Disinflation, demographics, Doge

Rob Armstrong (0:00)

Special note to listeners, we're very keen to hear your questions and answer them on the air. If you have burning questions about markets, finance or the economy, send them to robert.armstrongatft.com. Pushkin. Aiden, a couple of months ago, we thought we had inflation beaten. Were we wrong?

Aiden Reiter (0:32)

Very likely.

Rob Armstrong (0:35)

That is depressing. But today's show will not be depressing. We're going to talk about disinflation, demographics, and Doge. The big three Ds, hanging over the American economy and American markets right now. I am Rob Armstrong, and this is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. We are coming to you from fabulous, gold-plated, air-conditioned, and extremely comfortable Unhedged world headquarters in New York City. Joining me today is the brains behind the whole thing, Aiden Reiter, my partner in crime on the Unhedged newsletter. Welcome, Aiden.

Aiden Reiter (1:18)

Certainly not the brains, but I do type fast.

Rob Armstrong (1:20)

No, you're the brains. So, Aiden, we have three important American things to talk about today. All three of them, as it happens, start with D, they're disinflation, is it really happening? Demographics, is that going to sink American economic growth over the next 25 years? And Doge, the new government department? I don't know if it's a department or what.

Aiden Reiter (1:47)

It's certainly not a department, but it has the name of one.

Rob Armstrong (1:49)

But it has, Doge, the Department of Governmental Efficiency, which is going to save the US Treasury market.

Or so some people hope. Let's start with disinflation, Aiden. Let's. I have before me a chart of CPI inflation, excluding the notoriously volatile food and energy categories. It seems like we've had about four months where CPI inflation, depending on how you look at it, is not going the direction that one would want it to go. It's not shooting up, but man, it doesn't look great. What's going on here, Aiden?

Aiden Reiter (2:26)

Yeah. So if you just look at core CPI, which, as you said, strips out volatile food and energy, it went up from 3.25 to 3.3. That's a small jump.

Rob Armstrong (2:35)

Yeah.

Aiden Reiter (2:35)

But that's kind of the third month in a row that we are having not great directional changes in CPI.

Rob Armstrong (2:41)

And the goal here is 2%, right?

Aiden Reiter (2:43)

Yeah, the goal is 2%.

Rob Armstrong (2:44)

However you cut it, it's 2%.

Aiden Reiter (2:46)

Yeah, and that's core CPI. If you include the food and the energy, and remember that oil is really cheap right now, it still went up. So it went up from 2.4% in September to 2.6%. So either way you slice it, we're not really going the right direction.

Rob Armstrong (3:02)

It has been a mantra of the last two years in markets and economic circles to say the path of inflation downward to target was always going to be unsteady. It was going to weave and wend up and down a bit. This is actually a tiny bit worrisome, how long this has been going on now. Are there particular components of inflation that are proving troublesome?

Aiden Reiter (3:29)

In September, it was kind of all across the board. This month, there were some funky readings we got from housing. Those might be two quirks in the data, as opposed to some real change in shelter costs. That being said, we like to use one-month, three-month, and six-month moving averages of annualized change. So just to tick through those, one month went down a little bit, which is good, but three months went up. And three months went up because the last three months have actually been above what our goal had been, whereas we had a couple good months in the summer, so six months is down.

Rob Armstrong (3:59)

I guess the optimist says, we know housing inflation, which is the third of the basket, is going to keep coming down. This is the old story where the way the government measures it, housing inflation is a very lagging indicator, but if we look at new leases, we do see that disinflation has firmly taken hold. Am I getting this right? So the optimist says that will come through fully and that will bring us down another however many basis points.

Aiden Reiter (4:33)

Yeah, and we had shelter coming down hugely from August to September. But there's some other weird things in the housing market that it's kind of hard to understand right now. So for example, a lot of the home builders have a lot of supply, but they've essentially stopped building because there's not enough demand. So there's this fundamental thing not working in the market where prices which are supposed to come to meet demand are not coming to meet demand. And whether that's home builders waiting for inflation and mortgages to come down or something else, but either way, we can say that across the board there is some inflation going in food and other products that look like they might be here to stay, especially if we keep on the same rate-cutting trajectory we thought we would be on.