SYLVIE DOUGLIS, BYLINE: NPR.
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WAILIN WONG, HOST:
Hey guys. Do you hear that?
PADDY HIRSCH, HOST:
ADRIEN MA, HOST:
WONG: Crickets, crickets – that’s the sigh of relief coming from the Federal Reserve, our central bank. The latest inflation numbers, the CPI, came out earlier this week, and prices have cooled down a bit.
HIRSCH: Yeah, maybe that’s why I didn’t hear the noise because it must be a very small sigh because inflation is still very, very high at 8.5% over the ‘last year.
MA: Maybe a squeal – is that the sound a Fed makes?
HIRSCH: No, that’s the sound a Fed makes – wah wah wah wah wah wah wah (ph) – like that…
WONG: That’s what I was going to do – I was going to do the adult sound of Peanuts, like (imitating the adult sound of Peanuts).
HIRSCH: The adult sound Peanuts – that’s the sound.
HIRSCH: That’s not fair. We love the Fed.
MA: How about another sound for the Indicators of the Week?
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WONG: Ooh (ph), quick. I am Wailin Wong.
HIRSCH: And I’m Paddy Hirsch.
MA: And I’m (the beatbox) Adrian Ma. For the Indicators of the Week, we’re going to dig into the latest inflation numbers.
WONG: What is price stickiness and what are inflation expectations?
HIRSCH: Sticky prices – we promise it won’t get too messy.
WONG: We can’t make such a promise.
HIRSCH: I can make a promise like that. It’s after the break.
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WONG: Before I get to sticky prices and inflation expectations, I’m here to talk about transitory prices.
HIRSCH: Wow, what?
MA: That’s a word I don’t think I’ve heard in a while because it’s kind of been discredited, right?
WONG: Yeah. I mean, I can already feel listeners cringe when they hear that term because if you think back to last year, the Fed continued to describe inflation as transitory. They said, you know, it’s – it’s supply chain bottlenecks; they will resolve.
MA: Transient – so, like, some of these higher prices just come through town.
HIRSCH: Like, in transit, baby.
WONG: Yeah. And it’s like a guest who stays too long. I mean, people were like, these prices don’t seem transient; they feel like they are going to stay here forever. And so in November, Fed Chairman Jerome Powell said it was time to retire this term.
HIRSCH: So what is it? Wailin Wong resurrecting phrases, bringing them back from the dead against Jerome Powell’s wishes?
WONG: Yes. Necromancy is a dark art, much like predicting inflation.
WONG: But, you know, yeah, transient – that term gets a really bad rap. But, you know, what the Fed meant was that they didn’t think inflation was permanent – or that certain types of inflation were permanent. And in this last July CPI report, there were some categories of things where the price, for example, skyrocketed during the pandemic, and now it looks like they’re finally coming down. So here is a flash series of transitory inflation indicators.
HIRSCH: I’m ready. I’m ready.
WONG: OK – rental cars down 9 1/2% in July from June, hotel prices down 3%, airfares down 8%.
MA: Okay. But that’s, like, after a huge price spike over the last year, isn’t it?
WONG: Yes. I mean, it’s declines from, like, huge, huge upswings. So, you know, the rental car industry, you may recall, used terms like rental car apocalypse to describe…
WONG: …What was going on? And if you rented a car recently, like me, you’re probably still paying a lot more than before the pandemic. But, you know, if prices for rental cars, hotel rooms, and airline tickets continue to drop, that could be a sign that some of those pandemic pressures are finally getting out of the system. These guests eventually left.
HIRSCH: Well, that sounds good. I mean, some prices go down, but some prices don’t go down. Some prices stay where they are. And there’s a phrase for that, isn’t there, Adrian?
MA: That’s true. The phrase is sticky prices.
HIRSCH: Sticky prices.
MA: Basically, that is, prices that don’t react very quickly to changes in economic conditions. So prices wouldn’t be as volatile as for many of the services you mentioned, Wailin. And so, where we often see sticky prices, where we’ve seen them over the past few months, is for alcohol – you know, booze – and medical care, the cost of hospitals. But where I really think the best example of an expense category with sticky prices is rent.
HIRSCH: Not the musical.
