INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. I'm joined by my two trustee co-hosts, Ryan Sweet, Ryan's director of Realtime Economics, and Cris, Cris deRitis who went AWOL last week. I see you're back, Cris. [crosstalk 00:00:31].

Cris deRitis:                       I'm back. I'm back.

Mark Zandi:                      How was your vacation? You were gone for a long time.

Cris deRitis:                       I copy you have a podcast. What's that?

Mark Zandi:                      You were gone for a long time.

Cris deRitis:                       Three weeks.

Mark Zandi:                      You look rested.

Ryan Sweet:                      That's a little bit of a sabbatical.

Cris deRitis:                       I was until I heard the last podcast.

Mark Zandi:                      We were... Why? What [crosstalk 00:00:49]?

Cris deRitis:                       There was a little trash talking there.

Mark Zandi:                      Oh really?

Cris deRitis:                       You don't remember that. All right, I won't bring it up.

Mark Zandi:                      Do you remember that, Ryan?

Ryan Sweet:                      Oh, I remember it.

Mark Zandi:                      Oh, you do?

Ryan Sweet:                      Your trash talking got Cris back on Twitter.

Mark Zandi:                      You're so sensitive. What's that?

Ryan Sweet:                      Your trash talking last week got Cris back active on Twitter.

Mark Zandi:                      Oh, that's right.

Cris deRitis:                       You have to motivate me.

Mark Zandi:                      You, Cris, are... Because you've been avoiding, you were like the Maven of LinkedIn, and now you have joined Twitter, right? What's your handle?

Cris deRitis:                       MiddleWayEcon.

Mark Zandi:                      Oh, now that makes perfect sense. That makes-

Ryan Sweet:                      That's perfect.

Mark Zandi:                      Right down the fairway economics, I like that. What made you decide to join the Twitter sphere?

Cris deRitis:                       You.

Mark Zandi:                      Me?

Cris deRitis:                       The trash talking, had to get back on, see what was actually going on.

Mark Zandi:                      Well-

Cris deRitis:                       I'm still trying to figure it out, though.

Mark Zandi:                      It feels like you're going to be on social media all the time now. No?

Cris deRitis:                       No.

Mark Zandi:                      No. All right. Very good. Well, it's good to have you back. We missed you last week. We had a good podcast. We're also joined by, I think this is the right word, bevy of colleagues, folks that have been on before. I think everyone's been on before. We've got Mike Brisson. Mike is the fellow who looks at everything vehicles. Good to have you Mike.

Mike Brisson:                    Good to be here. Thanks for having me.

Mark Zandi:                      [crosstalk 00:02:21]. I should say to preface all this, obviously, I guess I was just taking this for granted. We're talking about inflation. That's what we're talking about here. But consumer price number, the index number that came out on, I guess it was Wednesday. Was it Wednesday?

Ryan Sweet:                      Yeah, Wednesday.

Mark Zandi:                      Pretty ugly. Then the producer price index that folks don't follow nearly as closely, but that was pretty ugly too, wasn't it, Ryan? That came on this Thursday.

Ryan Sweet:                      It was. The only good inflation news came out this morning with import prices falling.

Mark Zandi:                      Oh, I saw that. I saw tha.t we can talk about that as well, but we got, obviously, one big aspect of... Oh, so we've got all our colleagues here because we're going to dig deep into the consumer price index. What's driving the high inflation? To do that, we got Mike. Mike Brisson is going to talk about vehicle prices, which was a bit of a surprise at least to me increased in the month. We've got Chris Lafakis and Juan Pablo Fuentes. You guys are energy, all things energy. Obviously, that's a big part of the inflation story, so we want to dig deep into that.

Mark Zandi:                      We have Jesse Rogers, going to talk about food prices. Food prices are up a lot. Everything's up a lot, but food prices in particular. We have him for that. Cris, we're going to talk about rent and housing services cost. But I think Cris, you're going to cover that for us as well. We've got all our bases covered. Welcome, guys. Good to have you. Hi, everyone.

Juan Fuentes:                   Hello.

Jesse Rogers:                    Hello.

Mark Zandi:                      Good to have you. Any words of wisdom before we dive in? Jesse, you're always good with philosophical statements. Do you have any statements you want to make?

Jesse Rogers:                    I just hope we get to food, because I came hungry today. I don't know if I'm going to leave happy depending on how dismal the conversation gets, but at least eager to join, and to be with everybody.

Mark Zandi:                      Well, you're right. Jesse, you're right, because sometimes I invite you on, and I don't invite you to speak. That's rude.

Jesse Rogers:                    It's our dynamic.

Mark Zandi:                      That's our dynamic, so hang tight, buddy.

Jesse Rogers:                    Let me warm the bench for a little while.

Mark Zandi:                      We might get to you next March or something, but just hang on. Hang on.

Jesse Rogers:                    High inflation is hopefully coming down by then.

Mark Zandi:                      Which is really a shame because you have a lot of really cool things to say. We were talking about sorghum prices before we went on, and you know all about sorghum. What? I didn't even know what sorghum was, but you know what it is.

Jesse Rogers:                    I do. It's a burgeoning market.

Mark Zandi:                      A burgeoning... You use big words too, which is really good.

Jesse Rogers:                    All right.

Mark Zandi:                      All right. Very good. It's good to have you guys. All right. Let's get down to business. We are going to play the game, but we can't play the game with the bevy of colleagues. That would take forever, but we'll play the game, the statistics game. Everyone knows what that is. We'll come back to that. But before we get there, let's get a lay of the land. Ryan, what the heck? I think, the CPI number was even hotter than you expected right? You expected a pretty hot number, so why don't you give us a sense of the statistics, the CPI statistics?

Ryan Sweet:                      I feel like I repeat myself every month. It was another ugly CPI print, so the consumer price index, which measures prices for goods and services that you and I are buying, that was up more than 1% again. But I think the concern is that the price pressures are broadening out, so more and more of the components of the CPI are rising, and rising very, very quickly. I caught the attention of the fed and financial market. So after the CPI came out, which was much hotter than people were anticipating, was up on a year ago basis, a little bit more than 9%.

Ryan Sweet:                      That's an enormous number, the highest since the early 1980s. Market started pricing in 100 basis point rate hike. We can get back to this later in fed tightening in July. That's-

Mark Zandi:                      It's a full percentage point for layman.

