivity revival, I've seen a bounce in productivity, hard to know whether that's just temporary or more sustainable. My sense is that there might be some things going on here that argue that this productivity gains have some legs.
I don't think it's related to artificial intelligence or remote work, but we have seen a significant increase in business formation over the past several years since the pandemic hit, maybe in part due to the immigration, maybe due in part to remote work that facilitates the starting of companies, maybe necessity back early on people were losing jobs and needed another way to earn a living, but whatever the reason business formation has been extraordinary across industries and everywhere in the country. And it feels like that's starting to reap benefit in the form of stronger productivity growth. And that clearly is key to helping out in terms of the inflation.
And then finally, the other positive shock, supply shock was the surge in oil production among US frackers. The shale producers, very surprising when Russia invaded Ukraine and sanctions were put on Russian oil and the Saudis cut back on their production to try to keep prices up. I thought oil prices were going to head north, and instead they went south. And that goes to just the dramatic ramp up in production of oil here in the US. We're now at 13 million barrels of oil a day. That's a record high up a million barrels from a year ago. And that's gone a long way to filling the void left by the pullback in production by Russia and Saudi. It kept prices down and that's been very, very helpful in getting inflation and moving in the right direction.
You can see though we're still not at target on the core PCE deflator, what I'm showing you here, we're at 2.8% on the overall PCE deflator including food and energy. We're at 2.7%, the target is two. But the good news here is that the gap between where we are and where we need to be is the cost of homeownership. And you go to the next slide. That point is, I think driven home quite nicely here. This shows the so-called harmonized measure of inflation, a core inflation, core PCE, that's the blue line and core CPI, consumer price index. Core, again, is including food and energy. That's the green line. Harmonized means that it excludes so-called owner's equivalent rent, the implicit rent that homeowners pay to live in their home.
And Cris is going to do a really deep dive into this because this is really critical to the inflation situation. And you can see here, if you exclude OER, exclude the policy cost of homeownership, we are back to the Fed's target, both on a PCE based on both the consumer expenditure deflator, the PCE deflator, and the consumer price index, the CPI deflator. In fact, based on the CPI on a year-over-year basis, which is what I'm showing you here, we've been at Target, you can see here for about a year. And then based on the PCE, we've been there for about six months. So if the Fed were focused on this as their target measure, then we'd already be there and they'd be cutting interest rates. But of course they're not. Harmonize, of course, is, another point about Harmonize is this is the way inflation is measured in most other parts of the world.
I think, I may be wrong and Cris will correct me, but I don't know that there's anywhere else in the world that actually uses OER, owners equivalent rent, implicit rent to calculate the cost of homeownership. But we may be unique in that regard, but most other places exclude it because it is so hard to measure. And one reason why central banks overseas like the European Central Banks meeting tomorrow, and will probably cut interest rates because they're focused on this measure, not the broader measure. But needless to say, the key to the economic outlook is really the outlook for inflation.
If inflation comes in to the script that I just described, getting back to the Fed's target by this time next year, and the Fed starts cutting interest rates as we anticipate, and we'll talk about a little bit more down the road here in the presentation, then we're golden, we'll have a soft landing that'll be very consistent with our baseline forecast. If inflation doesn't come in, if that so-called last mile, if we can't get from the 2.7, 2.8% back down to two, then the Fed's not going to ease and the risk that something goes off the rails will rise and we'll have a very different economic outlook.
Okay. With that as preface, I am now going to hand the baton over to Cris so he can do a deeper dive into OER. But before I do that, any questions that folks have posed and I should say, if you have questions, fire away, you can see the Q&A button at the bottom of the screen just to fire away. And we'll try to hit as many as we can during the presentation and we'll certainly get to all of them offline after the presentation. Cris, any good questions that I should take before we move on?
Cris deRitis: A lot of the questions, my read is we're going to be answering them later on.
Mark Zandi: Okay.
Cris deRitis: I don't know. Marisa, anything else catch your eye?
Marisa DiNatale: No, I think you're right. I think the questions about the Fed and policy coming forward will be answered later.
Mark Zandi: Okay. All right. So Cris, it's all yours?
Cris deRitis: All right, thanks Mark. So I think the question as you've laid it out comes down to the outlook for rents and owner's equivalent rent. What's that outlook? Based on that harmonized index that's really the key to getting overall inflation down. So question we often get asked then is why are we confident that we will see inflation get back down to the Fed's target? What is it about rents that we think will lead to that conclusion? I think the first slide here illustrates that quite nicely. I'm showing you the various measures of CPI. So overall headline index in blue, the core CPI stripping out, food and energy in green. This is on a year-over-year basis. And then I'm also illustrating two components of the CPI. That's the rent of primary residents in red and the owner's equivalent rent in light green. And these are the two primary measures of shelter costs in the CPI.
They do have a substantial weight in the consumer price index calculation as Mark alluded to. So about 8% wait for primary rent itself, about 27% wait for owner's equivalent rent. So overall 35% up the totals, that is quite substantial. A couple of things to note here that gives us some confidence. First of all, just the trends in these Rent and OER rent series here. They do operate with a lag. You can see that they peaked later than overall inflation most recently. They are trending downward, but they still remain high relative to history compared to where they were prior to the pandemic. And certainly that is putting that continued upward pressure on overall inflation. So just drawing a line with your eye. If you assume that these are going to continue to moderate going forward, that will continue to lessen the upward pressure on overall CPI and core CPI inflation. So that trend alone gives us some confidence.
So then the question is, well, why are we confident in that downward trend? Why should these rent growth figures continue to moderate? We can go to the next slide to get a deeper sense of that by looking at market data. So we can look at data on rental units and how the rent is changing on those rental units, both for new leases. That's what's illustrated by the purple and red lines as well as existing leases. So the rental increases that might occur with renewals of rent. And remember that rental contracts in the United States typically are around 12 months. So that is also part of the reason why we have that substantial lag in the overall CPI, just takes time for those rent prices to be reflected in leases in the broader market. But if we focus just on the new lease market, so new apartments that come online that landlords are looking to rent, you can see the wild swings that we've had in those rental prices throughout the pandemic and pandemic recovery period here.
