Surveillance: US Inflation Tops Estimates

I think you know, Mike nailed it earlier. I mean, if you there's any doubt at all about seventy five, they're definitely going seventy five. And then you know, Lisa, I think you had a very good comment there as well. What does this mean about November. I mean we thought they would be stepping it back to November to fifty in November, and at this point you would say seventy five is certainly going to be on the table there in November. Jay, how do you take this data, this

financialization shock over to the real economy. What does this eight thirty numbers signal about potential slowdown and economic growth? Well, you know, I think what you're looking at here is there's two things that's going on with the inflation right. One is that inflation is going to continue to eat into nominal income. And so what we've seen if you're looking at real disposable income year over year UM, at least in July it was down three point seven percent UM.

And so you can't continue to have consumer spending grow if real income is contracting like that. So that that's the first problem with inflation. The second problem is it puts the FED into overdrive. And if they're in overdrive, sooner or later they're going to make a policy mistake. And if we're talking seventy five, as far as the eye can see, they're going to make that policy mistake and then potentially can put the economy into into recession, which is what we think is going to happen early

next year. J Why did almost all forecasters get this wrong? Well, there's you know, there's there's a bunch of volatility on a month by month sort of basis. Here, Um, we were above consensus, but we weren't at zero point six. You know, I think that the big thing here that's really pushing a lot of this and this is why it's going to be hard to bring inflation down in

the near term. Is the shelter component, you know, the way they treat shelter, the way they treat housing in here comes in with a long lag and we all know what's happened over the last year or so. Housing prices have exploded and it came into the CPI relatively slowly. It's coming in with a vengeance. Now. The problem is it's going to continue to come in UM as well, and so that's going to keep the CPI inflation rate

elevated for the foreseeable future. And many FUNE officials have given us the impression that what they wanted was two or three softer inflation reports to rethink the trajectory of right hikes at Leasta mentioned and you alluded to it. Do you think this really disrupts their ability to say

in November that we need to go a different direction. Well, yeah, I think, Well, obviously we've got a lot of data coming out between here in November, so you know, we'll we'll see, right but you know, if they want to see two or three soft prints in a row, we've just set reset the clock back to zero right now. And so UM you know, seventy five. Obviously it's on the table. I think in November we'll see what happens to the real economy that we know. We'll have you know,

two more UM employment reports between now and then. That'll be key. UM. So if you do see slowing in the real economy, maybe it backs off. But right now we haven't seen a lot of tremendous amount of slowing in the real economy, and that keeps these supersized rate hikes in play. Jay, can you tell me where you expect to see unemployment by year end? And at the moment, this fat as you know, it's very very focused on the one side of the man date bringing inflation lower.

We're all trying to work out whether the two sides of the mandate come into more conflict as we get closer to year end. So our our view, m John is at the end of the year, you're looking at an unemployment rates are around three seven or so. So I think that's still a very very tight labor market. Now, as we go into early next year and as we see uh, you know, the deceleration and then contraction and economic activity, I think that's when you see the unemployment

rates start to move. But if we're still at three seven or to say we're still below four percent, you know, we still have a three handle at the end of this year. I don't think the Fed is slowing down at that point. What does this say J about the inertial force of supposed disinflation. I think we're talking about getting to five or four percent inflation out there. But do we blow that up today and say simply our path is to get to seven or six point nine

percent inflation? Well, Tom, I do believe that you are going to continue to see So our view that inflation starts to recede next year is predicated on our view that you do have a recession. If you do have a recession, then what you do see is goods prices will definitely start to decelerate as well service prices as well. You know. The good thing, if there's anything that that's good here, is that we have not seen inflation expectations

become quote unmoored. That's a that's a word that the Federal uses all the time, um, and so that's a good thing because if that does become unmoored, then that creates it's it's its own dynamic as well, people start to pull forward their expenditures, which pushes up inflation. They asked for higher and higher wage increases as well. Fortunately

we haven't seen become unmoored. But if you continue to start to see, you know, continuously prints like this, then you do start to worry about that happening for all of you. On Bloomberg Radio, Bloomberg Television, Dr J Bryson whether this as well as Fargo here a stunning inflation report, John, Is that the right word? Stunning? Surprise? Tom, stunning inflation report. Futures turn around and I'm doing the math in my head, John,

