00:00Stuart Paul, Bloomberg Economics, joins us now for more.
00:03So, Stuart, we got the PCE figures this morning, and of course, when we're taking a look at monthly data,
00:08it's always a little bit stale, but that feels particularly true in this case when you think about
00:13all the developments that we've seen on the geopolitical front.
00:16But walk us through what stuck out to you in this morning's report.
00:20The thing that I'm looking at is core PCE inflation.
00:22I think that that's really what matters more right now.
00:25We, of course, know, as you say, that the May data are stale because global energy prices have come down
00:29about 30%.
00:30We're expecting to see an outright deflationary month-on-month headline inflation picture
00:37when we finally get the June data starting with CPI, I believe, July 14th.
00:41In today's report, when I dig into the core, I would be more concerned if I saw a major uptick
00:49in core goods prices,
00:50which we did not see.
00:51I'd be more concerned if I saw something like labor-intensive services prices accelerating.
00:57We didn't see that in May either.
00:59Instead, the core is being buoyed by sort of idiosyncratic factors like airfares,
01:04like portfolio management services, which is downstream of equity prices during the month,
01:09and for other things like health insurance, insurance products.
01:13And when that's what's really driving the core right now, you would expect the Fed to sort of sit on
01:19their hands.
01:20You know that headline inflation is turning over.
01:22You don't see a major wage price spiral driving core inflation right now.
01:28And so even with the market anticipating a rate hike, I would expect the Fed to be a little bit
01:34more cautious right now,
01:35lest it sort of snuff out real economic activity prematurely.
01:39Interesting.
01:40So putting it all together, when you think about, you know, what we've learned in the past month,
01:44it sounds like what you're saying is that we could be seeing the peak right now in inflation.
01:49I think that we are seeing the peak in inflation.
01:50I think that it's going to be a pretty long disinflationary road.
01:53I think that the labor market still is pretty healthy.
01:57Labor income growth, as we saw in today's report, is running at an annualized pace, approaching 5%.
02:03That's pretty strong.
02:04That should sustain spending growth.
02:06But what we are also seeing is that households are relatively more price sensitive.
02:11They need to see core goods prices down if they are going to increase the volumes of purchases.
02:16That's exactly the dynamic that we saw in today's report for the month of May.
02:20And when we think about what else has been sustaining household spending growth,
02:25it's been things like elevated tax refunds.
02:27It's been things like wealth effects.
02:28As the market gets more choppy, you would expect to see a bit more precautionary saving.
02:33Households are stretched in with a saving rate of just 3% right now.
02:36So we really need to see sustained labor income growth, a healthy job market.
02:41And if we start to see any cracking up, especially in the job market, it becomes more two-sided.
02:47The risks the Fed faces becomes more two-sided.
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