So focusing on the apartment list data, which is the purple line, you can see that rents initially in the pandemic actually went down. We had the lock-in. We had a lot of college students moving back home with their parents. Rental demand went down as people were certainly very concerned about the virus itself. But then by the end of 2021, we saw things turn around and there was an explosion. There were lots of demand for rental properties and you saw the rents increase here quite dramatically, double digits, some of the highest or fastest year-on-year rent growth that we've ever seen in history. So very high levels of rent growth that did attract some capital or some building in the rental market. But of course it takes time for those new rental properties to come online. We had about a year or so of that elevated rent.
And then as we got into 2023, you can see that that rental market went flat, even negative based on the apartment list data, but nonetheless, very close to flat over the last say three, six, 12 months here. A couple reasons for that. Certainly we have affordability issues, so we have some demand destruction. People just can't afford rent at some level, so you can't push rent growth up infinitely. But perhaps more importantly, we did have more of that supply that I mentioned coming online and that has kept rent growth from really accelerating here. So that is certainly what we're seeing in the new rental market. You can see that confirmed by a BLS series, which is the new tenant regressed rent index. So just another index that also is trying to capture what's going on in that new rental market. And so that gives us a bit of a precursor of what to expect in the overall rent growth figures.
More importantly for the CPI, of course might be the all tenant regressed rent index. Remember the CPI, consumer price index, is trying to capture the expenditures across the entire economy, not just the new rentals, but how our rent prices or the cost of housing services changing across the entire economy. And you can see that there too, that rent growth is moderating and that is having the desired effect of pushing down or bringing down the CPI rent and owner's equivalent rent indices. It's just taking time. Again, it's just operating with a lag, but it is moving in the right direction in that downward direction. And we do expect that to continue to be the case. We do have more supply of housing coming online. We still have a lot of multifamily projects, apartments underway that will continue to add supply and that should continue to put some downward pressure on rents as we go forward.
So not an immediate process, perhaps a bit frustrating because we can see what's happening in the new market or the market for new rentals, for new leases and already see very convincing evidence that things are flattening out or even negative in certain markets. But again, it just takes some time for the official statistics to reflect it. So given that we've received a lot of questions about, well, okay, fine, why do we go, why do we use this approach? Why would we use an owner's equivalent rent approach? And first of all, what is this owner's equivalent rent approach given how much impact it has on the CPI index? So allow me to illustrate that here graphically. I tried to put some graphics here to help make some sense of it, but essentially what the owner's equivalent rent concept is trying to capture is how much would a homeowner pay to rent their own home?
We're trying to capture the cost of housing services. That's very easy to do when someone is actually paying monthly rent and we can observe how their rent changes from month to month or year to year, can get our price indices pretty easily from them. But for the other two-thirds of households that actually own their own homes, how can we approximate what that cost of rental service is? And one method that we have is this owner's equivalent rent method, which I would say is conceptually sound. The idea is to look at a neighborhood or look at a group of houses and examine the rents that we can observe from those rental units and try to use that data to infer or estimate what the rent would be for the owner occupied units. So conceptually, I think that makes a lot of sense. Trying to use a model here, or if we had richness of data, we should be able to look at the rentals, look at the own properties and make some assumption or estimation of what the rent would be for those homeowners.
And in certain neighborhoods, and in a stylized example, and I'll call it neighborhood A here where you have a lot of homes, they're all very similar to each other. There's not a lot of variation in either the floor plan or the location. The quality of the homes is equivalent. Some just happen to be owner occupied and some just happen to be rentals. Then this concept makes a lot of sense. It's actually very easy to implement. You just look at those rental units, see how much the market rent is, and that should be a very good approximation of what those owner occupied units would rent for if suddenly the owner decided to move and to rent out a property. So again, I think conceptually makes a lot of sense. The problem we face today and especially is that we don't have this homogeneity of homes across the country.
In many parts of the country, you have very distinct owner-occupied markets and rental markets. The properties are quite different. The markets are quite different in terms of the size, the floor plan, the view location. Lots of factors that are influencing the differences between these markets. And this is particularly a problem in areas where you might have a very small rental market. So in many parts of the country you have a lot of homeowners concentrated in certain areas, very few rentals, and then in other neighborhoods, in other districts, maybe it's the opposite, you have more rentals concentrated. So then the question becomes, well, how good is this estimation process if you had a neighborhood that looked like neighborhood B? Lots of owner-occupied housing may be a bit larger than the rental stock, which may be a small portion. Let's say it's less than 10% of that market and very different in its features.
So even though we may be using models to approximate or control for the observable characteristics like the number of bedrooms or again other things we can measure, it still may not be a great way to estimate what the homeowners equivalent rent would be. And I would say on top of that, especially today, given the lack of affordable housing, many of those rental units in a market like neighborhood B, maybe the smaller units, maybe the more affordable units where we do see still lots of demand and the rent prices may actually be growing at a faster rate because that is at the low end of the market is where we still see a lot of activity. It's really the upper end, the more luxury end of the market where we see rent growth really falling or slowing down considerably. So bottom line is this OER estimation process may be distorting or biasing some of the results that we see when it comes to the data that we're seeing here.
So I guess this is an argument for that harmonized index. At the end of the day, maybe if we're not able to estimate the OER, owner's equivalent rent very accurately, perhaps best just to leave it out and focus on the prices that we can observe. All right, let's move to the next slide, and I'll just take a minute or so here just to describe some other alternatives to the OER. Again, we've received a number of client questions about why the BLS uses this different approach, this approach, and are there any different approaches we might use to measure the value of housing services? And again, remember CPI is trying to measure the changes in expenditure required to maintain a certain standard of living. That's the objective, that's the goal. So there are many different ways we can think about assessing the cost of housing, but each one of them has their own assumptions and certain flaws, if you will, in terms of the measurement that we can conduct.
