What $4 Gas Would Do to the Economy

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**Ed Elson** (1:15)
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Welcome to Prof G Markets. I'm Ed Elson. It is March 12th. Let's check in on yesterday's market vitals. The S&P and the NASDAQ were flat and the Dow declined. Oil crept higher even after the International Energy Agency approved its largest-ever reserve distribution. And finally, Treasury yields rose as hopes for rate cuts this year wane. Following the CPI report, we'll get into that right now. Okay, what's happening? Inflation was sticky in February as expected. The consumer price index, including food and energy, rose 0.3% from January and 2.4% from a year earlier. That annual rate is higher than the Fed's 2% target and unchanged from January. Inflation in the coming months, though, is likely to get worse. The war with Iran has already driven up the cost of oil, airfare and fertilizer, and prices at the pump have increased by 20% since the strikes began, which complicates the inflation picture. So here to help us break it down, we're speaking with our friend Mark Zandi, chief economist at Moody's Analytics. Mark, thank you for joining us. I want to get right into it. 2.4%. What do you make of this inflation print?

**Mark Zandi** (3:09)
Once you count for all the moving parts here and the measurement issues, it feels like to me, inflation is closer to 3% than 2%, and 3% is on the high side of anything that you'd feel comfortable with. I mean, as you pointed out, the Fed's target is lower. It's about 2%.
So, you know, it's better than 4%, but 3% is still too high. And as you pointed out, we are going to see inflation pick up here because of what's going on in the Middle East and the fallout from that. So, I don't know, it's okay, but it's not great. And certainly the trend lines here are disconcerting.

**Ed Elson** (3:49)
Yeah, my reaction seeing this report was again, I can't tell how much it even matters because one, there's the point that you've been making, which is when you account for the other factors, the number is actually higher. It's closer to 3%. And then two, we've got a war going on, which is absolutely skyrocketing the price of oil.
So, does this even matter anymore? I guess that is the real question, does it matter?

**Mark Zandi** (4:17)
It's in a rear-view mirror, for sure. So, it's certainly not helpful in trying to understand where we're headed and what it means for people's purchasing power, standard of living, what it means for markets, what it means for the Federal Reserve. So, markets really didn't respond to this because it just really doesn't matter because it's history and it doesn't reflect on where we're headed here in the future. We're going to get another read on inflation on Friday, the consumer expenditure deflator. That's the measure the Fed actually uses to gauge inflation and set monetary policy. That's where the 2% target is. And that's going to be on the hot side and that's going to be 3% on the nose. And I think that's where we are. And I think that's what people are going to be focused on and nervous about, thinking about how all this translates to future inflation. So, does it matter?