Transcript: Today’s inflation numbers

This is an audio transcript of the Unhedged podcast episode: ‘Today’s inflation numbers’

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Ethan Wu
Today, the US government released the consumer price index inflation report, telling us something about the US economy, about whether we’re gonna get a soft landing and about where inflation’s at. Today on the show, we talk through today’s inflation numbers and what they mean for the wild ride in bond markets. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in the New York studio, joined for the first time ever from London by not markets editor Katie Martin, but rather, markets columnist Katie Martin. Katie, hello.

Katie Martin
Hello. Happy new year, Ethan.

Ethan Wu
Happy new year. It’s good to be back with our Katie-Ethan episodes, even though this was on a Thursday. But Katie, tell the audience about your glorious new promotion to the heights of FT stardom.

Katie Martin
(Laughter) You are hyping me up here, Ethan, this is completely unwarranted.

Ethan Wu
I have to do it.

Katie Martin
But yes, I’ve shifted over just to doing columnising and thinking and doing podcasts and this sort of thing, and no longer rolling up my sleeves and doing things like bossing people around and editing copy and that sort of thing. So it’s very nice.

Ethan Wu
Yeah. You’ll have to tell me what it’s like to do some thinking before you do some writing. I think with a once-a-day newsletter, we don’t often get the right balance of that over at the Unhedged newsletter, which you definitely should subscribe to, listeners, nevertheless. (Laughter)

Katie Martin
One hundred per cent. Yes, yes.

Ethan Wu
Well, Katie, it’s a big day in US economic data. We got the consumer price index report today. It’s a much-watched indicator of US inflation. And since inflation started going up in 2021, every month when this data comes out, people pore over it, argue about what it means, how you read the details under the hood, what it tells us about the economy. And we’re gonna do a little bit of that today and try to explain some of the numbers that matter and some of the methodology considerations that go into it, which can get a little complicated, but I think does help paint a picture of where we are and if we’re gonna get this soft landing.

Katie Martin
Yeah, I know exactly. Like year-on-year inflation, last time around, it was 3.1 per cent and the market thought, OK, maybe it’ll come up a little bit, maybe it’ll be 3.2, but 3.4. So this tells you that, you know, no, inflation is not like, snapping back like a kind of elastic band. But it’s not going away and it’s not going to fall as quickly as, you know, perhaps some of the real optimists out there had thought, you know, all those people who’ve been baking in like six Federal Reserve rate cuts over the course of this year. Maybe they’ve got a little bit ahead of themselves. So the month-on-month reading was 0.3 per cent. Again, it was 0.1 last time around. It all just tells you that inflation, it hasn’t gone mad again. We’re not back in the bad old days, but it is just not going away.

Ethan Wu
That’s definitely true, Katie. I think with the headline rate, which means all inflation price categories, we’ve seen the year-over-year rate basically flatline for several months. Where there’s maybe a little more good news on the margin is in the core rate, which takes out food and energy because those are relatively volatile. They depend on kind of global commodity markets and in general, don’t tell you exactly where inflation is going in the months ahead. The core rate has continued to come down on a year-over-year basis. It was at 3.9 in December, down a touch from the November reading.

Katie Martin
But we’re talking a touch, right? Like, the difference is tiny.

Ethan Wu
Barely. Yeah just a hair. And actually, the month-over-month reading was even a little bit hotter. But I think to get a sense of what the real inflation picture is, you have to really dig in a little bit. And, you know, a couple of categories of inflation stood out to me as particularly interesting. I mean, one is goods prices, right? Like people will remember, in 2021 when everyone was locked at home, everyone bought like five Pelotons, two Xboxes, like a used car, like . . . 

Katie Martin
It was strange times. Yeah.

Ethan Wu
They were weird. You were telling me about your sister one time, right? Your sister bought a bunch of stuff like that.

