Thriving, Striving or Surviving

**Mark Zandi** (0:14)
Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Marisa DiNatale, Chris Dries. Hi, guys.

**Cris deRitis** (0:22)
Hey, Mark.

**Marisa DiNatale** (0:23)
Hey, Mark. Hi, Chris.

**Mark Zandi** (0:25)
I know, Marisa, you're out on the West Coast, but you're not feeling this smoke.

**Marisa DiNatale** (0:30)
It's kind of ironic, right?

**Mark Zandi** (0:32)
Oh, yeah.

**Marisa DiNatale** (0:33)
You guys have fire smoke?

**Mark Zandi** (0:35)
Yeah, it's really pretty bad. I was in New York yesterday, and boy, it was kind of dark. Chris, how are you handling it?

**Cris deRitis** (0:42)
It's apocalyptic, right?

**Mark Zandi** (0:43)
Yeah, very sad.

**Cris deRitis** (0:45)
Yeah, just staying inside, right? That's the...

**Mark Zandi** (0:48)
Staying inside? Yeah. Yeah, it's a shame. And we've got the World Cup Championship this weekend, hopefully in New York, no less. Hopefully it clears up.

**Emmaline Aliff** (0:57)
Yeah. Yeah.

**Mark Zandi** (0:59)
Okay. And we have two colleagues, Matt Colyar. Matt, good to see you. How are you? This is a CPI week, a PPI week, a inflation week, and you always join us to go over those statistics, and we'll do that in a second. And we've got Mike Brisson. Mike, we'll talk a little bit more with you later in the conversation, but thought we'd have you on here to talk about potentially vehicle prices if we have a chance. And we've got a guest, Emmaline Aliff from Equifax. She's going to join us in a little bit after we get through the inflation numbers and the news of the week. And we're talking about consumer credit and the condition of household balance sheets and all that kind of stuff, which is really important for the economy.
But let's dive right in. Matt, want to tell us about the inflation numbers this week?

**Cris deRitis** (1:53)
Yeah, absolutely. So first data point we got was the consumer price index which was expected after a bunch of months of big increases because of gas prices. June was expected to see where to bring a decline based off of what we saw in energy markets. Kind of a temporary de-escalation in Iran. So we got a 0.4 percent decline from May to June in the headline consumer price index. That was weaker than our call, which was for a 0.2 percent decline. We were even, call it more optimistic, we were lower than consensus. So it really was a big surprise to see the 0.4 percent decline.
Expectedly, a lot of that comes from energy. You had retail gasoline prices averaging $4.50 per gallon in the US in May and then dropped to $4.00, $4.05 per gallon in June. That's roughly 10 percent decline and that's what we see in CPI for energy and CPI for gasoline.

**Mark Zandi** (2:54)
Food prices. Can I ask on that, Matt? Just quickly on that, are you surprised we haven't seen, things are changing very quickly and the war's restarted and gas prices or oil and gas prices are moving back up. In the month of June, were you surprised that we didn't see an even bigger decline in gas prices, given the decline in oil prices?

**Cris deRitis** (3:13)
In looking at oil prices, like just crude prices in general, I think, in isolation, you would expect to see that. But so much of that comes to, as you know, crack spreads, which is just refinery capacity is diminished. And that doesn't really affect crude prices and the ability to move barrels of oil unrefined around the world. But if you want to turn it in to jet fuel, gasoline, diesel, that's an extra step in the process that has been diminished. And we're seeing those crack spreads widen, so you don't get the reaction that was maybe implied by gas prices alone.

**Mark Zandi** (3:46)
So the crack spread is the profit margin that the refiners are getting. And they can, they're able to not pass through the benefit of the lower oil prices because of lack of capacity in the refining industry globally. You know, because they're ex, I think they're, US refiners are actually exporting product now to the rest of the world because they can get a higher price elsewhere, I think.

**Cris deRitis** (4:08)
Right. Yeah. So, and that's not great relief for consumers because, you know, they're not buying West Texas intermediate crude oil, but they are buying unleaded gasoline, which is slow to come down.
And now, as we are into July, and we see a little bit of the decline that came through June, crept into the first week or two of July, but that's since reversed. And now, we're at about 390, 395, close to $4 per gallon. If you look at gasoline futures, that implies we're going north of, you know, 420, 425 in the next week. So, we think when we start to peg what the CPI for energy might look like in July, I think the best case scenario is that it's a neutral contributor, but more likely, we're going to see a positive contribution from gas, which is going to drive a positive contribution for CPI, or CPI relied.