I think maybe the biggest news for the markets certainly this week were the CPI
numbers that really disappointed to the upside here particularly on the core.
What did you make of those numbers. Look for me they were unwelcome but not
wholly unexpected. I think the right reading of the data
all along has been that headline inflation fluctuates substantially.
But we've got a significant underlying inflation problem.
And that's what that core inflation rate where the month was faster than the
quarter. The quarter was faster than the half
year to half year was faster than the year and the year was faster than last
year. That's what it showed.
And the month was at a close to 7 percent core rate.
We've got a substantial underlying inflation problem.
Another way to see that was that median inflation is higher than it's been any
time since we started collecting the data.
Another way to see that is that we're seeing substantial inflation in the
housing components of the index which we know have very substantial persistence.
Yet another way to see that is in the data from the Atlanta Fed which I think
is probably the best wage indicator on those who are switching jobs which show
we are. The market really is unlike those who
are staying on jobs which was running at 8 percent
or or more. So we've got a substantial underlying
inflation problem that doesn't come out without very substantial monetary policy
adjustment. And the market is waking up to that fact
and is now building in substantially more monetary policy adjustment than it
was with the terminal. Fed funds rate are up now at 4.5.
If you think back David it's been an extraordinary journey.
It was only 15 months ago that the Fed was saying that the rate was going to be
zero in mid 2023. And now it's saying that that rate is
going to approach four and a half. And so the idea that that would change
financial conditions can hardly be a very surprising one.
So Larry let's pick up on exactly that point.
As far as you see it right now what would you project the so-called terminal
rate to be. We've got the head of economics of
Bloomberg saying 5 percent. Deutsche Bank says 5 percent.
Where do you think we end up. That wouldn't surprise.
That wouldn't surprise me certainly at 450.
There's more realism in market pricing than there was several months ago.
I think we're more likely to end up above four and a half than we are to end
up below four and a half. And it certainly wouldn't surprise me if
that rate has to get above 5. If we are really going to in a
determined way contain and control inflation.
Whether the Fed is going to stay the course and do what's necessary to
contain inflation you know we're going to have to see how that plays down down
the road. Rick Michigan a former Fed governor had
a very strong op ed this week making a point that I've made a number of times
that even Paul Volcker had a kind of false start on inflation containment
where he brought down rates in response to
economic bad economic statistics in the spring of 1980 which then had to be
reversed and forced us to have even higher rates than we otherwise would
have had to have in the early 1980s. So I think it's not going to be easy to
do what's necessary. History records many many instances when
policy adjustments to inflation were excessively delayed and there were very
substantial costs that again and again through the 1960s and 70s for example I
am aware of no major example in which the central bank reacted with excessive
speed to inflation and a large cost was paid.
And so I think that. And that in terms of minimizing the risk
of a stagflation pre catastrophe the Fed has to be prepared to stay the course is
the important one to internalize. Larry as you know so well have said
repeatedly on this program one of the major components of inflation are wages.
We walked right up to the brink of a national rail strike this week in the
United States have avoided at least tentatively with a tentative agreement.
Obviously that would not have been good for the economy if there had been a
strike at the same time. What does this say about the hydraulic
pressure from organized labor and otherwise on wages.
David I think we have failed on labor rights in this country over the last
generation. It has been far too easy to fire union
organizers. We have not done enough labor law reform
to support the right to organize which I think is something fundamental to having
an effectively functioning labor market and something that is essential to
having a fair and just society. But I do think at a moment like this
when inflation is a crucial issue the federal government needs to be very
careful to keep a focus on all that it buys
at all that it sets a pattern for to pay attention to holding costs down rather
than rewarding workers. And I think there are a variety of
provisions that try to maximize the wages of those who are involved in
activity. The government is supported.
And so I worry about provisions that seek to enshrine high wages for example
in those who are producing goods related to the environment.
And I think the federal government has to walk a very careful balance here
between restoring appropriate labor rights which has been a real flaw
and a huge problem for the last 30 years and doing things that will entrench
inflation through wage pressure to the detriment of the overall economy
including the economy of workers who work with their hands.
And finally let's turn to geopolitics for a minute.
Obviously Ukraine had a rather good week I'd say with the advances it made in the
northeast with Russian troops retreating or even an absolute right route.
On the other hand President Putin had a rough week as he met with President Xi.
And President Xi has some concerns about that war.
What do you make of what's going on there.
I was heartened
by the Ukrainian success but I think that from an
economic point of view we're going to have to be very thoughtful about how we
support Ukraine as hyper inflation becomes a greater risk in Ukraine.
And I think more broadly there's enormous uncertainty in markets for
natural gas in oil markets through those markets and markets for diesel fuel and
for fertilizer. Add a great deal.
We don't always say this but a great deal in the U.S.
inflation process is going to hinge on whether as markets tend to be pricing
while prices stay moderate or even come down or whether as geopolitical experts
warn we hit adverse developments and those prices spike up again.
I don't have the wisdom to know which will happen but I do think it's going to
be an enormous factor for the inflation process in the months ahead.
Okay Larry thank you.