Surveillance: US Inflation Surge

Council Director Brian Das joins us right now. Brian, fantastic to catch up with you, sir, core CP in America forty year high. This is the last inflation report before the mid terms. Does the White House take any responsibility for this or whatsoever? Well, Look, it's clear that inflation is a challenge. It is a global challenge affecting countries

around the world. And I think the first and most important part point to make is that the United States is in a better position than virtually any other country three to address this challenge and do what is necessary to bring prices down without having to give up all of the economic gains that we have made. That continues to be our focus, and that will continue to be our focus until we get this job done. The challenge is getting bigger. The President acknowledged this week the potential

for a very slight recession. His words, his assessment. You brief the President this week, Brian, if your internal forecasts become more or less negative over the last few months, well, I think it's important to look at this monthly data in in in context. We are seeing some progress. If you look at annualized headline inflation over the last three months, it was about two that's down from eleven percent in

the prior quarter. Now, a lot of that is the significant reduction in energy prices and in gas prices at the pump. Obviously economists tend to strip those out and look at core, but for typical American families, for workers, the reduction in gas prices by more than a dollar gallon in most places in the country is a meaningful and real sign of progress. At the same time, we're seeing some elements of the transition which we anticipated, but

now focus on the work ahead. Shelter inflation represented more than half of core inflation for the last couple of months, and obviously that's a place where we're gonna have to look very carefully because there is a well known understanding that that data operates with the lag and we're seeing some contemporaneous real time evidence of sharp deceleration in rental

price appreciation, sharp deceleration in home price appreciation. So that's going to be an area that we're gonna have to stay very focused on here in the days of months. And can you see why people get really frustrated with politicians? Twelve months ago, six months ago, you would have said, strip out gasoline and look at what's happening gas square, And now it's leave gasoline in because gasoline is coming down, Bran, can you see why people are very frustrated with the

why the White House has navigated this issue? No, Look, I would I take issue with that characterization. We always say that we look at the data, because we always say that we look at the data and the aggregate, and there's a reason to look in the fullness of overall inflation and then also to look at elements of

the court. Like I just said, for typical American families, gas and food are big parts of their typical budget, and food prices UH in this report and in prior reports are moving up too fast, and that's something that we need to make more. We need to make more progress on. So we look at all of the data and understand, Uh, the point about gas prices is just

a very salient one. Your outlet, various others over the course of the spring spent a lot of time focused on the increase in gas prices and the impact that has on the economy, on consumer sentiment. Now that they're coming down, it's important to recognize that that has an impact on the economy as well. Well. More recently, they've been come back up as why you know, it's why you've been very critical of Saudi Arabia over the last week.

The presidents hold aback consequences for Saudi Arabia. Brian, what consequences? What are they? Well, I'm not gonna get ahead of the president, and as he said, he will make those decisions and and and make those announcements when he is prepared to do so. I think our focus right now is on continuing to make that progress. If you look nationally right now, gas prices are still down about a dollar and ten and learned twenty cents from their highs

this summer. We're seeing some welcome moderation in certain areas of the country, the Midwest and California now and we still face this historically large gap between the wholesale price that that that energy companies pay for refined products, gas, deesel otherwise, and the retail price that consumers are paying.

So that's a continued area of focus. Obviously, refinery and refinery capacity as an element of that, but that's one of many areas that we are working with the industry and trying to focus on what we can do from a practical perspective, from a policy perspective to try to move the ball forward on OPAKE plus. The NFC spokesperson John Kirby called the decision short sighted, a short sighted

decision that benefited Russia. Can you understand why using the SPR as the strategic mid term reserve as a short sighted decision that only leaves this country even more exposed to the whims of OPEC PLUS next year. Look, I disagree. We said that the the OPEC decision was short sighted precisely because the lack of supply and reliable supply continues

