For The First Time In Years, Why People Are Suddenly Talking About Inflation Again

seemed to be mutating. And at the heart of these big changes that we're seeing is a very important debate about the economy, and that is whether we're really seeing a pickup and inflation for the first time in a long time. And so if you weren't aware, basically since the crisis, we've been seeing this incredibly mellow inflationary environment around the world, not much pricing power, not much acceleration

in wages or anything else like that. And of course that's made central banks job very easy, because they're tasked with maintaining stable prices or in the US, stable prices and full employment. But if prices are just really stable, then that makes it easy. They don't really have to

do anything for the most part. And so if we're starting to see a turn, if we're starting to see inflation really gained some teeth and accelerating prices and so forth, then that raises the question of whether central banks are going to really have to change their approach since the crisis. And if central banks changed their approach since the crisis, that could have potentially big ramifications for all sorts of markets,

risky assets, bonds, and so forth. So this question of whether the uh, the Goldilocks era of inflation not too hot not too cold is going to persist is top of mind for a lot of people these is and so answering this question is crucial, and so that is what we're going to try to do on today's episode. So, without further ado, I would like to bring in our guest. His name is Michael Ashton of Enduring Investments, and he is on Twitter at the Inflation Guy, and he tweets

very knowledgeably about inflation. Every time new data comes out, he breaks it down, and there's probably nobody there's probably nobody better to help us answer the question of what the heck is going on and what's about to happen. Michael thank you very much for joining us. Thank you very much, Joe. It's good to be here. And I'm I'm sure I speak for Tracy and saying that I'm really sorry that I'm missing this. I feel very sorry for Tracy that she's missing this huge She will be devastated,

but I'm very excited. Let's talk first about your background. So, as I mentioned, you're the atflation guy. That's literally your Twitter handle. You right, every time there's a new economic data release that has the latest inflation data, you really dive in and break it down and look, what are the components, Why did it move higher, why did it move lower? What's your background? How did you get to be, uh,

the inflation guy? Well, let's see. I I've I've been in financial markets since the early nine nineties, I guess since nine and I've spent a long time as a strategist, fixed income strategists for a lot of the big shops out there, bankers, trust, JP Morrigan, that sort of thing, and then got into trading around two thousand for Barkley's. And I was trading options for Barkley's when Barkley's, which at the time viewed themselves as actually they styled themselves

as the inflation house. You know, at that time, inflation derivatives were just getting started in Europe and they're just case start in the US. And Barkley's said, you know, we really need to get the US inflation derivatives market going because that's good for Barkley's. And and I was, you know, I had a good strategist background, a good

trading background. I spent a lot of time writing as I do now and explaining things, teaching, training and so on, and so I had a very good, uh well rounded background to go and be be made the inflation guy. So uh so you come to it from both a theoretical with a theoretical background, but also the trading world background. That's right, inflation derivatives. So inflation is an economic measure, but derivatives are essentially instruments that people can use to

bet or hedge on specific outcomes in the economy. So theoretically, you could construct a instrument that will pay off X if say the CPI rises to two point five percent next year or something like that. That's right, And actually inflation derivatives generally pay off on the price level. And

we've tried a couple of times to create CPI futures. Actually, one of my big flubs was in two thousand and three, I persuaded the Chicago marke Until Exchange to launch CPI futures, and I suggested they should look like euro dollars, and it turns out that that's not at all the way they should look. And so I was the market maker for these these futures and they didn't really do anything and eventually got delisted. But we figured out that rather than trading on a rate in general, when you what

you're really trading is you're trading the price level. And so you can obviously figure out the price level today versus the price level ten years from now. We can figure out what the rate is, and that's what goes into yields and things like that. Is that expectation, but

it's really the future prices that you're trading. I don't want to go too far down the rabbit hole with inflation derivative, but anytime I hear about things like this, I one of the questions that I always ask in my mind is who are the natural sellers and buyers of this product? So I could imagine that a fixed income portfolio manager whose assets would stand to lose a lot of money would want to protect against higher inflation. Who is the natural seller of that protection. It's interesting.

