Today's inflation numbers

0:05Pushkin. Today, the U.S. government released the Consumer Price Index Inflation Report, telling us something about the US economy, about whether we're going to 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. Hello.

0:44Happy New Year, Ethan. Happy New Year. It's good to be back with our Katie Ethan episodes, even though this one's on a Thursday. But Katie, tell the audience about your glorious new promotion to the heights of FT stardom. You are hyping me up here, Ethan. This is completely unwarranted. I have to do it. But yes, I've shifted over just to doing columnizing 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. Yeah, you'll have to tell me what it's like to do some thinking before you do some writing.

1:19I 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. 100%. Yes, yes. 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 pour 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 going to 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 going to get this soft landing.

2:00Yeah, no, exactly. Like year on year inflation, last time around, it was 3.1%. And the market thought, okay, maybe it'll come up a little bit, maybe it'll be 3.2, but it's 3.4. So this tells you that, you know, no, inflation is not like snapping back like a kind of elastic band. But it is, 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%.

2:40Again, 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's just not going away. 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.

3:14The 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. But we're talking a touch, right? Right. The difference is tiny. 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 a couple of categories of inflation stood out to me as particularly interesting. I mean, one is goods prices, right? People will remember in 2021, when everyone was locked at home, everyone bought like five Pelotons, two Xboxes, like a used car.

3:53They were strange times. They were weird. You were telling me about your sister one time, right? Your sister bought a bunch of stuff like that. She loves her Peloton kit, I'll tell you. Well, I'm sure listeners know what we're talking about. And goods prices went absolutely crazy. And what we've had throughout 2023 is the opposite of rapid goods inflation. We've had goods deflation, falling prices in 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%, so no change in prices.

4:30Again, 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 Skaggs several months ago is what's going on in car repairs. This is a services category that has gotten 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%.

5:03The first month over month declined 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. Yeah, exactly. But the big thing is shelter, right?

5:38Yeah, 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.

6:19And there's been an expectation that I'd say it's 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 ApartmentList, and there's some other sources of this that have 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 think, almost a year now, if I'm not mistaken, for quite a while. And so people have been saying, well, okay, CPI is going to follow eventually, right?

6:59And 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%. 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. Yeah, but it all just paints a picture of just inflation generally that is simply not going to go away. There are some kind of voices out there in financial markets who are like, hooray, inflation has been defeated now.

7:36Let's all just, you know, have a big party and expect that the Fed's going to cut rates really fast, that markets are going to do incredibly well. And this is one of those data points that says, you might just want to 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 going to be higher for longer, higher for longer, higher for longer.

8:20Eventually, market got the message, bond prices fell really hard. And that meant that yields ran up as high as 5 % 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 % peak.

8:58Reverse ferret. reverse ferret. It's a British thing. I'm sorry. Where yields went all the way from 5 % 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 had 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.

9:31But what we do have is a little bit of a pickup 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 it, 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. I'm putting reverse ferret in my list of British slang that Katie Martin has taught me alongside.

10:09It's all gone Pete Tong, which I had never heard in my life before you said on this show, Katie. Have you tried it in real life yet? 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. Reverse ferret is quite useful. 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's doing the exact same thing. I will say, I've noticed in my conversations with analysts and market participants, 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, it hasn't resolved itself, but it's become less threatening, I suppose.

11:04There'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%, looks like a reasonable long-term yield. Maybe we go down a bit. Maybe it's more like closer to 3 % than 4%. But broadly speaking, we're in the realm of plausible equilibrium 10-year yields. And I'm seeing more people 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, two and a half or something like that.

11:41Yeah, that is hard to see. Yeah. But I think we're about 4 % now. I would not be at all surprised if we ended the year about 4 % 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 around that kind of central points. So this is just not going to be a straight road. 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.

12:19I 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. 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.

12:53Yeah, 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.

13:09Welcome 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, you and Healy had a great piece in the FT on dating apps, trying to monetize. It's a hard market to monetize, right? Because you need to give most people the free experience. What price, love? What price? Tinder, with its new Select program, will be charging users$499 a month to the top 1 % of Tinder super users. Excuse me? Baking powder? $499 a month? Not$499. $499. $499 a month. not four dollars 99 cents it's a truly astounding price tag are you sure i'm pretty sure i and i say that because i went on the tinder select faq page out of pure journalistic curiosity and no purchase intention and apparently you can hide the fact on tinder that you paid 499 a month to be one of the select users which i you know i suggest to me there's maybe dubious quality involved in this product.

14:20But I don't know. We'll have to see. People like paying to be distinguished. We're status-based creatures in the end. And it'll be interesting to see if this monetization strategy works as opposed to a more mass market subscription that some of the other dating apps are trying to sell people. But wait, you pay the big dollars, all 500 of them, and what? You get a bigger picture? They make you look more handsome and lovely? I know I sound like my mom here, but I don't get how this whole thing works. It's a fair question. I mean, I think there are some small benefits. The main benefit is you can be in a pool of other Tinder Select users.

14:58So only the best of the best who have also paid the$499 price tag will be in this pool. So 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. I mean, it's a no from me. I'm also going to be short this. Well, Katie, since you are not long, what Tinder calls its most sought after profiles, what are you long? 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. No, we have a show coming up on that, don't we?

15:40I thought we were doing a show on that. 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 news really travelled as far as the States about 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.

16:30But it was just an absolute fairy tale run and like darts is your classic kind of rowdy, drunken basketball. 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. Snooker. What is what is snooker? Snooker is like pool for Brits and it's billions. 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 going to be fun. Snooker, Pete Tong and Reverse Ferret folks.

17:16You heard it here first. Brits blailing as a service. All right. Thank you, Katie, for the inflation lesson, the markets lesson and the Britishism's 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. Catch you next time. 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 Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Tover Foreheads.

17:51Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, 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 slash unhedged offer. I'm Ethan Wu. Thanks for listening.

18:18We'll be right back.