CPI and the AI Trade

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Tom Keene (0:27)

Four minutes away from the inflation report.

Right now, Eric Winograd with Damian Sassauer and me as we begin our coverage. We are commercial free to the nine o'clock. Our Winograd, David Rosenberg, and Rob Sockin, that's the way that we roll. Eric, what do you expect to see? What will this inflation report state to America?

Eric Winograd (0:48)

I think what we expect roughly in line with consensus, sort of a mid-point two month-on-month print for the core CPI figure. I think the message that that sends is inflation is still higher than we would like, but it's not running away.

It is maybe not coming down as fast as we would like, but it's not accelerating either. I think that that gives everyone a little bit more time to see how things play out.

Tom Keene (1:11)

At AllianceBernstein, do we get used to a 2% plus near 3% inflation? Can America survive with that elevated rate?

Eric Winograd (1:22)

In our forecast for a long time now, we've argued that inflation is gonna be between 2% and 2.5%. Remember, pre-pandemic, it was running between 1.5% and 2%.

So we have always, or for a long time, expected it to be somewhat higher. I think 3% is too high. But I think that between 2% and 2.5% is something that people can live with over time. That, to me, is not disruptive.

Paul Sweeney (1:45)

Eric, our last guest was talking about the underlying drivers of inflation and that they are primarily supply shocks. You believe the same thing.

Are those supply shocks going to be resilient? Are they durable or are they likely to fade in the coming months?

Eric Winograd (1:59)

We expect that they will fade in the coming months. But again, the supply shocks are often driven by non-economic variables.

If the war in Iran persists or accelerates or there have been discussions in the market that perhaps after the midterms, that we might see an escalation, who knows? The problem with supply shocks is you can't really forecast them because they come from exogenous events. The one thing that would give me pause if I were a member of the FOMC today, we're accustomed to looking at inflation expectations over the long term and five and 10 year inflation expectations look just fine. There has been though over the past few months a march up in short-term inflation expectations. The New York Fed survey of one year inflation expectations is marching higher. The University of Michigan survey of one year inflation expectations has risen. That suggests that economic actors, businesses and households are starting to extend how long temporary lasts, right? We originally thought this would be a matter of months. It now looks like maybe people are thinking this might be, well, maybe it might be more than a year.

That starts to stretch the definition of temporary. And if that is something that continues, it might give the Fed pause.

Paul Sweeney (3:08)

Eric, have you been surprised about the resiliency of the US consumer, the sustainability, the durability of demand strength here in the US?

Eric Winograd (3:17)

Yes and no, at an aggregate level, yes. But if you break it down, no.

The investor class, people who are invested in markets, look, higher prices are an inconvenience, but they aren't really a problem because the market has been so strong. If you are paycheck to paycheck, however, the situation is very different. And alongside the CPI release this morning, we'll get the real average hourly earnings print, which is negative. Which means that if you are relying on your paycheck for your income, you have lost ground over the last year. So we're seeing two different economies, and the investor class has been strong enough to pull the aggregates up. And Mark Zandi at Moody's has done work that says that the top 10% of income earners are responsible for more than 50% of the consumption in the economy. So that pay shape, that bifurcation gives you a stronger aggregate than I think many people feel.

Tom Keene (4:06)

A terrific sum into this report. Eric Winograd working off the work of Dr. Zandi at Moody's. You know I've talked about it folks to the point with Chris Waller of saying there should be two R-stards in America back to John Edwards years ago politically of talking about two Americas out there right now. We're going to look at one inflation report coming up here. And of course the ramifications into the midterm elections with Eric Winograd and David Rosenberg. Let's hear the report.