US Inflation Surprise Curbs Fed Hike Bets

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This is Bloomberg Businessweek Daily. Reporting from the magazine that helps global leaders stay ahead. With insight on the people, companies and trends shaping today's complex economy. Plus global business, finance and tech news as it happens. The Bloomberg Businessweek Daily Podcast. With Carol Massar and Tim Stenovec.

Tim Stenovec (0:32)

Oil is something I've been focusing on over the course of the day, Christina, you have been as well. We report a lot on what is getting in and out of the straight-up horror movies. It does seem like according to reports that we've seen, those levels are back close to what they were before this war. That's right.

Carol Massar (0:45)

That East West pipeline from Saudi is back at capacity, maybe running even hotter than they were before the war, trying to get some of that product out to market. It does seem like we're getting a lot of reports from industry analysts saying they don't think it's caused long-term damage to the systems, to the production there. But to me, the issue is always not just production, it's the risk factor and it's all the other pricing that goes into it. So I think we're going to pick that apart.

Tim Stenovec (1:08)

Yeah, we'll get into that a little bit later in the show.

Carol Massar (1:10)

But first, we're going to go to Mike McKee. He is our International Economics and Policy Correspondent here at Bloomberg TV because amid all the economic data this week, of course, we've got PCE, we've got CPIs, we've got Fed. Okay, so many acronyms. But let's start with the core PCE data. Can you start high, kind of at the 30,000 feet? Christine Raffini will understand this level and then you can dig into whatever really stood out to you.

Mike McKee (1:37)

Yeah, well, first, let me say thank you. It's great to be here with you on Saturday morning.

Tim Stenovec (1:42)

Mea culpa.

Mike McKee (1:43)

It's good to see both of you in the chair.

This was a kind of interesting report because the Bureau of Economic Analysis changed some of the methodology it uses in measuring some of the components of the PCE report. And so we knew it would be revised. We knew it would be revised lower. So the question is, and economists are fighting about this since the report came out, the question is, what did it tell us about the direction of inflation? And basically, to my mind, it gives us the idea that inflation hasn't changed a whole lot. What it did was lower the levels of the inflation, of PCE inflation, PCE and Core, since 2021 on a year-over-year basis. But what it showed is that there was really no change in August. We saw the Core PCE revised down from July to 3.4% from 3.7%, but then it was still 3.4% in August. So the Fed hawks could look at that and say, we're not really making progress. Now, some people say, on a three-month basis, we're at 2%, but you can also make the argument that within this report, there were signs that services inflation is still rising. And then of course, this morning, we got the news about the mortgage rates moving up quite a bit. So that's gonna have an impact on housing.

There's a lot in the numbers out today that don't really take us anywhere different, I don't think, at this point.

Tim Stenovec (3:19)

That mortgage rate number depressing my co-host as well as she looks at that going forward.

Carol Massar (3:24)

I was gonna say, Mike has been with us enough weekends to know that I hate talking about the fact that I'm never gonna own a house. And I was gonna let it go, but thank you, David.

Tim Stenovec (3:31)

Depressing the broader market and a more micro one as well. Mike, I pull up Warp here on the Bloomberg and I look at the odds of cut, rather a hike happening here at this October meeting. I see that at 40% now, roughly speaking.

How does this change the calculus for Fed policy makers as you see it? As you've been listening to a lot of Fed policy makers making the rounds, we've had an ample serving of Fed speak here over the last few days, and that continues over the rest of the week.

Mike McKee (3:54)

Well, this is kind of an unusual situation because the next Fed meeting is October 28th, so it's like five days before the midterm election. So ordinarily, you would think the Fed would not want to get involved in that or mixed up in that by raising rates, but it all depends on the inflation numbers we get between now and then. We'll get CPI, we'll get PPI, and so I don't think I would trust the Fed Fund's futures at this point. They change all the time with the latest data, and that could easily change if we get a hot inflation report. If not, they may hold off, but you heard John Williams, the vice chair of the Open Market Committee, say yesterday he thought another rise would be justified before the end of the year, so they could do that in December. And today's numbers didn't dissuade anybody. You look at the other numbers we got today, consumer spending was at the highest in years in August, up nine-tenths of a percent. We got a 90,000 job figure for private sector jobs from ADP. We'll see what happens on Friday with the BLS numbers. But it does seem that the economy is going strong, if not expanding. And that is always adds the possibility of more inflation.