to be the dominant challenge globally in energy markets. The lack of supply continues to be the dominant risk, and the use of the Strategic Petroleum Reserve in a historic, but calibrated way starting last last winter was designed to address that problem and to help have additional supply on the market during this transition, and during a period where we knew Russian supply was coming off and US producers

were ramping up. That's why if you talk to most energy market analysts, they will point to the fact that that use of the Strategic Petroleum Reserve as a bridge, as a bridge as US producers brought production back online, was one of the principal reasons that kept oil prices from moving up even more quickly over the course of the summer and into the fall. That's a prudent use of the asset as a transition as US producers ramp up, you say it's a prudent use of the asset. Other

people are very worried about this. You've joined the SPR so it's lowest level in four decades. The some accusation that you're using you're putting the polls before America's energy securitt See Brian, the Saudies themselves set this morning that the US requested a one month delay to the outpack plus output. I wonder why that would be, Brian, Can you tell me whether you did ask the Saudis for a one month delay to that decision. Are they tilling

the truth? Look, we clearly, we clearly communicated our views to OPEC members that we thought it was shortsighted for them to take the action that they were contemplating, and they announced with respect of the Strategic Patroleum Reserve. This was a calibrated decision to address the real issues in

the market. We talked to US industry last winter. We identified that there was about a million barrel a day gap between what they were producing this winter and what they said that they could get production to buy late this fall. That million barrel gap was what we calibrated to make the decision on the use of the Strategic Patroleum Reserve. And people should feel confident that the Strategic Patroling Reserve continues to be an asset that we can

deploy to address our economic and national security needs. That's always what has dictated the present's decision making on this, and that's what I will dictate his decision making on this going for And you didn't answer the question, so I'm going to ask it again. I'm going to share with you and share with our audience the quote from

the Saudiasty Semonic. The Government of the Kingdom of Saudi Arabia would like to clarify the based on its belief in the importance of dialogue and exchange of views with its allies and partners outside of OPEC Plus regarding the situation in the all markets. The Government of the Kingdom clarified through its continuous consultation with the US Administration that all economic analyses indicate the postponing the OPEC PLUS decision for a month, according to what has been suggested, would

have had negative economic consequences. Brian, again, it's a really straight question. Did you ask the Saudias to delay that decision for a month? Are they telling the truth or not. Look, I'm not going to I'm not going to get on air and disclose private conversations that remember shared it with us. I've got the opportunity to say it's true or not. Is it true or not? What I will say? What

I will say. What I will say clearly is that the communications that we've had VOPEC members and continuing have been based on our assessment of the economic circumstances of supply and demanding global oil markets. We disagree with the assessment in that statement that it was economically the right or necessary or appropriate thing to do to reduce production at a time where the lack of global supply on the market continues to be the predominant challenge in global

energy markets. That has been and continues to be the motivation behind all of our engagements Internet. Again, they're suggesting it's a political one, that your strategy is political, that you understand what they're suggesting, and what I'm saying to you is that our strategy I understand what they are suggesting, and what I'm saying to you is that our strategy has always been grounded in an assessment of the economics of the situation and what is prudent for the global economy,

for U S economy and US families. So the way you would have some kind of viable energy policy from here is to mate the decision as to whether what we're experiencing right now is a one off shop or something more permanent, one off winter or think more permanent, a permanent shift away from Russian energy Brian, which one is it? We are in We were in a transition where we face some very immediate challenges, but absolutely energy markets globally and in the United States are going to

go through a transition. We're never going to go back to the pre pandemic or the preputent invasion paradigm on

energy policy. And that's frankly why, even as we have worked in to address very immediate term issues, including helping the Europeans increase their reserves of natural gas going into this winter, to try to address those immediate challenges, we have been focused on long term prudent energy policy and providing incentives, incentives for US producers of cleaner sources of energy to produce at scale and at speed that they've never done so before, and to do so in lower

cost ways here in the United States, so that we can be a reliable supplier of clean, low cost electricity to our industry, to our own consumers and families, and to the world. The United States. The bidenminist station and focused on that, we prioritize that, and in fact, we have now legislated long terms incentives to drive exactly that