help me out here. Two point five percent flip flop and what we see and the disrupts the idea that this fed came back away anytime, Saint Thomas, a bit of all, I'll go with this disruption, or just to say that we got to rip up the script and come up with a whole new dialogue. We do that with Michael mcugh's dives into the inflation report a little more. Michael, what is the distinction between service dynamic and goods dynamic? Well, right now it looks like services are starting to pick

up some speed. Here theres is less energy rise by six tenths of eight percent. That's after four tenths last month, and now services are up six point one percent over the year. So we are seeing service prices start to rise, and you can see it in a number of areas. Interestingly, education tuition, college tuition. It's time for kids to go back to school, and that was up half a percent, a fairly strong increase for that category, so yeah, you

would know something about that, tom. We're also seeing uh, motor vehicle insurance up one point three percent, that's been an ongoing issue, and airline fares four point six percent, but they had fallen seven point eight percent the month before, so we're losing a little of the benefit from that, so you are seeing services rise. Uh. There was one thing I did want to mention. Somebody asked me this morning if we could mention this because it matters to

senior citizens. The consumer price index for urban wage earners was up eight point seven percent. We'll have to see what the net the average numbers come out to be once September's numbers come in, but that will lead into the Social Security cola, and if you're looking at an eight point seven percent, that's gonna be pretty big from London, which is looking at me. I'm in London and the keys looking at me. My mcate is going ahead for me, said, it's right to have you write that down for us.

Alongside Jake Bryson of wilst Foggo. I'm gonna totally avoid that. I'm focused on this market. This is brutal and again I'm gonna watch the bond space. You're gonna see a breakthrough of the total return aggregates of Bloomberg price lower. We have never seen this before. Devid Kelly joins us now to talk about this, the chief global strategist at JP Morgan Asset Management, David. We've given everyone the opportunity to respond to the data. So far, it's about an

hour old. Now your response to it. No, it's it's a little warmer than expected. But I'm not going to call one tenth of a percent of an increase in prices a hot inflation report. What's happening is it's cooling. There's just a few hot spots there. There are problems getting all of inflation to come down, but the cooling trend is there. I think markets overreacting to this. UH

In particular, there's a big chunk of inflation. The CPI thirty is in shelter and that's up seven tenths of percent, and that's really what's driving a lot of the underlying um you know, resilience of inflation here. But a lot of that is you know, owner's equivalent rent. It's a very you know, almost a mythical concept because nobody actually pays owner's equivalent rends. So there are parts of inflation

hanging on. But I think I think it's really important direct ignize the economy is cooling here, uh, and a lot of the things that pushed up inflation are cooling off also, So we shouldn't, you know, we shouldn't get messed up by by the fact that it was a little higher than consensus here. The big story here is inflation is actually coming down, David. That is convenient for

a lot of the bulls. And yet the story that people are seeing right now is that the hope was, we would say, a much faster disinflation that would get the Fed not perhaps a raising rates as much as they were saying, how can you lean against this? What parts of the market are most overreacting from your perspective, Well, you mentioned financials, and I think what's going on is people are assuming that this will make the FED a

bit more hole Chris, and I think that's true. I mean, I think that the FED will now have more of reason to go seventy five basis points next week, and I think that's what they'll do. I think the ECB obviously just did that. I think the Bank of England will do the same. But I think the FED will also leave the door open to a more increase in November, maybe fifty basis points, maybe basis points in December, because what they are going to see is inflation continuing actually

to cool, because that's actually what's going on. I think we'll get about two tents percent in the September read energy prices are going to be down month over month in September. Also, I think we'll see the airline fairs come down a bit more. I think lodging will come down a bit more. We've got a big increase in tobacco prices, no reason why we get that two months in a row. So I just think we're over reacting

to this. Yes, it wasn't good news on inflation, it was worse than expected, but the big trend here is coming down. I think financials are over reacting. I have no problem with the tenure treasury up near three fifty. I think that's that's okay. But I think the assumption that somehow we're not dealing with invasion or is going to get worse, I think it's just wrong. What about

big tech, Dave? I mean, David, We're looking right now at three point one percent decline on the NASDAC and it's been a knee jerk whipsaw lower and it has had legs. Do you push against that? Not not necessary.

