Moneybeat: Taming inflation

MARY REICHARD, HOST: Coming up next 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: Well, good morning, Nick, good to be with you.

EICHER: All right, the government released its consumer price index for the month of June, lowest CPI in, what?, two years. How do you read it?

BAHNSEN: Well, there's only one way to read it. And I want to add the CPI number that came Wednesday of last week was accompanied by the PPI number on Thursday, that's the Producer Price Index. And in the Consumer Price number, you got down to 3% year over year, inflation, which was indeed the lowest that we had seen. in over two years, the PPI number came in at 0.1%. Year over year, basically, no inflation. And core goods at the producer level, both processed and unprocessed goods had 4% deflation, year over year. So you most certainly have seen this inflation story go away, it has obviously not gone away, because all of a sudden the government started spending less money or other things that people previously thought were behind it. It's gone away, because the supply chain, normalize the things that were causing the inflation and 2021 and 22, as we had reopened to the economy, and left our economy unable to meet demand pushing prices higher. And over time, that huge policy mistake was just sort of naturally righted because the world reopened. And then, along with that you've seen inflation comes substantially down. The risk we have economically neck is that you have a Fed who believes that the cause of inflation was too many people having jobs and that the solution to inflation, is getting a lot of people to not have jobs. And I think at this point, it's become so abundantly clear that the course the Fed is on to draft This is very irresponsible. And we will see where they go from here.

EICHER: Don’t we have to wait for the Personal Consumption Expenditures number? I understand that’s the Fed’s preferred gauge and what the central bank looks to to determine that 2 percent “inflation” number to which it’s trying to steer policy.

BAHNSEN: Well, the PCE is a different metric of how to measure price movements, and I happen to think it is a better one as well. And that won't come out till later in the month, but it generally is going to correlate quite highly with CPI. And if anything, it may actually reflect even more disinflation than CPI is. Because I will point out that I believe CPI is showing a number at about 1.9%. Because the 3% is including a 35%, waiting to shelter to housing, that it is saying it has an 8% year over year inflation because of how big the lag is and rents coming down. That lag effect of housing is not nearly as severe in the PCE number that the federal looks to, so I won't be surprised if that metric shows even more disinflation than the CPI already does.

EICHER: All right, so who’s the hero of taming inflation here, David? Does you give the Fed credit for its policy choices?

BAHNSEN: Absolutely not. Absolutely not. And that's the biggest mistake that so many on the right have made throughout this is they have set things up to let the Fed take credit as a hero. Because once you said that the Fed caused the inflation or by the way, one someone said President Biden caused the inflation when it goes away, who's going to take credit for being the solution to it, the Fed or the Biden administration or what have you, in this particular case, because the inflation had such idiosyncratic causation, the shutdown of our economy, followed by a reopening where the consumer was ready to be normal, but the producer was not ready. That was the cause. And so there is no hero here. And we humans act, Rationally speaking people slowly but surely, saw various elements of their life go back to normal. Commodity prices have been forecasting for a year that inflation was headed way lower. And so I absolutely believe that the Fed will take a victory lap, the Biden administration is already doing it. And I think both things are just completely disconnected from reality.

EICHER: So looking ahead, I saw that you’d made note of Senator Elizabeth Warren’s call for the Fed to stand down on interest rate hikes. Do you think that’s what we’ll see about 10 days from now at the Fed’s next rate-setting meeting?

BAHNSEN: Well, it's pretty hard to bet against what the market is saying. And right now, the futures market for federal funds rate in July is showing a 93% chance of them hiking at the end of July meeting one more time. And yet they don't meet in August and their September meeting, there's an 83% Chance implied probability in the futures market that they just stay still. And so I suppose that's what you're supposed to bet on here, I cannot believe that they're actually going to go raise rates again, in the midst of this significant disinflation. And knowing that even just staying still not raising rates is still so incredibly tight, that they really are taking so much liquidity out of the system that they don't need to raise rates again, to still stay restrictive. But at this point, I think that they have said so much about going forward with the hike, that they're worried about credibility if they don't. And so right now, my bet would be that they go one more, and then they're done. But I think I've now said that three times.

EICHER: Just a few minutes ago, you cited the healing of the supply chain. But I’m seeing labor and management at UPS digging in. News on Friday was that UPS is training nonunion employees and the union representing the workers is saying if there’s no new deal by the end of the month, it’s ready to walk off the job. Now I realize it’s just one business, but it’s a big one, and that’s sort of supply-chain central. This can’t be good news coming off of the problems we had with getting goods to market.

BAHNSEN: Well, you're not going to get a return of global systemic inflation from one. But you won't talk about the word transitory obviously, a strike is by definition, a transitory event, and it could go for one hour, and it could go for one week. But those are the types of things that are awful interruptions to the business, and can result in a period of packages not being delivered or costing more. But it isn't systemic, like 41,000 employees, leaving federal express that were package handlers in the aftermath of COVID and 2021, people that were being paid to not work and receiving different extensions of unemployment, and transfer payments. And Fred Smith, the CEO of Federal Express, and founder of the company, told me that they had 41,000 package handlers leave. Now that is the kind of thing that resulted in a six month 12 month impact. A one week strike at UPS is not going to make the difference. And and as far as what their contingency plans are and, and how packages still get delivered. It has the capability of certainly being a spike of an interruption, and a disruption but not something that is embedded, which is what caused the inflation and embedded supply chain problems that still semiconductors do not come back to the US at the pace they were pre COVID. But shipping rates that had gone from $50 had gone up to $1,500. In order in getting cargo delivered from Shanghai to Los Angeles, ports were entirely closed, right. I mean, that's the type of thing I was talking about. Your restaurants all over the country with help wanted signs up. Those were embedded supply chain, including labor shortage issues that were just completely systemic in the reopening post COVID lockdown, something like a UPS strike is not good, but it's obviously transitory.

EICHER: And before we go, David, we discussed the trip to China by Treasury Secretary Janet Yellen, and you wanted to spend more time analyzing that. What are your thoughts today?

BAHNSEN: Yeah, I actually think it was quite interesting, because it was very clearly well organized by the buyer administration, what their messaging was going to be coming back. I'm not convinced there's a whole lot of substance out of this. But it appears that it was a really useful trip for them to just set the lines of we plan to message, a real hard line with China on national security. And we plan to message that that's really separate from our economic relationship. And so the kind of dual themes that Yellen repeated in the talking points, were rather emphatic that we are economic partners, but we are not going to compromise on matters of our own, you know, foreign intelligence and national security. And I would imagine that they convert that into a campaign theme. But as far as any particular policy fronts, trade commitments, things like that that wasn't part of this deal. But I imagine that we are a little bit closer to Biden and Xi meeting in September at the G-20.

EICHER: David Bahnsen is founder managing partner and Chief Investment Officer at the Bahnsen Group. His personal website is bahnsen.com. His weekly Dividend Cafe is at dividend cafe.com. David, thank you. We will see you next time and I hope you have a terrific week.

BAHNSEN: Thanks so much, Nick.

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