kind of investment in the United States. And that's based on an understanding that we are going to continue to be in a historic energy transition, not just in the months ahead, but in the years ahead as well, Brian. If this is not a one off shock, if this is a permanent shift, can we complete the conversation by you telling me how it's a viable strategy, a sustainable approach to drain the SPR to a four decade low. If it's not about politics, why is that viable? Why

is that strategy sustainable? Appreciate the question. It's a mischaracterization of how we use the Strategic Patrolling Reserve. We announced a policy that was explicitly designed as a temporary bridge over the course of months, a d eighty million barrels to bridge a temporary situation whilst whole U S producers were ramping up supply in the short term. Our long term challenges around energy are about investing in increasing the supply of clean energy in the United States and globally

at massive scale. Those require different policy tools, which is why we've enacted historic, historic incentives three and seventy billion dollars in long term incentives to increase investment in the United States. That's the right long term policy solution. You We can take short term and temporary measures that are prudent and well calibrated alongside long term measures that's what

we've been doing. Brands, we appreciate it's time this morning, except we're ready to thank you very much for choosing Blim Black sav and Blim Black Readio to have this conversation. Bryan Days that the National Economic Council Director, because I'm trying to suggest a one hour conversation with the managing director of the International Monetary Fund. Her entourage says, that's not gonna happen, so let's cut it down to twenty minutes. Managing directors, thank you so much for says I have

a plan. Eric Martin briefed me over a beverage of my choice last night and gave me this beautiful planet discussion. We're going to rip up the script, and we have to because of inflation. When you speak to your pH d s, when you speak to get to go open and arrested with your doctorate as well, do you have a character or understanding of this inflation? What is the makeup of this inflation that won't seem to go away? The makeup is one disruptions from omicron and they continue

in China. Two Russia's senseless war against Ukraine that has pushed energy and food prices up. We also are going to see some repositioning of supply chains that would have longer term impact on cost structures. But right now what we face is demand remains quite strong and supply has trouble meeting it. The most important task we have to secure our economies is to win the fight against inflation, and that means for central banks to show the results that is necessary and why we need to do that.

Why do we need to win this war? Because if we do not have price stability, we undermine prospects for growth, and because we hit incomes of people seeing it moving quickly, the US real yells. Jim Careent of Morgan Stanley just mentioned most ten basis points a two year Hulmans I

believe eighteen basis points. Do you suggest with the IMF suggests to central bankers, including German Powell, that they need to slow down the dialogue and assertitude, the rhetoric and extend the timeline out even its sacrificing a higher inflation to provide for financial stability. What we are suggesting is that the FAT needs to continue to be data driven.

They need to look at the economy, they need to look at where the signals are in terms of are we reaching price stability or not, and then they need to look at the impact their decisions would have domestically but also internationally. Let's remember UH type of financial conditions also mean stronger dollar, also mean capital outflaws from emerging marketing developing economies. Of course, the FAT is primarily focused

on domestic conditions. The responsibility of the PET is price stability in the United States, but also the FAT has been quite active to think of ways to support global stability, especially through extending swap lines to right now, we talked to UH people of the Green Book, the Financial Stability Book. What is the i MS present UH own on the

quality of the liquidity ease in the market. Given this inflation report this morning, we we have seen financial stability risks increasing, but we are still primarily concerned about inflation

running out of control. If it maintains so stubborn as it has been so far, then the most significant risk we faces that inflation expectations the anchor, and when they the anchor, that means then pressure on wages to go up would feel inflation from from other directions, and then the job of the fact would become harder and it needs to tighten even more. Two more questions, very very quickly.

