Inflation Reduction

financial universe. First though, to the markets following the Consumer Price Index data and John Authors, So, John, CPI still up eight and a half percent. Markets ripped after the number. But it's not exactly a low inflation print. No, it isn't. And if we've been told this was going to be the number for July six months ago, even we had been horrified. And it's important not to ignore that it is true that the number came in better than the month before, and that it was better than virtually any

expectation in terms of what really mattered. A lot of the really extreme price moves that were labeled transitory when they began to get going in earnest early last year, now dramatically reversing again. So things like car rental prices, used prices, they're coming down very sharply, and that helps the overall headline number. What I think needs to be addressed very carefully, however, is that if you look at core prices. There are various technical ways you can do this,

but the trimmed mean is a popular one. Exclude the most and the least rising inflation components and take the average of the rest. That's got to seven percent. And it did rise, it rose less than usual, but it's not actually peaked yet. Similarly, the Atlanta FED looks at sticky prices, which takes you a while to change, compared

flexible prices that can move all over the place. And initially this was all about flexible prices, and at the moment, flexible price inflation is coming down and sticky price inflation is still going up, which brings us to the question of whether it takes the impetus for a seventy five basis point hike away. We will have another CPI round and another jobs report. If you look at FED funds contract for the next meeting, it shot up on non

farm payrolls. You went from in round numbers from a forty two about a seventy seventy chance of seventy bits rather than and it went straight back to exactly where it was before the non farm payrolls. After inflation, it's almost exactly a fifty fifty shot whether we get seventy

five or or fifty. So a surprisingly strong employment number gave the Fed more cover a more recent to hike, and this inflation number gives them more reason not to hike if they don't feel like it politically, they don't want to hike in immediately before the mid terms if they can avoid it. They have a better shot of doing that if they hike by seventy five bits next time. And there is no way these numbers suggest inflation is licked.

Headline inflation, including those extreme moves in oil, it would be very disappointing of the peak isn't in for that, but that's not something the FED can actually control that directly. The stuff that the Fed is trying to control is not clearly peaking yet. We're going to talk about the Fed potentially making a mistake in a few minutes with Jonathan Levin. But if the Fed moves seventy five or fifty, how immediate of a mistake would that be if it

were the wrong number. Wouldn't there be time to turn it around? Monetary policy work works with a lag, so it's not as though the economy would immediately tank after it happened, But the market, I mean the markets might. September is often a time when a lot of the Great Market Crisis get going in September history, and so yes, you can you can imagine. I think also in terms of American politics, there is the fact that these mid terms now do look as though they could be interesting,

and that will feed into some degree of volatility. Certainly, if the Democrats held onto the House, that would be a very big surprise, which at least is now conceivable. So yes, the chances of greater volatility in September there we do have Jackson hole. Between now and then, we have Jackson hole, and Powell is going to have to be so careful at exactly and another CPI and another

non farm payrolls. If they haven't managed to get their messaging straight so that they can do whatever they do without shocking anyone, that would be bad management by the Fed. I'm not too worried about that myself. I mean, they don't have much more visibility than we do, and they won't have much more visibility by Jackson Hole either. So it's difficult to know what Powell will make a speech about.

It will have to be something very an adyna well, yes, whether whether he wants to just say forget about the speech I made two years ago when he was going to be an inverse Vulka, but he did say that he was going to try to raise inflation, and boyd did these succeeds on that one. We can at least give him some credit for that one. Just one point before we continue on. You've pointed out this week that profit margins are an expotential pain point. I think that's

consensus pretty much. Well companies be able to manage them. This is the interesting point. This is I have been skeptical about the equity market rally. The one big point that gives me pause as to whether stocks really do deserve to be rising is that margins held up much better than many had expected in the second quarter, and

