Surveillance: U.S. CPI With Furman

Economic Advisors. Jackson. Wonderful to have you with us at this moment. You're gonna tell me as a public policy type that we need to see more data that we need to see two or three months data. Does President Biden and others wait for that data or must they adjust to this report? Ok? I think the main people who need to adjust to this report, adjust to the job's report we got last year is the federal Reserve.

The other part of it is looking at what we can do in our economy to address the biggest thing we have, which is a constraint on supply. We need more supply. Shots and arms are doing a lot. My guess is there's a lot more people are working in May than in April. But when you take this plus the jobs report on Friday, plus the totality of the data, I think we have a very different picture of the economy right now than a lot of people held a

week ago. It's a different picture of the economy. Vice Chairman Clarata will speak here and I believe twenty four minutes. Does he adjust Is there one word or one sentence that will begin a tone of a Federal Reserve shifting their language. I don't know. I mean, they're very big on this being transitory. A lot of this is transitory. We saw a ten percent increase in the youth call is in trucks market in April. Okay, but Jason, Jason, I don't want to interrupt you, but I'm looking at

rentals in New York City that are not transitory. Is Michael McKee just mentioned higher rents are real not transitory. Oh? I agree. I was gonna say, you are going to be able to point to things that are transitory. I think your best guest has to be that this isn't entirely transitory. The FED and others have rested a lot on inflation expectations being anchored this is the type of thing that's going to start to move those inflation expectations.

So yes, I think the problem is you can point to all sorts of chransitory things, strip all of those out, add in what we know about how much demand we have in our economy, how little supply we still have. Uh, you know, I think this this there's some caution and

should change the way people are thinking about the economy. Jason, what do you think that means for the relief package we passed just a couple of months ago, when Larry summer Is another court including Olivia Blanchard, came out and said it was too big for the moment we're in. Do you think this is evidence of that? But it was definitely too big for the moment. I don't know any economist that was recommending something the size that what was done. Um, the question is how big the downside was.

I wouldn't leak to a judgment yet on the basis of April. This is one month's data. The data are obviously extremely noisy. We knew as the economy reopened there would be all sorts of patches along the way, rough patches along the way. But you know, I think there's a you know, a certain amount to that logic, and let's try to do what we can to make it not true. How do we make Larry's prediction not true? We increased labor supply and the FED is a little

bit more cautious to help keep inflation inflation anchored. Jason, can I get your thoughts then on what happened on Friday when we saw that big miss, and we talked about the supply side story and the mismatch between demand a supply, and the maybe prices would need to adjust. Arguably is view pointed out. We saw that in wages already and we could see that a whole lot more

in months to come. Some governors of Republican states have decided that they need to remove the additional UI, the unemployment insurance that was offered by the federal government and the package that was delivered recently. Do you think that's the right decision to fill that gap? Yeah, So the big miss on Friday was wages. The expectation for wages was zero point zero percent. The actual number was zero

point seven percent. Even that actual number understated what actually happened because of composition effects that the real number is probably more like zero point nine percent UM. Either way, that's the fastest wage growth we've had since the nineteen eighties. So you're not looking at you know, one isolated data

point around used truck. This is everywhere around us. If I were in a state with a three point five percent unemployment rate, I'd be thinking seriously about whether UM paying bulmore to not work than to work was a good thing to continue doing. Jason lost for words that even agreement with Republican governors. Then in places like corkinsil Iowa, Montana, South Carolina, you know, it depends on where you are in the virus. It depends on where you are in

your unemployment rate. But by certainly by June July August of this year, I don't think we need the same UI system we had in January. In January it made sense three thousand people were dying a day. We did. We wanted to give people an option other than work and support them in that option. UM in an increasingly hot labor market for a lot of states, it may not make sense. It may not make sense in the same way. So I think they should be taking a hard look at it. Dr frem and I just did