So there's really no perfect method. The OER, as I mentioned, is one measure of housing inflation that we can take a look at. Again, trying to measure how much a homeowner might pay themselves if they had to rent their own property and explain the methodology there on the previous page. Another method, maybe quite simple we might think of is a so-called acquisition approach. Just look at the house prices, what are the transacting values of these homes? See how they fluctuate and that can give us a good approximation of housing cost, and that sounds very attractive. It's based on hard data. We can collect this data quite easily. We see it. There's no estimation really involved. Maybe some controls here and there just to account for differences in quality. But conceptually, or statistically I should say, it's quite easy to manage. The problem with this approach, of course, is that homes not only provide consumption value, the value of the services, but they also have investment value.
They're also appreciating, and we want to separate out that asset price appreciation from the services approach. So this is an approach that is used, I believe in Australia, but again, it comes with certain drawbacks. Third approach is a so-called user cost approach. Again, conceptually sound. In this approach, we basically try to consider the opportunity cost of owning a home. So if we can measure all of the expenses, if you will, involved with owning a home such as mortgage interest, property taxes, maintenance, and depreciation. If we could come up with all these measures, the theory is while that should be an estimate or give us a good estimate of the implicit rental cost or the opportunity cost of not investing in the capital that's tied up in your home somewhere else. But again, this requires a number of key assumptions, relies heavily on certain data, and also becomes complicated when we think about homes that are not actually carrying a mortgage and how do we handle those.
So again, lots of assumptions are based in that approach as well. And then finally, there is the approach that the BLS had in place up until 1983. This might be, again, a very direct approach that says, Hey, value of housing should just be the cash flows. We can measure mortgage payments, property taxes, insurance, maintenance and repair. We see all this information, we can gather it pretty easily through surveys. Why not use this? Well, again, this conflates both the consumption value with the investment value, as I mentioned. So there's a drawback there. And it doesn't, again, control for the opportunity cost of owning a home either. And then in the eighties in particular, things got particularly hairy given the spike in interest rates and the use of adjustable rate mortgages. So things became difficult to compare across time. So there was this movement to change the methodology.
I have a very simple example that on the right-hand side of the slide here that illustrates why this is a difficult problem with not an easy solution where you can imagine just a very simple or small neighborhood, three houses, three equivalent houses, all sat sitting next to each other, same floor plan built at the same time. So no variation across them. So the price of one should be the price of all of them you would think, that the cost of housing described by each house should be equivalent. There shouldn't be any differentiation between them. But I suppose though that the ownership structure is different across these houses. So house A is actually rented out for $2,000 a month, so we can observe that, but house B is owned with a mortgage that requires a $1,500 monthly payment for principal interest insurance and taxes.
But house C is owned outright, no mortgage, and you just observe the insurance and tax payment of $500 a month. Well, now how do we figure out what the right price of housing is? These individuals are each paying a different out-of-pocket expense. But what is the real cost of housing services that we're trying to describe in our CPI measurement? And again, this is really illustrating the difficulty that we have here. And it also illustrates that there are different purposes for this data. If you're a mortgage lender, you might have a very different view of cash flows from these different houses than if you are trying to estimate prices in the general economy. All right, so hopefully that gives you a sense of the OER, some of the challenges that we see. Again, good in concept but difficult to execute. Let me end my section here with just a couple of comments about the transmission mechanism of the Fed.
So if we can move on to the next slide here. Now there's a question about why Fed rate hikes haven't slowed down the economy perhaps as much as we might expect? We've had a very aggressive increase in rates over the last couple of years. Rates are higher than they've been in certainly a long time. Why haven't we seen more of an impact on consumers and businesses? I would certainly point to the chart that we have here as one of the main reasons. The fact is that in the US most mortgages are fixed rate by our calculation. The population of outstanding mortgages today has about 95% fixed rate, either 30 year, predominantly 30-year or 15-year rate mortgages, and really just a smattering of arms adjustable rate mortgages. Some are one to four-year. Actually, if you go to the right-hand panel, you can see a breakout of just the last quarter here and then a few longer-term, five-year-plus arms, but again, very small share, about 5% as I mentioned. That means that the homeowners really are immune to rate hikes. They don't really see that the rate hikes affecting their monthly payments.
The other point to make here on the next slide. For those homeowners with the fixed-rate mortgage, of course, given the drop in mortgage rates over the last four years here, we've seen that mortgage borrowers have been able to lock in extremely low interest rates relative to history. So about 87% of mortgages today carrying interest rate below 6%. If you look at the left-hand panel of this slide here, you can see that the mortgage market today is quite different from an interest rate standpoint. With the interest rate dropping below 3% during the pandemic, you can see a large number of homeowners were able to refinance lock in a very low interest rate of either below three, 4%. And today, again, most carry below 6%. Very few are anywhere near the prevailing interest rate, around 7% today. So the cost of moving certainly is very high. And again, the transmission mechanism is just not there for the Fed. The homeowners really aren't feeling the effects in terms of seeing their monthly expenses change to an appreciable degree. So I'll stop there.
Mark Zandi: Well, Cris, yeah, there are a bunch of questions, a ton of them. I think a couple that might be very useful to tackle is owner's equivalent rent ultimately is tied back to rents. So the question that we're getting is on both the demand and supply side of the rental market, just your perspective on things. On the demand side, it's the surge in immigration. So we've seen this very significant increase in immigration across the southern border. According to the CBO, typically you get a million a year, according to CBO we got 2.6 million in 2022 and another 3.3 million in '23, and we're going to get another 3.3 million in 2024. So that's a lot of folks that got to live somewhere.
So that is on the demand side. And then on the supply side, we're getting all this multifamily supply. If you look at the number of multifamily units in the pipeline under construction going to completion, it's coming, it's peak, but it's extraordinary like a million units or something, some big number. So you've got this impetus for demand and this impetus for supply. So the questions are maybe you can provide some granularity and context around that. What does that mean for rents here going forward? And ultimately what does it mean for OER and inflation?