I think the way that inflation derivatives are structured, you really do tend to have an imbalance, and so the supplier tends to be the government through tips, right, so the government tends to be the payer of inflation. And that's actually been one of the big problems with the inflation markets over the years that lots of people and most consumers, you know, we're exposed to headline inflation or something which kind of looks like it, and that's what

tips pay. But the issuer side, incorporates, they aren't exposed to headline inflation. They're exposed to uh, you know, if your caterpillary, you're exposed to farm implements inflation or you know, things like that. And so we haven't seen corporates issue that sort of bonds. That's interesting. I hadn't thought about it. So they are affected, but it's very a very narrow

slice of inflation. Let's uh fast forward a little bit to the post crisis period, and why don't you describe what we've seen in inflation in general over these last several years, which I sort of set up the sort of goldilocks scenario. Yeah, you know it. It really turned out to be a wonderful thing for central banks, as

you alluded to. You know, if you're fighting fires and you don't have to worry about any you know, nearby buildings, Uh, then it it turns out to be much easier than if you have to worry about everything else catching on fire. And central banks didn't have to worry over the last nine years about anything catching on fire. They could spray their hoses whatever they wanted and not really cause any

inflationary problems. And so we've had this continued low inflation A lot of people have called it initially after the crisis that was caused by housing prices going down, But even since then, as housing prices have come back up and housing inflation has come back up, other prices in the economy and mostly important goods, have tended to restrain the overall level of inflation. How much of this restrained inflation is essentially a matter of under utilization of economic resources.

So we've overbuilt a lot of houses prior to the crisis, during that boom, and so then if you owned houses for a long time, you didn't have much pricing power on rent and so forth, they're selling your house, And there was a lot of unemployment, and it's taken a long time for unemployment to come down. So if you're a worker, you don't have a lot of theoretical bargaining power.

Various versions of the same story of overbuilding, lots of resources that are still being under utilized, and when resources are under utilized, no one can really raise prices. How much does that explain in your view, the muted inflation. Well, I tend to push back a little bit on the whole, on that whole notion, it's certainly true at you know, in bubble periods, things like houses that got you know, too expensive and then got very cheap, and and that

tends to cause ripples in in inflation. But over time, what you're really looking at with inflation is what's happening to the currency, you know, in general, what can you buy over time? And that's not really caused by the relative supply and demand dynamics, um, It's caused by how

much money is out there chasing how many goods. The classic monitorist explanation of the thing you know all the other things that you describe, and you know, shortages of this or that or too much of this or that cause relative price changes relative to the overall rising tide, if you will. And so you know, we we have these general forces on housing that have caused housing prices

to to escalate faster than incomes for a while. And you have the strong dollar, and you have globalization that that has tended to depress goods prices for a while. But overall, over time, if you if you keep adding money to the system, then the overall price level changes. And this is this view that you espouse, the sort of monitorist money driven view. It's not really the I mean a lot of people at the FED would sort of take my the way I said that, which is

this sort of more Phillips curve style. You're not going to get inflation as long as you have capacity under utilization, and that inflation will really kick in now or soon once we finally are using everything and everyone is labor bargaining power. So talk a little bit about this debate and this sort of like because I think it's really uh a fundamental ideological question about what causes prices to rise. Yeah,

I think it's really interesting. Obviously, when we go we learn economics, we tend to focus on supply and demand curps, and so we tend to think about the idea that if you increase supply, you d decrease prices, and if you increase demand, you increase prices. And I think that the problem comes when you try to aggregate that to the overall economy UM and I s l M curves and there's lots of fancy Keynsian you know, macroeconomics to go and describe what happens, but you sort of lose

the forest for the trees again. You start talking. You take what are really micro effects and they don't really aggregate very well. So when you look at the central bankers around the world, ironically, I guess, since they're supposed to be managing the money supply as you, you don't have very many monitorous left. You have You had Daniel Thornton at the St. Louis FED who's retired, and then my friend Samuel Reynard at the Swiss National Bank who's

still publishing. But other other than that, there aren't any publishing monitorus out there anymore. Does this differing framework explain in your view why the FED has been basically persistently

wrong on inflation throughout this entire cycle. Incidentally, they've been, uh, they've been pessimistic relative to what happened unemployment, So they keep unemployment keeps falling faster than what they expect, but they keep missing on the inflation front too, So they expect inflation to come in higher than it does, and then every time it comes out it disappoints them. Is that error, in your view, attributed to what you see