a study here. Thank you John for extending that out because I was working the Bloomberg terminal, Jason, I did a standard deviation study on a monthly basis. Of course cp I back to the time of Paul Boker, maybe around I can find a jump condition in course cp I like we see now we do interview after interview or experts like you say, it's about the jump that we see an inflation. Right now, we're seeing a jump that I would suggest is near original. How do should

we respond to that? Yeah, I mean the economy is gonna do weird things. We saw a collapse that was um, you know, historic last year in prices. We're seeing. Some of what we're seeing now is the unwinding of that. Some of what we're seeing is different sectors come back at different paces. So I wouldn't leap all the way to where, you know, we're not worried about inflation now, we're worried about hyper inflation. It's going to be zero point nine every month from now one. But what I'm

saying it's just a recalibration of views. Discount the data a lot because of the weirdness. Don't discount the data all the way. You should update your views. How do you think that meeting in the White House changes later between the Big Four and the President of the United States with this inflation data this morning. Now every single market participant, every economist will come on the show today and talk about it only being one data point. But

that's the data point. I imagine that the Republicans will be talking about all day going into that meeting in the White House. Lank, Yeah, the meeting is there, and that's a political discussion. It will be emotional like Gasolene and all that. I'm way more interested in people like Jason Furman, and I would go to the Vice chairman where particularly if he does Q and A, John, that

will be fascinating. We get the Q and A in about fifteen minutes today, Jason, just to find a one from me before I have to run your view on that. How the Federal Reserve will talk about this when we hear from the Vice chair in about fifteen minutes. What would you anticipate What do you expect them to say in the coming weeks off the back of this data. I would expect them to make very little in the way of adjustment. I would expect them to emphasize this

is transitory. Some of the quirkish parts of this, like um use cars and the like. I'd love to see them Tilton notch towards concern about inflation, but I think they'll mostly I'll be doing more to explain this away than to express any concerns about it. Jason Furman, let's do a little bit of a history lesson of the shock here, and I went back to Neil Dutta talks about the biggest one month game since June of two

thousand nine. Dr Furman take us back to the sixties, and Robert Samuelson at the Washington Post has written about this the time of Walter Heller. What did they do in the sixties about the inflation shock and trude should we use that as a template. First of all, they did a lot of emphasizing one time factors and micro stories. You know, there's this segment is doing this, that's a mint is doing that, um and they missed the bigger macro forces what was going on with fiscal and monetary policy.

So number one is, look at the macro, don't do each try to explain away each one of them micro um lesson to that which I think is a good one for us. It took years and years and years of a policy change to get us to the place we were at in the late sixties. We've just been through a freakish pandemic. We've just been through a highly unusual period of policy. I don't expect policy uh too. I don't think there's been a huge regime change. I think we'll go back to the old regime and this

should hopefully all stay under control as a result. But we do need to get back to a little bit more of the old regime for that to work. We certainly heard that from young Hotzi yes yesterday, folks of Goldman Sex. Then I look at what wages will do, and there's a phrase from ancient history, Jason Furman, a cost push inflation. I don't observe that anywhere. Am I wrong? Are we gonna redux the sixties and seventies, I should say, and cost push inflation? Where we have to whip inflation now?

I mean we just seven in April, wages were up by about zero point seven zero point nine, depending on how you look at the number. Prices were up by that same amount. You know. Again, I mean, we obviously don't want to read too much into any one data point. But unless people start heading back to work in bigger numbers, we're gonna have concerns now that should happen, should happen no later than September when unemployment insurance expires, but you

know it needs to happen. Jason Furman, thank you so much, greatly appreciate it. With Harvard University, UNI, course of Peterson Institute, we're all Marcus, Marcus markets, John, I'm gonna go to the real economy, like Jason Furman, jobs formation and that you wonder if a little bit of rising inflation finally helps people in a booming g DP economy eight percent, whatever the number is. So that's attention, folks, as we go here twenty five minutes from now on the financial

aspects and the asset aspects, the real economy aspects. No one better to dovetail those two together than Alicia Levine of b n Y Melon always writing smart. And what's so important about Alicia Levine is really looking almost at a strategic basis of where we are. Given this rising inflation. You talk about a regime change. Alicia in America described

