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Consumers hate inflation. It reduces the buying power of their cash, it sends rates higher, and it makes anything purchased with credit even more expensive. During the COVID era, people walked down at home, shifted their consumption from services to goods. Supply chains became snarled. Then we had a massive fiscal stimulus and that is what led to the giant inflation
spike of twenty twenty one and twenty two. The good news is inflation peaked in the summer of twenty two and seems to be on its way back to normal. But that raises an important question for investors. Is inflation over and is the Fed done? I'm Barry Ridults and on today's edition of At the Money, we are going to discuss how to look at the data and think about inflation. To help us unpack all of this and what it means for your portfolio, Let's bring in Claudia Sam.
She is a former Federal Reserve economist and creator of what is known as the sum Rule. Claudia, let's start with a basic definition. What is inflation.
Inflation is the increase in prices, the percent increase in prices.
So we hear about all sorts of different measures of inflation. There's CPR, the Consumer Price Indicator, there's pceevre's consumption consumption right, there's core inflation. There's like a half a dozen different measures of inflation. Why are there so many different measures? Do they measure the same things? And which should we pay attention to.
It's absolutely important that we have a pulse on where inflation is and where it's going. So if something is a complicated phenomenon, you got to have multiple ways of looking at it. And the questions differ some so to the consumer price Index versus the Personal Consumption Expenditure Index, the CPI is pretty close to out of pocket expenses, and that the difference then is the Personal Consumption Expenditure Index, which is the one the FED uses and it's two
percent target. It takes a bigger picture on what's the price of all the things that we quote unquote consume. Healthcare is a big example of this. In CPI, it's only out of pocket medical expenses. In PCE, it's also the prices of things bought on our behalf, like by our health insurance, also by the government with Medicare. So these are two different things. CPI matters a lot to people because I mean, that's really what's coming out of
their pocket directly. It's also what's used to index Social Security benefits every year. So these are both very important. And this issue of total versus CORE and CORE is in the inflation taking out the food and energy. So the reason we talk about CORE, it's not that the FED is targeting CORE. The Fed's mandate is with all prices. What CORE is is it helps us have a sense
of where inflation might be going. Food and energy can move all over the place, and you don't want to get head faked by what's happening with gasoline prices per se. So the FED needs to have a sense of where things are headed with inflation because interest rates that tool, it takes a little bit to work its way through the economy. That's the reason that CORE gets as much attention as it does.
So we saw inflation tick up through the two percent target I want to say, first quarter of twenty twenty one, on its way up to just about nine percent. It felt to me very different than the inflation we experienced in the nineteen seventies. What is the data say, is this inflation similar to what we saw in that decade or very.
Different versus in the nineteen seventies, we had high inflation for many years. It was a kind of slow burn on the economy. We also had high unemployment at various times in that period. And it it had this, there was a lot of demand behind it. There was some energy shocks, like there were other things going.
On in Bargo in seventy three.
Yeah, but we talked about the We had the guns and butter as they call it. So there was a big effort with Vietnam, and then there was a big Great Society like program to spending. This time, we did have massive fiscal relief. Everything from the Cares Act through the Rescue Plan was pushing out a lot of money to help people in small businesses and communities. We also had these very strange disruptions, and you talked about several them.
I would add to the list. When we shut down the economy, not only did people switch from services to goods, they didn't spend as much, and so you had this big pentup demand even from people who did not get the fiscal stimulus. So when the vaccine started rolling out in twenty twenty one, you had this massive pent of demand that came out at the same time relief was
going out, and that, you know, the pentom demand. We talk about the quote unquote revenge travel, right, the summer of travel, Yes, and so that had that was shutting down a twenty trillion dollar plus economy is just like unfathomable. And it turns out that flipping the switch back on was really hard. And one place that that difficulty showed up was in inflation.
So investors who were tracking these various measures of inflation, what should they be paying attention to when inflation is on the rise.
It's very important right now to not get hung up in every single data release. We've seen a lot of progress with inflation coming down. There is absolutely going to be turbulence on the way down. Not every data release is a good one, and the Fed knows that, so, I mean, this is not news to them. I do worry sometimes that investors get pulled around by the latest number. It's about looking for the trajectory, like the momentum, and
inflation is complicated. It is important to look under the hood at what's going on.
So you mentioned the federal Reserve. Obviously, we can't talk about inflation without mentioning them. They have a dual mandate full employment and stable prices. What does Jerome Palel, the Federal Reserve Chairman, pay attention to when he's looking at inflation.
That it's coming down. I mean, the FED is going to keep going until they have inflation at two percent in December. At their last meeting, for the first time, there was a little more of this tone like, oh, we're watching unemployment too. So they do realize they are making a lot of progress towards two percent. It is essential that they get both sides of their mandate. The FED is not just about inflation.
And j.
Powell in his entire tenure as FED chair has really emphasized, Hey, we know we have that employment mandate, and that's heartening, and that's the law, right that's what Congress gave them as a dual mandate. And yet right now the FED, in terms of the decisions about when do we cut interest rates, how low do they go next year, is all about the inflation data.
So let's talk about the FED Open Market Committee and the raising of rates. Typically, when the FED raises their rates, it slows the economy by making consumer credit more expensive. This is credit card, debt, car loans, mortgage is and that tends to slow the economy. But it also comes with what everybody calls a long and variable lag. Tell us about why it is so difficult to tell when Fed policy action makes its way into the economy.
