Can the US stock market stand 3% US inflation?

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The systemic risk in the economy is affected both by levels of consumer debt and federal debt. They don't necessarily interact directly, but high levels of debt across the economy can create risks for stress in the financial system, perhaps ultimately instability in the financial system.

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Robert Armstrong (0:36)

Pushkin.

Katie Martin (0:40)

Just when you thought it was safe to get back in the water, US inflation is back. Very scary times. The inflation rate picked up in data that came out this week, and the market had not been expecting that.

I wanted to get the smartest person I could find to talk to about what's going on here, but unfortunately, Ethan Wu is not around. So we have instead, Rob Armstrong. How are you?

Robert Armstrong (1:04)

I'm fine.

Katie Martin (1:06)

You're missing Ethan.

Robert Armstrong (1:07)

Yeah, it's tough. Who's going to do all the work?

Katie Martin (1:10)

Who's going to do all the work? It's going to have to be you. It's certainly not going to be me if you're a podcast. I didn't introduce myself. I'm Katie Martin. I'm a markets columnist here at the Financial Times. And this is the Unhedged podcast on finance and markets from the Financial Times and Pushkin.

So we are going to ask Rob and I exactly how worried should we be about this little pickup in US inflation. Rob, give us the numbers, like what's going on here.

Robert Armstrong (1:33)

Okay, let's just look at the consumer price index, the basic, simple, the core consumer price index, which is your basic prices of things, not including food and energy, which are too volatile to care about. And if you smooth them over a three month average, they're sort of not going down since the summer, right? We're cruising along at a bit over to you sort of pick your inflation indicator. And one of the things nerds like us like to do is argue about the best one.

But you pick your inflation indicator and a lot of them look alarmingly like they were going down, down, down since the beginning of 22 And since some time in the middle of last year, they seem to be going sideways, sideways, sideways.

Katie Martin (2:24)

We have got a little bit stuck. So your absolutely basic CPI reading came out earlier this week as running at a year on year rate of 3.2% in February.

The market had been expecting 3.1, I think.

Robert Armstrong (2:36)

And the Fed wants two.

Katie Martin (2:37)

The Fed wants two so bad.

And it was 3.1 last time. So look, this isn't a massive rise in inflation. But as you say, it just makes people think, oh, but wait a minute, I am sure I read in some clever newspaper somewhere that inflation was falling and this is not falling.

Robert Armstrong (2:54)

Yes. I want to talk about a few other spooky things.

The Fed cares almost more about what people expect inflation will do than they do about what it will actually do. Because it's our expectations that make us do things rather than reality. And if you look at various measures of inflation expectations, some of them are still falling, but not all of them. Breakeven inflation, which is a market-derived measure of expectations, that has ticked up a tiny bit in recent weeks. So that is not very good. And generally, you look at the economy, Katie, and we're still churning along, creating 200,000 to 300,000 jobs a month.

Wages are still growing at like over 4%, I think, somewhere in that range.

Why would inflation go down, you start to ask. Economy is running hot.

Katie Martin (3:58)

That's it.

Robert Armstrong (3:59)

Right?

Katie Martin (3:59)

Yeah.

Robert Armstrong (3:59)

Generally, it takes a cool economy to slow inflation.

Katie Martin (4:02)

Yeah. Are we moving from a world where inflation initially picked up really, really sharply because of all the supply chain issues that we all remember from happy fourth anniversary COVID-19 lockdowns? It's been real.

But if it's not COVID supply chain gubbins, that's really doing the damage here, then what is doing the damage here? What is really pumping up inflation?

Robert Armstrong (4:27)

It's not energy. That's excluded from the core and that has been falling. And as always, when you look at the small items inside the large inflation indices, it's weird stuff like car insurance, hospital prices, food away from home, all this stuff as we, anybody knows who's been in a restaurant recently, knows that food away from home has not gotten any cheaper. So a lot of it is kind of consumer services we all use, but I don't know, why won't those things calm down?