that right. So look, we we think that When the new administration came in, it was really focused on Main Street versus Wall Street, and I think the policies that have flowed from the fiscal side and frankly for the monetary side, really are creating that. So, as you've said all morning, you know, a little bit of inflation is actually quite positive for main Street. You get higher wages, you get some pricing power, you know, you get assets moving higher, and in the real economy that's not such

a bad thing. It tends to be terrible for equity markets, particularly in the long duration assets, as we've seen in the last couple of days, where the tantrum really was in the equity market and not in the bond market. The equity market is telling you that their inflation fears all over the place for investors. So, look, we think there is a regime change, So higher growth, higher inflation,

that doesn't mean, you know, terrible inflation. It does mean, though, that higher than it was in the post global financial crisis, and therefore higher rates eventually. But right now we're seeing we think, we think it's sustainable. We don't think this is a sugar high. Okay, it's very clear it's not a sugar high. It's literally a regime change. You've got fancy degrees, you're expert at the mathematics of the financial system, and you and me what in common. As we started

out dishwashing. You had a love affair with the Hobart dishwashing machine at a camp years and years ago. Let's talk about the real world effects of this inflation in the old days that meant rising wages. Do you fold that into your strategy or is this time different from when you were running a Hobart. So so those were great days, and actually I didn't get paid at all. So yes, there's inflation for those jobs. But look, there is clearly supply constraints in the labor market as well,

which is what we learned on Friday. Wages are going higher, and they're going higher because we don't have as much slack in the labor force overall, even if you strip out the extra unemployment benefits, which of course are a

downward pressure on on labor coming into the market. But if you think about the expedited retirements in the boomers and above, you think about the fact that two million women have simply dropped out of the labor force, probably because schools are not open by the time those schools open. You know, it's been eighteen months that people are disassociated from the labor force, very hard to get back into the same job. So we think participation will be lower,

slack is lower, and wages will be higher. You know, as we saw with Jolty yesterday, there are eight point one million jobs available ostensibly, the same number of jobs as those who do not have jobs today that did February. Something's wrong, right, something there's a mismatch. So there's a skills mismatch, and there's a need to pay labor higher. And I do think that the fiscal policy that's been enacted has conditioned people, frankly, to want more and to

expect more. We've just spent eight hundred and fifty billion dollars from January one, as the economy is reopening directly into households, directly into bank accounts, more than we and we spent that was six hundred billion last year when the economy was closed, and we're expecting another four hundred billion by early September. All that is going to create upward pressure on wages. Next logical question, then, what does that mean for margentilation? And one of the sectors that

you would avoid. Right. Look, I think I think the rotation that came became apparent in the fall last year still plays out, right. So, you know, commodities, materials, industrials, financials, and energy are really the sectors that benefit from higher inflation. And that's where we would be very hard to ignore. Your profitable tech. You know, the future is digital. You have to be there. We just think that those that

sector probably underperforms a bit. And we do think that speculative tech, you know, those companies that we know in love and are valued on revenue and not earnings, were really suffer here and we would stay away from those. We just think it's a long term secular change and where rates are going, where yields are going, and where expectations are going. So I think the cyclical trade will

have legs and we'll have legs for longer. We saw a ton of companies in the first quarter, right seeing prices, P and G, Kimberly Clark, others as well. Alicia, there's a nice little debate debate plank out on the south side at the moment on staples, bt I G on the one side, BEMO on the other, bt I g likes the pricing path. Bemo is worried about the input costs. Where are you in the team on Staples? I like

Staples simply because they've underperformed so woefully. That is just a good It's not a bad place to come in here. They do have pricing power. I think households are are are becoming conditioned to paying it, frankly, because there's so much extra liquidity in the household sector, right, you're not getting pushback, so therefore those price changes will be sticky. If you add to that that the sector has completely underperformed, as the here and now looks better than worrying about

the future three years from now. I think it's not a bad place to add two staples here. You know, you want to add when it seems like the wrong thing to do, so it seems like the wrong Yeah, there you go. I mean, we like we we've learned this right. How many times do we have to be hit over the head? And so I actually do like Staples here for the reason I think this pricing power will be very sticky. When you raise wages, you don't lower them. When you raise prices that you don't lower them.

