Will US inflation ever go below 3%?

Rob Armstrong (0:06)

Pushkin. Here's something the Unhedged newsletter wrote back in September of last year. Inflation is beaten and it does not look set to stage a comeback. The US economy is cooling gently. Many global economies, notably China's, are cooling non-gently. Commodity prices are falling. Corporations have largely stopped taking price increases and some are offering rebates. Wage growth is decelerating.

Aiden, can you tell me what was, when you wrote that back in September, what was core inflation?

Aiden Reiter (0:42)

Core inflation was around 3.25 percent.

Rob Armstrong (0:44)

And what's core inflation now, Aiden?

Aiden Reiter (0:46)

3.25 percent. And there was a jump in the middle.

Rob Armstrong (0:53)

There was a jump in the middle. So today on the show, were we wrong about inflation in September? And can we be more right this time around? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from New York City, capital of the universe. Joined today by my trusty lieutenant, Aiden Reiter.

Aiden Reiter (1:21)

You know, Reiter is Prussian for more right, so.

Rob Armstrong (1:27)

Although that column back in September had both of our names at the top, I'm going to use my authority as boss of the newsletter to say that you wrote the whole thing. Now, nominally, we thought inflation was out the door and it hasn't gone out the door since then. The market was very relieved by what it heard about inflation in yesterday's report.

Aiden Reiter (1:51)

Yeah, which is a little counterintuitive.

Rob Armstrong (1:53)

Yes.

Aiden Reiter (1:54)

Right, so inflation, at least headline inflation, which people, we don't have to care about, went up to 2.9 and people were freaking out that it would be higher.

Rob Armstrong (2:02)

Right.

Aiden Reiter (2:02)

That still was a pretty big jump.

Rob Armstrong (2:04)

2.9. Headline though, that's gas. Gas prices are up because it's cold.

Aiden Reiter (2:07)

Yeah, either way, core.

Rob Armstrong (2:08)

Core inflation, no food, no energy.

Aiden Reiter (2:10)

Yeah, core only went down from 3.3 to 3.25.

Rob Armstrong (2:13)

Yeah, Fed's target is 2, we're not there. It's a very small step down. So why, I wouldn't say the market did backflips in response to that report, but it was clearly pretty relieved.

Aiden Reiter (2:25)

Yeah, it was a sigh of relief.

Rob Armstrong (2:26)

Bond yields fell, equities rallied, etc., etc.

Aiden Reiter (2:30)

Yeah, and bond yields had been rising for about a month there.

Rob Armstrong (2:33)

Strongly.

Aiden Reiter (2:33)

People were very concerned about a lot of things, as you and Katie discussed, but one of those things could have been concerns about inflation.

Rob Armstrong (2:40)

So was this a, I guess, one theory of the case is this was a relief rally, not because things got better, but because they didn't get worse.

Aiden Reiter (2:49)

I think that's right, right? 2.9 was just around where economists pulled by Reuters expected things. So we got what we expected, and after some big surprises, both in the job report and the last inflation report, that was good news.

Rob Armstrong (3:01)

So it's like, there was ugly things in the background. So the fact that the foreground was merely neutral. So let's talk about then, why inflation isn't falling faster, like we thought it was gonna do a few months ago. What's going on? Let me start with some things it's not. The problem doesn't seem to be housing inflation anymore.

Aiden Reiter (3:24)

It is not. Shelter inflation has been on a steady decline since about September. And there was actually a pretty big drop in the annualized rate last month. So it went from 4.1 to 3.1. And that's taking that monthly change and annualizing it. So shelter is not the issue.

Rob Armstrong (3:40)

Yeah, so and just for listeners who haven't been nerding out about inflation for the last four years like we have, everybody was worried about shelter inflation because for technical reason, it wasn't going down and it was quite mysterious. And it was like a big part of the inflation problem a year ago or whatever. But that's not it anymore. Here's another thing I would say that it isn't. It doesn't seem really to be wages. Wages have come down the last couple of months like everything else. There's a million ways to measure wage growth, but I'm looking at average hourly earnings of production and non-supervisory employees total private. So not including government employees and that's come down below 4.376.

That was much higher in January last year. That was at four and three quarters. So that's coming down. So it doesn't seem like we're in a wage spiral.