I think you have to go stock by stock because the the issue is there were a number of things that were overvalued based if you ever assumed a normal level of real interest rates, and we are getting back to a more normal level of real interest rates, and that is negative for UH for large cap growth stocks, which you know, which you were standing at very high valuation. So I do get that, and I don't you know,

I don't. I think it's really more of a return to rationality and a lot of the pricing and markets and that's no harm. But overall, I you know, I'm actually a politive on the equity market, and I'm glad to see so many people bearish, because I think that that sets us up to do a bit better over the next few months. David Kelly, what do you see among corporate earnings? Were really before the gaming of what corporate earnings are doing. But let's get out front with you.

How are corporations adapting to America's inflation? Well, it is, it is difficult. And you know, last year we had a spectacular year for earnings. This year, it would be lucky if we get to get out with the or in the year with a positive and operating earnings year over year. I think it could be negative next year. Yeah, I think we're going to see inflations or an earning squeeze. I mean, I mean, the reality is you've got this

growth in wages that is real. Companies can either pass it on or not, and I think they're gonna find it's hard to pass it on. And I think that's going to squeeze margins next year. So I do think that's whether we have a recession or not, we could end up with negative earnings growth next year. David, Like everyone out there on my cell phone, I have a real estate dump of whatever geography. I'm looking at doesn't everybody go out today and mark down the price of

their house for sale. Um. Yes, and it takes a long long time for that market to clear. But the but the reality is the average mortgage payment on a new home has gone up by sixty percent in the last year, and and that really that one. I do really blame the Federal Reserve for they kept great so low for so long that it caused it prices and now we can't deal with sure. I don't think there's enough enough people to buy homes when you push them.

The average mortgage rate or average mortgage payment up by sixty percent in the year, John, I think this is just absolutely profound. I can't say enough about sector to sector in inflation, the different elasticities are out there on homeownership and how it redounds over to rent, multi family nationwide, every region is different. Guess what this report is a game change. Core inflation came in after than expected, and shout is one of the most stickiest part of the

report when it comes to inflation. And David, I appreciate what you're saying that things might be getting better, perhaps not worse, but when you think about what the Fed will do not what they should do. David, can you talk to me about what you expect they will do. They've laid out their reaction function, They've they've told us how they respond to incoming information. Tell us what you think that means for what they will do. Well, I think what they'll do is they'll go seventy five basis

points next week. But I do think that in the press conference and perhaps in the statement, they will acknowledge the fact that inflation has cooled somewhat. But but they will say, you know, two data points are not good enough to to to call it a trend yet, so they'll have some caution there, but they'll put enough doubt in there to give them the space to only go fifty basis points in in November. So I think I think they want to set set it up that way.

They want to they want to put in a hawk ish move, but give themselves the opportunity then to put in a more dubsh language without being labeled as being soft and inflation. But you know, again I would focus on you know this shelter thing. Yeah, it's it's a long lagging problem problem in inflation. But if you think about it, how does higher interest rates help deal with the shelter inflation problem. I mean, if it stops people from building houses, how are you going to bring down rents?

So it's probably, you know, the very the one thing that that they're most worried about it, or the one thing that's keeping inflation high, is the thing that that they can fix the least by pushing up interest rates. There you go, Den Kelly objecting more an asset management. The message is a little cloudier and markets s t x c IO of flow Bank joining us. Now. We are seeing NAZAC down two point nine percent, a reset of the idea of a disinflationary tilts that we thought

would take hold but didn't. Are you rethinking any of your positions today? Well, it was never going to be a straight line down. We have a number of inflation data points that are still showing that disinflation is happening. Clearly, the core print for today was not fantastic, and we're seeing the disappointment in markets, especially because we had that expectations in the last couple of days that really ramped

up and boosted markets. From a positioning perspective. We still have PPI tomorrow, we have the Michigan numbers coming up at the end of the week. We had inflation expectations in the last couple of days showing us that those have come down quite sharply as well. So I think the disinflation trend is going to continue, but for today it's definitely going to be ugly. John, we're getting in those numbers right now. Peter book fire has one of

the isolated incidents. Health insurance up year over year. Services services is the distinction, without a doubt. With that in mind, got this tug of war between financial conditions and what is handling with the date and how the fetters responding to it, and investors who are hoping all of this goes away and next year at smooth sailing. What's your message to people that's still doubt the resolve of this

federal reserve. Well, there wasn't going to be a pivot, and there clearly isn't going to be a pivot anytime soon. I think Jackson Hole dispelled that idea completely. Anything that anything close to a pivot would just mean we're going to stop hiking, and that you know, happens at some point in and how many more percentage they get in before that uh, that number is going up of course for the with the November expectations rising as well, but

the Fed isn't going to blink. Inflation is gradually coming down lower than anyone would like, but the result is going to be very firm. Ste Where do I hide? Just as simple as my head is standing, this report wasn't what I expected. Where do I hide? To drag myself into two thousand three? So I think it's a bit too early to say that the entire end of the year is going to be bad. I think at some point we are going to have some improvement in markets.