Get comfortable feeling uncomfortable. That's a lifeless Alicia, Thank you, Alicia Levy bm Y Melon Investment Management right now. This is a joy for John and I to bring in Terry Weisman with us out of vest Or in Harvard.

Terry Weisman iconic on emerging markets at Bear Strings long ago, and most importantly he is the director of Global Currencies and interest rates for the crew at fifty Martin Place in Sydney, Australia with Macquarie, and where thrilled he could join us right now with a real touch of this economics. But also it is linked to the commodity boom. Does inflation cause commodities or is a commodity boom gonna cause the inflation to come Terry, you know it could be

two ways. Um. One of the aspects of inflation that I think is driving the commodity boom is just public policy. Right. You have quite a lot of of an imperative around the world to move towards a green economy, and that's clearly causing some commodity prices to go up. So here

the causality runs from public policy to commodities. But you also have to take into account that the rising commodities, whether it's speculative or not, is going to put pressure on things that have nothing to do with that green economy. If copper prices go up, home prices can go up as a results, even because of the cost push inflation. So it runs two ways, um and and I suspect that there is a little bit of a specult development in some of the commodity prices that have seen a

big increase recently, but more so iron than copper. Let's say, right, that's right where I wanted to go cheery. When you talk to the commodity experts at Macquarie, and truly folks, they are Australian experts. How does iron or dynamics filter into a more developed world inflation Wednesday? Not too much because because iron goes into steal, and steal is really a construct auction material, it's not something that's really prevalent that much in the consumer basket. But I will tell

you this McQuary's view on iron is not positive. We see a lot of the run up recently as having been caused by hoarding on the part of Chinese steel mills,

who are worried. The Chinese in the second half of this year, Chinese policy makers will come down hard on the steel mills because of environmental issues, and that they will do that by restricting iron imports in the second half, and as a result, steel mills are hoarding iron now ahead of that and obviously hedging against future price increases.

But that's not really a demand based story as much as it is a story about fear of import controls and fear of restrictions copper, as I mentioned, a different story that is that is purely structurally demand ern people are excited about the the implications for copper demand coming from green economy imperatives. Harry, what's China's role in all

of this? If you shewed me a chance of China's credit impulse, I might have made a different decision on the direction to travel that seeing across some of these markets. What is China's rolled in this cycle? Well, well, normally China's role is as as a commodity UH importer and demander and and of course the credit cycle is hugely important to determining how much credit is being is being directed towards construction towards infrastructure UH in China, so credit

normally plays a strong role. We all I'm saying is that this time around, and maybe the reason you're seeing this divergence between credit growth and commodity prices is because, in the case of some commodities, what's being driven is not structural. What's driving is not structural demand coming out

of China, or certainly not the outlook for stronger structural demand. China, after all, maybe moving towards monitoring tightening in the bad latter part of this year, but might be moving these commandis instead is concerned about restrictions on the use of them later or the import of them later, I should say, and as a result, is hoarding today. Very different story,

very different dynamic. Let's say that what we normally get out of China where credit drives the commodity price cycle, when you look at market based inflation expectations in the momentary that's time of two stories together. What degree do you think that being influenced by what we're seeing in the commodity male kit not that much. I you know,

to some extent. We're talking about consumer prices here, um and the price of a house does not figure into the consumer price in deck, but figures into the persumer price index. Is the service price of renting a house, let's say, or the owner of equivalent rent that's not affect too much by the price of a home. So I don't think commodities themselves, not certainly, not those those those basic metal commodities are having that much of an impact on CP I know. I think what's having, or

for that matter, expectations. I think what's driving inflation expectations is somewhat different. It's it's a FED that has been politically inclined to be to sound very dubbish and therefore fuel inflation expectations higher. And of course we have everything pertaining to the demand impulse around the world coming from public policy, more spending in the US, prospectively more in Europe. I think that's fueling a little bit the inflation expectation

increase that we've seen recently. Terry Device Chairman, I believe, speaks at nine am, well street time. Can they shock the market or can they actually have a dialogue the next ninety days where we ease our way towards the beginning of a discussion of less accommodation, so they can ease into it. And can they do that? Not today? Not today? Just because I said that they can ease into it, doesn't mean they're going to ease into it today.

