CPI Shows Beginnings of Tariff Inflation: JPM's Kelly

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00:00How much comfort can you take from this morning's inflation data?

00:04Not a lot. And it's a very interesting report because you can see sort of the fading of issues

00:09that were causing inflation over the last few years. But you can also see the beginnings of

00:13the inflation problem related to tariffs. So if you look at owner's equivalent rent,

00:18auto insurance, those are the things that really held inflation up, and they're going away. And

00:22the other thing that really helped this report is we had a further decline in airline fares,

00:26a further decline in lodging prices. There's a lot of weakness in the tourism industry right now,

00:31and that's in this report. But when you look at core goods outside of new autos, we're seeing those

00:36goods prices go up. And that's where you're going to see this tariff inflation. And we have only seen

00:40the thin end of the wedge here. It takes a while for the tariffs to get to be implemented. It takes

00:45a while for the revenue to be collected. It takes a while for the inventory to make it to people's

00:49shelves. It takes a while for the retailers to say, look, I'm going to have to mark it up. But it is

00:52coming. So I fully agree with the Fed's forecast that inflation is going to go up between now and

00:59the end of the year, and they've got to stay on their guard. And yet, David, they also believe

01:02it starts to come back down again. In fact, for that reason, some officials, including Governor

01:07Waller, believes you can look through it. Do you think you can just look through it?

01:11Not yet, because we also have a lot of fiscal sugar in the first half of next year. What's going

01:17to happen is that we had a lot of temporary tax breaks put in for four years, but they started,

01:22they started this year. They're not going to adjust income tax withholding schedules quickly

01:26enough. That means a bumper season for refunds early next year. And, you know, we know from

01:302022 that you've got supply chain issues, and then you give consumers a lot of extra cash.

01:35What happens? You end up with inflation. I mean, eventually, I think it'll fade. In the long run,

01:39I am not an inflation hawk in America. I think inflation will fade. But I think it's going to be

01:43sustained by some of the provisions of the OBBBA. And because of that, I think the Fed needs to hold

01:49off here. If we got clarity on tariffs, if we could say this is what the tariffs ratio

01:54are, and they will go no higher, then I think that makes it easier for the Fed. So, you know,

01:59I think the administration really needs to think about, look, could we please, whatever the tariff

02:03policy is, let's make it and be done with it. Because this uncertainty is the very thing that's

02:09making it impossible for the Federal Reserve to say that we're out of the woods or will be out of

02:13the woods on inflation.

02:13David, is there a sort of a necessary weakness that we need to see in consumer spending and

02:19services at this point to make sure that inflation doesn't take off? In other words, that pain that

02:25Neil was talking about that you could start seeing in the data on the margins?

02:29Well, that's a tough way to do it. I mean, the way you want to, if you're worried about a long-term

02:34inflation problem, it's only going to become because wage growth sort of compensates for price

02:40increases. Now, we still have a relatively weak labour force in terms of their ability to demand

02:45wage increases. You know, I think, again, we have to think a little bit about how immigration is

02:50affecting labour supply. And again, there's huge question marks there. But so long as we don't see

02:54an acceleration in wage growth, the inflation will fade. It's not just a matter of consumer spending

03:00being weak. So long as wage growth is controlled, inflation will fade again. But I think it's way too

03:05early to say that inflation is coming down to 2%. We've still got to get past tariffs. We've got to

03:10get past the stimulus of effects of this fiscal bill. And that's really what's causing the delay

03:15in any further Fed easing.

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