00:00Well, I think the underlying question here with inflation is, is it being driven by, you know,
00:06by supply, by negative supply shocks, or is a part of it being driven by just a positive demand
00:13impulse in the U.S. economy? And that matters for monetary policy, obviously, because monetary policy
00:19really has more of an effect on demand and in particular on more persistent demand.
00:24You know, so when we look at this report, that's what we're trying to parse out.
00:27And I think when you look at the headline, it's very clear that, you know, above 4% inflation right
00:32now
00:33is really being driven by energy supply shocks that we're seeing in the Middle East.
00:37You know, and when you look at core, you know, certainly I think that there's, you know,
00:42some evidence of supply shocks there as well. So we have tariff-related pass-through that's impacting
00:47core goods inflation in particular. That, you know, looks like it's starting to fade, however.
00:52You know, and now the question is, you know, the AI-related impulse, how much is that impacting,
00:58you know, some inflationary pressures spilling over into the CPI? You know, and I think there's
01:05some evidence that that's happening as well. But when we kind of look at overall the data
01:09for CPI, you know, it suggests to us that we're getting these supply shocks. Hopefully they will
01:15fade. There's been a series of supply shocks. And really the question for the Fed is,
01:20will, you know, will that start to edge up inflation expectations? And, you know,
01:24and as of right now, at least the markets we think are giving the Fed a lot of credibility
01:28in terms of inflation expectations.
01:30So I think a lot of investors, Tiffany, are looking at the headline print of 4.2% and they're
01:36like, oh boy, that's not good. But the core at 2.9%, that's better, although it's still above
01:41where the Fed would like to be. How do you think about that differential there? How much of that is,
01:46you know, to use a word transitory, how much is kind of seeping into the real economy?
01:52Yeah, I mean, so yeah, I mean, the difference between headline and core inflation headline
01:58includes the more volatile food and energy prices. Energy inflation really is driving the wedge
02:06between the two. You know, and we all know, having, you know, filled up our tanks at the gas
02:11station. We've seen gas, gasoline prices in the United States that have really accelerated.
02:16And again, that's the direct result of the pressures going on in the Middle East right now.
02:21You know, so again, I think historically when we've seen these types of elevated energy prices,
02:28supply shocks, they have been temporary. And it's important to keep in mind that
02:33that when, you know, when global energy prices mean revert, you know, and they likely will mean
02:41revert at some point, that that will be putting downward pressure on headline inflation. So you
02:46could see if you just look at the energy futures curve, for example, and if energy prices were to
02:52follow that, you could actually have headline inflation falling below 2% next year as a result of
03:00of that, you know, kind of mean reversion in energy prices. So I think the Fed, when they're looking
03:04at it, just has to keep that in mind. Is there a consensus on this? I mean,
03:08to me, that's a really bold statement, given what people are living. Do you have a lot of company in
03:15that call, Tiffany? Well, you know, I mean, again, if we just look historically, you know,
03:23energy and commodity prices, when you do have these negative supply shocks, you know, eventually prices
03:28mean revert the supply, you know, sort of, you know, that the markets, you know, will, you know,
03:35come back to, you know, kind of a more normal balance over time between supply and demand.
03:40You know, we could have, you know, risk premium in the Middle East that starts to come down and
03:45things like that. You know, certainly we will, you know, we could see more elevated gasoline prices
03:51for a time. But again, inflation is about the change in prices. So even if, you know, global
03:59energy prices stay here, stay at these levels, inflation in energy prices will come down to zero,
04:07right? So that also is something to keep in mind here. So although we have this elevated level of
04:12inflation right now, you know, that probably will peak unless you get another ratcheting up of global
04:20energy. So again, we think 4-2 here is likely the peak for headline inflation. You will start to
04:26see it come down in the months ahead. And if we do get any mean reversion in energy prices, they
04:31come
04:31down at all, you know, that will actually, you know, put some more downward pressure on headline,
04:36could even see it below two, as I mentioned, next year.
04:39Tiffany, how about the other side of the equation for our Federal Reserve? The labor market here
04:44seems pretty darn resilient.
04:48Yeah, I mean, so what how I would characterize the labor market is in balance. And when I say
04:54in balance, you know, the data, the indicators that we look at suggest that the labor markets are
05:01not really a source of inflationary pressures. We have seen payrolls, monthly payroll growth accelerate
05:09in the first part of this year, which is very good news. But but nevertheless, you know, we look at
05:16job
05:16openings, for example, the unemployed, you know, it doesn't look like the labor market here. It was
05:21really the source of inflationary pressures. Wage inflation has really been decelerating. You know,
05:26I think there's more uncertainty around the labor market as a result of the AI dynamics. You know,
05:32so it doesn't really look concerning.
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