I think this is too soon. Even if the CPI print comes out high, let's say, on the headline base three point seven or three point eight, it's way too early for the FED to make a determination as to whether or not, uh the increase in inflation is permanent or temporary. And the reasons because we know that a lot of it's driven by supply shocks, and the market has a way of addressing those supply shocks ultimately with more supply. And as a result, I don't think the

FED is going to say today. I don't think Richard Cloud is gonna say today that it's time for the FED to talk about tapering. By August. Maybe, I think by August I will have ease their way into it, in part because by August the economy will be better, it will be a synchronized global recovery as well, potentially will be more some more pressure as a result of that on some basic goods, not necessarily copper and iron,

but others. And I think at that point they can talk about the need to have a discussion about taping and then and then the countdown begins, but today is too early. Sorry, gonna catch up. As always was that McClary on currencies commodities and writes as well, we're making jokes about it, but the inflation is real and it affects all of us, truly. The right guest at the right time, Stephen Rashida joins us seas with the zooo, and he does acute, I mean scary acute in detail.

I'm breaking apart the American economic landscape, he joins us. Right now, Stephen, shooter, Let's go right through the function and let's start with the consumer. How will the consumer adjust to new inflation? Well, I think the stimulus checks that have been provided are real. The adjustment the amount of excess savings or increase in savings that the household sector has accumulated as well over the last year plus of stimulus checks is going to help the consumer get

beyond these problems. I think you also have to understand that for a lot of these components such as airline fares, hotel rates, um, you know, used car prices, new car prices. You know, there was a big down draft in inflation that occurred last year in many of these components, and these are the components that are coming back now as the economy is reopening up, as the vaccine has become more important than the virus, and so therefore we're getting

back to more normal life. Okay, this is really important, folks, and trust me, I've had hate mail on this before. We'll do it when Mr roshutto right now. Steve, you know the sinodal function or sinusoidal function a boy physics. You've got the squiggly little line in it dampens down towards zero, and that's called a damp fun action. Or if you were a bow tie, it's called a dampen function. Steps Shudo, is inflation gonna dampen out over the next

number of months to a level that's more appropriate? Or do you have a fear of a trend like the sixties. I don't have a fear of the trend like the sixties. You know, the sixties was a wage price spiral. The wage price spiral is largely a function of the cost of living adjustments that were rolled into unique contracts um and those are what created the wage price spiral. This time, we don't have a direct linkage between wages and prices like we had before. And to the extent that we

have global excess supply. Now where we had global excess demand, their corporations had pricing power, so they thought they could pass the price increases on through to the consumer, and that's what created the cycle this time through. Yes, there will be an upward movement and inflation, but it will not be anywhere near that wage price spiral that you know people are still fearful of all these year later. Paul John from Lester emails and he says, Tommy, you idiot.

Damped is when the signs of waves dampens down towards zero. Dampened is when your tire gets wet. Okay, but he spelled a t y r E. We're throwing that out all right. So Steve fed, chairman of Vice vice chairman Richard Clarenda this morning said he was surprised by the rise in consumer prices, but continues to believe that they are transitory. What's your take there, Well, again, this is this is the theme that they're running under. It again in my world, with excess supply, they are likely to

prove to be correct. You know, we had a big downward draft and inflation due to COVID. Now we're having a big response back up due to the vaccine being more important than the virus, and that tends to drive the price is higher. What the FED is concerned about is they want to see real increases in compensation costs to drive a sustained move upwards in prices so that they could be assured prices are going to be at

