He mentioned a special guest and indeed we do have one, Tom Barkin, president of the Richmond Fed. We're here at the Richmond Fed with him and I know you haven't had a chance to really look at these numbers but in general the low-fire, low-hire economy and the tariff-affected economy seem to be about what they have been.
Well, it's always good to come on right after a bunch of data comes out, but I wouldn't be as negative on the productivity as you just were. 2.8% on a last 10 or 20 or 30 year basis is a really good number. And I think we are seeing companies invest in productivity and deliver it. Some of that technology, AI, but I think a lot of it is you were caught short workers three years ago. You invested in new processes, new staffing models, automation, and people are seeing the results today.
And that holds down inflation.
It does hold down inflation and it allows people to maintain margins at times when their input costs might be coming up.
Well, input costs are probably going up for people who use petroleum. So, I want to start there with obviously the Iran war just started, but what's your gut feel about how that's going to impact prices and the economy?
Don't have any sense on how long it's going to take or what the implications are going to be. Obviously, you watch oil prices. While the US is no longer a net importer, it's still the case that the price at the pump matters a lot in terms of sentiment, in terms of crowding out other spending. And so, I'm just watching prices at the pump. They've jumped up over the last week. You can see that when you drive around, but of course, no one knows whether this is going to be short-term or long-term. And so, we'll just see where it goes.
Well, back in the 1970s, we had the oil price shock and we had gas lines and people were miserable at having to pay all this money. And so the Fed eased into that. That turned out to be a mistake. Does this put on hold ideas for the time being of continuing to cut rates?
Well, I think we'll go meeting by meeting and we'll see what we see when we get there. You know, gas prices obviously if they're up, that is inflationary. Textbook monetary policy would be you look through a short-term shock, but you don't look through a long-term shock. And I think that's a lot of the assessment people are going to have to make.
The Open Market Committee before the Iran war started, basically the views seemed to be that we're at peak tariffs now and inflation will start to come down in the latter half of the year. But you throw this into the equation. Where would you put yourself in terms of thinking about the progression of inflation and when you might have enough information to decide whether a cut is worthwhile or not?
Well, we'll have to see how it evolves. If you go back to the fall, the conversations I have with businesses suggest to me that they believe their pricing power is very limited. Consumers are exhausted by inflation, affordability. People are pushing back, whether that be not purchasing or private label or trading down to lower price retailers or repairing rather than replacing. And so, in the conversations you have, you do have a sense that we're on the back side of this inflationary period. We'll head back to normal. In the numbers in the fall, absent the government shutdown, we're seeing much the same thing. I will say over the last month and with the PCE numbers that we're expecting next week, you've got a couple months of relatively high inflation. That certainly puts pause to any conclusion that we're done fighting this, but we'll see where we go.
Well, slicing the business leaders are telling you a little more closely. They know consumers are price sensitive and they're worried about that. But are they also in a situation where they've had to absorb too much and if we see more price increases of inputs, they're going to have to raise prices?
Well, that's where we come back to productivity as being so key to this whole story because most every business I talked to last April that got tariffs was going to pass it on. It was just clear and they needed to maintain margins. The consumer was going to have to take it. And when they experimented with that, they got a lot of push back and so prices didn't increase the way that a lot of those folks expected. Now their margins have been very steady and so corporate margins are quite healthy. Earnings were up I think 13% fourth quarter year-over-year and that's because productivity has allowed people to absorb these hits without having to affect margins and having to pass it on fully in prices. And when you start seeing good productivity numbers over and over and over again, that gives you some hope that can continue.
What are you hearing from businesses about the other side of your mandate, employment? Obviously, we're seeing low, higher, low fire continue.
