Bloomberg Audio Studios, podcasts, radio news.
Let's get a little bit more detail. This is the ecan function on the Bloomberg terminal. It really helps to break down the different inputs to overall CPI. The yellow bars core services, the purple is core goods, then the red is energy, and then the blue is food. And what I find really interesting about this is a disinflationary trend that we saw back in twenty twenty four is
basically over in this last read. Maybe a little touch of a disinflationary trend when it comes to the core goods, but for the most part, everything else energy and food as well as services is still rising now. Albeit services inflation has come off the boil from one of what we saw back in twenty twenty four in July, but still we're right around forty year highs. And anyway you look at it, those prices appear sticky plus for I mean, if the disinflation narrative is over, then what then what?
Let's pose that question to our first guest kicking this off to the close is Esther George of course, former Kansas City Fed President, and Esther, you've had a lifetime, really of doing this you've seen these various inflationary cycles, these various economic cycles. Should we be worried about a potential resurgence in inflation or is this just that normal sort of bumpy road down to what I guess most of us hope is going to be that two percent target.
Yeah, well, thank you for having me today. And I think you have to be worried about this inflation, not because what we've seen so far tells us that there'll be a resurgence, but because this level of inflation has remained well above the Fed's target. That, of course, is a principal job of the FMC is to make sure that inflation rate gets back to its two percent target in a timely way. And we've gone on some time now with inflation hanging out there ways above that.
How dangerous is it? Though? I mean we still talk at least if you take pals preferred measure the core PCEE, I mean we're basically at around three percent on some of the headline CPI numbers. We're certainly in an area that I think a lot of people can live with, whether it's the economy, whether it's corporations, or whether it's the market. If the economy is healthy as evidence by
consumer spending, as evidenced by the labor market. Should we still be quibbling over three point three percent on core CPI?
Well, I think you do want to quibble over it, because once in inflation psychology gets embedded in an economy, you begin to see inflation expectations change. And it's one of the things that would have my attention right now is the FED has been able to rely on anchored, well anchored inflation expectations over the course of this post
pandemic period. But if you look at recent prints, you will see that those are beginning to drift up and even consumer expectations or begin to signal expectations of future inflation. And that's why, in addition to the FED zone credibility, you want to anchor that inflation at the Fed's stated two percent target.
A lot is being made though esther on seasonality, and there's January season atalie sort of post vacation movement there. You also had LA wildfires, etc. Do you buy the seasonality argument, Well.
There's always an element there that you have to take note of. But I think what's particularly important right now is this is just a one off data print. You have now seen a succession of reports that are telling us that inflation is hanging in there in the three
percent range. And even though that's not the Fed's preferred indicator when they are making decisions, the truth is CPI tells us something because so many contracts in our economy are based off of this, and so it's not to be ignored, I think, and just dismissed at this point, and I'd be paying very careful attention to the numbers we've seen come in now.
Clearly at the FED, you guys look at PCEE versus CPI. So is there a level for PCEE that you guys used to talk about. Okay, that's a hurdle for say, talking about hikes.
Well, I don't think there was a particular level to talk about hikes, because what you're always trying to figure out is that that core level telling us something. Is that the headline, which can be volatile, as people know with food and energy cost. I think what we've seen over the past few years, though, is something quite different.
This is really telling us that there is real inflation in the economy, and the FED has been quite clear as I think they have to be that they will not be satisfied that they have achieved their mandate until they get back to two percent on a sustainable basis, and so there's more work to do here.
Clearly, are you, generally, though, satisfied with the communication that we're getting out of the Fed, whether it's coming directly from Bow or from some of the other FOMC members, Is that helping.
Well? The markets I think have already begun to take note that this idea of a steady pace of rate cuts is not likely to happen. And of course, with a hundred basis points of cuts last year, the most recent one in December, those expectations are beginning to shift. And I hear that in the communications from the FED, which is to say, we are not going to be moving. We have time. We want to watch and see what
happens with the data. And this is true not only for inflation, but you see a number of other policy implications coming down the road as the new administration begins to look at various levers they have for the economy.
Does the FED have that luxury of just waiting and seeing and they've been waiting and seeing for a while now. We played some comments earlier from Muhammadel area, and he gave an interview on Bloomberg Television where he talked about, in his words, what he sees as a lack of strategic vision on the part of the FED, this idea of just wait for the whites of the eyes before
you shoot. And now he seems and certain folks in the market also seem to think that maybe the FED should be a bit more proactive.
So I think the FED is certainly going to have to be talking about this. And if you listen to their language, they continue to refer to current interest rates even at that four and a quarter four and a half to be in restrictive territory. Some refer to it as meaningfully restrictive. Some have said maybe it's getting close to neutral.
And so I.
Suspected their upcoming meeting this has to be a real point of discussion, is really narrowing in on where they think they are and how they will communicate what their stance is going to be relative to the objective that's in front of them.
Esther, isn't it all confusing as to why it seems like the feed through from rates from monetary policy to the real economy has been somewhat stemied.
Yeah, I think that's been interesting to see whether the transmission of policy has changed, and you can look at some of the reasons why that might be. For example, just look at a market that tends to get hit directly in real estate, and particularly residential real estate, when most of the mortgage holders have locked in low rates, it will make the transmission of that policy different this
time and slower. You also see that I think when you look at services, a services economy has a different traction I would guess as it relates to that policy transmission. So it is a challenge for the FED coming off the pandemic, coming off the supply chain issues that were
complicating their analysis to really understand transmission. I think the risk, of course, and one they must be very mindful of, is that waiting too long carries important risks until they bring that inflation right back down.
Esther, was a true pleasure to get your perspective. Thank you so much, Esther George, former President and Chief Executive of the Federal Reserve Bank of Kansas City,