Moneybeat: Improving inflation

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm The Bahnsen Group. Good morning!

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

EICHER: Let’s begin with the inflation report—the government’s Consumer Price Index for July—showing a rise in the index of 8.5 percent versus the previous July. But it’s down from the historically high number from June, which put year-on-year price inflation at more than 9 percent. How’d you read the inflation report last week, David?

BAHNSEN: Well, it's really kind of uncanny how much of it was what we talked about a month ago, when the last CPI number came out that I thought the CPI number had peaked—that goods inflation, having dropped four months in a row, probably was the leading indicator to where overall inflation was going. And that the stubbornly and persistently high inflation was coming from the big increase higher in energy prices that we saw in May, and June. And as those numbers in energy prices came down in July, it really brought both headline inflation and the total CPI number down.

Now, again, 9.1, coming down to 8.5 is still very high. The reason the market was up so much last week, and is now up just thousands of points over the last few weeks, is that the Fed gave so much indicator that their main concern was still growing inflation, not still-high inflation, and that seeing the inflation rate begin to drop was likely going to at least pause the level and rate of their monetary tightening.

There's more and more economic data coming in suggesting we're not in a recession; some numbers have not looked great, but some numbers have certainly looked better than expected. And so what that's done is just give the market this opening to believe that the soft landing issue is at least possible. And by soft landing, I mean that they'll be able to somehow get monetary policy tightened to some degree, that inflation will naturally come down and that the worst of a recession can be avoided. The market could very well be really overly optimistic about all that.

But the CPI number you asked me about, I believe will be coming lower in the months ahead. And the one issue is still keeping it higher, that will eventually work its way into the data to come down, too, is the housing side. the renters price. I think that rent inflation is way down. But that lags in the data, it takes a few months to catch up.

EICHER: I’m guessing more people heard the reaction of the president and the White House spinning the inflation report than actually read the inflation report. And if so, they heard President Biden say inflation was zero in July, saw him take a victory lap. Is it a little early for that?

BAHNSEN: Well, everything in politics is spin and everything is done to manipulate a narrative towards a desired political end. And so both parties want to make the bad news for the other party worse than it is and make the good news for their own party better than it is.

Obviously, the President substantially misspoke. And the question is whether or not it was just a pure fumble, or whether or not he literally didn't know what he was talking about. I'm open to either interpretation, but the inflation rate was not zero. If what he was trying to say is that the rate of inflation declined, he would have said it was negative point six. But of course, even that would have been substantially wrong.

Going from 9.1 to 8.5, is not zero. It's a decline in the rate of growth, the inflation rate month over month, was still higher. It's just that the rate of growth of that inflation, the better way to say it is year over year, prices in June were 9% higher than they were the year before. Prices in July were eight and a half percent higher than they were the year before. Either way, it's still positive inflation for the time being.

Now, I will say this, Nick, because I said it on your show a lot. I've written about it a ton. I believed last year that Republicans were walking into a trap here. And I think that they are, because even though the president is way premature on this, there is going to come a time in which the inflation rate is substantially subsided, and they will claim victory, and it's one of the great fears I have about either party politically. When you put so much blame on an economic event on another party, you logically are allowing that other party to take credit.

Now there's a lot of hypocrisy in this. President Biden, you notice, blamed fuel prices going up on Putin. And he's taking credit for fuel prices coming down. So there's a sort of best ball that goes on here. I'm critical of all of it. But no, I do believe the inflation rate will come down. It just wasn't 0% this month.

EICHER: Before we go, and since we’re on politics, we should touch on the “Inflation Reduction Act of 2022.” The House gave approval on Friday—$700 billion in spending, new IRS agents, and other things. The key was the Senate coaxing the two most reluctant Democrat senators to get in line. So the leadership got Joe Manchin and got Kyrsten Sinema to go along and they got their bill.

BAHNSEN: Well, I don't agree with that interpretation. They didn't get Sinema; she took out the worst part of it, which was that they were going to put in a 15% minimum corporate tax, and take away the deductions of people actually buying new equipment in factories and manufacturing. And Sinema got that deduction back in, she got rid of the deal they were going to do to eliminate carried interest on private equity, and so forth.

So in the end, they got the bill, you’re right, and they get to title it something that is hysterical. They may as well have titled it, you know, the Los Angeles Clippers NBA Championship Bill, because it has a better chance of doing that than it does the inflation issue. But again, I have a cynical view of politicians to begin with.

But in this case, you can argue that the Democrats can do a victory lap because they got a bill done. And it does give a lot of free money out to solar companies. But you could also argue that if this was the best they were able to get, versus what they were trying to do, the amount of things that are not in this bill that they had said they were going to do a week ago, let alone a month ago, let alone a year ago with Build Back Better, this is a very miniscule victory. But all that to say it's still a bad bill.

EICHER: David Bahnsen is head of The Bahnsen Group. He writes daily at DividendCafe.com and as mentioned last week he has just launched a free video course on economics—30 lectures with quizzes along the way and a final exam. You can go at your own pace, but a serious program free of charge at Bahnsen.com. David, thanks for giving us this time each week, appreciate it. See you next time.

BAHNSEN: You bet Nick, thanks so much.

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