Today's number: 2 million. That's how many dollars the Department of Defense spent on Alaskan king crab in the month of September. That's in addition to the 7 million they spent on lobster tails and the 15 million they spent on ribeye. More evidence that Republicans are the fiscally responsible party.
Welcome to Profy Markets. I'm Edson. It is March 12th. Let's check in on yesterday's market vitals. The S&P and the Nasdaq were flat and the Dow declined. Oil crept higher even after the International Energy Agency approved its largest ever reserve distribution. And finally, Treasury yields rose as hopes for rate cuts this year waned following the CPI report. We will get into that right now. Okay, what's happening?
Inflation was sticky in February as expected. The consumer price index, including food and energy, rose 0.3% from January and 2.4% from a year earlier. That annual rate is higher than the Fed's 2% target and unchanged from January. Inflation in the coming months, though, is likely to get worse. The war with Iran has already driven up the cost of oil, airfare, and fertilizer, and prices at the pump have increased by 20% since the strikes began, which complicates the inflation picture. So, here to help us break it down, we're speaking with our friend Mark Zandi, chief economist at Moody's Analytics. Mark, thank you for joining us. I want to get right into it. 2.4%. What do you make of this inflation print?
You know, once you account for all the moving parts here and the measurement issues, it feels like to me inflation is closer to 3% than 2. And 3% is on the high side of anything that you'd feel comfortable with. I mean, as you pointed out, the Fed's target is lower. It's about 2%. So, you know, it's better than 4%, but 3% is still too high. And as you pointed out, we are going to see inflation pick up here because of what's going on in the Middle East and the fallout from that. So it's okay, but it's not great. And certainly the trend lines here are disconcerting.
Yeah. My reaction seeing this report was again, I can't tell how much it even matters because one, there's the point that you've been making, which is when you account for the other factors the number is actually higher. It's closer to 3%. And then two, we've got a war going on which is absolutely skyrocketing the price of oil. So, does this even matter anymore? I guess that is the real question. Does it matter?
It's in a rearview mirror for sure. So, it's certainly not helpful in trying to understand where we're headed and what it means for, you know, people's purchasing power, standard of living, what it means for markets, what it means for the Federal Reserve. So, you know, the markets really didn't respond to this because it just really doesn't matter because it's history and it doesn't reflect on where we're headed here in the future. We're going to get another read on inflation on Friday, the consumer expenditure deflator. That's the measure the Fed actually uses to gauge inflation and set monetary policy. That's where the 2% target is. And that's going to be on the hot side and that's going to be 3% on the nose. And, you know, that I think just that's where we are. And I think that's what people are going to be focused on and nervous about, thinking about how all this translates to future inflation. So, does it matter? Yeah, not really. I mean, it's more academic at this point than anything else.
Where are we on gas prices? I've seen that gas prices have increased 20%, that's what I've read, since the strikes began, but oil is moving so quickly up and down. I can't tell how much of a handle we actually have on the price of gas in America. What is it looking like at this point and what do you think it will look like in the coming weeks?
Well, you know, we got AAA canvassing gas prices across the country, they're a little over $3.50 a gallon. That's up over 50 cents a gallon from where it was a week ago. And if oil prices stay right where they are today, you know, they're somewhere between $85 and $90 a barrel depending on WTI or Brent. If it stays there, then we're going to see prices go to $3.75 here in the next week or so. If oil prices go higher than that, then, you know, we're looking at $4 and above. But right now we're at $3.50 headed to $3.75, I think, pretty likely. The one thing I will say that has struck me is how quickly the events in the Middle East and the run-up in oil prices have translated through in the form of higher gasoline prices. I mean, you know, there's this old adage, prices rise like a rocket, fall like a feather, but this time it was a rocket on steroids. I mean, I was very surprised at how quickly it all translated through. And maybe that's because of the nature of why prices are up. It goes to the conflict and the war and the energy companies are, you know, taking that in and pushing prices through very, very quickly. But yeah, they're up pretty meaningfully. And obviously for the American consumer, this is a real hardship, particularly if you're lower and middle income, because, you know, you have to make a tough choice in many cases. Do I fill my gasoline tank or, you know, if I put my hard-earned money in my gasoline tank, what else can I spend my money on, or do I not pay my credit card bill on time? That kind of thing. And so we're going to start to see more of that as we go forward here.
Let's say the price of gas increased to $4, increased above $4, maybe even like $4.50. What happens then? Like, how bad is that for the overall economy? What kind of impact does that have on overall inflation and what does that mean, say, for the Fed who has a mandate to keep prices down or at least keep inflation down as much as they can?
Yeah, for closing in on $4 for a gallon of regular unleaded, that means that oil prices that are 100 bucks, that's kind of a good benchmark. That would mean if that were sustained for a year, that would cost, just the run-up in gasoline prices by itself would cost the American consumer about $200 billion annually. That kind of gives you order of magnitude. That doesn't include the effects on other prices like diesel, which affects food prices, and every package you get from Amazon at your doorstep will be, you know, higher in cost because of the higher diesel price. It doesn't account for the jet fuel, higher jet fuel prices and the impact that has on airline tickets, but just gasoline, that kind of gives you order of magnitude, a couple hundred billion. And if you do the arithmetic per household, this is a back-of-the-envelope calculation, Ed, so I might not have it exactly right, but that would probably add about $1,000 to the typical household bill, you know, in a year. You know, not next week, not next quarter, but over a period of a year, about a thousand bucks. So, you know, that's not a big deal for folks that are doing well, kind of in the top part of the income distribution, but if you're in the middle or the lower parts of the distribution, that's real money and you got to make some tough choices if that's the situation. So, that feels at this point like an outside downside scenario. It wouldn't be my baseline, but that kind of gives you order of magnitude.
Yeah. And considering the fact that the affordability crisis is already top of mind, I mean, add this on top, it seems that there are a ton of implications there, including in politics, which I'm sure everyone is aware of. So, what is, just as we wrap here, what is your base case at this point? It sounds like you don't think it's going to be hitting those prices over a year. What would you, if you had to predict in terms of probability, what do you think the next year will look like?
Well, in fact, Ed, I do that for a living, so I have to predict. And obviously, given the uncertainty, the right guy. Yeah. Given the uncertainty, the way to approach this is through different scenarios. So I think the way you ask the questions make a lot of sense. But, you know, my kind of working assumption here is that the president is going to find a way to stand down if, you know, if this continues for very much longer, because, as you point out, the political implications of this are pretty significant. I mean, there's nothing that resonates more with the American people than the cost of a gallon of regular unleaded. They're focused on that like a laser beam when they think about their own financial situation and how they're going to vote. So, I just don't think the president is going to push this for very long. Now, you know, one scenario is that things are now spiraling out of his control. That's something we need to be worried about. But if I think if he stands down in the next week or two or three, then, you know, oil prices will start to come back in, we get back down to 60 bucks, gasoline goes back down to $3 a gallon, and we go on, you know, to the next thing that, you know, the president decides he wants to do. But that would be my baseline just because that is kind of the way the president seems to have been operating here in his first year as president. You know, he's very focused on the stock market. He's focused on mortgage rates. He's focused on gasoline prices. He's focused on bond yields. All those things are screaming bring this thing to an end as fast as possible. And so that would be my baseline scenario. But again, we should consider all the scenarios here because this could take on a life of its own and outside the control of anyone, including the president of the United States.
All right, Mark Zandi, chief economist at Moody's Analytics. Mark, always appreciate it. Thank you very much.
