July CPI and Market Melt Up

**SPEAKER_1** (0:02)
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**Tom** (0:27)
Eric Winograd here, Raptor on CPI, Chief Economist, AllianceBernstein. The rub is that lower inflation is wrapped around, reduce real estate, reduce this, reduce that. Is it just those odd things that could draw down us towards disinflation or is there more going on than that?

**Ira Jersey** (0:46)
Well, that's what we're going to find out in a little bit, Tom.
I think that last month's soft print was largely due to some unusual factors all pointing soft in the same month. But, I know your colleague Anna Wong has been out with a piece arguing that today's number is likely to be lower because of some of these things. I think she's largely right. I can't say for sure whether it will happen with this month's print or next month's print, but the things she's pointing to are likely to point lower in our view over the course of the next few months.

**Paul** (1:13)
Eric, I'm just looking at notes which are very helpful. Because Chair Warsh has not been willing to tell us about his reaction function, he's left the impression that the market is in charge of determining whether the Fed hikes in September or not. So if that's the case, we need to pay attention to this, I guess.

**Ira Jersey** (1:28)
For sure. Look, I think because Warsh has left a vacuum, an analytical vacuum, in the way that he talks about the economy, which is to say he basically doesn't talk about the economy. He hasn't told us what he thinks about it. He hasn't told us what would trigger a rate hike in his mind, or even if he's willing to raise rates. And so the impression here that he has left is that if the market prices it, then he'll probably do it.
That does make today's data point particularly important. I would say, though, that it's not determinant. There is another CPI print. There is another payrolls print. And Chair Warsh has another chance, in the form of his Jackson Hole speech, to guide the market before the next Fed meeting.

**Tom** (2:05)
What's our audience seeing in inflation? Because Paul and I get mail. There's frankly no other topic in America.

**Ira Jersey** (2:13)
Yeah, again, it's a difficult topic for individual households to assess, because none of us really face inflation. We face the price level. We don't face the rate of change, which is what inflation is measuring. What we have in our mind is a memory of what the price of something should be.
And even if inflation is only 2%, the price level is way more than that. So households still experience this.

**Tom** (2:34)
Paul, I decided to be healthy yesterday.

**Ira Jersey** (2:37)
Is that right?

**Tom** (2:38)
And I was gonna buy some fancy wild-caught salmon. The price is X dollars above any recollection I have.
That's the inflation report.

**Ira Jersey** (2:50)
Right, and that's what I mean, right? The price level, you're remembering that salmon should cost a certain price and it doesn't. It might only be 2% more than it was a year ago, but it might be 10% more than it was three years ago. So the price level is what households feel. That's what all of us feel on a daily basis.

**Ed Yardeni** (3:04)
Why doesn't the Fed feel that?

**Ira Jersey** (3:06)
They do. They just can't do anything about it. They can't go back and undo price increases from two, three, four years ago. What they can influence is what the rate of change will be going forward. And so that's why they focus on inflation rather than the price level.

**Tom** (3:19)
Paul, get another question in here. Two-year yield comes in right now. 4.1823%. Only Bloomberg Surveillance goes to four decimal points.

**Ira Jersey** (3:27)
Oh, boy.

**Paul** (3:27)
There we go. And it's not just today. We still have another inflation report. We still have another payrolls. There's more data that the Fed will be able to see, and that will presumably influence what they're doing.

**Ira Jersey** (3:38)
You would think so. I suspect that the reaction to today's data is likely to be overdone in the grand scheme of things because we have these other numbers. If the Fed were meeting next week, if this were the last word, then that would be one thing, but it isn't. And I expect that the market will respond. In shorthand terms, the key number to watch is the core CPI month over month, and if it's three tenths of a percent or higher, the market will price a rate hike, and if it's 2.2% month over month or lower, it won't.