Surveillance: Quickening Inflation with Gapen

tour of duty at the International Monetary Fund is noted. Michael, I want to talk about the second derivative of inflation, the rate of change. Of the rate of change that we're all living's personified by my favorite indicator, the Cleveland Median is out two point eight standard deviations. It's on

the edge of we've never seen this. What kind of report will we never see in twelve minutes, Well, it could be a really interesting part of this report is we all expect the headline to be driven by energy, gas, food prices, everything that we've been discussing and you've been

discussing on on your show in recent weeks. What we will be looking for underneath that is any indication that actually goods prices are starting to roll over, there are signs use car prices could be falling in the next months ahead, and even new car prices this month we

think might be falling. So we could see a bit of a dichotom here that the anticipated decline in goods prices that we've all been waiting for perhaps might show up a teeny bit in this report, but would be completely overwhelmed by, of course, what would we would be seeing and at the headline level from from energy and gas, whether it's Dallas trimmed or Cleveland Media, and let's go inside those trims. What inside the report will give you

the best indication of America's inflation trend. Wow, that's just I mean, that's I would say. I would point to his service. We we all expect at some point for goods prices to moderate. So the underlying trend, we still think the long run will be driven by the services components, so shelter rent, owner's equivalent rent, and we as we have been discussing for some time, a lot of upward pressure there as well. So underlying inflation over the long

run in the US is about services. It's less about energy, it's less about goods. So that if you if you can strip things away and think of, well, inflation should be moving lower over time, where might it settle in than you'd want to focus on services. The former New York Fed president built down. They came on this program Mike a number of weeks ago and found it was a few months ago, and he said the Fed forecasts

were in fancy land. This is the forecast for growth in twenty two four percent for core pc A two point seven percent. Is that fancy land? Well, the Fed forecast always assume policy works and you get an optimal outcome, which in this case is a soft landing. I've been thinking their growth forecasting me have been too optimistic. Uh, when they were at four, we were at two nine, and now we're at to six. Um. I think you mentioned you were on with my good friend Seth Carpenter

a few a few segments ago. They've been revising their growth lower in the US through down forty basis points. He said, So that four percent number has to come down a lot for a variety of reasons. And yes, they've got to bring that inflation number higher just because of where spot inflation is. I still think the outlook will will be a Goldilocks soft landing forecast. The FED has to kind of forecast that. But yes, I think some reckoning here in the in the data will will

mean big changes in their outlook. Mike, I want to sit on that point that you made. This assumes that their policy we calibrations will work. Do you think that that is in question? Yes, I do, and that's it's

not necessarily a direct criticism of the FED. I would just say that you know, the FED, as as you all know, has focuses on things like core and trim means, and it's a cognition that there are some prices that are set in markets that are largely beyond their control and and we've been getting movements in those prices recently, and we're all constantly revising our forecast higher and saying, oh, yes, the peak is coming, it's this month, it's getting pushed out.

So yes, I think the the ability for central banks to control inflation in this environment without generating a substantial contraction and demand is certainly a question. And Mike, you talked about their assuming and they kind of have to this goldilock soft landing kind of outlook from your perspective, given the speed that we have seen of the increase in cp I and the increase and some of these inflationary inputs. Do you think that a soft landing is

possible at all? I do think it's possible, and I would still say it's probable, but I think the odds of that come down. And in terms of you mentioned the speed of the move and inflation or sorry in the move of prices and in this case energy that

that is important. Some of the work that we've done suggested is more about the speed of the move in oil prices than the level uh and and what tends to happen in cases where where gasoline prices shoot higher in in a very short period of time, consumers don't know what to do, so they pause, and what they do is they stop buying durable So durables is the most sensitive part of consumer spending to changes in oil prices.

And if you look at history, it'll it'll say when when the three month annualized change and cp I exceeds nine percent, we we tend to get major pullbacks in durable spending. That happened for example in the go for obviously echoes of that in the current situation and following Hurricane Katrina, so major disruptions to oil a sharp rise and energy prices, consumers tend to pull back discreetly on durable's purchases. A CP president Christine the Counts just walked

into the ride. Her opening statement before we turn to her her full counts in the Q and ice sction at the u CP my game and we have to come to USA from Barkeley. You've had a bit of time to pull through this one. You'll take you away. Well, it's probably the first time that we've talked in two years where we got a forecast spot on so um, you know, I guess we're happy about that. But look, I think your your main point was, Look, this is a report that came in before the recent conflict. So

