Moneybeat - Sky high 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 Bahnsen Group . Good morning!

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

EICHER: CPI, Consumer Price Index, crossed the 9 percent mark—hitting a 40-year high for that headline inflation gauge—and I know there are plenty of conflicting economic data points, but that inflation story has got to be the top story this week.

BAHNSEN: Gosh, there were kind of a couple of big stories this week, I mean, the CPI print was higher than had been forecasted. The goods inflation was down for the fourth month in a row. But again, that energy inflation, particularly from last month, really caused the overall number to go higher. But that delta, that spread between the core inflation, which doesn't include food and energy, and the headline inflation, which does, that continues to grow. And that's the really more politically sensitive numbers, the headline number. Regular people, voters, you know, they care about food and energy.

Now, the gas prices have come down a fair amount in the last few weeks. And so it is possible you'll start to see even that number move lower. But definitely the goods inflation number has started to come down. So that political story is not going away anytime soon.

But there was, you saw the stock market rally huge on Friday of last week; the economic data came in a little bit better than had been expected.

And so this has been the story for a while, Nick. There's so much mixed data out there. It's really quite surreal.

EICHER: Let’s talk about what that might mean for the Federal Reserve, with continued evidence of inflation, maybe that puts pressure on the Fed to move more aggressively, more quickly to raise interest rates, higher, faster.

BAHNSEN: Yeah, I mean, all you ever have to really do is look to the futures market. And as as we're talking, it's in the futures market a 71% chance of a 75 basis point, a three quarters of a percent, interest-rate hike, and there is a 29% chance of a full 1%.

I continue to believe it doesn't matter much. Look, the futures will end up being right as we get closer to the end of July, when the Fed makes this decision at the FOMC meeting. The question is just simply on what the terminal rate will be like, where are they going? What's the rate at which it stops? I don't happen to think it matters much the pace at which they get there.

The Fed has been kind of experimenting with that, you know, what they did last time, they leaked to The Wall Street Journal, what they were going to do three days in advance, and wanted to see how markets responded. And so you ended up going into their meeting, where they had announced three quarters of a point hike with a 100% chance that they were going to do so. And had markets revolted, or there been some sort of an uncomfortable response to the leak, then I don't think they would have done that.

So there's a lot of this forward guidance kind of game playing that the Fed is doing, which is part of a now long term strategy of the Fed to not want to surprise markets. People can agree with it, disagree with it, but they can't dispute that that's been sort of governing policy of the Fed for quite some time. I believe the last time the Fed genuinely surprised markets was 1994.

EICHER: And before we go, David, one more thing about the inflation story: I’m reading it’s making Senator Joe Manchin more reluctant to go along with the Democratic spending priorities in Congress. As we know, it’s a 50-50 Senate, the Republicans have no interest in helping with Democrat spending bills, the Democrats can’t lose anybody, and Manchin is the more moderate Democrat who’s known as the key to any spending deal getting done. And the political negative of continued inflation is making Manchin jittery. So that’s going to seriously complicate things for the Senate Democrats, the House Democrats, the White House.

BAHNSEN: Yeah, actually, the White House has not been a part of these discussions at all. It's between Senate Majority Leader Chuck Schumer and Joe Manchin and they want to get a deal fully done before they then go back both to the White House and the Pelosi House. And all reports were that they were very, very close, that they had worked out an agreement on prescription drug benefit and a kind of price fixing mechanism, along with some form of a climate mechanism. So that was the only two components that were really going to be able to get a much smaller spending bill instead of the, you know, four or $5 trillion bill they wanted last year this was going to be 600 billion, but they were going to be paying for it through a couple of different taxes on very high earners. But one in particular was a 3.8% tax on the income over certain dollar levels, like a surtax a totally extra punitive tax on income above certain levels for any LLC, or S corp, which are basically what they call pass through entities, but they're largely entities that family-owned businesses and small businesses use. And that was by far the thing I was most concerned about. I don't want to see big punitive taxes for people over 10 million of income either. But obviously, that's going to affect a much smaller amount of people. This LLC, small business tax, I think was going to be much more punitive. And now, Manchin has pulled back and said he's no longer on board, he's still willing to do something on the drug benefit side, which could be paid for in another way. But they're saying no tax increases at all. And even the climate restrictions are off the table. I'm still hearing from some of my sources, some things could end up happening, that there's a lot of jockeying back and forth behind the scenes, but at this time, that particular tax is publicly off the table. And that's a very good thing. And it very well may be part of the reason the markets rallied so hard on Friday.

EICHER: All right, that's David Bahnsen. He's a financial analyst and advisor and head of the financial planning firm, the Bahnsen group. David’s daily writing is at Dividend-Cafe-dot-com. You can read him online or sign up there to receive his daily missive by email.

David, thanks again.

BAHNSEN: Thanks so much, Nick.

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