Austin, let's start with the inflation numbers that we're at today. What do you see inside the new CPI numbers?
You have pretty solid numbers. You never want to make too much out of one month's number, especially on inflation, because there's a lot of noise in it. But overall, it has continued before the uncertainties of the last couple of weeks. This suggests we continue on this long path toward our 2% target, let's call it, or manageable stabilized price.
And what inside those numbers gives you feeling that this is a part of a trend?
If you look at the components, the biggest puzzle facing us last year, the year before, coming out of the great inflation reawakening was housing. If there are three major components of core inflation, which are goods, services, and housing, the biggest puzzle was housing. That the house price inflation was high and was supposed to come down. If you looked at what the market rents were, they suggested that thing should be coming down and we went for a lot of months not seeing it. Now we've seen pretty sustained progress on housing, decent progress on services. Goods has been a little bumpier as you might imagine, but there's a long-term trend in goods inflation toward very low, even mild deflation. So that gives me, as I look at it, gives me a little more comfort that that's on a sustainable trajectory until we got to the uncertainties of the current moment. But that's a topper.
Tell me about the uncertainties of the current moment.
Well, there's no way around viewing big tariffs as big as they've had in the US in 100 years. They raise prices. So to the extent that the Fed's job by law is to stabilize prices and maximize employment, something that reduces employment and raises prices is a bit of a problem. And so we got to just figure out where is this going to settle and how's it going to work its way through the economy. In a way, the Fed's charge is to look at the hard data, the unemployment rate, the job growth, the inflation rate, but we at moments of transition like that turn to the soft data because the hard data only comes out with a lag. Right? So, we're out in the Fed and I'm out in the seventh district in the Midwest talking to business leaders, civic leaders, consumers. What's happening? What do you see? And what I've seen and what I've heard is a lot of anxiety. Anxiety of the form: Are we about to go back to this period that we just lived through and we didn't like? You know, we went through a period of massively excess inflation well higher than what anybody wanted. And before that, very large supply disruptions where you can't get chips, so you can't make car seats, so you can't make a car. So the rental car prices go up because they can't get cars. So the traveling salesmen have to pay more for rental cars, so the price of their thing goes up. And that chain that destroyed team transitory, that inflation wasn't transitory. It lasted far longer than you thought. There's a lot of anxiety expressed by business leaders now that they're afraid and don't want to go back to that kind of environment.
So that uncertainty, that anxiety you're talking about, help people understand how that affects a business owner or a consumer as they try to make the choices in their day.
The critical element when you're thinking about, let's call it the soft data, the sentiment, is is it changing people's behavior? And what you've seen is that businesses have expressed that it's changing their behavior on both sides. On one side, go front in the anticipation there might be tariffs, go buy as many of the parts and components before the tariff gets there and just put them in the warehouse and we can draw on that for 60 days, 90 days while these things sort out. Or on the consumer side, some of the same, let's call it front-running behavior. Should I go buy an iPhone? Should I go buy a car before the tariff comes in? Or if the economy is going to start to sour, should I start building up a nest egg and stop spending in anticipation for hard times ahead? And those kinds of changes of behavior when they start showing up in the hard data, they tend to show up quickly. So that's why I think everybody should be out looking at sentiment indices and talking to people on the ground before they start showing up in the data.
How important is that going to be? Because if it shows up in the data, by the time it does, it's a little bit of a sunburn. You know, is this gonna, should we put on sunscreen today? I don't know. If you look down and you have the sunburn, yep, you should have put on sunscreen, you know, and it's got a little component of that.
The behavior you talked about as people try to anticipate how this uncertainty is going to play out. Is that, since you were an economics professor, is that productive economic behavior to worry?
No, it's usually not productive economic behavior to be worried and anxious. It can lead to paralysis. It can lead to reductions in consumer spending, reductions in business investment. As one business executive in the auto industry told us, you would be crazy to do anything right now and not wait for a few months at least to figure out where things are going to settle rather than commit yourself to a supply chain that proves outdated or obsolete because of tariffs. And that's the fear that it's more than talking ourselves into a problem, but it is a little bit talking ourselves into a problem that the expectations can feed on themselves. And so even if a move on tariffs might be considered good in the sense that it might lower prices, is each incremental policy announcement a contributor nevertheless to this idea of uncertainty?
It can definitely be a contributor to uncertainty if there are a lot of changes to the policy. So the fact that we have an announcement of a big tariff and then a reduction that for 90 days we're going to have a smaller tariff but on some countries it's going to be bigger but there might be exceptions for certain products. All of those things contribute to, well then just wait. Let's just wait until we figure out where this is going to settle down. If there's going to be massive retaliation in Europe, in China, and other places of what form or are they going to go after your business? Is it going to be things that you as a consumer you buy every week? Um, we just, there's no cure of when there's uncertainty. There's no cure but patience. You know, you just don't want to get stuck out on an island that's unpleasant. And that's the anxiety that I described as people feel like, wait, this is going to take us back to a period where they learned a bunch of lessons they wanted to forget. They never wanted to learn the lessons of how do you deal with almost double-digit inflation? How do you deal with we can't get the components that are necessary to make our products? They've tried to forget it. Let us never speak of that again. And now the anxiety is, oh no, we're about to have to go pull out the playbooks from the high inflation times or the COVID times.
Let me see if I can frame what it sounds like the Fed's puzzle is. One puzzle is prices might go up as a result of tariffs. The other thing is, do you see any data that suggests growth might be going down? And does that make the job harder?
That makes the job of the Fed harder if you get what is clearly a stagflationary shock, which is to say both of the Fed's jobs, maximize employment, stabilize prices, both of them start getting worse at the same time. That's not usual, but it does happen. And when it happens, there's not a generic playbook that you turn to. How the central bank responds to a negative supply shock, that's what we call it, a stagflationary thing, depends on, well, which one's worse and how long are they going to last? And are the prices going up transitorily or is that a permanent? Or on the growth slowdown side, is this just a matter of resolving uncertainty or is it spiraling more into recession?
If you had a time machine and you could go back to the 1970s when we actually had stagflation, it's worth remembering that the person in the time machine would say, 'Hey, what's your unemployment rate?' You'd say, 'We're worried about stagflation. You know about stagflation. What can you tell us?' Well, what's your unemployment rate? About four. What's your inflation rate? A little over two. They'd be like, 'What are you bothering me? You know, come on.' They had unemployment in the sevens and inflation in the 13s in the 1970s.