The Fed's policy tools are very blunt, and over time they have made them even harder to figure out what's going on. So the Federal Reserve right now has raised interest rates well over five percentage points, and they did it very quickly. The discussion has turned late last year to when are they going to cut? When are they going to reduce interest rates?
Okay?
Jay Palell goes out after the committee meeting in December does a press conference. Another one of the Fed's new tools is communication policy, Like what the what Jay pal says? As far as I was concerned, as someone who listens to a lot of Fed speak, Jay Palell's press conference was basically pop the champagne bottle. I mean, it was just a very like we're headed towards this off landing,
we're gonna cut without any specifics, right. I don't want to overseew what he said, but I mean markets, they heard a lot of what I heard. Interest rates have moved down considerably. The Fed hasn't even cut yet. This is where they say, maybe those aren't so long and variable lags. They might actually be some pretty short legs, because the market's already like ahead of them. But it's
because the FED told them like this communication. It's not just the Fed or the markets made it up like they're listening, but the Fed doesn't know what it's going to do.
So I'm glad, glad you brought up that aspect of it, of the jaw boning for some younger listeners. I remember when I started forget press conferences, there wasn't even an announcement that the FED had changed interest rates. The only way you found out about it is you saw it in the bond market. The world today is so different than it was in the ninth eighteen seventies, and maybe that's why so many of the economists who came of age in the nineteen seventies seem to have gotten this
inflation spike wrong. They saw it as a structural, long term issue, but it seems to have been transitory. Tell us a little bit about team transitory.
I'm a card carrying member of team transitory. I would never have used the word transitory. Economists should not be allowed to give names to anything.
Well, everything is transitory if you have a long enough timeline.
I had someone on Twitter ask me, aren't we all transitory? And I'm just yes. It's like, let's stick to inflation.
Eventually heat death will take over the universe and everything will end. But on a shorter timeline, there's a difference between structural inflation like we saw in the seventies that lasted almost a decade and this up and down inflation that seems to have lasted less than two years.
Absolutely, the concern in this cycle, the frankly I think there was frankly overplayed, was the idea that we were getting embedded inflation, that we would have an inflation mentality like set in after a decade in the nineteen seventies.
That was the big concern, and that's the embedded inflation was then Fedchair Vulcar's reason for just like really pushing up interest rates and without a lot of warning to your point, but this time, if you have temporary disruptions and they're the form of these supply disruptions, that really aren't about the FED. Typically, if you have those disruptions like you would have during a hurricane, the FED is supposed to look through it in that they don't react.
That was what they were doing in twenty twenty one. They're like, this is not us. Unfortunately, these disruptions took a much longer to unwind. J. Powell talked about as Yeah, it was two year transitory, not one year, and that was too long, right, And that's why the FED did get in and they were concerned that as inflation stays high, people would get it in their mind, oh, this is just the way it is. We never saw a sign
of that. It's extremely important and the disruptions, the supply disruptions, really have work themselves out. Now there's a question. I mean, the fearmongers will not go down without a fight. That it could be that what is left in the inflation is demand driven and is about the FED and could get embedded. So that's not my read of it, but it's a risk people should pay attention to.
Ed Ardini has this really interesting observation quote, inflation tends to be a symmetrical phenomena. It tends to come down as quickly or as slowly as it went up. When measured on a year over year basis, we see this consistent pattern in the CPI inflation rate for the US since nineteen twenty one. Really quite fascinating.
I sure hope we get that. You know, I've become so skeptical of historical patterns just because the you know, and the it was the nineteen eighteen pandemic, so you got to go back a little further to what we've seen. But it makes a lot of sense because inflation is not just this blob like there are. There's a lot
of pieces under the hood. And if you have a very like quick shock like we had, and if their supply or something that's that would be very indicative of a temporary you really jack it up and then it comes back down quickly, as opposed to if it's demanded. You have the inflation mentality it like, you slowly build that up and then it can be hard to shake.
So last question, what should investors be on the lookout for when it comes to falling inflation?
Since the summer of twenty twenty two, we have seen steady declines in inflation and even the momentum picking up some towards the end of last year. What we should be looking for is that momentum to continue. If we get stuck in the first quarter of this year, the Fed is going to react very differently, maybe could even
raise rates. So what we're watching is, hey, is this more of these disruptions onwinding, in which case they could keep it coming down quickly, or have we gotten into a place where this somewhat above the target inflation is happening and the Fed is going to get two percent. The Fed knows how to get two percent, but it may not be pretty really interesting.
So to wrap up, investors and consumers who are concerned about inflation should be aware of a few things. First, be aware of the recency effect. Don't let any single month's data point throw you off. Use a moving average. This data series is very noisy. At any given month, you can have really good or really bad number. You have to look at the trend. Second, when it comes to the level of inflation, look at CPI on a year over year basis. That'll give you a sense of
where we are over the long term. And lastly, if you're a consumer concerned about inflation, take an honest look at your wages. Sure, inflation has risen, but so too have salaries. In fact, the salary component of inflation is significant. Hopefully your salaries have risen enough or more than inflation to maintain your buying power. I'm Barry Ridolts. You're listening to Bloomberg's at the Money
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