Why America’s Inflation Problem Isn’t Going Away

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**Ed Elson** (2:09)
Welcome to Prof G Markets. I'm Ed Elson. It is July 15th. Let's check in on yesterday's market vitals.
The major indices climbed on a better-than-expected inflation report. More on that in a minute. The inflation reading also sent treasury yields lower. Meanwhile, Brent Crude declined after President Trump scrapped his idea for a 20 percent fee on cargo in the Strait of Hormuz.
Finally, IBM plunged 25 percent after pre-announcing earnings that missed expectations. It was its worst day of all time.
Okay, what else is happening? Inflation cooled to an annual rate of 3.5 percent in June, which was lower than economists had predicted. Consumer prices fell 0.4 percent between May and June. That was the largest one-month decrease since April 2020 Much of that drop was driven by lower energy prices after the US-Iran ceasefire eased fears of supply disruptions, but that relief maybe short-lived. Last week, of course, President Trump declared the ceasefire over. And yesterday, the US launched a new round of strikes on Iranian targets. Brent Crude has since climbed back to around $85 a barrel, raising the prospect that energy prices and inflation could move higher again. So joining us to discuss this inflation report, we are speaking with Mark Zandi, chief economist at Moody's Analytics. Mark, great to see you. Thank you for joining us on the show. Inflation has come down. We were at 4.2, which was really high. We're now down to 3.5, still pretty high, but lower than expected. I think the bigger question though is how much of that was because oil prices went lower in June. And I ask that because oil prices are of course rising again, which makes me think maybe this is not here to stay.

**Mark Zandi** (4:06)
Yeah, it's odd when you said inflation is easing to 3.5%.
It is easing, it's down, but it's still awfully high, uncomfortably high. As everyone knows, the Fed's target is 2% inflation. That's kind of what we take as being a comfortable rate of inflation.
And I think what I'll call underlying inflation, kind of abstracting from all the vagaries of the data. And by the way, in this report, there was a lot of noise. I don't know if you noticed, but it's a very noisy report. And a lot of anomalies in the data, and I'm not sure how much to read into it. But abstracting from that, I think underlying inflation is kind of 3% to 3.5%, somewhere in there. Again, uncomfortably high. And that's abstracting from the swings in energy prices related to the war, which obviously added a lot to inflation coming into the war back in the spring, probably summer, and is now detracting from inflation. But abstracting from that, we're at a very high uncomfortable level of inflation. And this is after a number of years of very high inflation. In fact, inflation has been above the Fed's target for five years. And so the cost of living is extraordinarily high. It reflects the cumulative effect of those high rates of inflation. And I think people just are feeling very uncomfortable with that. And hopefully the wrong work moves in the right direction here and begins to abate. But as you point out, that's now a new risk.