Moneybeat - Comparative inflation

MARY REICHARD, HOST: Coming next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER: It's time now for our regular conversation on business markets and the economy with financial analyst and advisor David Bahnsen. He's here now. Morning, David.

DAVID BAHNSEN, GUEST: Good morning, Nick, good to be with you.

EICHER: Well, several government economic reports over the past week you want to pick which stands out the most to you, we had another inflation indicator, the Producer Price Index, generally that a snapshot of the supply side of the economy that PPI jumped up 1% in a month, this is January 22 versus December 21. And then comparing year on year, this past January, producer prices were nearly 10% up over January the year prior. Also, the retail sales number, it was up in January month on month rise nearly 4%. Home sales up month on month close to 7%. Of course, these new reports look back into January. But does any of this jump out to you?

BAHNSEN: Yeah, I think the Producer Price Index was probably the most meaningful number this week, although the manufacturing data was interesting as well. So there was quite a bit of economic data, but the Producer Price Index was most relevant to the ongoing inflation narrative. It's really important that for people to understand, inflation has to be viewed from a forward perspective; backward looking price movements are not relevant to people's, whether it's investors or consumers behavior, in the same way that forward expectations are. And of course, sometimes people may think the future will look like the immediate past. They could be wrong, they could be right. But when we talk about what's relevant inflation, the big point I'm making right now is that it's not just that what is forward about inflation matters more to us, which is true. But it's also what matters to the Fed. You can't make 2023 monetary policy around 2021 activity. And the fact of the matter is, that everybody being honest about the subject knows that 2021 activity had some hair on it. That's my very professional way of saying there were nuances around various idiosyncratic events that are still very much playing out. Perhaps some people think they won't be done playing out. That wouldn't be my view. But it's not an unfair illegitimate view. What I think is going to happen, Nick, and sorry, for the long answer, I think inflation rate of growth is going to come way down, and is going to be way up from what it was pre COVID. And because everyone has been so focused on the six and 7% big headline number from 2021, that when it drops to three to four, the narrative will end up being how much it's come down, instead of how much it actually went up versus pre COVID. And that focus, that emphasis, will make a big difference in the political will, the sort of societal response that will drive, I think, both fiscal and monetary policy.

EICHER: That that's interesting. Do you think, David, that the Federal Reserve is going to change its approach that it's been telegraphing right away with respect to interest rates?

BAHNSEN: No. The Fed is not meeting again till March and everyone knows they'll be raising rates there, I think there were some who were starting to speculate they may raise a half a point instead of a quarter point. But the Fed kind of threw water on that idea as well. They will raise a quarter point in March and then they'll raise a quarter point a couple more times, minimum. I'm on the lower end of expectations, there are some that think it'll be more, but the basic expectations for the Fed at the end of the day, the central bank knows that our over-levered financial system, and our overspent governmental system cannot afford yields much higher, a cost of capital much higher. So my belief for WORLD listeners to hear is, I can't time it perfectly, but I expect some form of Fed tightening, while they wait for the headline inflation rate to drop lower - even though it's still going to be elevated, to use that narrative to excuse them stopping any further monetary action. That's where I think we're headed. I think it's the key story in the next 12 to 24 months.

EICHER: Hey, David, we have just another minute or two I wonder what you think about that home sales number. It's down year on year of course, but January saw a big spike on a month to month basis more than six and a half percent. Kind of how that speaks to the health of the market.

BAHNSEN: Oh no, the prices are speaking to a very unhealthy market. The prices are absurd and irrational, and overstretched and very problematic. The volume is what were the reports that came out this week. You know, home prices don't exist as a national index. I mean, I understand that technically they do. But each market is very unique in terms of its own supply demand realities. And, and so real estate, almost always should be thought of as a local dynamic. But the fact of the matter is that we are having a very difficult time getting new homes built. And now we're having a difficult time getting homes finished that are started. There's a record level of uncompleted because they're still waiting for final appliances or garage doors or other things that are stuck in a supply chain bottleneck. But I think that when we talk about the health of the market, if you're a person looking to sell at a premium price, then, yeah, I guess that's a very healthy thing. But if what we're talking about is normal functional markets, I think it's been very distorted for some time. Now, the good news is that the 30 year mortgage rate has risen above 4%. It was below 3% at the low, and once you get higher rates and higher inventory, you will get lower prices. And that will take, I think, to later in the year to play out but it will bring back a little bit of rational affordability to the residential real estate market.

EICHER: Alright. David Bahnsen, financial analyst and advisor. He's head of the financial planning firm, the Bahnsen group he writes at dividendcafe.com. David, see you next time.

BAHNSEN: Great to be with you.

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