Cris deRitis: Yeah, sure. So I think much of the rent increase that we saw during the pandemic or during the pandemic recovery, more specifically back in 2022, 2023. If we went back a couple slides where we saw that spike in apartment list rent growth, I certainly think some of that was fueled by the surge in immigration. The timing lines up there that you had this real initial surge of immigration at a time when the housing market, housing construction market was still trying to recover. We were planning to build more homes, but the supply was really limited at that point, and I see that as a contributing factor to those rents. You also, of course, had the reopening of the economy, had some pent-up demand for rentals from young adults. That certainly pushed things up as well, but I think immigration certainly contributed to that.
I would say, or one observation is certainly new immigrants to the country, they do tend to certainly double up or live with relatives, so triple up or they're going to share units to a larger degree than the native born population. So their impact on the housing market is there, but it's perhaps not quite as strong as what we might expect if we were looking at the young adult population and what their impact is in terms of demand. So it certainly has some pressure, but not quite as much pressure on a person by person basis as what we see for that native born population. I think what we then saw was the construction boom, particularly in multifamily, but single family as well. And that additional supply brought down the rent growth. And the rent growth remains quite low at this point. We've seen this trend persist here.
So it does seem as though the supply is at least keeping up with the demand to a large degree, not allowing the rent growth to really accelerate here. And I expect that trend to continue, because we do have that large pipeline of homes still under construction. And I also expect that the immigration flow, although maybe still elevated, is going to also taper down as well. So I see this again consistent with this view that the rent growth is going to remain modest here. I don't expect it to remain below zero, go much below zero. I do expect that we'll see some re-acceleration here, but it's going to be slow-going given all the additional supply that's coming online.
Mark Zandi: So net, net, net, got all these cross currents, what are new rents going to do in the coming year, coming 18 months? Basically sideways here for another 12, 18 months, or-
Cris deRitis: I'd say sideways perhaps for the next six months. And then-
Mark Zandi: Six months.
Cris deRitis: ... gradually getting back up to, what? Two, 3%. So a gradual return to more of an equilibrium level here.
Mark Zandi: Okay. And then given the lags between new rent growth and then rents across all leases. And when that shows up in the CPI, that would suggest that we should continue to see continued moderation in OER through this year and through much of next year.
Cris deRitis: Correct. That's right.
Mark Zandi: Okay.
Cris deRitis: And that's consistent with our-
Mark Zandi: That's the key to getting that last mile 2.7, 2.8% down to the 2% Fed target.
Cris deRitis: That's right. That's right. Okay.
Mark Zandi: I'm leading the witness-
Cris deRitis: What's that?
Mark Zandi: I'm leading the witness, but I'm just want to make sure I'm leading in the right direction.
Cris deRitis: Yeah, definitely key. Although maybe good swag weight into Marisa's piece, there could be other components that actually move in the... If we get actually deflation in certain other components, that certainly could help even with OER and rents remaining stubborn, moderating, but not at a very aggressive pace, those other components may help to bring inflation back down or maybe there's other landmines out there, re-acceleration factors that we should be worried about.
Mark Zandi: A perfect segue. So Marisa, you want to take it away?
Marisa DiNatale: Sure. I don't know if this is going to make you feel better or worse with that segue. Kim, if we go to the next slide, I'm going to talk about everything else going on with inflation. So Cris focused on housing and rightly so. This is accounting for most of the inflation that we're experiencing right now. However you measure it, I think. You would still have rent prices and the cost of homeownership and things related to housing being the major contributors to inflation over the past several years. So it's very important. But there are a bunch of other things in the CPI and the PCE deflator basket that the BLS is measuring. There were a lot of questions that Cris got I saw come through about how this is actually collected. And I just want to say something about that since I'm looking at both the CPI and the PCE, and I'm going to tell you about some of the differences here.
These are sample-based surveys. So when we're looking at the CPI, a lot of you asked how was the government actually measuring this? These are geographic sample-based. So indeed places that are more populous will be weighted more heavily in this sample. The BLS via the Census Bureau conducts these surveys through telephone and in-person interviews where they'll call households and they'll ask them if they're renting or they're owning their home, and then collect information about what they're paying for those goods and services related to homeownership. So let's just look at the differences here. And the reason I want to look at the difference between the CPI and the PCE, as we know, the Federal Reserve is looking primarily at the PCE. So they are looking at the personal consumption expenditures deflator as their preferred measure of inflation. Right now, the CPI and the PCE are divergent from each other.
The CPI inflation that we're getting calculated out of the CPI is running hotter than out of the PCE. So if we just look at before the pandemic, the CPI was running about 0.3 percentage points higher on average than the PCE in the four years leading up to the pandemic. Since 2020, that is more than double that discrepancy between the CPI and the PCE on average over this period. So the CPI has been running about 0.7 percentage points higher than the PCE. And back to Cris's presentation, the major reason for that is the difference between how these two sources weight the cost of housing. So you can see here on the left, as was mentioned before, homeowners, so OER combined with outright rent, people that are renting their home make up 34% of the inflation basket in the CPI. In the PCE, on the other hand, they make up about half of that. So about 14%-ish.
The calculation from the PCE to get weights is not as straightforward. And shout out to my colleague Matt Collier, who helped me with this PCE. The weights on the PCE change every single month, and it's not a straightforward calculation. On the CPI they only change the weights twice a year, and they publish the weights. So you have to back out what the weights are in the PCE. So this is current as of April, but you can see that housing services, whether it's homeowners, that's the dark blue, combined with rent, which is the light blue, it makes up a much smaller share within the PCE. Now, the Fed likes the PCE better because overall it includes a lot more goods and services than the CPI. The CPI's basket is smaller and more narrow. The PCE basket also includes payments that are indirectly made by consumers or on behalf of consumers.