Katie Martin
She loves her Peloton kit, I’ll tell you. (Both laugh)

Ethan Wu
Well, I’m sure listeners know what we’re talking about. And goods prices went absolutely crazy. And you know, what we’ve had throughout 2023 is the opposite of rapid goods inflation. We’ve had goods deflation, falling prices and goods as kind of a correction from some of the excesses of that lockdown era. In December, goods deflation seemed to end. On a month-over-month basis. CPI goods came in at 0 per cent, so no change in prices. Again, a change from falling prices in the last couple of months. And that’s notable because that was a really significant source of deflationary pressure. And it was, I think, giving the Fed a little bit of encouragement that you’d have this tailwind from falling goods prices.

Another category that I think stood out to me, Katie, and we talked about this on the show with Alex Scaggs several months ago, is what’s going on in car repairs. This is a services category that has got a lot of people worried because it’s been quite hot for a while. But in December, it finally fell. The price of car repairs declined 0.25 per cent, the first month-over-month decline since March of 2022. So it’s been quite a while. And just generally speaking, services inflation has been concerning for the Fed because they think of it as potentially stickier or slower-moving than goods inflation, which as we’ve seen recently, has reversed quite dramatically. The Fed expects services inflation isn’t quite going to reverse like that. So the fact that you’re getting finally some turning around in especially these very hot services categories like car repairs is potentially a good, if small, sign for the Fed.

Katie Martin
Yeah, exactly. But the big thing is shelter, right?

Ethan Wu
Yeah. Yeah. That’s the most important inflation category by far. It’s the most important services category, importantly. And it’s been a bit of an enigma, I’d have to say Katie. I mean, generally speaking, when people look at shelter inflation, we’re talking about rents for the most part. But we’re also talking about something called owner’s equivalent rent, which is basically the government kind of imputes what you would be paying for rent on the house that you own as a way of just capturing the broad universe of housing costs in the economy. And they’ve been high for a long time.

As everyone knows, rents went absolutely bonkers after Covid. And there’s been an expectation that I’d say is pretty widespread that that was going to reverse, you know, maybe a couple months ago, even, because shelter inflation in the CPI data tends to follow what’s going on in private apartment markets. So there’s data you can find on Zillow or on Apartment List, and there’s some other sources of this, that have kind of, you know, a more timely access to what’s going on in the rental market. Those indices from Zillow and Apartment List, the private market rents have been falling for, I’d say, I think almost a year now, if I’m not mistaken, for quite a while. And so people have been saying, well, OK, CPI is gonna follow eventually, right? Right? Right? And month after month, it’s happened a little bit. It has come down. But I think a lot of analysts were expecting it to fall further at this point. In December, shelter inflation rose 0.5 per cent. That’s roughly on par with where it’s been throughout most of 2023 after taking a step down earlier in the year. So not as much progress as people are hoping, though I don’t think anyone expects it’s going to not come down. It would be weird if it didn’t come down.

Katie Martin
Yeah, but it all just paints a picture of just inflation generally that is simply not going to go away, you know. If, you know, there are, you know, some kind of voices out there in financial markets who are like, hooray, inflation has been defeated now. Let’s all just, you know, have a big party and expect that the Fed’s going to cut rates really fast, that markets are gonna do incredibly well. And this is one of those data points that says, hmm, you might just wanna rethink how dramatic this is going to be, right?

So pretty much all things in markets at the moment seem to stem from government bonds. You know, where it’s slightly in the world of one trade where everything kind of pivots around whatever the bond market is doing. And the bond market has been just crazy for the past few months. It’s been really quite wild scenes out there. So, you know, over the summer, inflation was still running pretty hot and central banks were saying, we’re gonna be higher for longer, higher for a longer, higher for longer. Eventually, market got the message. Bond prices fell really hard. And that meant that yields ran up as high as 5 per cent on the 10-year US Treasury, which is a lot.

And then, you know, all of a sudden the data started to kind of, you know, cool down and you started to see inflation coming off a little bit to the point that we’ve got to where we are now and yields just tanked. And then at the point, particularly where the Fed in December started to talk about, yeah, OK, maybe we’re up for a few rate cuts over the next year. There was just this enormous kind of reverse ferret moment from that 5 per cent.