Ryan Sweet:                      It's a full percentage point. That's... Last month, the fed raise rates by 75 basis points, which was the mostly done since 1994. This is even more aggressive. I think part of the reason is that it's not just attributed to one or two components of the CPI anymore. It's starting to really broaden out. So when you look at the July or the June CPI, energy prices were a big factor. They added 3.6 percentage points to year over year growth from June. We had 9.1% year over year. 3.6 percentage points to that was just attributed to energy.

Ryan Sweet:                      That's heating oil. That's electricity, utility cost. Gasoline was an enormous part of that. Then, of course, we have to look at supply chain constraint components.

Mark Zandi:                      Oh, wait, before you... Just so I understand that, is that just the direct impact of higher energy costs?

Ryan Sweet:                      Correct. That's the direct effect.

Mark Zandi:                      So it does not include the impact that energy's having on everything else, the indirect effect.

Ryan Sweet:                      Correct. Economists, we look at the core CPI, which strips out food and energy, which is there's just a direct energy effect, because that's a good idea of where core inflation's going to be in the future. But energy price is filtered down into other parts of the core CPI, say for example, airfares or public transportation, so that's not measuring that indirect effect of energy price.

Mark Zandi:                      Or food.

Ryan Sweet:                      Food. Right. Exactly. Jesse will get to that, but energy is all over the place, and it's affecting a lot of the prices that you and I are paying.

Mark Zandi:                      What you're saying is consumer price inflation year over year through the month of June was 9.1. If energy prices were just... That's gasoline and electricity and natural gas. That was just flat, had not changed. Overall inflation, that 9.1% would be down by 3.6 percentage points.

Ryan Sweet:                      Correct.

Mark Zandi:                      That's the direct effect. It doesn't consider what higher diesel means for food. It doesn't consider the jet fuel prices for airline tickets and so on. It feels like... Is it fair to say roughly speaking that if energy prices, not that they... They don't even have to fall. They just have to go sideways. They just go sideways for a while. Then inflation would be roughly half of what it did today.

Ryan Sweet:                      At least half.

Mark Zandi:                      At least half, still very high, but [crosstalk 00:09:00].

Ryan Sweet:                      But manageable. I mean, it'd be easier for the fed to bring that down than what they're doing right now, because-

Mark Zandi:                      Fair enough. This is obviously why we've got Chris and Juan Pablo on the call, because this is critical to understanding future inflation. What happens with oil prices? What happens with natural gas going forward? That's key to the inflation output.

Ryan Sweet:                      That's why July is going to be much better, because gasoline prices have come down. Global oil prices have come down, so we're going to see some relief in July.

Mark Zandi:                      We'll come back to that. Go on. You're decomposing the 9.1%. You now have accounted for the energy. What else is going on?

Ryan Sweet:                      The biggest headache, of course, is energy. Then second comes supply chain issues. What we did was we go through all the components of the CPI, and identify what was those components that are being significantly affected by supply chain, so think new and used vehicles, audio, video equipment, children's apparel, things like that. That added 1.1 percentage points to year over year growth in the CPI. Energy added 3.6, tack on another 1.1 for this temporary effect of supply chains. The good news is that we're seeing some improvement on the supply chain front, in fact, that the supply chain constraint components of the CPI are adding less and less over the last several months to year over year growth in the CPI.

Mark Zandi:                      Would vehicle prices be part of the supply chain?

Ryan Sweet:                      Yes. They're the poster child for supply chain.

Mark Zandi:                      The poster child.

Ryan Sweet:                      Yep. When you even decompose the supply chain contribution, most of it is coming from new and used vehicles, and you'll-

Mark Zandi:                      Just to connect the dots, you go back. Now almost a year ago, the Delta wave hit of the virus. It shut down a lot of Asia, particularly Southeast Asia, chip plant shut down. They can't produce chips. They go into vehicles. They can't produce vehicles, inventories collapse, nothing on dealer lots, vehicle prices go skyward. That's what you mean by supply chain disruption and vehicles being the poster child for that.

Ryan Sweet:                      Supply chain, I mean, it's both supply, like the supply of containers or looking at number of ships that are parked off the port of Long Beach. It's also demand as well, because the consumers, you and I were buying a lot of stuff over the last year, two years. That exacerbated the problems that we were experiencing with the supply chains, and that drove prices up through the roof, because we got retail sales this morning. They were really strong, and retail sales are goods. Most of those goods, we import, and that's a key source of the inflation that we're experiencing.

Ryan Sweet:                      You got energy, number one. Supply chain is coming at number two, and then you have the still reopening effect. So as the economy's coming back, those areas that were hit really, really hard by the pandemics, I think restaurants, for example, hotels, motels, even airlines, they're starting to raise prices pretty aggressively, but that only added 0.3 percentage points to year over year growth in the CPI in June. 3.6 percentage points came from energy. 1.1 came from supply chains. .3 came from the reopening.

Ryan Sweet:                      So if you exclude those, if you exclude energy reopening and supply chains, the CPI was up 4.1% on a year ago basis in June, which is still high. That's stronger than 3.7% that we got in May. I think that's one reason why the fed's getting a little bit more nervous is that some of these price pressures are broadening out.

Mark Zandi:                      Well, just to complete the story, suppose... I know it's hard to calculate, but your sense of it, if I account for the indirect effects of the higher energy prices, what would inflation be, CPI inflation be?

Ryan Sweet:                      Closer-

Mark Zandi:                      What would it be?

Ryan Sweet:                      Three, three and a half.

Mark Zandi:                      Three and a half. Let's say just be conservatively speaking, 3.5%. The Federal Reserve board's target for CPI inflation high end, I would put it 2.5%.

Ryan Sweet:                      Two and a half.

Mark Zandi:                      What you're saying is then in the re... When you say excluded, people say, "Well, why are you excluding?" I mean, the point is that these things are indeed temporary, more or less. They're not persistent. Let's put it that way. Temporary people think next month. They're not persistent for a long period of time, because it goes back to things like the pandemic. It goes back to things like the Russian invasion of Ukraine.

Ryan Sweet:                      Invasion of Ukraine.

Mark Zandi:                      I guess we need to talk about that more. They could last for longer, and be more disruptive for longer going forward. But if they simply not go away, because I don't think Putin's going to stand down anytime soon, the pandemic's not going away. We're going to get out of their ways of the virus. But if they simply are just... We've seen the worst of the disruptions by those big shocks to the economy. What you're saying is that inflation should moderate back into something around the mid threes would be fine.