that does feed into quite a concerning combination. The good news if you're a shareholder, obviously, is that your companies can absorb higher costs and pass them on to consumers. The bad news for your consumer, or if you're a central banker, is that that means inflation is likely to continue to go up. It also feeds into a narrative that could be pretty bad for public companies and their shareholders. I that the inflation is being driven by corporate greed

and rapacity. That would be one of the many reasons why inflation is going up. And they could be very very nice to the rest of us and helping price inflation come back down by voluntarily probits. But you know, it's just just to make clear that if you're complaining about them, this is what you want them to do. But it is a real issue, and a good populist politician can make a lot of hay with it. And the populist politicians are on both wings of politics as

long as they're not getting funded by these same companies. Well, there is that. We're also now joined by Jonathan Levin. Okay, so Jonathan Levin has joined us in studio. Jonathan. One of your columns this week or several of your columns, talked about inflation volatility and how that's actually the more important thing to watch. It's also very difficult to compute. Yeah, exactly. The problem with high inflation isn't necessarily that it's high, but inflation that tends to be high also tends to

be unpredictable. The models stopped working very well when we're in a regime like this. You know, in a perfect world, if I told you, Vanni, that inflation was going to be five percent next year, then you could adjust the cost of your goods and services accordingly. You could raise wages for all of your workers by five percent, and everybody would go about their business and it would be

no big deal. But when the models work as badly as they're working today, and you know, I don't mean to pick on anybody, the Wall Street models have stunk, the FEDS models have stunk, and just in general, the way that we go about understanding inflation has not worked very well for more or less the last eighteen months. So what does this mean? These hard decisions for households and businesses, they're taking them without very much visibility at all. Well,

and Donald there is pipe. Sandra's team did have another piece about inflation politility this weekend. It's high, they say, it's as high as levels of the nine seventies and nineteen eighties. Does it matter for real activity, as Jonathan evince, as it does. Yes, it does, because metaphor often used it. It throws sand in the wheels. It adds an extra layer of uncertainty, which more or less requires that you

meet it with some degree of of wastage. It's in the same way that if you're nervous about a storm coming, you're just going to have to have more in inventory than you'd you'd prefer to have to be safe. If you're really not sure where prices are going to be in another six twelve months, your behavior is going to be less predictable and it's almost certainly going to be

less efficient. So we should take confident in the fact that New York Beds inflation expectations data showed that they're coming they're coming down a little bit at least on the part of the average consumer. But we're waiting for you Michigan data to tell us a little bit more about that. But that plays very much into overall inflation volatility. Right.

Jonathan wrote a great column on Michigan expectation. It's a little bit like deciding presidential elections by getting galloped, go away into a pull and tell us who one do you think those inflation expectations surveys really merit the weight that's put on them now. Well, the trouble is that a lot of economic research about inflation over probably the past twenty years has has found that inflation expectations are very, very important. We just don't know how to measure them.

We have very little confidence in our ability to understand how consumers and households form their inflation expectations and to measure those expectations in real time. And yet that was the whole impetus for the fed's last move. So the question is to what extent is the FED still flying blind? Jonathan Levin, I think they were playing relatively blind. I mean, look, the situation is that we've had good reports in the past. Right in the summer of one, it really looked like

we had turned to the corner. But one good report does not a trend make. Frankly, three good reports does not trend and make. I will take one and I will hope for the best. You know, two or three or four months from now. I would say at least the FED cat now takes some degree of confidence that the really extreme transitory effects that followed the pandemic are now dying down. Having been somewhat less transitory than everyone

had hoped, they have still been transitory. So there's maybe one area of unpredictability that's been taken out of the situation. But I think the critical point, I think it is very likely that the headline inflation peak is in because of all those extreme oil and transport related things. So that's not what really matters. It's how quickly does it

come down. If it's still at four and a half five percent at the turn of the year, everybody's going to be demanding much more in the way of wage rises than they would be if it was two and a half percent at the end of the year. Is it fair to say, and I'm asking you both that recession is the base case for the treasury market and still is still with an you know, that's one reading