Ethan Wu
Reverse ferret.

Katie Martin
Reverse ferret. It’s a British thing, I’m sorry. Where yields went all the way from 5 per cent and just kind of tanked right the way back down to 4 or lower, even. And now we’re at this point where, you know, I think a lot of people have been sort of hoping that this inflation number would just be a monster number in one direction or another. Either inflation would be much higher than everyone would have been hoping, or it’d be much lower than everyone had been thinking and there would be a massive market sort of move that really set the direction for the next few months. We haven’t got that here, but what we do have is a little bit of a pick-up again in yields, which is the market’s way of saying, yeah, we might have got a bit too excited, actually, just before the end of the year. We might have got a little bit ahead of ourselves in terms of what the Fed is actually likely to deliver over 2024.

So really, I think we’re left in the situation, the same situation that the Fed is in, which is we’re all data-dependent. We’re all just living from one dollop of numbers to the next dollop of numbers and that’s the only way that you can trade these days.

Ethan Wu
I’m putting reverse ferret in my list of British slang that Katie Martin has taught me alongside “It’s all gone Pete Tong”, which I had never heard in my life before you said it on this show, Katie.

Katie Martin
Have you tried it in real life yet?

Ethan Wu
You know, I’m waiting for that opportunity to fit it in. I’ll find a place. Maybe I’ll get it into this show in the future.

Katie Martin
Reverse ferret is quite useful.

Ethan Wu
Yeah, for a markets journalist, absolutely. I think that totally tracks. I think you’re right, Katie. It’s been a long time of markets just hanging on whatever the data says and really falling into the trap of recency bias because they know that the Fed is doing the exact same thing. I will say, you know, I’ve noticed in my conversations with analysts and market participants, you know, just a touch more conviction in the past — I’ll call it three months — as sort of the soft landing consensus has formed, as the inflation data, you know, it hasn’t resolved itself, but it’s become less threatening, I suppose. There’s less upside risk for inflation.

I think more market participants are saying, well, where we are today on the 10-year yield, which is just a bit south of 4 per cent, looks like a reasonable long-term yield. You know, maybe we go down a bit, maybe it’s more like closer to 3 per cent than 4 per cent. But broadly speaking, we’re in the realm of like plausible equilibrium 10-year yields. And, you know, I’m seeing more people kind of develop conviction in that. And I feel like when all is said and done with inflation and the Fed gets it back down, it’s hard for me to see the 10-year yield being much lower than, I don’t know, 2.5 or something like that.

Katie Martin
Yeah, that is hard to see. Yeah. Yeah. But I think we’re about 4 per cent now. I would not be at all surprised if we ended the year about 4 per cent as well. But I think there could just be some really, what we saw last year was pretty much the same thing, but with some really big gyrations, you know, around that kind of central point. So this is just not gonna be a straight road.

Ethan Wu
No, I’m glad you mentioned gyrations. You look at stuff like the Move index, which is like a generically used index of bond market volatility, and there’s like a step change between pre-2022 and post-2022. And we never went back to that pre-2022 world and how volatile the bond market is. I mean, I guess the question to me is as we get clearer inflation data and the rates picture becomes more certain, do we see volatility come back down to that pre-’22 level?

Katie Martin
I think, you know, you and I speak to different people all the time. I think, you know, some of the investors you’ve spoken to recently have been a little bit more certain about the future. A lot of the people that I’ve been speaking to who are like, yeah, I feel like I know that rates are coming down rather than going up, but I’m more kind of scenario planning than trying to fix myself on a certain direction so I’m uncertain how much certainty there is.

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Ethan Wu
Yeah, that’s a very good way of putting it. Well, on that minimally speculative note, we’ll be back in a moment with Long/Short.