as an incorrect model? Oh? Absolutely, I think that that you can take an incorrect model and try to parameterize it better and you still have an incorrect model. And that's what's happened is every time they have a bad prediction, they look at the model and they say, oh, well, I guess you know the natural rate of unemployment must be lower. Well yeah, or maybe that doesn't have anything to do with it. I mean, it's possible. So what

is happening right now? Because as I set up in the intro, after many years, it feels like the debate is back and maybe for the first time in a while, people think inflation could go meaningfully higher. Before we asked why, like, would you agree with that that it feels like we're

at some sort of turning point at least into debate. Well, certainly the debate has has uh and we see it in our business every day with the amount of inquiry we've gotten over the last couple of months is just an order of magnitude different from what we had the three months before that. So the Keynesians would say, we're finally tapped out that you know why, we've been underestimating

how strong the labor market could get. But we were, We knew it was going to get somewhere, and we're finally hitting it and there really aren't any spare workers left or very few, and that means that the people that are in the labor market, there's a lot of demand coming. They're gonna ask for wage increases, that they're gonna go out and spend more on rent, and they're gonna buy stuff that we can't build in all this and we're finally seeing that. So what is wrong with

that story? Pretty much everything? But you know, I really love the wage push inflation, you know, our hum It's always sort of fun to me because if you think about it, if wages caused inflation. Higher wages caused higher inflation, then we would all love inflation, right, because our wages would go up, and then prices would go up, and so we that leaves us in a good position, right,

and businesses would hate it. And in fact we see exactly the opposite, that some inflation is good for businesses because they don't have to make wage adjustments right away, so wages tend to follow inflation. Actually, I got to give some credit to Bob Shiller. He wrote a paper about that, probably thirty years ago when he surveyed people, and in the name of the paper is something like,

why do people hate inflation? And it turns out that we all know that if the prices go up, that our wages aren't going to go up first, they're going to go up afterwards. Do you think there's a inflation fetishism to some extent where we forget that nobody really likes to pay more for stuff, and we talk about things like, oh, the fet is uh missed on inflation, or inflation came in weak or whatever, as if people just sort of have got into their minds that higher

prices are good. Yeah. It's it's strange too, because you know, if you talk to somebody from South Africa or from South America where inflation is higher, and they look at our obsession with one in three quarters versus two and a quarter, and they just laugh. I mean, it's just absurd to be that, you know, focused on these these

little things. But I think that the general view in the economics community, I guess I don't disagree with this is that some small amount of inflation add some lubricant to the economic system, allows you to decrease your real costs without decreasing your decrease the real wages you're paying without decreased the nominal wages you're paying, and so on. I'm glad you brought in the international angle on this,

because I wasn't thinking about that. But I always have found it to be pretty funny when you hear things like, oh, Japan, they can't seem to generate any lation. Is this big crisis. Meanwhile, unemployment is at thirty year loads said, they have a standard of living that's the envy of the world, and it's like that sounds like a pretty great problem to have if the only if everything, If unemployment is really low and they're one of the richest countries in the world,

and your big problem is that prices aren't going up. Yeah, it doesn't really sound that bad. No, I've never I've never really understood that. And I've asked people it's not gonna I've asked guests on TV and other stuff, like what's the big problem? And I have to say, I've

never totally heard as satisfactory answer to why it's so bad. No, I think that, Uh, it is funny that that for as good as that situation is, the Bank of Japan is is working very hard to completely ruin the entire future of Japan, right, I mean it's they really didn't necessarily have to do anything. Actually, you know, going back to the money supply, you know, the bank in Japan for many years struggle with money growth in Japan being around two percent or one percent, and that's the reason

they had low inflation. Now it's getting up to four something more reasonable, and they're starting to see inflation. But in the in the process, they've managed to completely nationalize their financial may a very interesting experiment, right that. See how all in the service of getting inflation from zero to two. It does seem a little odd when you put it that way. All right, let's go back to

the U. S and area. You you mentioned that the last three months you've seen so much more inbound interest in uh figuring out what inflation is going to do, versus the three months prior. We're certainly talking about it a lot more. Here. You've dismissed the Kynesian story, which is that, uh, the unemployment rate finally hit a point where there's not much more slack, and so you've dismissed the sort of wage wage push story. Okay, so that's not right. What is changing? Okay, So there's there's a

