Why Adam Posen Thinks Inflation Will Surge Back to 4%

SPEAKER_2 (0:02)

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Joe Weisenthal (0:18)

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

Tracy Alloway (0:22)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

Tracy, future, economy, it's always uncertain. Path of the, path of inflation, path of employment, always big debates. I think what's really interesting right now, compared to a few years ago maybe, is at various times, it's like inflation is gonna come down, but there's a fight over how fast, right? And now you have a situation which, there are people who argue both sides. Some people are like, oh no, we're on a, you know, we're heading down, the sort of Neel Jetta camp, et cetera. And others are like, look, we're reaccelerating, it's gonna get hot again. And we're recording this February 11th, we just hit a fairly strong jobs print, et cetera. And so some people are making the reacceleration argument.

Tracy Alloway (1:02)

We are so back, so back. Well, that jobs report, I mean, it was a blowout number. So 130,000 jobs added in January versus expectations for 65,000. And even if you drill down into it, like it looks pretty good, right? But you're absolutely right. So we used to argue about how far we would travel in one direction, you know, inflation. Is it going to be 4%? Is it going to be 5%? Whatever. And now we're sort of arguing about which direction we're actually going to go.

Joe Weisenthal (1:32)

Totally. And I think if you just look like, OK, one jobs report can't, you know, take it with a grain of salt. There is there does seem to be a lot of evidence of some softening in the labor market by a lot of different measures, et cetera. Housing market continues to be fairly soft. On the other hand, look at various commodities, you know, look at copper, look at a bunch of other stuff. Look at trucking prices, freight picking back up, et cetera.

Tracy Alloway (1:57)

I wrote about this in the Odd Lots Newsletter.

Joe Weisenthal (1:59)

Yeah, there's lots of things that are going in the other direction. And you would say, look, this looks like reflation.

Tracy Alloway (2:04)

Yeah. So we are going to be speaking with someone who had a non consensus call about a month ago. But again, I think it's becoming maybe more consensus by the day, by the hour, as we get these types of reports.

Joe Weisenthal (2:17)

Totally. Well, we really do have the perfect guess to sort of give us a different take, a sort of, I would say it's still a little bit out of consensus call, but definitely not the direction that a lot of people want to see. Definitely not the direction if you think that the Fed should cut rapidly this year. Maybe we'll talk some Fed stuff. We're going to be speaking, of course, to Adam Posen. He is the president of the Peterson Institute. He recently co-authored a piece with Peter Orszag. 4% inflation? What? Adam, thanks for coming back and joining us here in the studio. 4% inflation, really?

Adam Posen (2:50)

Thanks Tracy. Thanks Joe for having me back. Yeah. I mean, I've got friends who say I should have just said 3.5 and that would have been enough out of consensus.

Joe Weisenthal (2:59)

You saved some credibility for yourself.

Adam Posen (3:00)

Exactly. But I think it's realistic to think about 4% by the end of the year on Headline CPI and just going to the spirit of what both of you were saying. I think the direction of travel is up, not down, and pretty clearly that way. There's obviously, like you just said, today's job report, but I think that there's a broader pattern. The issue isn't, like you say, one month. It's more about why the jobs report looks the way it does.

If you look at prime age, like Tracy was saying about drilling down in the numbers. If you look at prime age labor force participation, which to me is one of the most important statistics you can look at, it's still pretty high. There's this risk of women dropping out of the labor force to look after kids and elderly and sick people if they don't restore some of the Obamacare insurance subsidies. There is a conundrum that if you're either they haven't deported yet or managed to drive out yet as many migrants as they think, or you're losing labor there too. So it's hard for me to see this as a very weak job market. The kinds of things people point to, like the slowing of wage growth or the vacancies over as compared to unemployment, I think are not indicative of a demand side slowdown. They're indicative of what economists call mismatch, meaning less good functioning in the labor market. So just to give you two quick examples, African-American unemployment is up relative to average unemployment. Historically, for both nasty and good reasons, that's been the case, but it had come way down. So the question is, is it going up because they're the canary in the coal mine, or is it because something specific hit African-Americans? And unfortunately, I think it's something specific contributed to African-American unemployment, which is DOGE may not have cut overall government spending, but it massively reallocated where our government spent. So Department of Education gone, a lot of environmental gone, a lot of health and human services gone. And these are things where you had a lot of government contractors that were African-American owned or run or heavily populated. And so I think part of the reason African-American unemployment is up, and that doesn't mean it's okay, it just means it's not a sign of demand shock or decline or soft market is because of this hit to this specific part of the workforce. Similarly, and I know you have had episodes talking about this issue, we see the phenomenon of young people having less hiring, particularly college educated people, young people not getting hired as much.