Ryan Sweet:                      Exactly. I think, people have jumped off the transitory bandwagon. I think one reason is that people put a time horizon around it. When I view transitory, I look at whether or not it's fundamentals versus these temporary supply shocks, and all our inflation problems are supply shocks. It's not fundamentally being driven by changes in population, or a really tight labor market. We got Russia invading Ukraine, which juiced up oil prices, the pandemic, which royal supply chains, the reopening of the economy, which is temporary. That's boosting inflation as well.

Mark Zandi:                      Just to make it a clear, to strike the point home, if energy prices simply go flat, and the supply chain issues continue to iron themselves out and moderate, that's going from 9.1 to 3.5.

Ryan Sweet:                      Correct.

Mark Zandi:                      But if they actually decline, if energy prices actually decline, and we're going to come back to that, it feels like at some point... They already are. They've already declined since we're at the peak back a month ago. That is going to put at least on top line inflation going to put significant downward pressure, and we could be below the fed target at some point here.

Ryan Sweet:                      We will. We most likely will. That's assumed in our baseline is that we get a lot of goods disinflation, and goods being stuff that we buy. That's needed to offset because plain devil's advocate. If we don't get that goods disinflation, if something else goes wrong, if China locks down again, we have services inflation that is really beginning to accelerate. One thing I didn't mention was that rents picked up, so they're accelerating. They added two percentage points to year over year growth in the CPI in June.

Ryan Sweet:                      That was the largest contribution since the early 1990, so we have a rental inflation problem coming. It's only going to get worse this summer and later this year, so we need that goods disinflation. We need energy prices to come down, or inflation's going to be higher for longer.

Mark Zandi:                      I didn't realize that. So the acceleration in the CPI for housing services, which obviously is tied back to the very strong growth in rents, added two percentage points to CPI inflation in the year ending in June.

Ryan Sweet:                      That was the largest since the early 1990s.

Mark Zandi:                      We'll definitely come back to that as well, because that is more persistent. That is more-

Ryan Sweet:                      Those are sticky prices, so another way you can easily look at the CPI is break it down into... I think the Atlanta fed does this. They break it down into sticky components versus more volatile components. Sticky inflation is picking up, and most of that is because of rents.

Mark Zandi:                      All right, let's just stop there. Let me turn to Cris, because I've guided the conversation in a certain way here. I'm just curious what you think. Well, first of all, fill in any holes in what Ryan said. Did he miss anything that we should be talking about in the report or inflation more broadly, and what the implications are? What do you think of that conversation we've had so far?

Cris deRitis:                       I think Ryan did a great job of summarizing.

Mark Zandi:                      Well-

Cris deRitis:                       He mentioned this, but I'll underscore-

Mark Zandi:                      That just-

Cris deRitis:                       What?

Mark Zandi:                      That just doesn't sound right, Ryan. When he leads with a compliment, that always makes me sweat a little bit.

Ryan Sweet:                      He's building out to-

Cris deRitis:                       I's starting to the but.

Mark Zandi:                      The but, oh, the but had... Go slow on the but. There you go.

Cris deRitis:                       Oh, no, not so much a but, just to under... This was a bad report. This was terrible. Ryan mentioned it was widespread inflation. It's not just concentrated in a few items. It's everywhere. It's in items that we also thought we're not going to experience a lot of inflation like furniture, right? We had expected with the supply chains, and Target and Walmart saying that they have a lot of excess inventory now, that we wouldn't see much price grow. We'd actually get some relief in those products, but we actually saw some acceleration in the prices of those products as well.

Cris deRitis:                       I don't want to... I don't think we need to sugarcoat this report. It was pretty bad. We're hopeful that it's at the peak, and things will improve, but I still think there's a lot of risk out there.

Ryan Sweet:                      It can't get much worse. It can't get any worse. I mean, that was awful.

Cris deRitis:                       I seem to recall that statement back in March, right?

Ryan Sweet:                      True. Very good.

Mark Zandi:                      But that simply goes to the timing of the oil price peak, right? I mean, the thing that we didn't expect in March, or we were forecasting was that European Union would not sanction oil. Therefore, they did, and oil prices jumped again. Therefore, we got the peak in June, which is the data we're talking about, right?

Cris deRitis:                       Yeah, but there can be other shoes to drop it to, right?

Mark Zandi:                      Fair enough.

Cris deRitis:                       There's still... I mean, we'll get into the energy markets I'm sure, but there's still issues both on the supply and the demand side. The sanctions, they haven't really gone into effect fully yet, so we don't know all the ramifications of that.

Mark Zandi:                      I guess to your point about the broadening out, the one thing that did make me... Well, everything about the report was, as you said, bad, ugly, but the one thing that made me particularly nervous was the acceleration in inflation for medical care, because that has been, up to this point, pretty modest and tame. That's not such a big part of the consumer price index, right, CPI. It's a very... I think the share of the CPI that goes to vehicles is greater than the CPI that goes to medical care, because the CPI measures' out-of-pocket expenses. A lot of the medical care that we consume is insurance companies covering that.

Mark Zandi:                      But that goes to the difference between the CPI and the core consumer expenditure deflator, which is actually the measure of the fed is generally most focused on. There, medical care plays a much larger role. There's a much larger share of that index. That makes me particularly nervous that that's picking up. Any insight on that, because we don't have an expert here going to talk about that? But Ryan-

Ryan Sweet:                      You just got to... You got to be careful with the medical components of the CPI, including physicians and hospital prices, because the response rate. So, what's the share of the universe that they're going out and surveying? The bureau of label statistics every single month has dropped. It's like it's to the point where it's very unreliable. I don't think it's a complete sample of what prices are actually doing.

Mark Zandi:                      That's a good point. All right, well, that's good. Let's now dig deep into some of these components of the consumer price index that have been and are adding a lot to inflation. We're doing this to try to better understand what's driving that higher inflation, and then perhaps more importantly, what does it mean about where inflation is headed over the next 12, 24, 36 months. To that end, Mike Brisson, let me start with you and vehicle prices. As I mentioned earlier, they rose. Both new and used vehicle prices rose in June.

Mark Zandi:                      That, for me, was the biggest surprise in the report. I had expected used vehicle prices to decline, because you have taught me to look at auction prices and our own index that you construct based on auction prices, actual transaction level prices. That showed a big decline in June, right? It's not showing up in the CPI. Can you give us a sense of what's going on there, Mike?

