K-Shaped CPI Report for a K-Shaped Economy, Says JPM's David Kelly

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00:00David, let's start with the inflation data. Is three the new two? And is it going to stop this

00:04Federal Reserve from cutting interest rates? I think the Fed's going to keep on cutting rates.

00:10It's generally a better than expected report, but I think what it really shows is we have a

00:14K-shaped economy and it's sort of a K-shaped CPI report. The thing that really jumped out at me is,

00:21first of all, rental costs coming down. We've got a big change in demographics here and

00:27rental inflation is just going away. You also saw used vehicle prices fall. I thought that was

00:33pretty interesting. And then the big thing here is core goods prices outside of food and energy.

00:39That's the stuff that should be hit by tariffs, but that's only up two-tenths of a percent,

00:44up one and a half percent year over year. It is clear that mainstream retailers don't believe

00:50they can pass on the tariff increases right now. And that's what's making this inflation rate

00:55a little bit tamer than people feared. David, doesn't this just justify what the market's

00:59already sussed out, which is that inflation fears were overblown earlier this year? The Fed can keep

01:03cutting potentially below three percent by the end of next year and that it's not going to cause a huge

01:09inflation problem? Well, I never thought we had a long-term inflation problem, but I think it is

01:14still early days on the tariff effects. What's going to happen is right now, retailers feel like

01:20they can't pass on the price increases. But early next year, you're going to have this refund bonanza.

01:26The average income tax refund per household, we believe, is going to be over $4,000. Last year,

01:31it was $3,200. And that is the exact time when retailers are going to feel like they can pass on

01:36these tariff increases. So I do think we've got a little bit of a spurt in tariff inflation still

01:40to come. But then, you know, if nothing else happens, you know, there isn't a lot of momentum

01:44in this economy and it'll slow down again and it'll cool down again. So I don't think we've got a

01:48long-term inflation problem. My real question is, given how bubbly financial markets are,

01:54do you really need the Federal Reserve adding more liquidity to the party right now? Or should

01:59they just, you know, hang on in there and say this is enough liquidity?