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Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Katie, I am short Tinder. Our colleague Euan Healy had a great piece in the FT on dating apps trying to monetise. It’s a hard market to monetise, right, because you need to give most people the free experience . . . 

Katie Martin
What price love? What price?

Ethan Wu
Tinder, with its new Select programme, will be charging users $499 a month to be top 1 per cent of Tinder Super users.

Katie Martin
Ex-squeeze me. Baking powder? 499 a month? Not 4.99. 499.

Ethan Wu
$499 a month, not $4.99. It’s a truly astounding price tag.

Katie Martin
Are you sure?

Ethan Wu
I’m pretty sure. (Katie laughs) And I say that because I went on the Tinder Select FAQ page out of pure journalistic curiosity and no purchase intention.

Katie Martin
Sure. No, no, no.

Ethan Wu
And apparently, you can hide the fact on Tinder that you paid $499 a month to be one of the select users, which, you know, suggests to me there’s maybe dubious quality involved in this product, but I don’t know. We’ll have to see. People like paying to be distinguished. It’s, you know, we’re status-based creatures in the end and it’ll be interesting to see if this monetisation strategy works as opposed to like a more mass-market subscription that some of the other, uh, dating apps are trying to sell people.

Katie Martin
But wait, you pay the big dollars, all 500 of them. And what, you get like a bigger picture, they make you look more kind of handsome and lovely? I know I sound like my mum here, but I don’t get how this whole thing works.

Ethan Wu
It’s a fair question. I mean, I think there are some, like small benefits. The main benefit is you can be in a pool of other Tinder Select users, so only the best of the best who have also paid the $499 price tag will be in this pool. So, you know, presumably it’s like people with more disposable income, who have a higher quote unquote status on the app can all date amongst one another. To which I say, cool. I mean, I don’t know.

Katie Martin
I mean, it’s a no from me. I’m also gonna be short this.

Ethan Wu
(Laughter) Well, Katie, since you are not long what Tinder calls its most sought-after profiles, what are you long?

Katie Martin
I feel like we can’t really do a session of Long/Short without quickly addressing the absolute train wreck that was the Unhedged stock picks for 2023.

Ethan Wu
No, we have a show coming up on that, don’t we? I thought we’re doing a show on that.

Katie Martin
Listeners, you’re in for a treat. You have no idea how bad Ethan and Rob Armstrong are at picking stocks. It’s quite incredible.

But anyway, crashing on, I am very long bar sports. I don’t know if you, if news really travelled as far as the States about like darts mania that gripped the UK a couple of weeks ago. This absolutely extraordinary 16-year-old managed to make it to the final of the world darts championship and the entire country went completely mad. And, yeah, Luke Littler, he had an absolutely astonishing run. He ended up not winning the final. He lost to another Luke, who, embarrassingly, his surname quickly escapes me. But it was just an absolute fairytale run. And like, darts is your classic kind of rowdy, drunken bar sport. And it was just, it hit the big time and it was amazing. But also, I’m going to the snooker tonight and I’m very excited.

Ethan Wu
Snooker. What is snooker?

Katie Martin
Snooker is like pool for Brits and it’s billiards. Whatever kind of comic version that you guys have over there. We have like snooker, ancient sports, very much a pub sport, quite a sort of anorak-y crowd that go to it. But I went last year and I loved it, and I’m going again tonight and I’m not ashamed of it and it’s gonna be fun.

Ethan Wu
Snooker, Pete Tong and perverse ferret — folks, you heard it here first.

Katie Martin
(Laughter) Britsplaining, as a service.

Ethan Wu
All right. Thank you, Katie, for the inflation lesson, the markets lesson and the Britishisms lesson. And listeners, if you can’t get enough of Katie Martin markets commentary, you can read her column now at a higher frequency on FT.com. All right Katie, thanks for being here. We’ll have you back very soon. 

Katie Martin
Catch you next time.

Ethan Wu
And listeners, we’ll be in your feed Tuesday with another episode of Unhedged. Catch you then.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Greta Cohn and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/Unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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