00:00So what's your take on this bang-and-line CPI print?
00:03You can see under the hood there's disinflation coming from energy
00:05and there's some inflationary pressures coming from housing and elsewhere.
00:08Well, first of all, when you look at an employment report or a CPI report,
00:12the truth is CPI is almost always what the analysts think
00:14because we have a lot of data going into it,
00:17which just makes it very hard to have a big surprise.
00:19So not surprised that we're not surprised.
00:22Having said that, I think there is a clear disinflationary trend.
00:25There are a lot of cross-currents, a lot of cross-waves in the data this morning,
00:29things like airline fare is up, tobacco prices not moving as much as it did last month,
00:37differences in medical commodities and services.
00:40But beneath it all, I think there are a few things to bear in mind.
00:42One, we're going to have lower tariff costs going forward than we've had a year ago
00:47because the new tariffs are not going to fully replace the EPA tariffs.
00:50Second, I do think that eventually oil prices will come down
00:54because eventually there's only one solution to this thing
00:57and everybody's always going to get out of the straightforward moves,
00:59and I think it will.
01:01But the biggest thing to me is this is the fourth consecutive month
01:04in which wages have gone up by less than CPI inflation.
01:063.2% year-over-year on wages, 3.4% on CPI.
01:10And what that tells me is American workers can't get a raise.
01:13And if they can't, you cannot have sticky inflation.
01:16We've essentially got Teflon inflation in America.
01:19It won't stick, and it won't stick because you've got this,
01:21you can't get a price-wage spiral going if the wages won't react.
01:24But we haven't seen inflation coming from the labor market for a while, though.
01:27This has been coming from one supply-side shock after another,
01:30and there have been many consecutive ones.
01:32At a certain point, when does it stay sticky?
01:35Like, how do you define sticky?
01:37It's been more than five years, and so it really hasn't been lengthened by that week.
01:40Well, it's been more than five years on a year-over-year basis,
01:42but it takes about a year to fix a year-over-year problem.
01:45That's the first thing.
01:46So if you actually look at it on a three-month basis,
01:48there have been plenty of periods where inflation has fallen below 2%
01:51over that five-year period, it's just on a year-over-year basis.
01:54As you say, we've had one supply shock after another,
01:56but they've been, you know, COVID and the policy response.
01:58We had Ukraine.
01:59We've now had the Iran war.
02:00We've had tariffs.
02:01All, you know, most of this is actually,
02:04most of it, apart from the Ukraine war, is policy decisions.
02:07I mean, you know, the inflation we have right now
02:09are policy decisions on immigration, on tariffs, on the Iran war.
02:14Or if we back off, and I would even think that with more divided government next year,
02:19quite possibly, we will back off on these things.
02:22I think inflation will gradually come down.
02:24I think the wise thing for policymakers to do here is just let it happen.
02:29It's going to work slowly.
02:30That's just how it's going to be.
02:31When you say policymakers, you mean Fed officials.
02:33Do you think that the Fed should stay on hold?
02:34Absolutely they should stay on hold.
02:35I actually think they will.
02:36I mean, I think I noticed just after this report,
02:39we just saw a further just slight decline in expectations for a Fed rate hike.
02:43And, you know, every confirmation that we're on a downward path,
02:46I know it's not coming down as fast as anybody would like,
02:48but you can do no good by trying to hurry this process.
02:50There's some, you know, it's like an injury.
02:52It just heals slowly.
02:53And if you try and speed it up, you're just going to mess everything up.
02:56So we have an inflation problem, which we're going to heal slowly here.
02:59Right.
03:00And if the data is coming in either bang in line or a little bit softer,
03:03like it did last month when it comes to inflation,
03:05then why do you see more Fed officials becoming more hawkish?
03:08Well, I think they want to sound hawkish,
03:10but ultimately I think they have a real communications problem.
03:13I think that they are on entirely the wrong track by saying we're going to communicate less.
03:19And so I think right now there are various...
03:20Well, it's only one.
03:21That's the Fed chair.
03:22Well, yeah.
03:22But I think it's important that the Fed chair try to reflect the consensus on the committee
03:28and tell markets about it.
03:30So I think the Jackson Hole speech that Kevin Walsh is going to do at the end of this month,
03:34that's very important.
03:35Because I think at that point he's going to have to back off a little bit from his very aggressive
03:40rhetoric
03:40and say, you know, admit that they're...
03:42And acknowledge that there's some progress in inflation.
03:44It's not as fast as we'd like, but there's some progress.
03:46And, you know, there is a cost to everybody in raising rates if you don't need to do this
03:51and if it's healing on its own.
03:52Do you think that if the Fed did raise rates,
03:54that would actually take control of the long end of the yield curve a bit more,
03:58that that will create a better financing environment
04:02because it could suppress some of the concerns about Fed credibility
04:05and longer-term inflation taking hold in the system?
04:08I think it's a close call because the other thing is that if they do that,
04:13then what's to say they won't also then start attacking the balance sheet?
04:16And the one thing that's going to push up the long end of the yield curve
04:18is if you try and pull down that balance sheet.
04:20So I think that would be a kind of mixed message.
04:23You know, ultimately, I think the most important thing
04:27in deciding inflation expectations is how long does it take us
04:30to get to a settlement in the Middle East,
04:32some sort of settlement that allows traffic resumed there.
04:35Does it really matter whether the Fed hikes rates by 25 or 50 basis points?
04:39Because pretty much everyone who we've talked to
04:40say that the fiscal stimulus that's coming from all the AI companies
04:43that keep doing all this capex spending
04:45is insensitive to where the Fed funds rate is.
04:48It doesn't matter for the economy.
04:49It does matter for markets
04:51because there's a lot of leverage in the system.
04:53There's a lot of leverage bets in financial markets right now.
04:56You increase the cost of leverage.
04:58That could help the markets hit a peak and come down.
05:03So I think it could.
05:04And I'm not saying the markets are too frothy.
05:08But again, there are other things we probably should be doing
05:11to try to rein that in rather than just raising interest rates.
05:15So you think that it really is a financial market response
05:17to the rate hikes that could potentially be problematic
05:19because of how much leverage there is in the system?
05:22Absolutely, yeah.
05:23And if you do hike and you've got higher short-term rates,
05:28then the temptation is to move to a little bit more safety.
05:31And that could take some of the wind out of the market sales.
05:34So that's where I think you'll see the response.
05:36Interest rates matter for financial markets.
05:38Honestly, they don't matter that much for the economy anymore.
05:40They do and they don't they don't list ,
05:40certainly doesn't matter what they're looking for.
05:40Did you receive their attention or anything for success?
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