Here you met yesterday with certain members of the British government, I believe, a gentleman from the Bank of England and a beleaguer chancel of the Exchequer. Did you sport amount in the proverbial American woodshed, I mean give us the inside No, no one's no one's listening or protect right now. How did the bile go with the two members of the United Kings. It went really well. It was a

very constructive meeting. We talked about the narrow path that the world economy has to walk on today and how important is not to make missteps out of this path and not to not to communicate in a way that

maybe more more difficult. What I was very encouraged to see is that the two of them sitting together with the common purpose and the Chancellor talking about his intention to accelerate a projection of how he's going to anchor his budget in medium fiscal sustainability, and also his commitment for the Office for Budget Responsibility to come up with

independent projections. That all tells us what we know that UK actually has strong institutions and they do work, even if at some point we may see some some this son't she'll be invited to the coronation dr or so much. Seth Carpenter, Global Chief Economists and Morgan Stanley joined us right now. Seth, you've had about seven minutes to pour over the details you'll take on this one, please yeah, absolutely so UM. I have to say I'll crow a

little bit and congratulate my team. So are u S economics team, Ellen Setner, the chief Julian Richards who works for her. We were above consensus on our call for this print. I think the stickiness that you saw in the shelter inflation was one of the key things and so clearly a shock for the markets. The markets are are off because of it. But for us, this actually didn't come in very different from where our forecast was. Uh. There is persistence, especially in the services side of inflation.

The apparel number, I thought was particularly useful. Though for a long time we and others have been talking about inventories, the pull back of the consumer from consumer goods. We're starting to see it. The challenge, obviously, in this context is it's when other bits of inflation, as Lisa pointed out,

are just going up more strongly. Right now, we're seeing the swaps market price in a peak policy right for the rate for the Federal Reserve of four point eight five in March of next year, Seth, is that what's required for the Fed to move fast, to continue moving into next year despite some of the concerns about financial stability. I'm not sure that is what's required. That's a little bit above where our our call is for the peak grade,

but only by a hike or so um. I think there's two way risk with that outlook we have seen. The last jobs report was was good, but still softer than the one before. And so if we get that downward trend continuing and non farm perils, if we get down into the one hundred something range, I don't I don't know that it's going to be obvious to the feather they need to keep going all the way up, you know, closer to Seth. I'm struck by what you said.

There's certain other areas outside of shelter that we're stickier. And I'm thinking about airplane tickets, people saying that after a while, people wouldn't be willing to pay for something that often is a discretionary expenditure. You could see this with Ikea and Pepsi all raising prices and still having pretty good sales. Are you concerned that your team and that you have been a bit too sanguine about how quickly inflation could come down on the other side, about

how pervasive even the wage stickiness is right now. Absolutely, If ever, there is a time for people who do economic forecasting to be humbled, this is it. Uh, It's very, very difficult. The sort of falling off of inflation for core goods has taken so much longer than we expected. I think. I think there's there's a lot of uncertainty here, the fact that the labor market is in fact cooling. We obviously got the Jolts data a couple of weeks ago that the market reacted to. We got non farm

perils that was solid but still coming down. I really think that part of the economy is going to be key. Can the Fed continue the tightness, get the overall economy to slow down, get job creation to slow down. That I think will be the key to to where inflation

goes over the medium term. If you're just tuning again live on TV and radio, you missed the fireworks core CP in America come again at a forty year high, inflation come again hot, equities heading south were down one point eight percent on the SMP, yields up at the front end of the yield curve, up fourteen basis points to four three, and expectations high going into the fed's

next meeting. Last time they met, Seth. In the minutes yesterday, they said the cost of taking too little action to bring down inflation likely outweighs the cost of taking too much action. Seth, do you anticipate when they meet again in November that we think in the same thing. I think there will be wringing their hands quite a lot. This was obviously an important data point, but it was

one data point. Um. The minutes also pointed out that at some point they're going to have a discussion about calibrating the size of the raid hikes because they don't want to go too far and and and do too much. So I think they're getting to the point now. Once we get close to four percent or over four percent, I think they really will be weighing both sides of that coin. Uh. The strength of the underlying economy is important,