Mike Brisson:                    Our auction is a wholesale price index. Our auction index, the Moody's Analytics sale price index, we're looking at hundreds of thousands of transactions each month that come out of the auctions. About 80% of auction transactions are shown in our data, but the CPI, they're looking at 480 observations at retail stores. Do a picture across the country, and then you add on the sales tax as well in each part of that country. You're looking at just 480 observations, and it's not seasonally adjusted, whereas our index is seasonally adjusted. Rightfully so, it's not seasonally adjusted.

Mike Brisson:                    There's not the large peaks and valleys that you have in the auctions, where in the spring, you have dealerships that load up on inventory, so prices go really high. Then they unload inventory towards the end of the year. There's a lot more seasonality in the auctions than there are in the retail. The CPI isn't seasonally adjusting either, but the CPI is down from its peak over 1%. We're expecting it to go down. CPI lags the wholesale auction, so you imagine dealers go to the wholesale auctions. They pay a certain price, and they pass those prices on to consumers.

Mike Brisson:                    If they're paying less now in June like we're seeing at the wholesale auctions, presumably later in the year, the CPI will go down in response.

Mark Zandi:                      So you're saying it's a matter of time.

Mike Brisson:                    Yes. Well, I believe the wholesale auctions will stay relatively steady, because new vehicle supply still remains low over the rest of the year, but I do think that the CPI will come down a bit over the rest of the year from what we're seeing in the wholesale prices.

Mark Zandi:                      Most fundamentally, as I mentioned earlier, it goes back to supply chain's chips lack of production, lack of inventory. Vehicle prices go higher. Give us a sense of that dynamic. My understanding is chip production is starting to improve. Vehicle production is starting to improve. We're getting a little bit of improvement. If you look hard, I think at the data in inventories, they're still incredibly lean, but they're off bottom, I think. That does argue that the very rapid increase in prices should come to an end. We may even see some as we were discussing price declines. Is that a reasonable description of what's going on?

Mike Brisson:                    Exactly. In the U.S., the production issue is different all over the world. It, well, wasn't this way last year. No one could produce last year. Right now, the U.S. is producing almost back at 2019 levels. We're about 10.7 SAR seasonally adjust analyzed rates. In May, 10.5 million. In April... The 2019 average was 10.9 million, so we're right there. For the six quarters before that, it was 9.2 million in the U.S., so we're back up to where we were. In Germany or Europe, but Germany, I look at it for Europe, it's probably down a little less than 20% from 2019 levels.

Mike Brisson:                    In Japan where they're closer to China, and so they were subject to all the COVID lockdowns, they're about 35% below where they were in 2019. The U.S. is producing pretty much where they were prior to the supply crunch. Germany, they got hit by the Ukraine crisis. A lot of the internal components that they were running through Ukraine and all those industries slowed down or shut down, so they were hit by the war, so they had some supply chain constraints there. Japan is hit the worst because of their exposure to the Chinese lockdowns.

Mark Zandi:                      Should we expect vehicle production to pick up in Germany, in Japan? I mean, or-

Mike Brisson:                    Yep.

Mark Zandi:                      We should. Let me ask you another question. This is tangential, but it's bothering me. Vehicle demand, the actual number of units that are being purchased, that remains very depressed. I think, wasn't it 13 million units, I think, in June, something like that?

Mike Brisson:                    That was the SAR for June was 13, but demand, I like to look at the miles driven. The statistics I would've used if I was playing the game would be 3.75 trillion. That's how many miles were driven in the past.

Mark Zandi:                      Do you see how he does that? He sneaks in the game. You see? By the way, I would've gotten that. No problem, Mike. I'm just saying.

Mike Brisson:                    It's the highest May reading in history, so the miles traveled in the U.S. is the most ever despite high fuel prices, so demand is out there. The high prices show demand is out there. It's a supply issue that's keeping the new vehicle sales down.

Mark Zandi:                      So, vehicle production is picking up. You're saying this hasn't picked up enough to start filling dealer a lot sufficiently that they can sell more cars.

Mike Brisson:                    Correct.

Mark Zandi:                      Got it, but that's going to happen. It feels like that's hap... We're moving in the right direction. Let's put it that way.

Mike Brisson:                    It's coming. It's coming. It's why I'm happy to defend that forecast.

Mark Zandi:                      I like it. I like that. Here's the other thing. Used vehicle prices have shown some softness. They rose last month, but they... Go back a few months ago. We had seen some declines, even at a retail level. New vehicle prices, no such thing. They keep... Every month, it's up a lot. I mean...

Mike Brisson:                    If I were to assemble all the OEMs, and say, "Let's collude and restrict supply as much as they have," you can raise prices. It's the amount of supply that's out there. You're able to raise these transaction prices. You cut off incentives. You're able to increase profits. Just go back to your industrial organization classes. You restrict that supply. You can raise prices. The transaction prices come up, and that's what's going on with used vehicle prices.

Mark Zandi:                      So, you're going back to... There's nothing on dealer lots yet. Therefore, prices aren't going to come in. It's only when we start to see enough production long enough that an inventory start to come off bottom that we'll actually see prices roll over.

Mike Brisson:                    Yes.

Mark Zandi:                      You weren't implying collusion though. You-

Mike Brisson:                    No. No. No. I'm saying if I were to design it, this is how I would've designed it.

Mark Zandi:                      Oh, I see. I see. I see.

Mike Brisson:                    It was a perfect storm for them.

Mark Zandi:                      Perfect storm.

Mike Brisson:                    Profit per vehicle sold has never been higher.

Mark Zandi:                      Right.

Mike Brisson:                    They're able to raise MSRPs.

Mark Zandi:                      OEM is jargon. That is...

Mike Brisson:                    Original equipment manufacturer. There's the producers.

Mark Zandi:                      [crosstalk 00:28:54] cars.

Mike Brisson:                    Yep.

Mark Zandi:                      All right. My takeaway, Ryan and Cris, correct me if you have a different takeaway, or let us know, is that we've got some optim... We should have some optimism here. From a prism of inflation, we're going to see prices start to come in here pretty significantly for both used and new. Month to month, who knows? But certainly by early next year, this time next year, we should be seeing definitive declines in vehicle prices.

Ryan Sweet:                      Yes.