Let me give you a couple examples of that. You can see that medical care, for example, is a much bigger weight in the PCE than it is in the CPI. 17% in the PCE basket versus 6% in the CPI basket. And part of that is the way it's measured in the PCE, which is that looking at medical care that is paid for you on your behalf by insurance companies. We'll also see in a minute when I get to talking about different types of insurance, whether it's auto insurance, homeowners insurance, or health insurance, that the PCE nets out claims that it makes to consumers, whereas the CPI does not. So there are some real differences in the way these things are measured. And because the PCE includes a lot more than the CPI, the weights between the different items in the basket are very different.
You can see that in the dark green here, or I guess the medium green. I have three shades of green, but the other goods and services category is much bigger in the PCE basket than it is in the CPI. So it includes a lot more stuff. So I just want to put this out there to level set and to just call out right up front that these things are constructed differently, they're weighted differently, and the Fed is primarily looking at one over the other. So it's important that we know these differences going into the discussion. Okay. So Kim, if we go to the next slide, what I did here is I looked at the PCE and I looked at how different, these are the major components of the personal consumption expenditures, like the second level components. I looked at their average growth rate before the pandemic and the four years leading up to the pandemic, that's the green bars versus their year-over-year growth rate as of April, the most recent data that we have.
And you see that nearly everything with a few exceptions that I'll call out, is growing faster now than it was prior to the pandemic. Some of these things are on the downswing as Mark and Cris both mentioned, inflation peaked a couple of years ago, it's been coming in, but in many cases it's not back to the average rate of growth we were seeing prior to the pandemic. It's probably no surprise that here at the top I've sorted these by the difference in the most recent growth rate and the average growth rate prior to the pandemic that we see housing and utilities up there near the top. So somebody had also asked a question about along with the price of housing and homeownership, what about utilities? Your gas bill, your electric bill, those kinds of things, those are collected separately. They're a separate line item in both the CPI and the PCE.
And you can see that those things have also been growing faster now than they were during the pandemic. And that goes really back to the general trends that we see in energy prices. Energy prices have started to come in recently in the past couple of months, but relative to where they were prior to the pandemic, they are growing faster. So overall, as Mark said, PCE inflation is up 2.7% year-over-year. That compares to about a 1.3% average before the pandemic. He showed that first slide that before the pandemic inflation was actually running under the Fed's target for years, it was actually sub-optimal. The Fed would've liked it to be closer to 2% than it was. Now we're coming back in, but we're still above it according to the PCE.
So just looking at some of these other components here, the things that are growing especially fast compared to where they were prior to the pandemic or things like recreational services. So this is anything related to travel or entertainment, hotels, casinos, concerts, sporting events, those sorts of things. The prices for those are growing faster. Prices for financial services, which includes insurance are also growing faster. And transportation services, and I'm going to talk about this in the next slide when we look specifically at autos and what's going on there with that category, transportation services are the prices for things like public transportation. But the bigger part of that is things related to your car. So anything that you have to pay for related to the care and maintenance of your vehicle. It also includes things like tolls. Those are growing much faster relative to where they were prior to the pandemic.
Goods prices overall are on the decline and we will see that when I talk about autos. You see down at toward the bottom of this chart, there are some things for which prices are actually falling. So you see recreational goods, I talked about recreational services growing faster, but recreational goods like sporting goods, RVs and jet skis, things like this, these things are growing. Prices for these things are actually falling. Other durable goods, furniture, things in the household, household decoration and furnishings, prices for those things are falling and they're actually falling more than they were prior to the pandemic. So really there's this disparity between goods prices and service prices. For those of you that listen to our podcast, we have recently and over the past year really focused on the auto sector. It is one of the bigger components when we measure consumer prices. Kim, if you go to the next slide, I just want to spend a few minutes talking about that for a few reasons.
So we focused on this for a couple of reasons. One is, as Mark said, his personal auto insurance bill went up by 25% over the last year. That is the average just in the past year. Car insurance is up about 25% and you can see, it's pretty wild. Motor vehicle insurance overall is up over 45% since the start of 2020. And you see how that compares to overall core CPI, which is up about 19% over that time period. And you also see the maintenance and repairs on vehicles that's up even more than car insurance. That's up 49% since the start of the pandemic. And Mark talked a little bit about this. Why is this happening? These are prices that are sticky. They don't change frequently. So auto insurers typically aren't updating their prices on a frequent basis. They're updating them. You might sign a contract for a new policy once a year, maybe once every six months, but typically it's about once a year.
So it's taken time for the price of things related to autos to catch up with the surge in vehicle prices that we saw during the pandemic when we had a supply shortage. So you can see the price of new and used vehicles, particularly used vehicles where inventory was drawn down to almost nothing compared to where it was prior to the pandemic, prices of cars just surged amid the supply shortage at the end of 2021. You saw that peak. Now prices of new and used vehicles, now both are falling and are on the way down. And now if you look at, go back four years, the price of new cars is almost about average in terms of overall inflation. You see that dark blue line coming into the black line there. And the cost of use vehicles, which is still elevated over that time period are also falling. So that's coming back in, coming back to earth there.
But insurance prices and repair prices took a while to catch up with those higher prices of vehicles. They are stickier and they take time to adjust. And that's what we're seeing. So when we look going forward, what can we expect with the price of these things? I think they'll continue to rise, but they're doing so at a much slower pace. So I wouldn't expect drastic cuts in your auto insurance bill over the next few years as vehicle prices come in. I think they'll still continue to rise or maybe they stay the same over the next few years, but it does take a while for them to catch up.
So we talked about housing and we talked about some of these goods prices. Kim, if we go to the next slide, I just want to drill a little bit more on the service segment because really when we take shelter out of the picture, and if we are all in agreement that most goods prices are flat or moderating, nearly not contributing as much to inflation as they were, it really is services. So if we look at the broad categories of inflation, we see what's going on here. If we look at, so-called super core inflation, which looks at core services minus housing. So it's services minus energy services and housing. That has actually picked up since the middle of last year. It went from a cycle low of 3.7% in the summer of last year to about 5% year-over-year today. And we can see some of the components of that in the PCE, see core services running above core CPI.
