00:00What catches your eye looking at this report?
00:02Well, there's some hints of second round effects of higher energy prices on core.
00:08So those airline numbers, the food at home numbers, there's also kind of spillage into headline through food because a
00:15lot of food prices are related to transportation costs.
00:19So the concern here, the assumption here, I think from the Fed's point of view and ours, is that oil
00:24prices tend to give you headline effects but not core effects.
00:28And there's at least at the moment, given the magnitude of the rise in energy prices, some hints of those
00:34second round effects in core.
00:35We need to see if those persist.
00:38So to me, that's what catches my eyes.
00:40The four tenth on core was not a surprise to us.
00:43That's that's where we were.
00:44And as Michael mentioned, there is some catch up effect here on rents and owners equivalent rent from the government
00:50shutdown last fall.
00:51So this number is artificially higher because of that.
00:56But you still have kind of a what I'll call a trifecta here.
00:59You have energy prices pushing the headline.
01:01We think we have the last vestiges of tariff pass through on core inflation, core goods.
01:07You saw the apparel number today.
01:09And then we had that catch up effect on shelter inside of services.
01:14So three forces pushing inflation in this particular CPI reading higher this month.
01:19If you were looking at the calendar right now and I say to you the following, can you just circle
01:23where you see the peak for inflation this year?
01:25Where in the calendar would that fall?
01:27On a year on year rate, May or June.
01:29May or June.
01:29We think we're at peak pressures now.
01:33If that's the case, then do you think that the Fed should look through this?
01:37With time, yes.
01:39But there are a number of forces here.
01:42This is our fourth major supply shock in recent years.
01:45And we've got evidence here of what I'll call a mix.
01:48How do you decide if tariff price passed through his ending when you have some of these other second round
01:53effects from energy prices?
01:55So we think ultimately, yes, they will be able to look through it.
01:59But I'll say look through it with a long lag.
02:01Like I think we think the Fed's on the sideline for the rest of this year.
02:05What does it say that companies are pretty easily able to pass along the price increases that they're experiencing to
02:12consumers?
02:12We've seen that in profit margins.
02:14We've seen that in earnings.
02:15And frankly, we're seeing that in how quickly some of these price increases are transmitted through things like airline tickets.
02:22Yes.
02:23It's not a surprise that energy prices get passed through quickly.
02:26That has been the historical record in the U.S.
02:29So seeing airline fares up as much as they were, we actually thought they'd be higher this month.
02:33So I'd say that is pretty standard from a historical perspective.
02:37The tariff pass through has taken longer.
02:39It's taken almost almost a year.
02:42That said, when we look at some of the granular data, you know, nonlabor costs reflect those higher tariffs.
02:49But firms were able to pass along a greater increase in prices and build in more margin.
02:54I think that speaks to pricing power, still strong underlying demand, but kind of an oligopolistic corporate framework, right?
03:02We've got some very large kind of quasi-monopoly type firms and industries.
03:07Typically, they have better pricing power.
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