MA: No, not the musical. But no, I’m talking about, you know, like, renting an apartment. So when you rent an apartment, most of the time, you know, it’s for several months, often a year at a time. So your rent won’t change from month to month. And that’s what makes rental prices sticky. And that’s why, you know, when they say overall inflation over the last year has been 8.5%, it’s only been 6.3% for rental prices. And that’s my indicator for this week – 6.3%.
HIRSCH: Okay. So, you know, I get the idea of the term sticky, but it doesn’t really seem to fit here when you think about how rents have continued to rise in recent months.
MA: Yeah, yeah. I mean, it’s totally true. Like, sticky is kind of a relative term, and it really describes the period that the rent is locked in. But when a lease comes up for renewal, that’s when prices take off, and you can see big rent increases. And that’s, like, a trend that we’ve seen across the country – rents are really on the rise. And, you know, nationally, when you look at it over time, it looks like rents are only going in one direction, right? When you look at the CPI rent index last month compared to ten years ago, it is 40% higher.
WONG: Oh, my God.
MA: One thing I would also add is that we may not have seen the worst yet.
MA: And the reason I say that is because the CPI rent index is – you know, it’s what they call a lagging indicator. This sort of tells us where prices have gone up so far, but it doesn’t tell us where they will go in the future. And September is fast approaching. We are in this period of the year where the leases turn. It’s kind of high season for that. And so we’re going to see more price unstuck, get stuck at this new higher price. But these haven’t yet registered in the CPI index, so we won’t really know how high they have risen until next month.
HIRSCH: Wow, there’s a lot of ups and a lot of downs, which means, to me, a lot of uncertainty. And of course, we know what uncertainty does to markets. This disturbs market emotions. So I think it’s time for me to put on my therapist hat and ask ourselves, how do we all feel about this?
WONG: Well, what do you think of that, Paddy?
HIRSCH: Actually, I’m going to outsource this to the New York Federal Reserve first.
WONG: They don’t have enough to do.
HIRSCH: They don’t have enough to do. And they actually surveyed consumers who said they thought inflation would be 6.2% this year and average 3.2% over the next three years, which is well below what it is now.
MA: It’s kind of a rosy prediction.
HIRSCH: That’s really a very bullish prediction, especially when compared to the bond market — that is, people who lend money to corporations and government by buying their debt. These folks are feeling a little better about things, but not quite as good as the consumers or, for that matter, the stock investors who drove the market higher this week on the news. And you can guess bond market emotions by looking at the spread between two-year and 10-year Treasuries. This gap has narrowed recently, but it is still cheaper to lend money short term than to lend it long term. And of course, we all know what that means.
WONG: The yield curve is always inverted – well, at least the 2/10 yield curve, anyway.
HIRSCH: The yield curve is still inverted. This means, of course, that borrowers are still nervous about the short term and want to be compensated for short term risks, including inflation. And it’s a signal that bond investors, bond investors, are far from convinced that this great news we’ve had on inflation is a turning point for anything inflation or otherwise.
MA: What a disappointment, man.
WONG: The bond market doesn’t care about your feelings.
HIRSCH: No, we’re still about feelings. And the people whose feelings we really want to hear, of course, are the 12 voting members of the Federal Open Market Committee, or the Fed, if you will. As we all know, the Fed raised interest rates recently to calm the economy – the goal, of course, being to lower inflation and ease the labor market. Well, inflation may be a bit lower, but it’s still well above the 2% target rates. And the labor market is still very tight – 3.5% unemployment is much, much lower than the 4.1% President Powell said he would like to see in June.
WONG: I guess that means he’s still hiking.
HIRSCH: He’s still hiking – a lot of the time. Everyone at the Fed is lacing up their boots and pulling out their bad weather gear as they believe that conditions, even if they have eased a bit, are likely to remain quite risky for some time. And how do we know they feel that way? Because they tell us. Even the most optimistic board members say it’s far too early to claim victory over inflation. They say we’re going to see, at the very least, a half-point increase in the base rate in September, most likely three-quarters of a point. The pessimists on the board, meanwhile, argue for much more than that. So when it comes to the Fed, we can expect a lot more of the same for some time to come.
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WONG: This episode was produced by senior producer Viet Le with technical assistance from Maggie Luthar. Kathryn Yang checked the facts. Kate Concannon edits the show. And THE INDICATOR is an NPR production.
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UNIDENTIFIED PERSON: Rewind.
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