couple of different things here. One is that the increasing interest in the last couple of months is mostly due to the optics of inflation. You know optics. It looks like inflation is suddenly accelerated. Well, it really hasn't. The underlying level of inflation. If you look at you know, median inflation, or you look at something that moves more slowly,

you see that inflation itself hasn't moved very much. But what we're what's happening is that these we had all these one offs, you know, cell phones, We've been talked about a lot, but there's other one offs and they're all fading, and so we had this decline and core inflation that's just coming out of the data. You know, the next six months, we're gonna have core inflation going from where it is now to you know, up to two point three two point four, and people are going

to think the sky is falling. But most of that's an illusion. Inflation is going slowly higher, but it's a lot of that's an illusion. That's why we're getting all the calls. But the underlying process has sort of two risks right now. One of them is is I guess policy, and one of them is for the inflation dynamics as

a whole. The policy part we've been talking about a lot the last couple of days that you know, the risk when President Trump was was inaugurated was that it was not you know, the Trump flation, We're going to run the economy too hot. The risk was that we're going to reverse globalization or at least stop it. And globalization is a real it's the main reason we've had such a great trade off of growth and inflation over the last really since the fall of the Berlin Wall.

In the early ahead, explain the mechanism there so I could think of a couple of different ways in which theoretically globalization could reduce inflation. And so one of the obvious ways is, Okay, well, you've just opened up all these new manufacturing markets, and so if you want to build a cell phone or you want to manufacture a bunch of T shirts, then there's a factory with really cheap labor in an emerging economy that could just do it cheaper than you could in the US. So that's

one way I could see it reducing inflation. The other me chanism it seems to me that globalization could reduce inflation is that if there's no barriers on who could trade with whom, then everyone just sort of operates at the max efficiency, and capitalism is all about making the economy more and more efficient and competing on wages and

that sort of cheap emerging market labor. Aside that any economy that sort of faces fewer artificial constraints would just sort of ring in efficiencies out of the system faster, and that will do So what is the sort of related you know, you mentioned since the fall of the Berlin Wall, this extraordinary period of globalization, how did that reduce inflation? Yeah? No, that you have it exactly right. I think that capitalism is about arbitraging out these inefficiencies.

And and as you do that, uh, the the you know, that allows you know, again, you can think about it as a as a manufacturer. Let's think about someone who's manufacturing T shirts, you know, and prior to the nineteen nineties, we manufactured all our own apparel. Now we manufacture none of it. And the reason we manufacture none of it is that it turns out to be much cheaper for the manufacturer to go and and make these T shirts overseas,

which allows one of two things to happen. Either as the manufacturer, either I can lower prices for my T shirts and get the same profit, or it can raise profits that's found money. As you globalize, you have more and more opportunities to do that, not just on the labor front, but also you know, getting cheap other goods,

cheap inputs abroad as well. So, as you said, the sort of remember right after the Trump got elected in early November or sorry, in November, we saw a big initials sell off and treasuries and people started talking about Trump inflation and okay, is this going to change the tide, and in your view, the key variable that may have changed or that maybe changing under Trump is this is the renewed relationship and the renewed trajectory of globalization or globalization.

That's exactly right. I wrote that actually right after he was elected in our quarterly piece, that if you go through all the things that he'd said on the campaign trail, most of them would have no meaningful long term impact on inflation. We don't really know about the appeal of Obamacare what that would do exactly, but um, you know, in the long run, probably not huge. But the one thing you can really do is put the Berlin Wall

back up. Now he can't do that obviously, but but you know, we're sort of seeing that not just we're talking about our own wall. Of course, Well yeah, exactly right, we're putting a wall back up. And but it isn't just us either. It's you know, Europe is having you know, many more cross border conflicts, and the general trend to globalization looks like it's at least coming to a slowdown. Anyway.

