Apollo Chief Economist Torsten Slok Talks Energy Shock, Inflation | Bloomberg Talks

Well, the key issue is that of course headline inflation is showing signs of higher inflation. That makes total sense because headline inflation also consists of food and of course importantly energy. Core inflation expectations, we don't quite know yet what they are doing, but what we do know is that when you look at various other sentiment indicators, including today we got consumer confidence, also was starting to go down. If you look at the daily indicators for consumer sentiment from Morning Consult, it's also going down for low-income, middle-income, and high-income households. But the key issue at this point is that if you look at the actual spending, the daily data for how many people travel on airplanes is still good. The weekly data for Redbook same-store retail sales, meaning what was sales in stores last week relative to the same week a year ago, is actually also still very strong. And what you're also seeing, even hotel demand on a weekly basis from STR, is also very strong. Both RevPAR is strong, the daily rate is strong, the occupancy rate is strong. So there's a very different divergence between what are consumers saying relative to what are they actually doing. So at this point, the duration of the shock has simply not been long enough

to actually create that demand destruction that we all worry so much about.

And in fact, if you look at longer-term inflation expectations, and you see that within University of Michigan sentiment survey today, those are well anchored. Absolutely. So both on a market basis and a survey basis, long-term inflation expectations are very, very stable and have not shown any signs of going up. In fact, some of them have actually started to go down. So it's actually the Fed would mainly worry about markets getting worried about inflation becoming out of control. Maybe yes in the next year. We can call that transitory, temporary, whatever we're going to call it, but it's very clear the market is saying this is absolutely something that's only here for a very limited time, and then we will go back and have inflation expectations at the longer run more stable level. Now the one difference here between the Wall Street folks and the Fed folks is perhaps the inflation indicators they're looking at. CPI has been going down, and it'll obviously on a headline basis go up, but PCE even without oil has been rising, and that's the index that they follow.

Absolutely. And what was also very interesting the ECFC Bloomberg survey was that the probability of recession actually went up from 25% to 30%. So we're almost looking at more bifurcated distribution where either you worry a lot about inflation being higher and potentially above three now for a very extended period, meaning at least the next several quarters, or alternatively people begin to worry about the maybe there is a harder landing that is also potentially an outcome. So that distribution tells you exactly what the problem is for the Fed, namely they worry on the one hand about inflation being high, but they also worry about it the labor market begins to deteriorate, including of course also if AI puts upward pressure on unemployment. And all those factors are of course the challenges for the Fed, namely how much should they put up weight on inflation relative to how much weight should they put on the risk that the labor market might begin to deteriorate over the next several months.

Absolutely. I think it was low hire low fire because of the trade war for most of last year, and now I think it's low hire low fire because of the energy shock. So that's why companies are responding in probably the most rational way by saying we don't really know exactly how long time the shock will last. We don't know what oil price will go to. So for that reason, it makes sense that the labor market continues to show this fairly cautious overall properties, especially as you mentioned, Scott, that jobless claims continue to be relatively low.