the contours were as we had expected. We were looking for gas to be up seven percent, so very much in the line with with what Michael had reported. Their food prices up up strongly, right, this is where the new impulses is coming from. So for the moment, we've got a little reprieve from goods prices. Let's see if that continues. If it does, it will provide some offset from headline inflation, but inflation is not likely to roll over and begin to come down for for several more

months here. So I think this kind of sets the stage for where we are now, and we need to see how long this conflict plays out and how disruptive the sanctions regime actually is. Michael gape In, Honestly, the reaction in mark kids is not that significant. People were prepared for this because you and others got it spot on. How much does that tell you about how much or how little people are pricing in seven point nine percent given where yields are. Yeah, I mean it's a difficult

situation to be a bond trader at the moment. So I think where yields are is is consistent with again medium term expectations that this is going to uh come, that inflation will come down and be back at levels that that we're more comfortable with. That's obviously a bet that the market is making, and one of the reasons they're doing that is because of what the ECB said this morning and the reaction in bond yields in Europe,

what the FET has been saying. It's like, yes, inflation is high, but we will do what we need to do to bring that down. And that's why long and yields are where they are. Michael Gabin, I have hinged on this report for I'm going to say four, if not six weeks. How does this change the question you would give Chairman Powell on March. I think that the

question I would give him is is beyond this? I think the question I would give him is about how do you how do you conduct monetary policy in an environment where the inflation that you're getting is largely beyond your control and uncertainty is has been rising right? And I think the answer to that is, you know, tread carefully. Move. I think sitting on the sideline is an option. I

think they have to move. But when you're in an environment, when you don't know exactly what your policy move is going to bring in terms of response from markets, you have to go cautiously. My cap of Barclays, the team here at Bloomberg putting tremendous efforts to get you the right voices out of Europe and what is happening at the moment. No one is doing that better than Maria today. Let's kind of chat with Maria right now. Good morning, Maria,

Good morning Jonathan. I'm very happy to say I'm joined by the Prime Minister of Stonia. Minister Kallis, thank you so much for being with us. Of course, you have been incredibly outspoken about the Russian threat. You set it from the beginning. This is a real issue in Europe. Of course, now we see there's a word stending now for fourteen days, today's surgery leave of the Russian for a minister acting as if nothing was happening. How can you engage with a Russia that seems to be completely

oblivious to what's happening. You can't, That's that's the thing. They don't have any diplomatic will to you know, find a solution. They are building this narrative that they are selling back home in Russia that you know, the West is attacking, you know, there are biological weapons. I mean, this is now the third story that they are trying to sell to the people to you know, say, why are we doing this? Why are we attacking our Slavic brothers?

And it's very hard to explain really, and you see Slavic brothers because that's that's but that's also a very important point here of course, as a culture that is shared by by Eastern opinions. But I wonder when Sergei Lavrov says, we're not here to talk about a ceasefire. This was not the goal, and the Ukrainian Prime minister hints it's latinerie put In the mix of decisions here and he does not want to meet with Zelinski. How

can you have a diplomatic way forward here? Um, I don't think that they have the political will to have a diplomatic way forward. I mean they want to cause as much damage as possible. Um. It seems to me that Puttin, in poker terms, has gone all in, so he either wins or he loses. And I think it's it's up to everybody to make sure that Putin doesn't win this war. And when you say that Putin doesn't

win the world, what does that mean? That that means that Ukraine, Ukrainians should win this war, which means that we shouldn't give in. We should help Ukraine every way we can humanitarian aid, military aid, political support, so that Ukraine would be able to defend its country. And there's a line of thought you know very well in Europe that says is best not to put Vladimir Putting in the corner because that makes In dangerous. Is that a mistake.

But um, you know, we haven't put him in the corner. But he has still done everything that we are seeing right now, and it's heartbreaking to see what he's doing. If we look at the bigger picture. He has been planning this for for quite some time, I mean in all over the world, I mean creating or increasing it's it's influence, also trying to you know, cooperate with different countries and and and plan carefully this this attack as well, and also you know, having tests like Crimea don bus

Um that went quite peacefully. So probably he had a thought that it's going to go easy overall Ukraine as well, but it's it's not because Ukrainians are fighting for the country and these people are fighting like hell and have been doing this for two weeks. But I wonder when you look at what Vladimie Putting is doing right now, is this an aspiration to return to the old Soviet Union? We know that he said the end of the USSR

was the biggest tragedy ever in Russia. Is it about going back to the U S s R. He has been very open about his imperialistic dreams, so I mean years already talking about these things. Um, so so, and also being very open about not recognizing Ukraine as an independent country. So I think we should take him for his words, what his thoughts and plans are. But it's also up to us to make sure that it doesn't execute those plans. And of course I'm want to ask

you about NATO. Your country belongs to native of course also the European Union. When it comes to NATO, are we going to see from now on an operation that is bigger in number, longer in time, more weapons. Is this a collaboration that will see NATO becoming stronger? Yes, I think so, because so far we have had this

