Getting inflation wrong

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Thank Pushkin.

Katie Martin (0:39)

The cool kids in markets are pessimists, but good news, inflation in the US is lower, a lot lower.

Don't know if you remember it being stuck at around 9%, but we've come right back down to 3%. Growth is good. It looks like investors might have to stop worrying and learn to love the rally. Can we all be happy? Are we there yet?

This is the Unhedged podcast from the FT and Pushkin, Ethan, I'm afraid, is out today. I'm Katie Martin in London. I'm joined down the line from New York by Rob Armstrong, who writes the Unhedged newsletter in New York. Rob, what are we going to do without Ethan to make us look clever?

Rob Armstrong (1:18)

Well, as a professional unhappy person, I am here to rain all over your optimism, Katie.

I don't know how I'm going to do it. I agree with you. The data is alarmingly good, but I'm going to find a way.

Katie Martin (1:32)

Oh, God bless you.

So, look, I mean, it does look like we're kind of there, right? Inflation has come back down to 3%. The sky hasn't fallen in. The central banks haven't hiked us into a horrible recession. Shouldn't we all just cheer the heck up?

Rob Armstrong (1:47)

That latter point, it would be one thing if the Fed had done 500 basis points, also known as five percentage points, of rate hikes, and we were now in the economic doldrums.

But they've done that, and growth still seems pretty good. We are still adding jobs, wages are okay. The consumer is still okay. The banks that have reported have told us that bad debts are not piling up at an alarming rate. It looks like a healthy economy.

Katie Martin (2:21)

Whisper it, but maybe...

Rob Armstrong (2:22)

Whisper it after the Fed takes action to try to cool it off. This is a remarkable turn of events.

Katie Martin (2:30)

So listen, let's just dig down a little bit deeper into the inflation numbers. 3% headline inflation was the number that rolled in last week. Are you going to be one of these tedious inflation truthers off the internet who's going to tell me that actually, actually it's much higher?

Rob Armstrong (2:45)

No, it is coming down. I mean, if you take out the drop in energy costs and food costs, so-called core inflation is still too high.

Katie Martin (2:56)

And it should be about 2%, right?

Rob Armstrong (2:58)

It should be about 2%, and it's over 4% still, but it's going the right direction. And if you look at what we're comparing to a year ago, the numbers were lapping, as it were. The trend ought to continue in the benign direction it's been going. So I'm not an inflation truther.

This is good news. And the interesting thing is that the fact that this is happening at the same time growth is good, it means we sort of have to reconsider why inflation happened in the first place and what's going to happen to it now.

Katie Martin (3:32)

So have central bankers won? Are they the heroes of the hour? Have they actually done this?

Or has this got nothing to do with them?

Rob Armstrong (3:40)

No, I think they've won by mistake, Katie, which is... I mean, I think that still counts in most sports. But the point is because growth is still strong and inflation is coming down, it looks like what happened is a supply shock bout of inflation. We had this weird pandemic. We threw in a weird war on top of that. Prices took a one-time jump up.

And that jump in certain prices took a couple of years to sort of bubble through the economy.

The guy who makes the metal had to raise the prices, and then the guy who makes the nails, and then the woman who builds the house, and then the broker has to charge more. When you have a supply shock, it takes time to work its way through the different sectors of the economy. And it seems to have kind of worked its way through. So there's an argument that a few people were making that what the Fed did actually isn't the thing that brought the inflation down. It was just time. So our colleague Martin Sandbu has been saying for some months, if you guys will just relax, this problem will take care of itself.