Moneybeat: Navigating high consumer prices

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

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

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

EICHER: Okay, David, right off the top, we got to look at the price index that is said to be the Fed’s preferred inflation gauge, it comes from the Commerce Department. It’s not the consumer price index, the CPI that we talked about last week. Instead, we’re talking about the personal consumption expenditures, the PCE for January, that Rose 5.4%. year on year on the headline number, the core PCE was 4.7. And that’s an increase, January over December. So we’re talking about that persistent problem of too high consumer prices. David, what do you take from the PCE Report for January?

BAHNSEN: Yeah, I think that whether it’s the PC, or the CPI, that there is still this issue. I don’t think it will get cleared cleared up until April or May. And even then it won’t be fully cleared up, only starting to move the other way. We have spoken about how housing prices and rent prices in particular are still showing as if they are going higher when everybody knows the number is going lower. And the reason for that is just an issue of how it has to be measured, which might be a little too complicated or wonky for our purposes.

But that issue is distortive in a sense. Even with that said, I do think the PCE number was a tad higher than had been expected. Not by much. We were looking at a headline level of point five percent and ended up getting point six: So a tenth of a percent higher. And so we are still essentially in the same limbo where goods prices continue to come down and energy and food prices remain volatile, which is why we have a difference between core and headline. So in my mind, the shelter prices are just suffering from a lag effect.

EICHER: Alright, staying on the PCE report. David, I want to read a quote from a Fed President. This comes from an interview with the Wall Street Journal, Loretta Mester of the Cleveland Fed said this: “Inflation is too high. We have inflation pressures that are pretty ‘in there.’” And this was in quotation marks, to sort of emphasize that the inflation pressures are pretty ‘in there.’ And so let me just let that sit and let it serve as a lead-in to our first listener question:

SAM BURNETT: Good morning, Nick and David. My name is Sam Burnett from Abbeville, South Carolina. I would first like to thank David for being a living example of what is taught in Genesis 2:15. Now to my question: Are people like Jerome Powell trying to establish the correct inflation rate in order to devalue the debt over years or decades but yet not crush the economy? Thank you very much.

BAHNSEN: Yeah, I mean, I think that there’s a couple of things going on. As a general rule, I am a different kind of Fed critic than a lot of the more high profile and more inflammatory Fed critics who are out there, in that I am overwhelmingly and consistently critical of a monetary policy that is too, shall we say, arrogant—that is trying to get a central bank to do more than I think it ought to do. And yet, I do not believe that that stems from them having bad motives. I believe that our central bankers basically do believe, economically, that they have the ability to do something that I don’t believe they have the ability to do. 

So when we talk about Powell’s motives, he is not on the political side, he is on the central bank side. And I believe whether you’re in Japan, Europe, America, since the Great Depression, every central banker I’ve ever studied exists to fight against deflation, the fact that they simply know that they cannot do anything once you get into a debt deflation cycle. And that whether it is the great financial crisis, whether it was the lessons learned out of the Great Depression, the things that have taken place out in Japan that are well-documented and quite severe over the last 30 years, and even the response to the COVID pandemic, central bankers go all in on what they believe could be deflationary problems that always stem from excessive debt. Inflation is the stated purpose of the Fed, they are to produce a nice stable value of money. And so of course they have to say that they are concerned about inflation. But I know I do not believe that Chairman Powell is sitting around thinking about the fact that inflation helps to devalue the debt. I think the political class thinks about that, and I think Powell knows that the government needs to afford their debt, and with a higher cost of capital would not be able to. So they’re in a very sticky situation, and I believe that setting an inflation target of 2%, which is what they’ve had for a number of years, and they couldn't get up to 2% inflation for 15 years. And yet, even a 2% target to me is not the same thing as stable money. 

And so I don’t think they should be targeting to have an inflation rate that cuts purchasing power in half every 36 years, which is what a 2% inflation rate does. And nor do I think right now that Powell has the ability to get us down to 2% inflation because I don’t think this is primarily about the cost of capital. So I know I’ve put a lot out there and I hope that there’s some takeaways in there that are useful to answering the question, but I want there to be that nuance when we think about the Fed I want us to have an intelligent, Christian oriented commitment to sound money critique of the Fed, but I don’t want it to get carried away to conspiracy theories that I think are really unhelpful.

EICHER: Okay, last question. Today, David comes from listener John Hildebrant.

HILDEBRANT: Good morning, Mr. Bahnsen. When my wife and I got married nearly 19 years ago, we committed to one another and to the Lord that if we had any children, she would stay home and raise them full time, rather than entering the workforce. Early on, of course, this made many things difficult to afford, like homeownership. And so I've wondered since then, how this decades-long trend of women entering the full-time workforce has affected the economy. Thanks so much for all that you do.

BAHNSEN: Yeah, you know, this is not something you’re probably ever going to hear me say again, but you know who wrote one of the best books on this subject was Elizabeth Warren. And it was when she was a much more moderate, probably let’s call it center-left public figure well before she was in politics, she was an academic. And she wrote a book called The Two-Income Trap. And just talking economically, not theologically or domestically or culturally, but economically, she pointed out that one of the economic side effects to two income families, which essentially means that we had gone from primarily men as the breadwinners to now having an awful lot of two income families. And at the time she wrote this book, it may have been about 60, or 70%, it’s now of course, gotten up much higher than that. But she pointed out that it embedded a cost structure that essentially enabled there to be two incomes that can now service a monthly payment on a mortgage, and two incomes that could serve as a monthly payment on a car. And it embedded a higher cost structure for an automobile and housing. And I don’t believe she was saying it as a criticism or concluding that women shouldn’t work. But I think that that is probably the biggest impact economically, that is undeniable, regardless of one’s theological or cultural disposition, that it really did push up a higher cost structure to some of the primary sticker price items that we have. 

I think that there’s no question that more people working leads to greater productivity. And yet, then there’s trade-offs. And that's the whole point of the book I wrote, There’s No Free Lunch, everything comes with trade-offs. We don’t have time for me to right now litigate various other theological and cultural aspects of men and women and home and work and roles in society. You know, there’s a lot to unpack there. I do have opinions on it all. But it isn’t something I could get into right now. But economically, I think that women working has added to greater productivity because it’s an input, right, you get more output out of a higher input of work effort. And yet there’s been trade-offs. The trade-offs are economically at higher cost with housing and cars. And then of course, there’s other cultural trade-offs and things as well, that we could talk about another time. I hope that generally gets to answer the question.

EICHER: Well, you may have a question for David Bahnson, and if you do, please send it to us. The email address is feedback@worldeverything.com. Thank you this week to Sam Burnett and John Hildebrant. David Bahnson is founder, managing partner, and chief investment officer of the Bahnson Group. His personal website is bahnsen.com. David, thank you again, we’ll see you next time.

BAHNSEN: Thanks so much, Nick.

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