So two things to note. One is the insurance picture is measured by the PCE. It's very different from what it is measured by the CPI. And again, I think I alluded to this, this is because in the PCE, they net out insurance premiums by subtracting out from the premiums, the claims that they're paying out to consumers. So I may pay an auto insurance premium every year, but if I get into a car accident and my car insurance company pays me, they are netting out that payment to me, whereas the CPI does not do that. So in the PCE, actually all types of insurance have grown at a slower pace compared to the core since the pandemic, unlike in the PCE. Really the only core component of core services that has grown more quickly is this personal care services. And I think some of us can also attest to this.
These are things like salons, haircuts, dry cleaners, that kind of thing. The price of personal care services is up over 30% since December of 2019 compared to about almost half that when we look at just core alone. So we really need to focus in on services. And finally, I'm going to end on my next slide, which is looking at where household expenditures are going in the service category. We look at food away from home. This is not groceries, this is eating out in restaurants. Prices of restaurants are growing much faster than they are at home. We see that in the CPI too. We see food away from home being much more of a contributor now to inflation than grocery prices, which have basically gone flat. Travel related expenses and housing are all at the top of the list for what is growing outside of housing.
Maybe surprising to some, but there are some services that have actually grown at a slower pace than overall inflation according to the PCE, which is healthcare. This is healthcare services, not healthcare goods, recreational services and other services, which include things like education, child care, daycare, have actually grown, social assistance have actually grown a bit slower. So as we look over the course of the next year, where do we think this stuff is going to go? Mark's going to talk about that. But we're really seeing this surge in service growth coming from the resilience of consumer spending, which has been propped up by the excellent job market. We've had very strong job growth and we've had strong wage growth, and that's helped to contribute to this revival and service spending. And Mark, I think I'll turn it back to you to talk about what the fundamentals of consumer spending look like and what the risks to that are over the next year.
Mark Zandi: Okay. So Marisa, a couple things. One, there's a lot of moving parts here. Looked at a lot of different components of the inflation measures. So the net of all of it, is it an ad, a subtract, a neutral with respect to measured inflation? You hear going over the next six to 12 months.
Marisa DiNatale: Service growth outside of housing has accelerated a bit in both measures over the past six to nine months. So it is still mostly a housing related story-
Mark Zandi: But looking forward over the next six to 12 months, the net of all of these cross currents, is it a wash or-
Marisa DiNatale: No. I think we're going to see inflation come in for sure on that.
Mark Zandi: Come in-
Marisa DiNatale: Right.
Mark Zandi: ... on that.
Marisa DiNatale: Absolutely. And mostly just because of what Cris said about housing costs, that is the largest component-
Mark Zandi: Excluding housing, excluding housing. So housing, he nailed that down. I'm convinced, he convinced me, but-
Marisa DiNatale: Okay. So outside of housing, what are we going to see?
Mark Zandi: Yeah.
Marisa DiNatale: Yeah, I think we're going to see even outside of housing prices come in, we're seeing-
Mark Zandi: On that.
Marisa DiNatale: ... other goods... On that. Goods prices are falling and a lot of these services though they're higher than they were a year ago, are coming in as well. And I think as we think the economy slows a bit that service spending will follow suit.
Mark Zandi: Okay. So the approach we've taken here in this presentation is what I would call a bottoms up approach. We're looking at all the different components of inflation, talked about the ones that are most important in terms of their weighting and what's driving the inflation numbers at this point in time. Another way of looking at it is top down. And if you look at it from top down, one key aspect of that, especially on the service side, and you just mentioned service prices, is wages, wage growth, the cost of a labor. Because at the end of the day, services are very labor-intensive and labor costs drive the trend in terms of the inflation in that part of the economy. So can you just give us your thumbnail sense of what's going on there in terms of wage growth and what it means for overall inflation, the the top down kind of approach?
Marisa DiNatale: Yeah, wage growth is coming in for sure. So we saw it peak a couple of years ago, well above 5% it's come down just to around 5% depending on the measure you look at. We look at a few. We like the Atlanta Fed's wage tracker, which follows the same job over time. It has the same approach to measuring wages as the employment cost index, which the Fed looks at. And you see it across all different wage tiers. And this is really driven by the very sharp decline in the number of people quitting their jobs over the past few years. So we saw the quits rate peak at an all-time high a few years ago. And that's come in very, very quickly. And now it's actually below where it was right prior to the pandemic. And the reason that's important is because when people quit their job and get a new job, they're able to negotiate typically a much higher salary that has a big wage premium. With people now staying at their jobs that they have, they're not getting the big wage bumps every year that we saw.
So wage growth has come down, which is good. There was a lot of talk, we talked a few years ago about the prospect of a wage price spiral that service sector wages, especially for some of these jobs that were in high demand, like you mentioned, restaurants and entertainment and retail, these in-person high touch services, we're seeing double-digit wage growth year-over-year. And that's really come in now. And so typically why is this so important? Is because in services, the wage bill is the biggest part of the employer's cost structure and they can pass that on to consumers. So we are seeing wages come in, people are quitting less. We expect that to continue. We just got new data on quits and layoffs and hires the other day that showed further moderation in the labor market. We don't have the same upward pressure on wages nearly that we did a year ago, even a year ago.
Mark Zandi: Okay. Okay, I feel much better now. I just wanted to make sure that-
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Okay. Let me bring this home very quickly. Bring it back to the overall economic forecast and why it's so important that inflation sticks to this script, why it's important that we're back to the Federal Reserve's target over the next couple of years. And Kim, you can go to the next slide. Critical to that is the consumer. At the end of the day, the American consumer is the thing that drives economic growth, not only by the way here in the US but globally. We as consumers, American consumers, buy everything we produce here and lots of what's produced overseas. That's our large trade deficit. And in the current point in time, the US consumer is leading the way for really much of the rest of the world. And this chart, I think nicely shows why it's so important that inflation continues to moderate and why consumers are going to continue to do their part.