NATO's deterrence poster. But now we are moving to the defense plan, which means that you know, there are different capabilities, how these things work together, how we cooperate with different different troops on different soils, different countries. So, um, this is how NATO should work. I mean the defense plans, because it's a defense alliance, more troops on the ground, and of course, my ministers, just a final question. We know that today there are two big topics. One do

include energy in the sanctions? And should Ukraine be part of the European Union? What's your answer to those two questions. I think we have to give hope to Ukraine and and some really clear political signal that they are part of the European family and they have a way to uh to Europe because they are literally fighting for Europe right now. Um. So this this is we need to

give them some kind of message. Um. What comes to energy, of course we talk about the sanctions and and there is already the fourth package of sanctions on top of it. But what we have to understand that different European countries have different energy dependence. So so it has two sides. One side is of course that we want to hurt the war machine of Putin and and you know, deprive him of of of his income. But the other side is that our public has to support the decisions made

as well. So you don't see a full band on imports. I don't think so No, I don't think so. Well. Prime Minister Callis, thank you so much. Has always appreciated your time here on Bloomer Television. Jonathan Tom Maria fantastic work as always. Going to catch up Maria today with the Prime Minister of Estonia Tom and eight member which shares a border to the East with Russia. Right now, Pierre Truwortz joins us out of the University of Texas

in the combine at LBJ. He is now at the London School of Economic x and Professor of International Relations Peter Chubo. It's one of my iconic reads is Magna Decide of Lse and the wonderful Marxist Revenge. It is a clarion call of modern capitalism. Here's a guy talking about the shadows of Nazism, Denazification and the rest. Hearkening back to the empire, hearkening back to post lenin uss Are and it's all a shambles. What is Putin's theory

this morning? Well, Tom, great to be with you. I mean, look how everyone wants to size up who's Putin's motivations and they range from security imperatives, a response to NATO and EU expansion, to what you're suggesting here Russian irredentism like restoring the glorious Soviet Empire to the autocratic nature of his regime. This guy made a massive miscalculation on two fronts. First, he underestimated Western resolve and unity, the

capacity to respond collectively. And secondly, I think he just thought Ukraine was too fractured to respond the way they have responded, and it's just you know, he's created I mean, it's like a shambles in that sense. Doesn't mean that Russia is gonna lose, it's not going to get anything

that it wants. He's demonstrating that he's prepared to go where people just you just don't want to go, do It' alluding to it the top all of these horrific photos in pictures to bring it to America, Peter, do we need a Ulysses Grant right now? Do you see the West with any idea of the sacrifices required to stop this guy? Yeah? I think. I mean, look that the West is in a You're in a difficult position. You're not dealing with an ordinary power, You're dealing with a

nuclear power. I mean it's guy's like armed to the teeth with nuclear weapons. And so the problem here is to provide sufficient support to the Ukrainians on many different dimensions, but you know, immediately on military grounds, to be able to let them push back and sustain the war effort, but at the same time to avoid things that allow Putent to escalate that give them an excuse to do it. That's why no flies zone, That's why the EU will

probably be very careful in response. And you know at Versailles today and tomorrow over how to respond to the Ukraine's request for expedited membership into into into the EU Peter we heard from yesterday. Certainly markets were hoping for some sort of diplomatic solution that we're diplomatic talks based on what we have seen. Is there any potential diplomatic resolution to this conflict? Do you have any optimism around that? Well? I think you know, I mean, we're all reading tea leads.

I was not surprised by and I'm sure you weren't either by what just the outcome in interur Key this morning here. Um, Look, these talks are important because it's a way for each side to get a better sense of the other side's political resolve and importantly, I think to get clarity on minimal acceptable positions. They all both sides began with their maximal positions, and what I see

is change on both fronts. The problem here is somebody alluded, maybe it was tom earlier and before I came on, lav Rov is not really speaking with Putin's confidence and so that you don't know, you know, exactly anything that he agrees to will be signed off or agreed to at home. But if we've seen two things so far, just let me finish on this point. One is what we're hearing from this to these negotiations but also the negotiations involving the Israeli Prime minister is that Putin is

no longer looking for regime change. Okay, that you know, the Zelenski government has to go. And on Zelenski side, what we've heard is that they're willing to accept some form of neutrality in lieu of NATO membership. So there's movement on both of those things. The problem here is that both sides are making judgments diplomatically based on what's going on on the ground, and that is very opaque. Peter.