but inflation here is clearly clearly strong. You know, there was the point about used car prices having come down but new car prices staying strong. I think it's exactly those sorts of frictions that are going on in the goods and services market that is presenting such the conundrum. Well, there's a lot of friction right now in this bond market. Let me tell you how far can we push this up? Sixthing basis points a least on a two year I'm watching this and now we're at three. I mean, it

just keeps going up higher. As the terminal rate now is looking at four point eight five percent, it is moving closer to that five percent handle that we heard about from Larry Summers, that we heard about from Bill Dudley, and people laughing, and I just say Bill Dumpy said that in the summer of now that he was talking about maybe summer twenty one, rather talking about maybe they'd have to go a whole lot further than people thought they would seth Carpenter, thank you so much for all

the time that you've spent with us this morning. It's at Carpenter of Morganstown, Stanley right now. He's the President of the World Bank. Of course. David Melfest joins US. I need to clear something up off of a political article. And this is the uproar about senators in your tenure at the World Bank, where something was said, you're not a scientist. I fell off my chair because you are

the physics major from Colorado College. Always clarify right now your position with the World Bank, given this turf floor, this political war in Washington. So it's very clear that people cause greenhouse gas emissions and that affects climate change, and so that should have been clear in the original remarks. And whether you're a scientist or not doesn't matter, and

so it got off track. I think we're back on track because what the World Bank is doing is a massive amount with regard to climate change, both in countries that need adaptation living with the changes going on and with the mitigation. So there's this intense focus within the World Bank on these efforts. And what's great about this, folks, And this goes back decades and decades. One of the

coolest science majors in America was the Colorado College. The way they taught science at CC was so different back when male passes there. In physics, let's go to the equation S equals V O t plus one f GT squared. There's the gravitational constant and they're not seeing till the derivative giant says that g matters. Right now, what does the new gravity of higher yields and inflation mean for the debt build up at the World Bank confronts So

within physics, the gravity is always there. Within economics, there was this temporary period where interest rates could be at zero and there were various explanations of why that was working. Now it's to where there there is a connection between interest rates and inflation. So the central banks are moving up toward some kind of neutral where it's non inflationary.

Fiscal policy is also changing massively. One of the themes of this week for for the for the advanced economies is how do you mesh those two policies, the fiscal and monetary policy, so they don't conflict with each other. So if that means you're tightening on one side, do you want to tighten on another? What does it mean for the World Bank? And there are billions of people in the world at heel to the Bank of England and to the Fed. It this is a really challenging

and I call it a crisis facing development. People living in developing countries aren't getting capital. In fact, there's a capital outflow. They're seeing their currencies weaken and and a lot of their debt is in dollar terms, So as their currency weakens, the burden of the debt goes up and interest rates are going up. So that's really a trifecta triple uh, a triple burden going onto the countries.

And many of them had built up debt under COVID because that was the that was the cyclical the countercyclical response. So there's been a lot of talk the last a couple of days about ways to have a better debt restructuring process for the countries that hit the wall, somehow seen through currency. From Mondale to Jacob Franklin on we've studied foreign exchange on this, but the modern equivalent is in the derivative space and the immediacy of overnight swap lines.

This goes back to your bear Stearns tenure. Do you feel we have a stronger structure now with swap agreements with the rich guys the FED to allow the World bank community to have liquidity in these distorted times? Um, So, developing countries have a challenge and find finding swap lines. Some do with with the I m F or with the US FED, but for the poorer countries in general, they don't. They may be able to arrange something, but

when that happens, that means you're under the gun. So a better way to do it is to find a way to get to actual debt reductions so that you can have light at the end of the tunnel, get out from under the debt. So that applies to the to the lower income countries. You know, we're up to where there are dozens and dozens that are where the debt is unsustainable, and that means you need to have some solution to go through it. That's under discussion challenging

times to say the least. David Melvis, thank you so much for joining today. He is of course with the World Bank. 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 Bloomer