Mark Zandi:                      Well, no. No. That... Wait, Mike got to answer that question, and then we react to that.

Mike Brisson:                    Definitive declines this time next year?

Mark Zandi:                      Yeah.

Mike Brisson:                    Yes. There's a... Right now, the year over year price growth is about 7% of the CPI.

Mark Zandi:                      It feels like around 10. It was higher for new, lower for used, about 10.

Mike Brisson:                    Yes. For used, it's about 7%. New vehicles, I have a different outlook for than the used vehicles. I think I can see more price gains in the new vehicle market. The difference between new and used prices is over 20% right now. They historically track themselves. So depending how far down the used come down and how high up new come down, those will have to equal out, so that 20% gap has to close somewhere. It might be raising the used vehicle prices, and the new... or raising the new vehicle prices and used vehicle prices coming down 10% each, or used vehicle prices come down 20% [crosstalk 00:30:23].

Mark Zandi:                      Distracting from all. That's... I get it. But in aggregate, is it fair to say... I don't want to put words in your mouth, but I want to put words in your mouth. No, because I just want to make sure my forecast is right. A year from now, sequentially month to month, year over year, that's a little trickier. But even year over year, we should see some declines in aggregate vehicle prices. Use new combining however you want to do it.

Mike Brisson:                    Yes. It'll be concentrated in the used.

Mark Zandi:                      That's a big swing, right? We've gone from stratospheric increases to declines. That should have a meaningful impact. By the way, you add it up. I think new and used are 8% of the CPI index, so it's not inconsequential. It's a consequential part of the index. All right. We just... Oh, by the way, Ryan, Cris, anything there? Ryan said yeah. He agrees with that. Cris?

Ryan Sweet:                      Yes. I mean, a used vehicle can't be an appreciating asset forever. It's unheard of.

Mark Zandi:                      Canopy. Right.

Mike Brisson:                    Invested in four runners last week.

Mark Zandi:                      Cris?

Cris deRitis:                       Prices will come down in recession, so yes.

Ryan Sweet:                      There you go. See? Chris is coming on-

Mark Zandi:                      Rude.

Ryan Sweet:                      Coming to the dark side.

Mark Zandi:                      Rude. Well, even in a non-recession, what do you...

Cris deRitis:                       Yes. Yes.

Mark Zandi:                      I mean, because Chris is... Mike's forecast is based... I should say these projections are based on no recession. Recession, we're in a different ballgame.

Ryan Sweet:                      Correct.

Mark Zandi:                      All right. Very good. Anything else, Mike, you want to bring up on the vehicle front before we move onto the next component?

Mike Brisson:                    No, I think we're good. We got the trajectory.

Mark Zandi:                      Well, thank you for that.

Cris deRitis:                       Pretty rare, though, for vehicles and [crosstalk 00:32:18].

Mark Zandi:                      No. Wait, Cris, Cris, no. No. No. I'm leading the way here. You follow me. I'm moderator, so let me moderate, because we got a lot of ground to cover. I want to get to you, but before I get to you, guys, I'm working backwards because energy obviously is very important, but let's go to Jesse next. Because if I don't go to Jesse now, we'll never get to Jesse. Jesse, let's talk about food prices, which are up a lot too. I think an aggregate food at home, at restaurants is up double digit year over year, I believe, in the CPI index. What's going on with food? What's driving those higher prices?

Jesse Rogers:                    What's driving higher prices? It's really a confluence. I like the word perfect storm that Mike used, the phrase perfect storm. It's higher energy prices. Food manufacturing is energy intensive. Agriculture as an industry is energy intensive when it comes down to fuel, electricity costs, fertilizer. Of course, we've had the almost explosion in commodity prices from the war in Ukraine. Markets have since rationalized a little bit. There was a spike when the war started, wheat prices, grain prices, particularly because Russia and Ukraine are so important to global agricultural production, specifically in emerging markets.

Jesse Rogers:                    As global shippers have figured out ways to move Russian wheat, grain prices have come down. Food prices are high, but they're probably going to level out.

Mark Zandi:                      Level out. That means... What does that mean? Year over year, food prices go flat, essentially?

Jesse Rogers:                    Yeah. Usually, prices for food, the stuff we consume, whether at restaurants or at the grocery store, that typically responds to changes in commodity and energy prices with a lag just because food producers are locked into long-term agreements for their inputs. We've seen food prices lag the overall CPI, and are rising and broke into this double digit range more recently. Over the past couple of months, we've seen prices for raw materials, mainly grain prices, but also energy a little bit come in, and that's eventually going to keep food prices from rising over the next couple months.

Jesse Rogers:                    If we look at that medium term outlook, we're going to... They'll remain high for things that are going on in the global farm economy that we can talk about. But in terms of contributing to inflation, food prices are going to... Food will be expensive, but we're not really seeing gains on a month to month basis going forward.

Mark Zandi:                      You mean... Going forward. Right.

Jesse Rogers:                    Yeah, going forward. Food prices are high. They've come in, and that's going to reduce pressure on producers, both on the raw input side and in food manufacturing. Food's contribution to overall inflation, which has come in hot and heavy, but with a lag, that's going to ease over the next... both on a month to month basis and year over year. It doesn't mean consumers won't hurt, because food prices are high, but in terms of contributing to further price gains, I think it's fair to say that we've seen most of the run up, and we're past the peak.

Mark Zandi:                      You may have said this, but just to reiterate, there's two broad forces at work pushing up food prices. One is the Russian invasion of Ukraine, and the disruption to ag markets. Russia, Ukraine produce a lot of wheat, corn, sunflower oil, that kind of thing, and that's disrupted markets significantly. Fertilizer, obviously, is important to a lot of different types of agricultural activities all around the world. Second thing that's been driving food prices is the higher energy prices. You got to get the food from the farm to the store shelf proverbially speaking, and that you put it on a truck, so diesel prices are way up.

Mark Zandi:                      By the way, they haven't come in as much as gasoline prices over the last month or so, but they're very elevated. Those two things have driven this double digit, what we're now seeing through June increase in food prices. In going forward, well, we're saying... We're going to come back to energy in a second, but we're expecting energy prices to moderate, at least not rise any further. We're saying on the Russian-Ukraine front, that while that conflict is going to continue for the foreseeable future, the impact of that on ag prices, we've seen the worst of it.

Mark Zandi:                      Is that a fair characterization of your view?