Are the sanctions working quickly enough to exert the pressure on Vladimir Putin and frankly on his surrounding circle enough

to really boost the prospects of some sort of resolution here? Yeah, So you know, Lisa, that's like the I don't know sixty four million dollar question, because I mean, the thing is is that what those sanctions require is the Ukrainians to resist, and the longer they can resist for the sanctions to take their bite, and the harder it will be for Putin to convince average Russians and also his selectorate, those very close to him, that the cost of the

war in blood and treasure is worth the effort. But that's the story. It's not gonna happen overnight. Peter Kellis of Estonia joined us in the last hour. She and her nation, with all of her heritage, of her family back to World War One. What level of threat are the Baltic States under this morning? There's I mean, I have reason to be concerned, but the main reason for them to be concerned is not I think that Putin is going to pivot militarily. Um, I don't think right

now Putin. Putin's got his handsful as it is. The danger is inadvertent escalation. It seems to me that this thing just tumbles and in ways that none of us can kind of anticipate. And that's why, you know, I think that the Biden team has been smart about the way they're handling this so far. Most of the Europeans have as well, and you know, but I think that this is this is a real present problem for them that this thing could stand in ways that you know,

I mean just everybody's nightmare scenario. Peter, thank you said as always fantastic catch. It's that of the London School of Economics, Mark Chandler always has plans with Bannockburn their chief markets throughout to just Mark, I'm gonna go big and broad off of your magisterial book where you took the skies and astronomy and the fixedness of the stars into guessing our uncertainties. As Christine Legard has said this morning, the uncertainties are unmeasurable. How do we get a cast

on the stars right now? Given a war in Ukraine? Yeah, what a tough situation we find ourselves in. I think that both the latlinits see uh today from Laguard but also we're going to see next week from the stead of Reserve, is that the net impact of this war is too sort of sharpened both blades. One blades inflation, it's going to raise inflation, and the other blade is slower growth. And that's what we're seeing. The e CBS forecast higher inflation. We could growth will probably get the

same thing from the Fed. Powell gave us a nice rule of thumb. At a recent press conference, every ten dollar a barrel rise in oil prices. He says that a rule of thumb takes list the CPI by about point two and takes off about point one off of growth. So here we are, you know, at with oil at a hundred and twelve dollars, so it's maybe a thirty dollar rally since the war began. Just giving some sense of the ECB headlines, because there were a lot of

them the press conference with Christine Laguard just ended. The ECB forecasts assumes an exchange trade of one dollars and twelve cents, and this comes as a growing number of prognosticators have said that the euro is going to face a weakening trend if there isn't some sort of hiking action or more hawkish action by the e c B. How much do you think that was the reason behind what seemed to be a pivot in today's announcement. Yeah, I at least I think that we really misunderstand how

the ECB thinks of the Euro and oil prices. These are not really forecasts, but these are really the forward rate. And because the interest rate differential is such that I think that there's really no predictive value in here. They're just saying that if the euro doesn't really change much from much recent averages, what would this mean for growth?

What would this mean for inflation? So I don't take I think what happened was that initially the ECB statement made it sound like they were more hawkish reducing the asset purchases at a faster pace. But once the guard got to the microphone, it was very clear that she said this was not the case. It's sort of reminds me of what happens that the last press conference with Powell, the statement elisious stocks rallied as soon as Paul began talking stocks of earthed and sold off. What's the safe

haven calculus right now? Mark Chanleng, just the final question, do you here the safe haven measurement? Here you see swissy move, gold move other safe haven equivalence. What's that dynamic that you see right now? Yeah, so I'd say the gold, but I'd say that most interestingly lately has been the strength of the Australian and New Zealand dollars and the Brazilian currency. And this is as commodity. This is things that can hurt when you drop on your feet.

That's what people are buying. And the other thing I point out is just the Italian bonds spread over German bounds. The Italian bonds have sold off sharply. They the yield, the ten year yield up twenty basis points, the German yield up less than five Okay, we'll have to leave it. Their Mark channel is just a huge news flow this morning, Lisa Brown, what's Mark channel? There? With Banneker, I should say,

this is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine a m. For insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple Podcasts, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg