Surveillance: US Inflation Cools Again

ago and far away. We used to worry about what Sandwich Chairman Greenspan was carrying into the FED meetings or maybe into the inflation report. Vincent Reinhardt is expert at that. Vincent Reinhardt is with Dreyfus and Mellon and of course led all of our economic research at the FED during the green Span years. Vince, just perfect to speak to you, uh this morning. Thank you for joining this micro analysis of data post pandemic. Have you ever seen anything like it?

You mentioned Alan Greenspan and he loved getting into the details of the data. So you know, the fact is the Federals are board building is pretty big, and it's stock full of economists and they look into the details of all these reports. I think that the FED chair Pal has been extremely transparent about a very specific mechanism about inflation. Uh the super core or the Pal's power core. Uh, you know, really getting down into the third level of detail.

I want to make clear, Jow, we need to continue to look at these markets their narrow moves. But nevertheless, we were green on the screen with a real plunge down and John, just as Mr Reinhard gives us wisdom, boom, we come right back. Interesting to say, the FX moves as well. That's a tape cent move on Doliena, which I think is what you were looking for. Yes, yes, stronger, stronger, yain there in a euro dollar one O way. Will

continue to look at those major pairs. Here with vincent rein Artist, Mike McKee dies deeper into the CPI report. Vince Reinart, is this inflation completely pandemic induced or do we have issues that aarken back to when your lapel's

were wider? Um so I never wore that wide lapel's, Tom, But I think the the answer is why is j Pal going into the details, Because it's the mechanics of inflation have has been worried inflation is embedded in the persistent part of the basket that households consumed, that that uh services less shelter, that might keeps mentioning, that a pal keeps mentioning. That shows up in all those speeches, And in some sense, yes, we got an inflation report exactly as as as we expected. We also got a

reminder that the labor market is running pretty hot. From the fence perspective, aggregate demand has momentum that's putting pressure on resources, that will put pressure on wages and therefore on prices. Maybe not this month on prices or wages, but the mechanics are there, the mechanism that you worry about inertial inflation is there? Vincent rynrt with us and and thrilled he could join this morning, Vincent. Is there an underlying theory at the Fed? Or they literally making

it up as they go? Is there? Oaken? Is there? Phillips? Is there? Tailor is there Reinhardt? Or they fly and blind. They're doing the best they can, and it's actually pretty conventional. Inflation has an umber of parts to it. John Williams talks about the inflation onion. We've gotten the good news on the outer shells commodity prices off energy prices in particular awful lot next shell in goods prices are doing better because supply chains have mended, market economies work and

shift resources around. They're worried about the core. They're worried about the inertial part of inflation that is importantly gets embedded into contracts that are written at different times. And so it's a slow slog in which inflation has built and they're worried it's going to take a while for it to come down. So yes, I think markets got what they expected, even though they were hoping from good even better news. Don't don't try to get between a

rally and UH and and reality. But the reality is as look at at the details, and the details are supportive of two of the three planks to the story. They they rely on momentum slack maybe not so much right now, wages and prices, but the other two things are the reason you worry about future wages and prices. I thank you, Vince out of Virginia is really something Leland Miller John with China Beige Book, And you know you look at you look at Leland Miller folks, and

you say, well, what's so special about him? He has a granularity on China like no one. He frames six point two percent GDP this morning, Leland. What do you do when you hear six point two percent g d P from some competent people like ed him? And how

do you react to that? In China. I think that you could get some extremely high numbers of GDP next year, but it's based on the idea that you're not just going to have the cyclical bounce back which we expect, which is and you know, firms restarting investment after COVID, euros pullback, consumers jumping back in I'll be a temporarily getting the pop off is very low basis, statistical basis. But in addition to that, in order to hit six point two, you're gonna have to have them layer on stimulus.

It could happen. You're seeing headlines about stimulus, but you have to you have to expect them to be doing all these things at once. So it could happen, but it's much too early to be to be uh guessing that with any type of you know, clarity, So your expertise, like folks, the electrical grid from Shanghai out to the west,

Leland Miller. If they impute a fiscal policy, can they diffuse that stimulus faster because of the power of the government, the totalitarian regime, It depends on what kind of you know, this is the question three. And we just built a proprietary fiscal stimulus index to be able to track the flows that are going into physical spending. We have a

fistical activity on deck to see what's actually happening. And what's happened in December, for instance, is they're pumping money in and absolutely nothing happened that the activity in decks fell off a cliff. So it doesn't you know, just because you see a stimulus headline doesn't mean it's being worked into the economy. So that's the real problem with are we going to actually see these big headline numbers and even some of this easing that we see more broadly,

will it translate an activity? How does this economic discussion translate to the medical discussion the nation faces right now? Well, Beijing is doing their best to pretend that COVID zero is gonna be a you know, a blip for a month or two and then they're on their way and

you know, to some degree this will happen. But I think that the fact that you know they're acknowledging virtually no deaths and and most people are thinking they're gonna see, you know, a million deaths, you have to understand there's gonna be a cascading effect, you know, through the rest of the year. It doesn't mean you're not going to see a nice but cyclical bounce back. It doesn't mean that Chinese assets are gonna rally like crazy for a while.

It just means that you know, this is not something where you can dive into, dive out of, and have no effect in the middle. And you also have the possibility that later on the year you have another problem with COVID. So there's a lot of potential risks here that are getting camouflaged by people's optimism over the fact that the middle of the year should look should look quite good. Leland, the China, this real opening is not

the China that shut down. There is an argument for many that perhaps this consumer, the Chinese consumer, is a little bit more nationalistic. Leland which trying to work out where this demand actually shows up kicks in. Does it go abroad to people travel to Canada, Vancouver try and buy property like they tried to before. Trudeau is trying to stop that. Government scantists is trying to do the same thing in Florida. How do you think this is

going to pan out? Yeah, there's been this idea that just because Chinese consumers haven't spent for a while, that they're gonna take their money, They're gonna run out of the country, They're gonna spread around the world. This is never really in the way it works. Chinese travelers used to spend a lot of money abroad. They're not buying a lot from abroad. But I think even the even

the travel parts have to be moderated. Right now, people are seeing the relatives domestically for the first time, and you know, in three years, uh, plane ticket prices are through the roof. You know, there's just a lot of guessing people are doing in terms of skyrocketing travels coming back and skyrocketing. This is coming back, and China's gonna guide us into the next stage of uh, you know,

of global consumption. This has never been true. So I think we need to we need to be very very cautious on assuming Chinese consumers are gonna do anything for

the for the world. Even just one final question from me as well, I think we're all trying to work out how much bad dates will have to look through in the near term and for how long, which basically is is what you're touching on at the moment, Leland, How quickly do you think this will snap back, snap back in and we'll start to see that good stuff in the future. Well, look, I I think you one

is going to be a mess. Uh. The second the second quarters when you'll see a reactivation of the economy uh, and are going off you know, very low numbers. So people could be very very pleased with with the with the bounce they're seeing the middle of the year. The key part is this could be a head fake because maybe you see three or four quarters of growth pop back up, you're still in the midst of a long term structural slowdown. So for the next you know, for

moste people could be talking about the cyclical uptick. But then after that, as we get towards the end of the year, we're gonna start re talking about the structural slowdown, which is going in the other direction. Lay the minute of that. The see China Pacebook one of the best leading just fantastic, Canso White Seth, Thank you everybody. We talked to folks rights in a certain way. The religion of reading high frequency economics is founded on the concision

and depth of the daily reports of Carl Weinberg. He joins us right now, Chief Economists, the force of high frequency economics in your eight pages, Carl, with every paragraph having value, linking global echo with your concerns into the dynamics of yield. What's the single paragraph our audience needs

to know right now? Well, good morning, tom um. You know the I think the most important observation that I've had in a long time is that everywhere I look in the world, wages are increasing by less than prices. And that tells me that you can't explain what you're seeing in prices by a wage spiral, because wage prices are inspiraling alright, Wages, if anything, are slowing down inflation.

So we're breaking inflation into two pieces. The first is a one time price increase that we experienced in that now is leveling off. When we look at the CPI this morning, it's almost level months per month, it's almost uh and that's bringing down year over year rates of CPI increase that we call inflation. Whether it is or not, discuss another day. And then there's the bigger problem of wages that may occur if the unemployment rate stays as low as it is. And that's what we think that

the FET is watching. So what we'll all see inflation metrics come down this year at least early part of this year. The FET is still going to keep on Hockey rates. Are we still in a supply side analysis? In a timeline of supply side analysis? Even if our institutions only can do demand side action, yeah, so um, our institutions can also do supply side action. I mean, why do prices go up? Alright? One reason is that

we have too much demand? And that was, as I said before, the one time fiscal stimulus monetized gave people more money in their cash accounts than they needed. They bought more stuff than the economy could produce. Prices went up. That's that's history. Now we're moving past them. But the supply side issue is that when wages go up, the supply curve shifts upward, and that raises prices while at

the same time reducing output. And that's the spiral that we want to make sure that the FED wats to make sure that we don't get into That's why we're going to see them move rates up to five and not move them down later this year, as the market currently is believing they're going to. You know, it's it's interesting, you know, President Biden's out with a tweet here for the six month in a row yearly inflation is down.

I mean, that is absolutely correct. Does that not give maybe the Fed, you know, to see six months of declining inflation to say, hey, maybe what we've done so far is in fact working, It is cooling this economy. Maybe we can take a more cautious approach, maybe even pause in the near future. What do you think about that? Well, you know, the Fed's job is to make sure that the inflation target is hit in the medium term, not just in the next two, three or six months. And

we forget that. It was just less than a week ago, five six days ago, that we printed a labor market report which showed hundred two hund a thousand jobs two and three thousand jobs being created and an unemployment rated a fifty year low. So you know, everything we know about economics, everything the FED knows about Economics says that if the unemployment rate keeps on coming down or even just stays at this level, eventually we're gonna wage pressure.

So that's where their eye is that you know, months to months, we will see a year over year increases in prices slow down, will decrease, and that will be good news. The market will treat that as falling inflation. But the FEDS is on the labor market, and every FED speaker, if there is only one thing that they all talk about without exception, is how tight the labor market is. It still is, inflation is still above target. We're going to see continued rate increases and sustained high rates.

Carolinberrg Frequency Economics, Paul, I looked out on my phone just to see what the red sox are doing about shortstop in the market moved that's where green on the screen and now I got futures of negative thirty three here that with the opening the VIX twenty zero at six. I do want to point not Brent crude and barrel is elevated in gold. When is the last time I talked about two thousand dollars? I know, and it's interesting to bitcoin up as well. So Carl, recession call. How

are you thinking about this now? Given the latest CPI prane, What is your recession scenario? I guess well, growth is certainly going to be slower as we move into three There's there's no doubt about that. Sets hyped interest rates, real incomes are still not keeping up with um price increases, households are drawing down savings and pulling up their credit card bills in or do maintain lifestyles. Things are going

to slow and high frequency economics. We think that the US economy is strong enough to still power through this on the basis of a strong industrial fundamentals and on the basis of normalizing economic policy. So we think we're

going to avoid a recession in the United States. I won't rule one out all together, but I think the baseline case has to be slower growth in the US while the rest of the world, Europe, the UK, Japan all see economic contractions for equity investors, that's a better fundamental in the US from economics than we're going to see elsewhere in the world. Carl, how concerned are you about you know, Europe here in terms of their economy

here and the impact they may have. I mean, China reopening certainly a positive for a lot of the European manufacturing sector. But what's your view in Europe here, Well, before we talk about Europe, I'm just going to double back on your China reopening the theory, and the theory in my view, has no basis and current experience. You know, we've never seen amicron sweep through a country and just see,

you know, one and done. Everything goes back to normal the next day, and the big wave of amicron has yet to hit, you know, after the lunar New Year, we'll see a big wave and staid theily then we'll see more waves after it. And as you guys have been talking about on the program earlier, absentee ism keeps people out of the office just as much as lockdowns do. So I think China's episode with COVID and economic problems are a long way off from snapping back. But I

think it's wrong time about that. It's really Europe. Excuse me, answer the question on your my fault I jumped in there. You know it's my fault. I didn't answer the question on you know Europe is headed for a recession. It's been headed for a recession for a long time. Industrial output is flat. They're suffering from an energy shortage. They're in a war zone. They're in an economic war zone, and they're going to be diverting resources to defense over

the course of the next year. Um interest rates are going up, and again wages aren't up with price increases. I got thirty seconds. You're acclaimed China. Note what's your GDP view on China? We got people sucking five. You don't buy that. Now, those people need to get a

spreadsheet and learn about arithmetic. If the economy contracts in the fourth quarters, we'll know about next week, all right, then it's going to be impossible for China to grow more than over the course of Caroline brig thank you so much. You know he says that, and he doesn't realize I'm the worst user of Excel spreadsheets on the street.

And we are privileged for a repeat performance from Dana Telsa's chief executive officer and also of research and tells the advisory group on the pulse of American at retail. I've got to go to the gossip of the moment, and I'm gonna say this with respect. Richest guy in the world, a guy that took Louis Vuitton and figured out how to do luxury fashion. There's nepotism involved here. How do you address is one of the most grizzled

veterans on the street when it is about relationships. If it's product in relationships or it's lvm H with his daughter coming over to run, do you are? Is that a plus or minus? Right now? It's a plus? And the reason why these aren't new people going into those business lines. She's been involved into yor she's been there twenty years, so you're getting experience and you have to say the succession planning. But look at the depth of

talent underneath her and Franklin each of the brands. What they have with seventy five brands at LVMH, they have the experiential talent to move everyone up the line and that's what they do. These have log convexity. These luxury groups off China opening and the rest. You predicted this with your team. They're a moonshot right now. Can you acquire shares this morning in these heritage luxury brands? You can because the next development will be the reopening in

China and that China consumer. We've already heard from others. I mean, look at what Neiman Marcus most recently said about the strength of the holiday season, and you're seeing the product innovation driving demand. So I think it's going to be a good season. But let's keep in mind we're still having consumers in all areas. With the volatility of the market, there's been a step down in terms of what the rate of growth is compared to last year. And even so one more question on luxury, can you

overweight luxury now? Is the market is overweighting luxury. I don't think the market's overweighting luxury yet. Really were the moon shots were seeing in some of these things. I think there's more opportunity when the holiday sales come in because also the ability to drive strength out of China that's going and luxury, particularly when you look at to China. What's your single best buy right now, I mean it's LVI, m H in the international, it's Tapestry in the domestic,

and the other one Ralph Lauren. Ralph Lauren has a significant opportunity, So we'll go to that in a moment. I mean, tap, this is killing me. You know how much I hate this. This is Coach right, Yes, but it's coach, it's Stewart Whiteman and Skate Spade and what they've been able to do in resetting prices, updating the brands Wesselman, they did the Tom Wesselman thing. Is that where we're going. Where these brands come in and they get famous celebrities and artists like they'll do a Dana

Telsey code or something like. I don't know about that. It's collaborations, they matter. Collaborations drive demanding. You know why they go viral on social media? Everyone sees them and there you go sell through. Hat does social media help Macy's move forward to the big boxes that Joe Felman looks at, Yeah, it does. I mean we just had

a dinner with Macy's the other night. The personalization and pricing science that's being allocated to their merchandising is really helping them navigate a consumer environment that's definitely a bit more challenging for the income level of the Macy's consumer. How do they manage expenses? At that dinner that they talk about the cross rationalization of suburban malls that are off the mark, Well, not only that, but what about the bed Bath and Beyond stores? That could come up

for play and there's a healthy demand. Even a marketplace by Macy's or the off prices want those boxes. Those are good boxes in great location for the same concept. For Macy's, it's a from concept. It's a smaller marketplace by Macy's concept that they put in there. But let's see what develops with these bed bath and beyond location. My recollection is tells the advisor group avoided the carnage

of bed bathroom Beyond. Let's be constructive. Why did they feel what's the best practice forward for retail not to do a bed bathroom beyond. You need branded merchandise under a halo, not just private label brands. And also you need to be able to continue to innovate the offering. And yet home goods out there taking share and you didn't play up what made bed bathroom beyond so special? Go in there and buy more than you originally expected,

got a lift to the market. The vixen a stick here with Dana Telsey and tells the advisory I grew up watching this carefully less curve and version than what we saw off the CPI report. Dana, I've got to wrap up with the guy who is iconic, Relf is ralf. Does he have nepotism and play like Mr Arnault or does he have a succession plan? He's a bit ancient, um. I think overall, look at the team that you have there now with Patrise Louve and Jane Nielsen CEO and CEO.

They're taking the brand to the next level and modernizing it and it's showing up in the numbers and the au are and consumers are reacting. One question, single best buy right now for Telsea Advisory Group. Across all your team. I mean, we have a bunch of names that cost in. Joe likes Amazon, It's been a favorite name of his. But also let's take a look at what some of these off prices are doing. I mean the t j X certainly were watching. I would say that you look

at Abercrombie and Fitch and it's exciting. Really, Ralph Lauren, do you know that Michael McKee almost was a model at Abercrombie fit years ago? Okay, well you know it's a different today than it was then. Yeah, I would have been helmet. What's what everyone knows this brand they're going to resurrected again. How's the Abercrombie and fitsh gonna do it. What the what's the pixie dust? The pixie dust this time is the Abercrombie and Fitch brand has

aged up. They're getting it's better quality. Yep, it's not the teens and Hollisters showing some improvement in their assortment and getting the men's withsiness data. Telsey, thank you so much. We're gonna age jump and continue with Keenan McKee. As we age up, tell me about the ageless comments some Hearkin and also Mike, what you see in this historic

inflation report? Well, Pat Harker is joining the crowd that says basis points in the numbers today, justify that with a one tenth drop on a month over month basis in December pushes the headline number down to six and a half percent. So on the path to where the Fed wants it to be. Interesting thought here with Dana here is I'm looking at apparel costs and everybody thought maybe we'd see a discount on that, but we have their up half a percent because men's clothes went up.

Almost all of women's clothes fell, men's and boys went up. So the interesting thing there company after a company I spoke to over the past three days. Men's is showing improvement and all the retailers inventory levels are coming down faster than expected, and that's going to be a good thing. They told Tom he needs a new suit. The interesting things and woes. Yeah, men's and women over twenty years old, that's what that's the problem. I look to wrap this up, Dane,

I'm so sorry. I've got to go to Mike here as we drive forward into the Bloomberg that morning, Mike, are we going to have the same inflation frenzy thirty days from now? Sure? I mean, this is because it's all about inflation for the FED, and the Fed's going to keep going or at least hold until they are convinced that inflation is going down to present and we don't know what it's going to take to convince them. John emails in from Manhattan. He says, asked Dane about

when Tiffany opens. That's like soon, right, like a couple of months here should be. Second half of three brings more traffic to the whole area. Has a restaurant in the in the business, in the in the store too. It's gonna make sexing prices of slumbers and that Tiffany, Are you kidding me? The ron nose are nuts. They walk around saying take the price up, It'll create demand. That's good, Dana Telsea, thank you so much. Our economic report from Telsea Advisory Group today. 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 in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg