Simone Del Rosario

We’ve seen significant progress on downward inflation over the year, and they do expect that to get a little bit sticky at this point. So here’s what the fact set expectations are. Headline CPI is expected to go up 2.6% for October, when it went up 2.4% in September. So they are expecting to see inflation go up annually just a tick, while core inflation, that’s the one that the Fed really looks at that strips out the food and the energy. Core inflation is set to stay steady at 3.3% so that is much higher than the Fed’s 2% target, right? We’re going to be talking about how the Fed may digest these numbers. And in addition, we’re expecting a new presidential administration come January. How will those policies affect the Fed’s path toward getting inflation back down to that 2% target? There’s a lot to talk about today, so I want to bring in Mary. Lovely. Mary is the Senior Fellow at the Peterson Institute for International Economics. Mary, it is lovely to have you this morning.

Mary Lovely

Thank you. Great to be with you this morning Simone

Simone Del Rosario

I’ve laid out the expectations. Economists do expect inflation to go up a little bit. Are we concerned about that trajectory? Have we reached what was the bottom? Even though we aren’t where the Fed wants us to be.

Mary Lovely

Well, that narrative suggests that we’re sort of on a journey. We might be on multiple journeys in the sense that, you know, we have a new administration coming in. We’re going to see new forces that affect supply and demand, both domestically and globally, and that will affect inflation. So we have a regime change, and I know that you want to talk about that, because it’s going to be really important looking forward. 

Simone Del Rosario

It is 830 on the dot the Bureau of Labor Statistics isn’t always perfectly on time, but I just refreshed and here we are. Okay. So headline inflation numbers coming in at 2.6% annual rise that is exactly in line with expectations, as well as the point 2% monthly rise so right on target there, although, as we mentioned it, is, you know, higher than last month as far as core right on target a point 3% monthly rise in core inflation, as I’ve explained to our viewers, that strips out food and energy, because those are two more volatile indexes. You’re trying to get the idea of what the rest of the goods and services cost, and the rise for core over an annual basis is 3.3% that is the exact same as September. So that’s what we have headline inflation 2.6% in October, core inflation 3.3% in October, same as September. It’s very rare that we do get the right on spot results. So how do we take this? This is, you know, exactly as expected. That should be nice for people. The markets like to expect things before they come.

Mary Lovely 

Yeah. I mean, you know, I think it’s great. There wasn’t a whole lot of policy shift moving into the month, so it’s probably not that surprising. We haven’t had any surprises. So economists do their job, and we got a pretty good forecast this time turns out to be right on the money.

Simone Del Rosario   

Yeah, right on the money. So I’m looking a little bit more at what the what the breakouts of all of this are, food from an annual basis actually ticked down a little bit. So economists were expecting food to be a little bit hotter, a little bit more inflationary, that it ended up being food as a whole rising 2.1% on an annual basis, while your groceries are up 1.1% it is really the food away from home when you’re out in the restaurants dealing with, you know, services higher wages, where you’re seeing a 3.8% rise. So those are all on an annual basis and coming in a little bit softer than economists did expect, although, as we mentioned, the overall numbers are the same. If I go down and look at shelter, shelter is staying exactly the same from an annual basis, 4.9% rise. This has been kind of, you know, the thorn in the Fed side, shelter accounts for a very large portion of the inflationary rises, and it’s staying pretty hot. And even more hot is the monthly rise in shelter costs at point 4% last month it was point 2% rise. So seeing a lot of heat in that area still, as I continue to look at, do you look at what’s happening as far as what categories you’re seeing more inflation, and what are you searching for when you’re, you know, kind of looking at what the inflation picture is.

Mary Lovely

I think we want to look at, as you mentioned, shelter, food. These are very important to people. Lots of people who were interviewed over the election were discussing, you know, how much they felt price increases when they went to the grocery store, lots of complaints among young people about the cost of shelter. They have feeling that they’ll never be able to buy a home, for example, and I think that that contributed to this future worry that we saw, perhaps reflected in the election results. But we want to look at what will happen, obviously, to energy prices, vehicles, large consumer durables. And what we see, of course, is that those are areas that have had much, actually price decreases and have contributed to keeping inflation low. So we might want to look at, what do we think will happen in energy markets? President Trump has talked a lot about that. What will happen in vehicle markets as well. And then, of course, another important category and thing to think about is what you talked about, which is food away from home, as opposed to buying food in the grocery store, and that points to concerns about price of services rising, and we spend a large share our income on services, and it’s very closely tied to labor costs. So those are certainly things we might want to follow up on,

Simone Del Rosario

yeah, to kind of go back to everything that you just mentioned. So if we look at the shelter index, as I mentioned, it’s a big part of it. When you look at that core inflation, which is, you know, the Fed wants to look at something that’s a little less volatile, looking at how prices are overall, and I mentioned that 3.3% that’s a much farther leap from the Fed’s 2% target. But shelter alone, the rise over the last year accounts for 65% of that core inflation. That is a huge chunk of what these prices are. So until the country sees that deflationary pressure or disinflation in the shell Turk prices, we’re going to continue to see inflation market marks that are off the mark, right? And then as far as the energy is concerned, you mentioned that those are actually deflationary, so negative 4.9% on the energy index over the past year. And vehicles, new vehicles, negative 1.3% so 1.3% cheaper and used cars and trucks. Remember when those were so expensive? Used cars and trucks now at negative 3.4 noting, however, that the price in used cars and trucks did jump up for the month. So if you were out buying a truck or car last night or last month that was used, the prices were up 2.7% on the month, but still down year over year, and that has a lot to do with how crazy those prices went up. Okay, so we’ve, we’ve got the official numbers down for October, as expected, but still showing that, you know, the B of A economist said sideways inflation. So we’ve been trying to move down for so long. They said inflation is moving sideways after a period of disinflation. Is that? How you read it? Do we feel like these numbers are kind of indicative of, oh, you know, the at least the headline was so close to that 2% target. Now it’s kind of looking a little further away from it.

Mary Lovely

I think people are worried that we’re not just sideways, we’re plateauing, and that we’re going to go back up. And this is, of course, a concern, because a lot of market, you know, markets, have built in an expectation for a rate, another rate cut from the Fed, and whether that happens or not, clearly is going to be influenced by the numbers we saw today, which were as expected. But there’s a lot of concern as to whether that rate cut is really warranted, given expectations of higher inflation next year. So for example, just looking at shelter, you know, a lot of people, I think, want interest rates to go down. Right if you’re buying a home, financing of that home is a huge part of what you’ll pay in your monthly bill. And we saw interest rates come down and then pop back up. So, you know, I think there’s a possibility here that we’re not just moving sideways, we’re actually plateauing and we’re on their way back up. Yeah,

Simone Del Rosario

that would be really bad news for the efforts that have been happening to try to get inflation down. We’ve had, you know, that interest rate the highest it’s been in decades. People are seeing that, feeling that unable to get a mortgage because that monthly payment is so much more than they have the ability to spend.

Mary Lovely

Yeah, and I think it’s something we don’t talk a lot about, which is kind of intergenerational equity. So you know, older people either own their homes outright because they’ve already paid off their mortgage, or they’re holding on to mortgages that were as low as, you know, 2.75% new people coming into the market now are seeing interest rates of seven or higher. And, you know, they like what’s happening to me, and I think among young people, that is a very big concern, of course, that gets reflected in the cost of apartments and other things that young people are looking to buy as well or to spend money on. So I think that interest rates, which are tied to the CPI numbers, these nominal interest rates, are going to be affected by what we see today, if we’re at a plateau, we don’t know yet, are we going up going down, but I think there’s a lot of warnings starting to come that inflation will go higher.

Simone Del Rosario 

I did a report, I think, last week based off data from the National Association of Realtors, and it was saying that the average home buyer today is 56 years old. First Time Home Buyers fell to historic lows. They’ve been tracking this for decades. First time home buyers now make up less than a quarter of the home buyers out there. And the age of first time home buyers now 38 years old. That is not you know what we were raised on? Believe? Well, if you work really hard, you’re going to be able to buy your first home at age 38 that’s already up three years just from the year before, when interest rates were already high. So to your point, it really is pushing different economic pushes and pulls really as to what’s happening with those interest rates and how it’s so closely tied to to how people act and what moves they make moving forward and building that equity as well. Neel Kashkari, the Minneapolis Fed President, said yesterday that there would have to be a surprise on the inflation front today to be able to change things so dramatically. The outlook is that the Fed is going to cut again in December, a quarter basis point cut. And I’m looking at what traders are thinking, and there’s like a almost a 60% chance in their mind that the Fed is going to cut by a quarter point, but that no cut territory is growing a little bit in consensus, more than 40% are betting on a no cut territory. There’s zero surprise in this inflation report. So do you expect the Fed to move forward with that cut? And should they?

Mary Lovely

Oh, wow, that’s a big question. First of all, your numbers on homebuyer first time homebuyer age is very interesting, and I think really does reflect what I’m hearing from my college students, from my graduate students, from my own kids. I think it’s very telling about, you know, obtaining the American dream, and how people feel with inflation being kind of front and center in terms of the cut. I mean, I don’t know what they’ll do, obviously, but, you know, yes, the inflation numbers came in, as we expected, but we have had some uncertainty, you know, resolved this month, which is that we know who won the election, and while both candidates had programs that many economists thought were inflationary, new spending, for example, there’s been, I think on the Trump program more concern because of big Well, the renewal of the tax cuts that were enacted under Trump, one, for example, and of course, the tariffs, which he has not only promised he’s drilled down on over the last couple of days in his statements, so that will directly raise the costs of goods that are coming into the United States. So the question is, I mean, does supply expand sufficiently to offset those effects? And that’s going to be really hard to do and to see how that actually can happen. Part of the reason why is the US is already operating at a very low unemployment rate, and the incoming administration has promised a lot of deportations of undocumented workers. Now, regardless of how you feel about this policy, what it will do is affect the size of the labor force. And two places where it matters a lot are agriculture and services. So the, you know, the kitchens of restaurants, for example. And so this is going to be really inflationary push the price of those services and those goods up, and I think people will feel it pretty fast, because if there’s one thing we do is we go to the grocery store, we like to eat out occasionally, and we’ll feel those pretty quickly, I think,

Simone Del Rosario

yeah, three times a day. That’s when we’re affected by the price of food, right? Five times a day. However, your however your schedule is, you can’t get away from it. It’s, that’s why, when we were dealing with this massive inflationary episode, I mean, we continue to talk about grocery prices because, gosh, I can’t believe I’m spending $3 for a single bell pepper. I mean, it’s, it’s crazy. It’s how expensive things have gotten, and now you’re saying that there’s a big chance that that’s going to continue to rise before we get into how things are going to change on the inflation front, with President elect Trump in office, is there a reason that inflation is stagnating right now? So this would be before, you know, this is October. This is before he’s won the election. This is, you know, all of these, all of these factors put aside. Was there a reason that people believed that we might have plateaued and why we’re seeing the increase today?

Mary Lovely

Well, I mean, we do. We did have a lot of inflationary pressures resolved. So shortages of vehicles, for example, supply chain snarls and hold ups. The energy situation in other countries, Europe, for example, still an issue for them, very high energy costs, but it’s settling into kind of the new normal. So those pressures have settled and. Um, we’ve seen actually having a deflationary effect in the US energy prices and then, of course, vehicles. We had a big vehicle shortage. Uh, you mentioned when people were looking at the prices of used cars going sky high. So we had a lot of things that came out of not just the pandemic, but also Russia’s invasion of Ukraine, impacting the prices of goods and services. Those things have settled down now. That doesn’t mean they’re all resolved, but they’re not pushing up prices anymore. So those were all good things that allowed the Fed to think, Okay, we have done our inflation fighting, and we’re able to kind of take the take the foot off the brake right now. And there was a lot of talk, and I’m sure you discussed it here on soft landing. Some people even taking a little victory lap. But as I said, things have changed. We now know that the incoming president United States is going to be Donald Trump, and so we’re going to have to talk about how hot he’ll run the economy, what other things his various programs on the international front, on the domestic front, will do, as I said to that supply, demand balance.