The blue line represents the consumer CPI inflation. A percent change year ago. This is quarterly data because we are using the Atlanta Fed Wage Tracker here that you just referenced, Marisa. This is Q1 2019. I don't think we've gotten the first quarter data yet for 2024, have we? Probably not. Maybe we have. I am not sure, we've got to take a look. But you can see that inflation is now consistently below and has been below wage growth across the wage distribution. Those are the other lines in the chart. So for example, the yellow line represents the wage growth for folks in the bottom quartile or bottom 25% of the wage distribution. So people's so-called real incomes are rising, their purchasing power is improving. And historically consumers spend what they earn. And right now their earnings look pretty good. The real earnings look pretty good, and that's allowing them to continue to spend and keep the economy moving forward and avoiding an economic downturn.
The other thing I want to point out with this chart is this disconnect between, the seeming disconnect between all the happy talk that economists like us are espousing and the pessimism that many American households are expressing with regard to the state of the economy. And I think that does go to the experiences of most American households back in, you can see in 2021, 2022 coming into '23, the blue line was above all the other lines. Real wages were declining, people's purchasing power was eroding. And particularly for folks in the bottom part of the income distribution, really the bottom third or half, they turned to credit cards and consumer finance loans in an effort to maintain their purchasing power in the face of the higher inflation, which was one thing when interest rates were low back in '21, early '22, but it becomes a much more difficult thing obviously with interest rates as high as they are today.
And even though inflation is moderated, it's not like prices for most things are falling, maybe used vehicle prices, but it's not like food prices, grocery prices in total are falling. They're no longer increasing to a significant degree or they're growing very slowly, but they're not falling. And so people are just feeling the sting, the financial sting for having to pay a lot more, motor vehicle insurance is up 25%, groceries are up 25% from three years ago. Rents are up 20, 25% from three years ago. Gas prices at three buck 50 for a regular gallon riddle under a 20, 25% above where they were three years ago. And that's what people are feeling and it's one of those things that it's not going to change quickly. It's only going to change over time. As long as this graph continues to hold and inflation remains below wage growth, people will start to feel better, but very, very slowly over time.
And because of the improved purchasing power, you can go to the next slide, because of the fact that people have locked in the lower interest rates, Cris talked a lot about people locking in the low fixed mortgage rates and are more insulated from the run-up in rates because stock prices are at a record high, I think we hit another record high today. Last I looked, housing values are at record highs. People's net worth has improved dramatically because there's still plenty of excess saving built up in people's checking accounts, particularly the folks in the top third of the income distribution. Consumers are doing their part, they're hanging tough and that's what's shown here. This shows real consumer spending. The total is the blue line, spending on goods stuff is the green line, spending on services, restaurants, ball games, travel, that's the red line. Indexed to equal 100 as of February of 2020. So right before the pandemic, you can see the trend line. That's the pre-pandemic trend line. That's the dotted black line. Consumers spending has returned to its, really quickly returned to its pre-pandemic trend and that goes to the American Rescue plan.
It happened in early 2021 and since then they've been right on target doing exactly what we want them to do, spend just enough to keep the economy moving forward, avoiding a recession but not growing so quickly that would cause a problem. The other key result of the moderation inflation, that's key to the economic outlook and you go to the last slide that I want to show Kim, is it is setting us up for lower interest rates. We're close, bit of a parlor game as to exactly when the Fed will start to cut interest rates, but as you can see here, we expect that to occur here in the next few months. The blue line represents the federal funds rate target. This is monthly data, excuse me, quarterly data from Q1 2018. I'm showing you a bit of forecast out through the end of 2025. We have the first rate cut occurring this September, quarter point cut.
I think the Fed has made a strong, to stake out a strong position that it needs to be absolutely positively sure that the inflation is back at target. Now, they don't need to wait until it's actually at target, but they have to be convinced that it's going to target and I think that's going to take another two to three months of good inflation numbers before they're absolutely convinced. So I think the earliest that they'll start cutting interest rates is September. That is now what markets anticipate. The markets are very consistent with that view that we'll start to cut rates. And then we expect the Fed to cut rates a quarter point each quarter going forward. Ultimately pushing funds rate target down to the, so-called equilibrium rate, the R star that rate, which is consistent with policy, monetary policy, neither supporting nor restricting economic growth.
Right now it's a bit elevated because of the interest rate insensitivity of the economy people have locked in. But as you move out to latter, into the mid-part of the decade, second half of the decade, that'll migrate down to we think about 3%. So we're going from five and a half to three over the course over the next couple three years here. You will note that the ten-year treasury yield, the green line is between four and four and a half percent. That's where it should be in the long run and that's where we expect it to stay. Obviously there's a lot of ups and downs and all the rounds in the bond market, and so there's going to be a lot of volatility, but cutting through the volatility we're roughly where we need to be. And so if this, everything hangs together here. The yield curve, the difference between the funds rate target and the ten-year treasury yield should go from being inverted with the funds rate above the ten-year to rightly sloped, positively sloped by the end of 2025 going into 2026.
So again, a relatively sanguine economic outlook, but at the end of the day it does rest on our expectations for inflation coming back in here in a reasonably graceful way. Feel confident that that's the case. That is our baseline. Obviously there's risk to that both on the upside and the downside, but feel pretty good about that forecast at this point. Okay, I'll stop right there. We've got a few more minutes. I think we're going to go to 3:15 Eastern. Cris, Marisa, did you see any questions from the folks that you think would be good to address before we sign off?
Cris deRitis: Yeah, I'll give you a quick one.
Mark Zandi: Yeah.
Cris deRitis: What do you mean by prices coming in? Listener asks, that seems a little unclear. Do you mean the prices will be higher or lower? What exactly do you mean by-
Mark Zandi: Yeah, yeah, yeah. That's Zandi nomenclature. If you listen to the podcast, there would be no question. What I really mean is that inflation will come in and it will come in back to the Federal Reserve's target. That's what I mean by prices coming in, just shorthand makes it less precise. To be precise what I mean is that the rate of inflation will continue to moderate and come back into the Federal Reserve's target in a reasonably graceful and timely way, in our forecast that's by this time next year. On a year-over-year basis, consistent abstracting from all the measurement issues we were talking about, OER and everything else, the straight up, the personal consumption expenditure deflator, what the Fed targets, that will be a two on a consistent basis year-over-year by this time next year. That's what I mean.