For the time being, it feels really like the dollar is a great place to hide. The switch Frank. You were talking earlier about the Swiss National Bank coming in with those hikes, so switch Frank probably is another place to hide. But you're you know, you're making something in cash, and I think a lot of a lot of investors are going to be happy to sit in cash and wait for the picture to improve, hopefully over the next couple of weeks. ST. Thank you ST to act a

flo bank right now. It's a good oil we do this. Regina Mayor, Global Head of Energy and KPMG steeped in all the game the theory of her Rice University, Regina. I want to focus on the game theory right now of President Biden. In one chart I just saw in passing, which is our so called strategic oil reserve, and the proper scientific word for this is the volume we have

in reserve is truly cratered. What does that mean for America? Well, I just think we've probably reached a tipping point where it's time to focus on refilling the strategic control and reserve because it is an all time low um and I think we're sort of out of the woods from a US energy price pressure that was driving inflation and the things that I know the politicians were worried about coming into the mid terms, and that was the price at the pump. We see gasoline prices in the US

consistently go down and down and down. So I believe if anybody was taking my advice, it's time to start focusing on on restocking our spr and getting it a little above where where it is today. Can you get out the kufil a US or slide rules at KPMG and tell me how much a gallon of gas is gonna go up, as President Biden, your restocks a reserve are we're going up twenty cents a gallon? Fifty two

cents a gallon? What's that statistic? Now? Actually, I think we're out of the woods on gas prices, Tom, I mean I think that you know, we've done with summer driving season. We've got quite a lot of stock or fineries are up and running again. I'm less worried about

what that would do immediately to gas prices. I will say that what the administration did with regard to releasing fuel from the spr was one of the key things that the energy industry will say made a material difference in the summer peak season and when we set gasoline prices at their peak in June, Regina. That's a story

over in the United States. You're in Portugal right now, in Lisbon, and we're in London, and the focus very much as on energy, and it's a very different and multi pronged concern because it's not all gasoline or crude, it's natural gas, it's uh, it's it's some of the issues of nuclear energy. Over in France, from your perspective, is the plan that's coming to shape from the European Union of trying to cap demand will also providing up

profits from the energy companies two households. Does this make sense? Does it feel feasible to you? At least? I think that he's already made quite a bit of progress. So we have seen European gas prices draw more at a seven week low UM and it's off its peak on August. It's still eight times higher than normal, but there are bright spots. Gas storage is at right now and it's slightly above where they would have expected to be for the five year average. The countries have been working on

securing as much supply as possible. Now they're looking at packages to reduce demand and to cap what that would do to household income. It's gonna cost a lot of money. There's gotta be national budgets are going to be strained, so it's gotta be a lot of different things that that happened. I would not say they're out of the woods, because if it's a particularly cold winter and if you see Asian demands start coming back in where cargoes of lergy are priced up in a competitive way, that's where

things get really critical again. So not out of the woods, but the things that they have been doing in the

near term are having a measurable impact. Okay, Surgenda could just build that out a little bit of memorable impact in that we are seeing gas natural gas prices come down significantly, But is that impact going to low were them further as they are so eight times higher than where they were a year ago, or is it going to just keep them here, keep it just sort of a persistent crisis rather than something that is much more

acute and immediately needing to be addressed. Definitely, we're not out of the woods, and I think that the pullback in recent days is probably over amplified with what's happening in Ukraine. I think maybe there's a little bit of a rational exuberance about what happened, and maybe some people thinking, Okay, the war might be over and we can stop weaponizing gas.

I don't anticipate that at all. So while the measures are important, and what I see that you working on is a comprehensive package because you have to work on both demand and supply, no doubt it's having a material impact and it will have a material impact on the economy. I'm hearing from some executives here in Portugal, that their energy costs are in some cases a billion dollars over

write what they're expected energy costs are. All of that's gonna have a material impact on earnings, competitiveness, and they're gonna shutdown factories because it's too expensive to run them. We're already saying that, and we could see a hold on Mark on Prince and Winds. Gina Mada of KPMG at a listban port school Tonight. 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, and this is Bloomberg