The interesting thing to me about this pivotal role that Trump plays in the inflation story is that central banks or the Fed seems totally out of the picture on this question. And so it's the central bank's job to lift inflation or maintain stable prices. And central banks, to some extent, really pride themselves on having defeated inflation over the eighties and nineties and two thousands, and they congratulate themselves on sort of maintaining very low inflation expectations, which

they say then feeds back into low inflation. But according to your story, there are other really big factors that are completely unrelated to the central bank, and maybe it's someone on the political side that could actually get the inflation right back up to where they want. Yeah, look, I think the central bank power is uh is exaggerated in their own minds, and in reality, you know that if the only thing you have is a hammer, everything

looks like a nail. And the only thing that the central banks can really do, other than you know, police the financial system make sure it doesn't collapse, is maintain money in reserves, and it turns out that doesn't do everything. You know, The one thing they can do over time is raised or lower the price level, and that's kind of all they can really do. And that's you know, Greenspan used to say that that, you know, by maintaining low and stable inflation, that's the best thing the Fed

can do to to create better long term growth. Let's, you know, the other policy lever that Trump could pull besides the globalization could be something on the fiscal front. And we've seen an unexpected or we're in we're going to see an unexpected positive fiscal impulse that I think a lot of economists weren't expecting. Part of it is the tax cuts. Part of it is also the elimination of the budget caps from the dead sailing in. That's a lot of money going into the economy theoretically, a

lot of new funding for domestic programs. Again, I guess this gets back though to the sort of Candian equation, because the way we'll talk about that is this is a lot of new money at a time when we don't have we don't have a lot of spare resources. But on the fiscal side, is there Does that do much in your view to lift inflation? No, not really, because um, you know, and it can it can change the texture, the near term texture of inflation, but can't

really change it that much. You know, to go spend money, the government has to borrow it. And so they have to take dollars from somebody. And you know, whether it's they're taxing it from you to spend it somewhere else, or they're borrowing it from you to spend it somewhere else, the dollars are are neutral. You know, the amount of liquidity in the system doesn't change. Uh. And so yeah, we can favor one industry over another industry. Um. And

we can change with tax policy. We can change you know, the near term contours, but we can't really change the level of inflation very much with fiscal policy. It's difficult to do other than other than by well, I guess this is really fiscal policy, but putting up trade barriers will do it. This is a really contentious point, this question of the fiscal dominance and whether it can change

their trajectory. And I have my own personal audio syncretic views, but I don't want to, like, I don't want to get into that here. But I'll let's go back to what's happening right now in inflation. When you look at let's say we get the next CPI report, what are you going to be looking at. I mean, one of the things that you do on Twitter. Which is really great is you really dive into the data and you look at rent and healthcare and various trimmed mean measures

of breaking down the CPI report. What are you doing when you look into all this stuff? How come? Okay? Sure, so I'm an inflation nerd. There's you know, someone's got it's been said and it's yeah, exactly, somebody's got to do that. Um, you know, the BLS produces two hundred and eighties some different subcategories of inflation. Um, you know, so you know eggs, uh, you know fresh you know, which they aggregate up into fresh food, which aggregates up

into food which you know. So so you can really break down when you get the headline number, it really doesn't tell you a whole lot, because it can be a big thing moving a little or a little thing moving a lot, and so it's important to kind of look down at those little pieces, um you know. Recently, what I think the story is going forward over the next few months is what happens to um used autos, but also what's what's happening to medical care, So medical

cares in services ex housing. It's kind of roughly a quarter of the of the CPI pie is services ex housing less rents of shelter, and medical care is an important part of that volatility wise. So you know, if medical medical care had been going down for the last year, so we think that's one of those temporary things, and so in the last month or two it looks like it might might be hooking back positive, and so we're

gonna watch for that see that hook continues. And then the other about another quarter of overall inflation is core goods, and once the dollar has gone down for a while, you expect core goods to go positive. Core goods have been in deflation forever, uh and so we would expect that to start going a little positive. And so those are sort of the big, well, the big little pieces

that we look at. How do you protect against because as you say, there's so much data, there's so many ways to look at some time series and lop off something like we're gonna look at uh CPI services X energy, which was a something we were focused a lot on during the oil crash and and all that stuff, because okay, that's that's an idio styne credic one time factor. How do you guard against essentially finding the series that fits a narrative. Sure, if you take everything out that went down,

it goes up right. Well, you know, you have to have a general you have to have a longer term view. I think of what's you know, what's driving a particular series, And I think that economists tend to have a longer term view of what's driving inflation, but they don't really have a view of what's driving a pair. And so this last month we had this big jump in apparel prices month on month, and and lots of economists said, oh,

you know, that's that's gonna be reversed next month. But if you have a longer term view, you'll notice that the prior few months that had been really really low, and so we're actually just back on trend. And so we don't think that's going to do anything, But you have to have This is the reason that I delve into the numbers as much as I do, is you've got to have some idea of over a longer time

frame than last month, what happened to the numbers? Yeah, you mentioned eggs, and they feed out how do they tell the price of eggs? They just go to a grocery store and look, what is the process. Yeah, I mean it's it's it's pretty close to that. You know.