Jesse Rogers:                    I couldn't have said it better myself. I think one thing on Russia, Ukraine-

Mark Zandi:                      Now, you're sucking up. Now, you suck up. [crosstalk 00:38:08] that. Now, he's sucking up.

Jesse Rogers:                    No. Well, I mean, when it's fair, it's fair.

Mark Zandi:                      All right.

Jesse Rogers:                    I like to let the chips fall where they may.

Mark Zandi:                      Very good.

Jesse Rogers:                    That's very fair. I think that's excellent.

Mark Zandi:                      So if I told you a year from now in June of 2023, year over year, CPI food inflation was zero, or close to zero, you'd say what? That sounds about right to you.

Jesse Rogers:                    Yeah, or even unwinding, we could even see small on the negative side.

Ryan Sweet:                      All right, Jesse, I'm holding you personally accountable for this, because Wawa's Hoagiefest is expensive this year.

Mark Zandi:                      Is it?

Ryan Sweet:                      This is the best time of year. It's Wawa's Hoagiefest, and prices are up.

Mark Zandi:                      What makes it a... They'd sell hoagies all year round. Why is this a fest this time of year? I mean, what makes it a Fest?

Ryan Sweet:                      Well, they reduce the prices a little.

Mark Zandi:                      Oh, they do. Oh, okay.

Jesse Rogers:                    Yeah.

Ryan Sweet:                      Yeah.

Mark Zandi:                      But it's still very elevated the price?

Jesse Rogers:                    Yeah.

Ryan Sweet:                      Compared to last year.

Jesse Rogers:                    I mean, think of what goes into a hoagie. I mean, it's bread. It's-

Ryan Sweet:                      I'm so proud of you, Mark. You're at Wawa all the time.

Mark Zandi:                      I've sworn off hoagies, I'm telling you. I'm a little [inaudible 00:39:20] guys.

Jesse Rogers:                    That's salami.

Mark Zandi:                      If I eat a hoagie, I won't eat for a week.

Ryan Sweet:                      You're not allowed to live in Philadelphia.

Cris deRitis:                       But Mark, you noticed the 16% increase in hotdog prices, right?

Mark Zandi:                      I love hotdogs.

Cris deRitis:                       That goes right to your budget, right?

Mark Zandi:                      I love hotdogs. They're really... They're up 16%. I knew wings were up a lot, at least last I looked on wings, chicken wings.

Ryan Sweet:                      That was Cris's number.

Cris deRitis:                       That was.

Ryan Sweet:                      That's good.

Mark Zandi:                      No way. For this week?

Cris deRitis:                       No. No.

Mark Zandi:                      Oh, sorry.

Cris deRitis:                       Was a backup.

Mark Zandi:                      Oh, was backup. Are chicken wing prices still rising quickly? I didn't look. No. Mike Brisson knows. He's shaking his head. No, they're not rising as much.

Mike Brisson:                    I'm in Upstate New York, but mainly, chicken wings for food around here. They're going up in retail. I know that.

Mark Zandi:                      What did he just say? He said at Upstate New York, that's what we eat. That's [inaudible 00:40:11] chicken wings.

Mike Brisson:                    Yeah. Buffalo wings, it's all over Upstate.

Mark Zandi:                      Really?

Mike Brisson:                    That's right, buffalo. Buffalo.

Mark Zandi:                      All right, very good. All right, Jesse, that was very helpful. I really appreciate that. Cris, Ryan, anything, any pushback on... Be careful. Jesse's very sensitive. You can't push [crosstalk 00:40:25].

Cris deRitis:                       What about the weather? We mentioned-

Mark Zandi:                      What about that? That's a good point, actually. What's going on here?

Cris deRitis:                       I don't know. I'd be a little cautious.

Mark Zandi:                      A little cautious.

Ryan Sweet:                      This summer could be an issue. Droughts.

Jesse Rogers:                    I think it's important to mention that food prices were really high in the first place, well, before the war in Russia, and Russia's invasion of Ukraine. That goes to just limited really bad climate conditions in your major bread baskets, North America, South America, Europe. When you think of it, when you look at green prices, they've shaken off the increase from Russia and Ukraine, but they're still trading at the upper range. The UN food price index is another great metric to look at.

Jesse Rogers:                    That's been tracking record highs, but when it comes to inflation, it's all about the increase, and how much worse can climate conditions get? I mean, they're pretty bad. I mean, farmers in Brazil are up to their waist in soggy fields. Kansas is dealing with drought. Wheat and soy producing regions are really struggling across the world. Yes, that just goes back to... I think, food prices are going to continue to hurt, right? Inflation's the change in food prices and how much more expensive they could get.

Jesse Rogers:                    Like you said, Mark, we've reached... We're near the peak of how much they're going to contribute to inflation on a year ago and month to month basis. But in the background is that food prices are high,

Mark Zandi:                      Let's move on to energy prices. We've got both Chris Lafakis and Juan Pablo Fuentes here for that. Guys, so you heard Ryan's decomposition of inflation, and energy is a big part of it. Obviously, energy prices, gas prices, diesel prices, jet fuel prices, or pick whatever it is, natural gas prices, they all seem to have peaked back a little over a month ago tied into, I think, the European union's decision to sanction Russian oil. They announced that in early June. Prices have come in since then.

Mark Zandi:                      If oil is our poster child for this, then we were $120 per barrel, 125, I think, maybe on Brent at the peak. We're now down below $100 a barrel. What's going on in the oil market, energy markets, and where do you think we're headed? I'll begin with Chris, and then I'll turn to Juan to fill any gaps.

Chris Lafakis:                    Sure. I think what happened was we had the Russian invasion when... Well, before that started to get priced in, oil was around 70, give or take. That started to get priced in. It happened. We had a spike up. There was a lot of uncertainty. The prices fell when there was more certainty. Market participants felt that the EU was not going to ban crude oil. The administration did a coordinated release of oil from strategic petroleum reserves with other countries across the world, and prices fell all the way back down to around $95 per barrel.

Chris Lafakis:                    Then at that point, market participants started to price in the probability of an EU ban on Russian oil, and prices went back up to 120. Now, they've come back down to about $100, give or take, on WTI and Brent, so the... There's a few reasons for the recent decline in the price of oil. I think that the main one would be fears of a recession with the market being convinced that the Federal Reserve is going to have to raise interest rates very aggressively to control inflation, and that weighing on all commodity prices, including energy.

