Today's number: 49,500. That is the current value of the DAO, down from 50,000 on Thursday. As a result, Attorney General Pam Bondi has officially declared that child sex trafficking is once again illegal.
Welcome to Prof G Markets. I'm Ed. It is February 17th. Let's check in on yesterday's market vitals. Markets were closed in the US for President's Day and stock futures were muted following last week's inflation report. More on that in a minute. Meanwhile, Bitcoin dropped below $68,000 as its bear market dragged on. It has now fallen for four weeks in a row. And finally, Bloomberg reported that Warner Brothers Discovery may reopen negotiations with Paramount. Okay, what else is happening?
January inflation data looks like good news at first glance. According to the consumer price index, headline inflation rose 2.4% year-over-year, which is slightly lower than expected. Meanwhile, core inflation came in right on target at 2.5%. But beneath the surface, the picture is less reassuring. Prices for services, excluding energy, jumped 4% in January. That's the fastest monthly pace since July. And there is another wrinkle. We are still missing October data, which is distorting the year-over-year picture. So, here is the real question. Is inflation actually cooling, or is the data just wrong? Okay, here to break down this inflation report, we're speaking with Mark Zandi, chief economist at Moody's Analytics. Mark, good to see you.
Hi, Ed. Good to be with you.
So, I want to jump right into this. Okay, the CPI report comes out. Inflation's up 2.4% year-over-year. Really good report on its face. People were excited about it, especially this administration, which, you know, they're saying that basically inflation is coming down. The giant elephant in the room to me, as soon as I saw this, was something that we've discussed in previous conversations when the last report came out and the report before that came out, which is the numbers are probably wrong. And something that we've been talking a lot about is the fact that this shutdown that happened in October caused the Bureau of Labor Statistics to just not count up prices in October. They just made the assumption that inflation was flat, which of course doesn't really make any sense. And that has reverberated through to the numbers that we're seeing in every inflation report subsequently. And so my reaction was, this is just wrong again, and that's what people should be talking about. The numbers are wrong. So talk about that for us. To what extent are these numbers wrong? Are they wrong? And what did you make of this new CPI report for January?
Yeah. And I don't know that I'd overstate the case. I mean, these numbers understate inflation because of the October government shutdown and the fact that BLS couldn't collect the data for sure. But probably, you know, if you account for that, it probably adds a tenth or two to year-over-year growth. So instead of 2.4, 2.5, which was topline CPI, core CPI, it's probably what, 2.5, 2.6, maybe 2.7, something like that. So inflation, if you take these numbers at face value, don't put it into any other context, make the correction I just made, you'd say, okay, it's, you know, not great. It's still above where the Fed would consider to be target and what I think most Americans would consider to be comfortable, but it's okay. But, you know, that's not the end of the story. There's a lot more to the story than just these CPI numbers.
Let's hear what else is in the story here. What else should we be focusing on?
Well, there's other measures of inflation. And I mean, obviously the most important is the consumer expenditure deflator, the PCE. That's the measure of inflation the Fed uses to set its 2% target. And we are now getting a lot more data coming in. The CPI, the PPI, all that information feeds into this other measure of inflation that's kind of the bible for inflation measures. It measures inflation in a better way, accounts for a lot of the problems the CPI has. And that is going to come in hot for the month of January. You know, when we get that number a month from now, we're going to have a different, you know, conversation around that. It's going to come in at least three-tenths of a percent up in the month, maybe four-tenths, and year-over-year is going to be close to 3%. And that's the reality of inflation. If you take all the different measures and you add it all up and you make all the corrections and adjustments and everything else, it feels like to me inflation is sitting around 3%. Not 2%. That's where the Fed wants it. That's where I think most Americans again would feel comfortable with. It's closer to 3%.
I think the thing that's confusing for a lot of people is there are all these different measures of inflation. You've got CPI, you've got PCE. There are questions about how those are measured and which one is more accurate. Then you have the third-party data. You've got, you know, you've been measuring your inflation over at Moody's. You've got, you know, other sources. And a question is like, what are you supposed to trust and what is actually the most accurate reading and what number is the right number, which is increasingly becoming a real question, especially when the data was kind of messed up in October. You know, just as an observer, I'm sitting here, I'm like, which number am I even supposed to be focusing on? Like, what would you recommend to people who are trying to figure out what the actual deal is?
Well, this is why I get paid a salary, Ed. You know, I interpret the data for you. You know, look, the reality is that any data are an imprecise representation of reality. Some data gives you a more precise representation, others not as precise. None of them are perfect. They all have their flaws and issues, you know, for lots of different reasons, some obvious, not so obvious. But I think the way to think about this is you take the plethora of information that's available, you weight those pieces of information, data that you know are more reliable for methodological reasons, survey-based reasons, whatever the criteria you're looking at, and you make a judgment as to, you know, where we are. This is what the Federal Reserve does when they meet. They have to think about the job market and they have to think about inflation, and this is what they do. They have these kinds of discussions and debates about, well, is this measure better? Is that measure better? What's wrong with this? What about that thing over there? You know, what about these new third-party measures? That's what they do. That's what they do for a living to set policy. So there's no good, unfortunately, I can't give you something you're going to feel really satisfied with. There is no satisfaction here. You've got to, you know, take all these pieces of information together and make a judgment based on that imprecise representation of reality.