that too slightly higher level on a sustained basis. So not until they see that happen are they going to change their view. Uh. And they believe they need to get to maximum and ploy should say full employment to get to that view. And clearly, if you believe the SEP where they think the long term trend in the unemployment rate is four percent and you're at six point one percent after the April data, they feel they've got a long way to go before those conditions will be

in place. Now from my perspective, the stimulus, the monetizing, the debt all are important factors pushing up on inflation. But by the same token, global access supply is a big force pushing down on inflation, and the net net is I think we're probably going to get back to a sustained two percent rise in inflation, But I don't think we'd get substantially higher than that. Well, Steve, you know, when you think about obviously wage inflation, that needs to

be there a big driver. Um, But you could argue that the uh, everything is in place to get some real wage inflation. Everywhere you go down the street there are you know, help wanted signs in there. It looks like if you want to get people off their couches and back in the workforce, you're going to have to raise wages, perhaps significantly. Are you concerned about that? Well, again, you're given the unemployment compensation benefits that are being provided.

It is certainly said a much higher threshold for low wage jobs to come into the marketplace. And not only do you have to match that wage, but when you consider if I could get that wage and not have to go to work, you're gonna have to pay me some something even more than that to get me to actually come into work. So the net result is they will look at even this upward movement in wages as a result of the compensation costs as a temporary consideration.

It will be a one time adjustment upwards in the cost of living, and that's what they're looking at their betting on that one time adjustment. Not a move we've been talking that's why they're focusing on maximum employment. Sime. No, that's fine. We've been talking about that all morning. I think it's really profound. But do we get a one time adjustment in boom economy? What is your reframe? I mean, I guess you got away for retail sales Friday, but

I get it. We're in a boom economy and then we get another ninety days of a sort of kind of like boom economy. What's the SHOOTO taken on Q three, Q four, Q one two. I love saying that. I sound like it's so fancy. Richardo would throw me off the stage. Q one two twenty two, Steve, what's it looked like? Yeah, the economy by three on average will be back to two to two and a quarter percent growth. All right. Everything they're doing is transitory in terms of

its transfer payments. It's not leading to real productive growth in the economy, and therefore we're going to get back to a more shallow growth trajectory. You keep on providing steamullis out of you, you're gonna keep on being able to drive it up temporarily. But once you get to the point where they aren't get any more stimulus down the pipeline, out of the balance power changes in Washington or whatever, we're gonna be right back to an economy that grows at two to two and a quarter percent.

It's just a question of where we are in the labor market. By tom we get there, all right. So one of the questions I have is when is transitory not transitory? Is it one month, two months, three months? Can we get back to V shaped exactly? I mean, when should we get concerned or when do you think more importantly, the Fed will say, oh boy, our transitory call may not be the right one. As we approach two that's when you begin to see if these things

haven't worked their way through the system this year. Given the growth numbers everybody, I mean, my number at five point nine percent for growth for this year is kind of on the low end of street expectations. And then people are looking at it, you know, another four percent type growth next year. So the reality is you have to get into two UM and that's when they're going to begin looking at this and saying, okay, is this sustainable? Is this not sustainable? Have these pressures been one time?

Have they been transitory? You're not. The presumption is that the vaccine will become more important than the virus in a lot of our trading partners at that point in time, and again that global excess supply thing will come back in a vengeance and wind up dampening prices. Keep them on a lot of what we're seeing here, or adjustments and things like hotel rates and airfairs. You know, how long is it going to be prayer lines start bringing more planes back onto the market. You know, this is

the kind of thing. It takes time to ramp these things up, and that's what they're betting on. So you have to get into two, which is a long way away from here. We're only in may See. Thank you so much, Stephen. We should have brilliant with the zoo there as well. 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 am for insight from the

best and economics, finance, investment, and international relations. And subscribe to the Surveillance Podcast on Apple Podcast SoundCloud, Bloomberg Duck Come, and of course on the terminal, I'm Tom keene In. This is Bloomer h