of the yield curve. Another reading of the yield curve, as my colleague Bob Burgess pointed out, is that the Fed is going to get the job done right and and and that's why tenure yields are significantly lower than say, two year yields. You know, for me, for six to twelve months, my base case has been if there's going to be a recession, is going to be because of

the FED. Right, So on the margin, if you think that this lower is your probability distribution that they're going to go higher this this most recent report, then you know the probability of a recession has dropped slightly in in the past twenty four hours. And the possibility of a soft landing, which I hit ticked down to pretty much zero at one point, is I still don't think

it's likely, but it's possible again now. But Burgess's column, as you mentioned, Jonathan Evan also though, ask the question of whether the yield curves predictability has been diminished, john Authors, would you say that that might be the case these days? Like inflation expectations, Another number that's incredibly important but totally impossible to measure in real time is the term premium.

Most sensible measures of the term premium, the degree of uncertainty you factor into your future prices, suggest that the term premium has never been lower, which would in turn imply that people really aren't worried at all, which suggests in turn that something very strange isn't he going on in the bond market, because that's not the case there. They're plainly are some very strange liquidity issues going on

with the bond market. That said, of all the markets that are out there, the one I would be least confident betting against would be the bond market. You don't dismiss it lightly, even if you do say, well, maybe this isn't as strong and indicator as it appears. It could be an indication of safe haven flows though known

Jonathan Levin this low term premium, Yeah, certainly. I mean there's a lot of risk out there well, and managers have to do something with their portfolios it well, yeah, and and and also there's there's a shortage of safe assets. Particularly Eurozone bonds would have been regarded as interchangeable with treasuries fifteen twenty years ago, post their sovereign debt crisis.

Whatever the rating agencies say, you're one degree more nervous about BTPs or French bonds than you are about treasuries, so they have more scarce the value because there are fewer apparently risk free assets out there. I guess we'll finish with this one John Authors, How does policy change affect the inflation picture? So we have the Infrastructure Plan but also the Inflation Reduction Act now, but it's been touted as inflationary and anti inflationary, depending on where you're standing.

I personally doubt in the short term you'll have minimal impact on inflation. In the long term, if the money is really well invested, then in the very long term it will indeed reduce inflation. If it's wasted, it will increase it. Their politicians and they call it that. I don't think it's a particularly relevant concern. I think geo political issues really matters. So if the Ukraine Russia war, which is steadily convinced us that we can forget about it in the last month or two, flares up again,

that's an issue. And obviously some of the scenarios coming into the Taiwan Street would change things profoundly. John Authors and Jonathan live in Well. The data is in New York, London, Hong Kong. They may not be the centers of the financial universe anymore. We're joined from Dubai by a junta Vetti and Janie. You looked at the data and found people are actually feeling quite differently these days about the

so called traditional financial hubs. Tell us a little bit about what you found in traditional financial hubs of New York, London, and Hong Kong top the list of financial centers as the historics we have because they have deep capital markets, regulatory infrastructure of financial plumbing, and they've created an ecosystem of workers around it. Now, the ecosystem of workers that get paid relatively well also means that the costs of living in next in these places goes up relative sil

go up, schooling, everything else around it. Generally costs are However, when you look at the flips out of that on the quality of living in deex events very low. And that's always been the case. And my conclusion from this is really that over the last two or three years, as they've lived to COVID works from home, people have realized they don't need to be people even commuting to the city or doing various things. They don't necessarily want to do that, and they don't necessarily feel the need

to do it. And therefore we've seen things like mass trends and employment or other unemployment of the Great Resignation, and increasingly people want to be in different places and care about the way we live and want to live better live. Yeah, and interestingly, we have seen movements of certain firms. You know, they've been moves to Nashville by some firms, even their h Q. And then there's been office openings in places like Miami and West Palm Beach

and in Britain outskirts cities like Birmingham. But it's not clear yet whether these cities will be able to handle the influx of these financial workers right or is it well, it isn't clear. But I think more broadly we need to be ready for and what employers and businesses need to be ready for that. You know, we need to have more spread out centers. You can't have a concentration

of workers because that's just not going to work. And how you manage that in terms of you know, would you rather have employees leave and then have a cost of rehiring in the cost of looking to the talent again, or do we accommodate people workers across different areas. And this doesn't mean that people need to be going and working on a beach. You know, they can be in places where there's enough potacity a center of gravity in those regions. Is it the case that finance brings some

of these problems with us it does? You know? I mean that is the caveat There are licensing and registration and all these issues that you know are constraints. However those can also mean depending on the city you choose, in the places you choose, those can be worked around. And I think ultimately it really comes down to understanding flexibility in its true sense. It doesn't have to me a black or white issue. It doesn't have to be

always work from home and never work from home. But I think our understanding of the workplace has gotten better and I do think there's advantage would be in the office. That said, which is why I think, you know, if it's more convenient and if people can work in teams and being offices, there needs to be different types of arrangements and I think it also depends on new sectors

and finance it can work well. Interestingly, we saw a sort of many example of this post Brexit, right we were wondering if firms would leave London, if they would need to leave London, and we definitely saw a move towards places like Frankford and other places where regulators are based, but London still held onto its status, at least so far, especially in the FX world. For example, you're in a

place now which might be a burgeoning financial center. Tell us a little bit about Dubai and now, Dubai is one of those places where if they've maintained being commercial through the pandemic, they've maintained air travel very well. They've

had plenty of housing, plenty of schools. It's kind of developed with the times, as you will, and while it has its own set of shortcomings, I think the more and more speak to people who've been here for the last ten years or who were here twenty years ago, it's become clear that has places attract talent, those places become central to how we think about them. So, you know, if we have more financed professionals who's been in many other places here, the quality of human capital close offs,

if you will, Will it become the foremost financial center. Unlikely, because we're still competing with the life of New York and London. And London you know facts, as you mentioned, it's the center of the world. It has the deepest capital markets, but it's still had its issues in that right. People have still been able to arbitrage that and get around that. So it's the question of how we think about it. You know, regulatory oversight is also very very

valid and important. It's a fairly vague framework. Well, you looked at the mercer quality of living in the and found that thanks to sky high rents and so on, which continue to go up. And it's not just New York, it's all over the United States. New York was forty four on the list, London was forty one on the list, and the city's the top of the list for places like Vienna and Zurich, and they're very developed places, but polity of living is extremely high. So why wouldn't it

be an option. I would ask employers and businesses to have a small huts there. No one saying have the headquarters there. But you know those those are things that people need to consider. The regulators need to think about it and to work in trandom with businesses to see what can be set up. The things do need to develop,

and of course we need guardrails in place. However, it is the time for us to reassess if we want to keep people in the workforce, then this is perhaps of time to be thinking about how to make things better and keep the workforce productive on Janet Travetti. By the way, do get in touch. Comments and opinions always welcome at Vonley Quinn on Twitter or email v Quinn at Bloomberg dot net. Now to Jonathan Bernstein and the

Weekend Paul Tics. So, Jonathan, we're definitely going to talk about the primaries, but with all of the theater this week, it would be a miss not to begin with Mara Lago and also the pleading of the fifth by the former president just theater or may this have some kind of an impact on voting on people's preferences? You know, my tendency is to guess that things like this will

not wind up having electoral effects. People vote for all sorts of reasons, don't vote for all sorts of reasons, And it's it seems unlikely to me that something that happened to Trump the former president in early August is going to have a major effect on whether people choose to vote or not. I would guess that things like gasoline prices and the pandemic and inflation and jobs more generally and highly sailing, and issues like abortion this year are going to have more effect on voting than this

kind of thing. It's very important. There's all kinds of important things about what's happening with Trump and the law. I'm not sure that it's going to have effects on elections or for that matter, perhaps elections right, and we are seeing abortion rights becoming more of an issue at the polls. But just to tie an in other aspect of things, is the picture getting any less muddy about whether the former president might actually see charges, whether Mary

Garland will actually prosecute. I try to not speculate too much. I would say it does appear that justice from it is taking the entire range of things that Trump has been doing pretty seriously. He also has the issue down in the Georgia judicial system where he's under saw. Of course that the thing in New York State, which is now a civil procedure not a criminal one. There's a lot of trouble that he's in and couldn't indictments absolutely well, at the very least. It has to be taking a

lot of his time, right. I mean, there's a lot of chatter about whether he will announce, should be announcing, is about to announce, will not announce, But he's spending a lot of his times and meetings with lawyers. That's true. You know. The truth is Donald trumpson running for president every day since he announced in He never stopped running between when he was president. He in fact, you know, formally announced right when he became president. But formal decisions

about that kind of thing are not that important. What matters is what is the candidate actually doing, and Donald Trump has been doing all the things that presidential candidates do. The political scientist Josh Putnam calls it, he's running four.

We don't know yet whether he'll be running in Yes, putting In that said, we got another round of primaries, and it does seem like the picturer is getting uddier in the sense that it's not going to be a slam dunk now for Republicans like we might have thought. In the House, Yeah, the Republicans are almost certainly going to wind up with a House majority. Even now when there's a democratic president, Republicans do well in mid arms

and vice versa. It's very rare to get otherwise. And if you add to that a president who is not popular and Biden's right around approval rating which is very low. But even if he got up to the incumbent party usually loses seats at the mid terms. There's some reasons to think that this might not be a particularly good year for Republicans. They were hoping that it would be. It still may very well be, but there's some indications

the other way. So the generic ballot, people ask do you intend to vote for a Democrat or Republican for the House, or sometimes they ask would you rather have the Democrats or Republicans have the House majority? That question is basically tied right now. Republicans had opened up a small lead than that's dissipated, perhaps because of the abortion decision. It's certainly coincides in time with the abortion decision, so that's an indication that Democrats may not be doing that badly.

We look at the last couple of special elections for House vacancies, one in Minnesota and Nebraska a couple of weeks ago, and the Democratic candidate beat the partisanship of the district probably by four or five six points in both of them. It's hard to be certain. We don't have absolute numbers of how partisan the district is. It depends on which elections you count and over how many years,

So it's it's not always easy to assess. You know, we know that in the Minnesota district Republican one by four percentage points. We know, you know how Trump did in the last election there, we know how the last House race went. But how do I add it all up to a real partisan balance is more art than science in some ways. How big should the Republican lead have been? Maybe around ten points but perhaps last Yes, very hard to know. And also we're still very early

days and can't forget that. Yeah, the more extreme Republicans that are winning their primaries. Is it possible to come to a conclusion and whether this is a good thing for Democrats or a a little thing for Democrats? Oh, I think that there's no question that Republicans are nominating a bunch of very risky candidates, mostly in statewide races.

And in fact, it looks like the Republicans could very well be giving away Senate majority because they've nominated a series of Trumpists and extreme candidates, and in Arizona, in Pennsylvania and Georgia and a few others, they've just done a terrible job in either who the voters chose out of the choice available, or more to the point, who ran in the first place, with a lot of mainstream candidates who most experts thought would have been strong candidates

decided not to run at all. Yeah, it's difficult to know what the g o B is doing right now. What the plan is? Is this plan? Well, I think you know, you take Trump, who has strong beliefs about maintaining his influence in the party, and that translates for him these days into running on the idea that the the twenty election was rigged, which is not true and which most voters don't care. Voters care about price of guests,

