Richmond Fed President Tom Barkin On Getting Inflation Under Control

SPEAKER_1 (0:03)

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Tracy Alloway (0:20)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:24)

And I'm Joe Weisenthal.

Tracy Alloway (0:25)

So Joe, we have a treat for Odd Lots listeners.

Joe Weisenthal (0:29)

That's right, we have a special episode of the podcast with Richmond Fed President Tom Barkin.

Tracy Alloway (0:35)

So we were actually on a reporting trip, shadowing Tom as he goes through some of his district and speaks to local business leaders there. We learned a lot, we spent a lot of time with him. You'll hear more from that trip in an upcoming Odd Lots episode. But in the meantime, we also talked to him about some more macro trends, things that are happening right now that he's seeing in the economy.

And we're going to share that portion of the interview with you right now.

Joe Weisenthal (1:05)

So, so far in 2024, we've seen three hotter than, generally the inflation data has been hotter than expected and some of the, there's certainly been some cold water on some of the soft landing optimism. What do you attribute that to?

Do you think this is a new trend or is it a speed bump in the road, as they say?

Thomas Barkin (1:24)

Well, so I think there are two interesting things going on with the data. One is demand has been pretty robust against most expectations that it would slow down. We got retail sales this week, very strong. We've got three strong job reports this year. And so the economy in general still seems to be very healthy. And I think a lot of people wondered whether, we weren't at the end of a growth period, still seems to be strong.

At the same time, inflation has remained stubbornly above 3% on a monthly annualized rate.

And there are lots of ways to interpret it. I am from a school that no one's as good as they are on their best day or as bad as they are on their worst. The seven months before the end of the year, we ran at 1.9% headline inflation. The last three months have been somewhat higher.

If you took the 10 month number, it's not that bad actually. And so I think the overall story that inflation is moderating is still the right story. But I've been of the view that inflation will be more stubborn to come back to 2% than we would like. And in particular, in the last half of last year, part of the reason the numbers came back so nicely was that goods turned deflationary and that offset still higher than normal levels of inflation on services and shelter. We're not trying to pick a particular mix of inflation, but it did make me worry that if goods price reductions ceased, you'd still be left with higher than normal services and shelter. And that's what's happened in the first quarter of the year.

Is there still room for goods to reduce? Of course. Is there still a story of why shelter might come down with new rents coming down? Of course. And with wages normalizing services? Absolutely, but it hasn't happened yet.

Tracy Alloway (3:13)

On this note, the last time we spoke to you on the podcast, you talked about the need to maybe offset housing strength in a different area. So if housing has proved to be surprisingly resilient, maybe you need to see an offset somewhere else in the economy. Is that still your thinking?

Thomas Barkin (3:31)

Well, I'm open to housing coming down. And there are folks who've done models that suggest that with new rents coming down the way they have, we're just minutes away from shelter inflation coming down as well, and that would be great.

If it doesn't come down and you want to get to 2%, then either goods or services or both need to run at less than their historic levels of inflation. That's just simple math. And if it doesn't come down, that's what you'd be looking for is some sense that relative prices have changed in a way.

And I want to make this point that that's entirely conceivable. Relative prices change all the time. In the 2000s, we had healthcare inflation. That was quite significant and much more than it was in the 90s. But goods price deflation came down. So the basket does shift and it's fine if it shifts. Just needs to get to 2% overall.

Joe Weisenthal (4:19)

There's sort of whispers out there and some people talk about it and you can kind of see it in the rates, options, markets and stuff. But there is this talk like, what if the hiking cycle isn't actually over? What if the next rate move is not a cut as has been the presumption for a while?