Chris Lafakis:                    Then the second is some uncertainty about how the European union will enforce or apply this ban, because we've only got data through May, actual hard... It's not even that hard. It can be revised. Rush import data. The EU, as of May, did not reduce its imports of Russian crude oil. Now, there were some important steps that went into effect in May 15 that applied to energy trading firms like Vitol and Trafigura and so on and so forth. That went in effect in May. Then the EU ban was announced in early June.

Chris Lafakis:                    We'll have to see how the data evolves over the next couple months, June and July, to get a sense of what is the true impact on global oil supply of the European embargo on Russian crude oil, but market participants are less worried that we're going to be short supply than they were a month ago. That has happened at the same time that the refining industry has responded. So refinery capacity utilization has increased. Crack spreads have fallen. That's the difference between wholesale product prices and oil, so the difference between wholesale gasoline and crude oil, the difference between wholesale number two heating oil and crude oil.

Chris Lafakis:                    Those have fallen dramatically, and they are a part of consumer energy prices, which is ultimately what the CPI is measuring. I think that there's further momentum for price declines in consumer energy prices in the month of July, given where crack spreads are now. That is a supply side response. I mean, it's so often the case just broadly across the economy, but especially when it applies to commodities in the energy market, that the cure for high prices is high prices. We are seeing the supply side respond here to very strong incentives, I would think, to produce as much oil, and refine as much oil as possible.

Mark Zandi:                      What you're saying, I'll paraphrase just like I did for Mike and for Jesse, is that anyone who's going to sanction a sanction or at least announce sanctions, and that the EU has announced sanctions, but they really, at this point, have not implemented them. It may... This is a risk, obviously, what they decide to do here, but they may decide... Given they don't want to see oil prices go skyward here, they may decide to be slow in implementing any sanctions to make sure there's enough oil supplies out there so that prices don't go skyward.

Mark Zandi:                      They'll calibrate their implementation of the sanctions. Also on top of that, the refiners here in the U.S. have been able to increase the capacity utilization of the refineries produce more refined product, and so we've got lower oil prices. We've got lower crack spreads. That means gas prices are starting to come in meaningfully. We're $5 a gallon regular unleaded record a month ago. We're now at 4.65 nationwide. I think that's... Is that consistent with our Wawa, 4.65? I think we're pretty close at our local Wawa.

Mark Zandi:                      Diesel prices, they've come in a little bit. Jet fuel prices have actually come in a lot relative to the peak. Assuming that EU doesn't start to really crack down on Russian oil, and the fact that we are getting more supply, because the higher price to your point about higher price solves the problem here, because it elicits more supply response. Oil prices, gas prices should at very least not go higher, and may with a little bit of luck go a little bit lower. Is that fair, that characterization?

Chris Lafakis:                    Well, yes. I think it's fair. I think that a lot will depend on how the EU will proceed, and if it does crack down hard, how much of that oil is going to find its way into other countries anyways? Because as of May, if you look at China plus India plus Turkey, they have increased their imports of Russian crude oil by about 800,000 barrels per day. That's about the amount that actually the U.S. banned that was entering the U.S. along with the UK. All of that oil has been rerouted to these other countries.

Chris Lafakis:                    The question is if the EU is forceful, then how forceful will they be, and then how much will ultimately that Russian oil end up in other countries? I think that there's possibility for oil prices to rise from here, but I think that the most likely case is that we do get just... They go sideways for a while.

Mark Zandi:                      Got it. Got it. Hey, Juan, what do you think? Do you agree with this? Do you want to add any color? What do you think?

Juan Fuentes:                   I agree with Chris. I think the main factor behind the recent declining prices is the fear of recession. That's more a market response to the sentiment in the market. The second reason I would say is that Russian oil supply has declined by far less than anticipated by the time the invasion took place. According to the International Energy Agency, Russian supply has declined only by 800,000 barrels per day. Initially, they thought that supply was going to go down by three million barrels per day in just one month. So obviously, that's not happening.

Juan Fuentes:                   The deep discount of Russian oil is everybody's buying Russian oil, everybody that can. I saw a news today that Saudi Arabia has bought a lot of Russian oil.

Mark Zandi:                      Really?

Juan Fuentes:                   Yeah. They are using the Russian-

Mark Zandi:                      Why?

Juan Fuentes:                   Because there's a deep discount.

Mark Zandi:                      It's an arbitrage play. They buy the cheap Russian oil-

Juan Fuentes:                   They buy Russian oil to use for their power plants, so they have more oil available for exports.

Mark Zandi:                      Can you explain to me why there's a discount? I mean, if the markets are so tight, why do they have to sell it at a discount?

Juan Fuentes:                   Because there are sanctions in place, so it's like... It has also to do with this news European talking about capping oil prices for Russian oil. I think what they're trying to do is let's... "We are not going to go after India or anybody that wants to buy Russian oil, but we are going to demand that they don't pay us market price. They have to pay a discounted price." The idea is that Russian oil, the supply wouldn't be affected as much, but the money that Russia get from their old sales are going to be affected by this price cap. That's what's happening. After the invasion, I haven't checked lately, but the discount was $20, $30 per barrel initially.

Mark Zandi:                      The discount on Russian oil.

Juan Fuentes:                   On Russian oil.

Mark Zandi:                      Let me ask you, I'm all a sudden confusing myself. The Brent oil price, which is the global price for oil broadly, does that reflect the Russian discount?

Juan Fuentes:                   No.

Mark Zandi:                      It does not.

Juan Fuentes:                   That's not a... That's what Europeans pay for oil in [crosstalk 00:52:29].

Mark Zandi:                      I see. They're actually paying less. We're paying... The U.S. refiners are paying more, because we're not getting any Russian oils. We're paying more than European refiners, let's say.

Juan Fuentes:                   Well, the Europeans are also not getting that Russian oil, so the ones that are taking advantage of the discount are-

Mark Zandi:                      China and Indian, they're benefiting.

Juan Fuentes:                   ... India, China, Saudi Arabia. These are countries that can afford to go around the sanctions, or they are not afraid of getting sanctioned by Europe or the U.S. They are taking advantage of this discount, but Europe and the U.S. have to pay full price, so this Brent or WTI the case of the U.S. The other thing I will say in terms of the inflation, I disagree a little bit with Chris on the refinery situation in the U.S. I feel like refineries are basically operating a full capacity right now.