they care about whether they have jobs or not. They really don't care about, you know, these crazy stories of how fraud supposedly happened in even if it really had happened. Unfortunately for Democrats, most voters don't care about the opposite things. They don't care that Trump tried to overturn the election, even if they were to believe Trump's lies about it, that's not what's on the top of their mind. So

that hurts Republicans. And then more generally, you know, if you think about the reasons that people run for office and want to be politicians, the Repolican party doesn't respond to most of those things, but they're probably party right now. Is is a whole bunch of people who want to go on Fox News and you know, become famous in that sort of media world, and people who are willing

to do what Donald Trump tells them to do. And you know, there's not that many people who want to be politicians who want those things, and a lot of

them aren't particularly good politicians begin with. So if you think of like motivations, why did somebody get in voluming politics, Well, there's something they see in the world that they care about changing, typically for Republicans, and something like you have Tom DeLay's origin story that he was an exterminator and he was really upset about government regulations that made his business hard to do in his view, and that got him,

you know, involved in politics in order to lessen government regulations. That's a reason people get involved, you know, because they want to change policy. But the Republican Party isn't really about policy. It's about crazy stories about voter fraud that didn't even happen. Another reason people get involved in politics, it's actually a good reason, is because they want power. They want to be in charge of things, and the

problem is in the Republican Party. Now, in order to get anywhere, you have to first go down to wherever Trump is and get on your knees and then beg him. And most people who want power don't really enjoy doing that sort of thing. No, that said, you know, you just mentioned policy. We have had a huge amount of

policy actually enacted in recent weeks. Obviously there was the Infrastructure Bill, but also now we have the Inflation Reduction Act, which came a little bit out of the blue, given that we thought it was older and it's it's essentially Joe mentions bill. I mean, he sort of chose what got put in there. In Christian cinema had a bit to do with it at the end as well. I mean, a positive thing for American democracy, Oh absolutely. I mean, look, it's not my job to say whether it's a good

bill or not, whether it's good public policy. But the fact that the Democratic Party in this case, it was just Democrats are negotiating our cunning deals, are responding to points of view, you know, at the points of view are are not popular ones, and coming together to address important problems in the world. That's good that the system

actually can work that way. And we saw that not only in the I can't take the name seriously, it's the Climate Health Bill, but also Joe Biden signed into law this week the burn Pit Bill for Veterans benefits and the Chips and Science Bill, which supports the semiconductor industry and funds basic science. And both of those got

some Republican support in the Senate. They weren't sort of true bipartisan bills because they didn't have a majority of both parties, but the ten Republicans who were necessary to support in order to defeat the Republican filibuster did so. And we also had a real bipartisan bill, NATO expansion. The Senate had two Republicans didn't vote yes on that one. So there's been quite a bit of legislating going on.

It could do something Congress. It's actually one of the most productive of Congress is in the last fifty years. Maybe not the most, but it's among those that. Yeah, yeah, there's a lot of fights about, well, what counts as a big accomplishment. You know, it's interesting though, Jonathan, we don't even ask anymore, what will bump to President Biden's rating. Yeah know, there has not been a real correlation over time between whether voters approved of the president and how

much legislation gets done or how much policy gets done. Generally, people care about if the price of gas is high, they care about that. If jobs aren't plentiful, they care about that. They don't really pay a whole lot of attention to things that passed in Washington, even if it winds up affecting their lives. You know, a lot of people are going to get healthcare subsidies within the marketplace plans.

They were established earlier in the Button presidency, and now they're going to be extended by this last till people have just moved past that, and that's not what people base their votes on. Jonathan Bernstein there, We are now choosing to end all conversations not with you, though, as always we'd love to hear from you at vaney quint on Twitter, or send your thoughts to v Quinn at

Bloomberg dot net. And don't forget we're also available as a podcast on Apple, Spotify, or whatever platform you prefer to get your podcast on. We're produced, as always by Eric mollow Till next time on Bloomberg Opinion, The Belove