Yeah. When I look at that, the number that came out, 2.4%, I mean, still, that's prices going up, and it's not the 2% number that we wanted. But the information that I'm sort of synthesizing: one, the issues that we had in October that we've discussed; two, I'm thinking about tariffs and the fact that tariffs have been passed through at a 96% completion rate according to this report. 96% of the pass-through is going to be passed on to consumers. So you've got tariffs, which is, you know, raising prices as well. I'm also going off of just general personal experience where I go around and I'm paying for things that are a lot more expensive than they used to be at the grocery store and otherwise. And, you know, I'm putting that all together and I'm thinking like inflation's not improving. Inflation is getting worse, based on that's my read. But some would say, no, that's not taking the data into proper account and maybe you're biased for various reasons. So when you look at all of the signals and data points that are out there, what would be your general characterization of inflation right now? Would you say that it is getting better, worse, or about the same?
I think it's too high. I think it's about 3% and I don't think it's getting any better. And I suspect, if I give you my forecast, I'd say it's going to get a little bit worse before ultimately it will get better. I mean, we've got more tariff pass-through to go. We're still seeing the fallout from the effects of the heavy-handed immigration policy on the labor market, on wages, on cost. You can see it in the service price inflation. So, you know, it's high. It's uncomfortably high and it's not going to get any better, at least not anytime soon. There's, you know, all kinds of caveats to that statement, and, you know, what the Supreme Court decides, what the president does in response to what the Supreme Court decides on the tariffs, so forth and so on. But that's my characterization of it. I will say in response to, you know, Ed's inflation rate, everybody has their own inflation rate, right? Because everyone buys different things and are focused on different things. My basket of goods and services I buy are different than yours. They're different than, you know, Claire's, the engineer here. So we each have our own, you know, basket of goods. The other thing I'd say is in terms of perception, you know, often what we perceive about inflation is related to what we buy on a regular basis. You know, I buy a cup of coffee every morning. You know, I have beef, you know, once or twice a week. You know, I buy certain kind of clothing regularly. You know, I need electricity every single day, you know, so forth and so on. Those prices for those things, gasoline obviously, because we all, you know, buy gas, most of us want, not you guys in New York, but most of us buy gas once or twice a week. So, you know, those are the things that we see on a regular basis. We are monitoring those on a regular basis, and so they have a heavier influence on our thinking about what inflation actually is. So there's a lot of things out there. Like if you go buy a car, you don't buy that once every three, five, seven years, and but that's still in the price index, by the way. That's another thing to consider. One other big caveat in the CPI, the consumer price index, and in the PCE, there are quality adjustments. So, you know, cars are obvious. You know, every year if you go look at the new cars that come out, they're better than the year before. That's measured in the CPI, a quality improvement, and you can actually see price declines. In fact, you're seeing price declines for vehicles in part because of that quality adjustment. So, right, you know, there's all kinds of things like that that make a gap between, you know, what's actually going on and your perception. But I agree with your perception. Inflation is too high. It's uncomfortably high for most Americans. It's way too high and it's not coming in.
I think that that quality adjustment kind of portrays a good picture of what's happening in the CPI, where, you know, a lot of people, I think, are confused that year-over-year number in January. It's like it's not just we're going to measure what prices are in January across the board and then take the difference between what prices were last year. There are so many of these imputations and adjustments that they're making on a rolling month-to-month basis, which is why the numbers are so soft, and it's so unsatisfying for someone like me who wants the real answer.
Yeah. I mean, were you raised as an engineer? It sounds like you were. I mean, you want precision. There's no such thing. There's no such thing.
Okay. But here's the other thing. There's so-called what economists call base effects. So every January, you get these, a lot of businesses, that's when they raise their prices for whatever it is that they're selling, right? They, beginning of the year, they say, okay, now we're going to start with this new price increase. And in recent years, last couple, three, four years since the pandemic, you saw big price increases in January. We saw big price increase in January this, but not quite as big. So this goes to seasonal adjustment. The seasonal adjustment makes things look weaker than they otherwise would have been. So even though it's year-over-year, you still have those adjustment effects and those base year effects. And so that's also probably pushing down the measured CPI rate year-over-year and making it inconsistent with, you know, how we think and feel about inflation broadly.
Just looking ahead, your forecasting for inflation. You mentioned you think that it's going to get a little bit worse before it gets better. Speak more before we end here about what you expect will happen to prices across America over the next, say, 12 months.
Yeah. If you told me over the next six months the year-over-year rate of inflation, let's use the PCE because I think that's just what we should be using, is going to go from 3% to three and a quarter, could be as high as three and a half percent by mid-year, and then it'll start to fade because, you know, we'll get most of the, there's still more pass-through to go between businesses to consumers on the tariffs. 96%, I think that's that New York Fed study you're probably referring to, that the 96% pass-through was to consumers and businesses. There's still a lot more to go from business to consumer, and that's going to happen. And so I expect some higher, but by the end of the year we'll get through the other side of that and we should start to see some moderation. And I'm hopeful, fingers crossed, that we get inflation, you know, headed definitively back to that 2% target by, you know, early next year, this time next year.
All right, Mark Zandi, chief economist at Moody's Analytics. Mark, always appreciate it. Thank you. Hey, Ed. We'll be right back. And if you're enjoying the show so far, be sure to like and subscribe to the Prof G Pod YouTube channel at the link below.
We're back with Prof G Markets. The White House just fired its top antitrust enforcer. Last Thursday, Gail Slater was ousted as the DOJ's antitrust chief. When she was confirmed last March, Slater told lawmakers she would resist any political interference in her division. Less than a year later, she was forced out for resisting settlements with companies represented by Trump-connected lobbyists. Her departure marked the end of a battle between populists who wanted tough enforcement and a pro-business wing that sides with corporate interests. Here to break down what all of this means, why she was fired, we're speaking with Liz Hoffman, business and finance editor at Semafor. Liz, thank you for joining us on Prof G Markets.