Cris deRitis: Got it. Got it. Another one, I think there are a couple here, is of course the election. How do you see the US election affecting the timing of the Fed's first cut?
Mark Zandi: I'm assuming it doesn't. I'm assuming that the Fed looks through the election and once it has enough evidence that we are in fact going back to the 2% target, that they will cut interest rates and they will have that evidence by September. Of course, that assumes a bunch of stuff. It assumes that the economy continues to hang together well, meaning we still continue to see good job growth. Unemployment remains around 4%. There's no financial events. The financial system is operating well. There's no major sell-off in stock market. There's no major global event. So everything else hanks together reasonably so. Having said that, it's hard to imagine that the election won't be on the mind of Fed officials when they're making that choice because obviously if it's, they're going to lower rates in September, that's right before the election, and President Trump will be pretty upset by that rate cut, I am sure. And the Fed will be quickly brought into the political process and may in fact be politicized.
And of course the Fed really doesn't want that to happen. They really want to stay out of the political maelstrom. But they, I think have stated strongly, and I believe them that what the election and anything related to election is not in their so-called reaction function. It's got to be in their thinking, but I can't imagine that that's going to win the day and cause them to wait until after the election to lower rates. Here's the other thing I'd say about that. That's a pretty tricky thing to do as well because look, it's possible that the election results are so close that it's contested and we don't know who the president is for some time. Maybe this thing extends on until we're in December, maybe January it's going to the Supreme Court. What's the Fed going to do with that? Now they're going to be cutting rates in the middle of all of that.
So I don't know that there's a really good time politically, anytime between now and a long time from now for them to cut rates. So I think given that, I think they decide, okay, we've got enough evidence to cut rates. By the way, I would've been, did I say this already? I would've been cutting rates a long time ago, and I saw some questions in the Q&A around OER about why does the Fed even use the OER? What's the logic so forth and so on. I've got an op-ed coming out into the Washington Post tomorrow on this very issue. So I think I'll answer a lot of folks' question in that regard. So you can take a look at that. And maybe we'll send that around when we answer the other questions here that people are posing. We'll send around that op-ed so people can see.
Cris deRitis: That sounds good. Marisa, did you have one that you wanted to-
Marisa DiNatale: Mark, you talked about productivity. There's a couple of questions about that. You talked about that on your first intro slide. How has that impacted inflation over the past few years?
Mark Zandi: Maybe I'll give that to Cris, because Cris, we had a conference yesterday. I missed your session, Cris, on productivity, you were debating Dante D'Antonio, one of our other colleagues, and you're the productivity bull as I recall, but do you want to take a crack at that?
Cris deRitis: Yeah, certainly. So the bottom line is productivity growth would certainly help with the inflation. Actually, productivity growth would help with a lot of problems in the economy in terms of wage growth, in terms of lowering inflation, in terms of helping with the national debt, debt to GDP ratios if we have a stronger growth rate. So that's certainly a real positive we should be championing and hoping that productivity growth picks up. My bullishness is based on a number of factors. I won't get into all the detail here, but we touched on things such as remote work, more flexible labor force. That's certainly, I believe, going to lead to better matching in the labor market. That should lead to some productivity growth.
We, of course, have all the technological innovations from AI to everything else that has been going on. There's just been a lot of investment in terms of infrastructure, certainly semiconductor plants for the CHIPS Act and just private investment in data centers and other broad capital investments that should pay off in the longer run. So for those reasons, I do remain more bullish that we'll see some acceleration in productivity. I don't expect it to go all the way back to the fifties or the sixties, really aggressive productivity growth, but I think it'll be higher than what we saw during the previous cycle. We'll get a little bit of a boost here, and that certainly will contribute to lowering inflation as well. Maybe not so much in the very near term, but certainly help in the short to longer term as well.
Mark Zandi: Hey, I think Marisa, was that a retrospective question? Meaning what was the effect of the weak productivity growth on inflation up to this point in time?
Marisa DiNatale: Yeah, yeah. It was more asking about how has it impacted inflation and the economy overall. There was a question about has strong productivity growth actually been boosted by, have higher interest rates pushed productivity growth up because they've eliminated a lot of weaker companies from the economy? That was one question.
Mark Zandi: Yeah. Do you think... Productivity growth has been one and a half percent per annum since the financial crisis and since the pandemic, I'm making that up, but roughly, which is down from 2% per annum between World War II and the financial crisis. Do you think that stepped down from two to one and a half has had a material effect on inflation?
Cris deRitis: Probably not.
Mark Zandi: Probably not.
Cris deRitis: Something certainly, but more recently we've seen productivity rising. So you looked over the last four years. If you look at the last couple of quarters or last year, you can get a little bit more excited, but-
Mark Zandi: It is really productivity growth relative to wage growth. It's the unit labor costs that matter. So I think wage growth also stepped down during that period, and so the actual unit labor cost growth I don't think was any stronger as a result. In fact, profit margins for businesses jumped during the pandemic, so I don't... Productivity growth, the unit is so-called unit labor costs, it's wages, labor costs relative to the productivity of those workers, and so I don't think that stepped down in that to inflationary pressures during that period. We can take a look at the data, but I don't think that's the case. Okay. I think we are at time. Oh, sorry. What's that, Cris?
Cris deRitis: I said I was a bit more forward-looking than...
Mark Zandi: Oh, yeah, yeah, yeah. Which was good too, which was good too. That's what you talked about at the conference. Oh, by the way, who won the debate?
Cris deRitis: Come on.
Mark Zandi: Yeah. Okay. Enough said. Enough said. Okay. I can't wait to rib Dante. Okay. With that, Marisa unless you have anything else to say, I think we're going to call it a webinar. Thanks, everyone. Take care now.