They obviously different sorts of prices are gathered in different ways, but to some extent, all the grocery store stuff is really still done by people walking around a grocery store with you know, the electronic equivalent of clipboards and looking for the same thing they bought last month and saying, okay,

now here's the price. And you have lots and lots of people doing that over many, many different goods, and then they all send it back to the BLS, who goes and does their little mathy thing on and gets the right answer. But what's interesting is it seems like it the measurement of inflation is not particularly sensitive to

exactly how you gather these things. The billion in the well, you know, so the billion prices project a m I T. You know, you might have heard about they've gather all their prices online and and you know, you can't gather some things online very well. But nevertheless, when they do that, they get almost exactly the same figure that the BLS

comes up with doing it the old fashioned way. And so it turns out that there's a lot of complaint about you know, uh, you know what you do with substitution if if something is not available this month that was available last month, and how you hadonically adjust things. A lot of complaint about that, but at the end of the day, it turns out not to make that much difference. Interesting to wrap up, I mean, as you said, the big question or the reason your phone is ringing

off the hooks. People want to know what's coming next. Are we about to see a turning point or has there been a lot of noise that's a result of some screwing numbers a year ago that's making the year over year figures look weird, or in the case of the recent CPI report, is it's something about apparel price is just compensating for the months earlier. Why don't you give us a forecast or sort of tell us what

you think is happening now? Sure, well, look, I think that you know, I sort of gave you the short term contour. I think that the longer term. You know, we have these two risks, and one of them was the policy risk we talked about, but the real risk, the big risk. And by the way, I think that investors should look at risks and they should manage risks. They shouldn't listen to me and what I think is

going to happen. They should be you know, everyone should recognize you have inflation risks, and you haven't seen it for twenty years, but you still have that risk, and particularly when it's cheap too heads, you should do so. But the bigger, longer term risk is that, you know, we know that inflation has these long tails. We know that over the last time of years, you know, a third of the time that inflation was over four, it

was also over ten. And and there are inflation dynamics which which caused that to happen, you know, And and the risk right now is that we've had this period since the early nine of a virtuous cycle of lower interest rates causing lower money velocity, which causes lower inflation, which causes lower interest rates and so on. And we've seemed to have come to the end of that cycle. And if and and and the risk now is that normalizing interest rates kicks in the vicious cycle of all

those things going in reverse. And if that happens, then yeah, it's not necessarily this cycle's concern. It's one or two or three cycles down the road. You go to three percent, then you go to five percent, and you know, and and we don't have central bankers who believe that, and they aren't doing the right things to counteractive. Michael Ashton of Enduring Investments the Inflation Guy on Twitter, thank you very much for joining us. Great to be here. Thank

you very much. Well there you haven't folks. Tracey is not here, so I have nobody to banter with. But I really enjoyed that conversation, obviously, and I think this is a topic about which all of us are going to be very focused on, at least for the next several months, as we see whether this is some sort of temporary uptick we've seen an inflation due to some distortions, or whether we really are on the verge of some sort of inflation tail risk or a new paradigm or

a new uh meaningfully new trend. And so hopefully we'll revisit this on the podcast at some point and we'll actually have an answer. Just kidding. None of these questions ever truly get answered. We just try and get a little smarter over time. Anyway, This has been another episode of the Odd Lots podcast. As I'm Joe Wisenthal. You can follow me on Twitter at The Stalwart. You can follow my co host, Tracy Alloway on Twitter at Tracy Alloway.

You can follow Michael on Twitter at The Inflation Guy, and please follow our producer on Twitter tofur Foreheads at Foreheast, as well as the Bloomberg head of podcast, Francesco Levy at Francesco Today. Thanks for listening.