Juan Fuentes:                   Refinery capacity has been down almost by two million barrels per day in the last two years, so refinery capacity in the U.S. at the beginning of this year was 17.1 million barrels per day. That's down from 19 two years ago. There is no really room for increasing production of gas.

Mark Zandi:                      Well, how do you explain the lower crack spreads? What's [crosstalk 00:54:02]?

Juan Fuentes:                   Well, the crack spread went up substantially up to mid June. They have come down a little bit, but they are still a lot higher than they were by the beginning of the year. Right now, they're almost at $1 per gallon, which is high.

Mark Zandi:                      Still very elevated.

Juan Fuentes:                   It's still very high. If you look at the declining prices... Gas and diesel prices are increasing more than oil prices, and then coming down by less than oil prices in July.

Mark Zandi:                      All right.

Juan Fuentes:                   I think that situation is going to continue. Gas prices are going to overperform crude prices.

Mark Zandi:                      Of course, I don't think you would argue. Would you disagree? I mean, refining capacity is still very tight, right? I mean-

Chris Lafakis:                    Oh, absolutely. I mean, we went from 88% refining capacity to 94.5%, which is where we're at right now.

Mark Zandi:                      I see.

Chris Lafakis:                    What I was referencing is the decline in the crack spread from June to July. So when that July CPI print comes out, you're going to see some relief from energy for... Energy's actually going to be deflationary for the first time since the invasion of Ukraine on that July CPI report.

Mark Zandi:                      I do think the refining capacity is a big deal, because I mean, one of the threats in my mind is we get a cat five hurricane blows through the Gulf, wipes out a refiner on the Texas coast for, I don't know, three, four, five takes it all flying three, four, five, six weeks. We got a big problem at that point, right? I mean, crack spreads, gap out, gas prices go back over $5 a gallon. I don't know. It feels like that's enough to push us in given-

Juan Fuentes:                   Inventory levels are very low for gasoline and diesel.

Mark Zandi:                      Very low. This keeps going back to Chris's threes point that we might make our way through if nothing else goes wrong, but... So, if I forecast, say, a year from now that the energy CPI is flat zero contribution in inflation, does that sound about right to you? I mean, it could be lower, but do you think... It could be higher obviously, but what's the best forecast? Basically flat, Chris?

Chris Lafakis:                    I would go flat. If not, price declines, because-

Mark Zandi:                      Price declines.

Chris Lafakis:                    We have... There's very, very strong incentive to produce crude oil, and to refine crude oil. A lot of it, there's just a lot of uncertainty with respect to what happens to Russian oil supply. I mean, I can construct really bad scenarios where the EU cracks down really hard. Russia can't resell the oil to anybody else. Then OPEC countries have tapped out in terms of their excess capacity. Then we don't go into recession, and then where does the oil supply come from in 2023? I can construct that scenario very easily, but I think that the most likely scenario is probably for energy prices a year from now to be consumer energy prices to be close to where they are right now.

Mark Zandi:                      All right. Fair enough. Okay, good. Thank you for that. Let's move on to rents, CPI for housing services. Hey, Cris, I'm going to call on you. You're really good at this. Explain to me how we measure the CPI for housing services. It feels... Well, I know it's quite complicated, and this feels a little weird compared to everything else in the CPI. Do you want to discuss that for a little bit, and what it means for how inflation right now for housing?

Cris deRitis:                       Sure. I'll try to give you an abbreviated version. It is quite complex, so we can be here all day. Essentially... Well, housing is a bit different than other goods in the economy, in the CPI, and that a house has both consumption and investment value, right? The objective of the CPI, why we construct the consumer price index is to price the changes in the consumption value of the goods and services that consumers are purchasing, right? Ideally, we want to ignore or abstract the investment component of housing, and focus just on the consumption component.

Cris deRitis:                       There's this concept of the consumption value of housing that the BLS has come up with, which essentially looks at rents, first of all. So for renters, it's pretty easy, right? If you're renting a house, the price change for you in terms of the housing services you're consuming is the rent change itself, right? I don't think there's any dispute or any real question if you're thinking about someone who's renting. The deeper question is for those households that own their property, so the owner-occupied properties. They're not paying a formal rental payment every month.

Cris deRitis:                       How do you capture the value or the inherent price of their homes? The BLS has actually gone back and forth on a couple of different methodologies. So originally prior to 1983, they actually used a user cost concept. It's like, "Hey, if you own your home, you have to pay mortgage, so there's mortgage interest expense. There's property taxes. There's maintenance. Other expenses that you have, we can simply look at those, and measure the change in those on year over year or a month over a month basis. That can proxy as the change in the housing service."

Cris deRitis:                       That was fine for a while, except that right around the early 1980s, of course, there were a lot of new mortgage products that came online. Adjustable rate mortgages became more popular, so that impacted their methodology. Prior to the early '80s, you had the FHA controlling much of the mortgage market, so things were fairly homogenous and standardized. You could look at those user costs, and get a pretty decent approximation of what the price or what housing prices were looking like, our service prices were looking like.

Cris deRitis:                       But as we got those new products, mortgage products, and as the FHA lost some of its market share, things got much more complicated. The BLS switched over to a method that involves this concept of owner equivalent rent, where essentially, they will look at homeowners, and try to approximate what the homeowners would be paying in rent if they didn't own the homes outright. They do that by essentially surveying the broader rental market, right? They look at about 50,000 properties in their survey. They collect data on those rents, and then they normalize or standardize those rental values by excluding utilities, and trying to account for quality adjustments just as they do with all the other prices.

Cris deRitis:                       Then separately, they conduct a survey of homeowners to get an understanding of what homeowners believe is the value that they could rent their homes out for. They use that survey in order to calculate the weights that they use in the CPI itself, so the 23%, 24% weight that is attached to owner's equivalent rent comes from this separate service. It's a bit convoluted as you can gather here, but the idea, again, fundamentally is to try to approximate the value of the housing service itself, and abstract that from the appreciation in home values, which are investment or capital assets.

Mark Zandi:                      Here's the thing that I find interesting if I've got it right. Food prices rise 10%. That means for the typical American household, they're shelling out 10% more to buy food. I mean, it's coming out of my checking account, or it's going on my card. I got to shell out this cash. For housing, for homeowner's equivalent rent, for people who own their own home, which is 25% of the CPI index, a big chunk of the index, that's not true, right? Because most homeowners, their monthly mortgage payment doesn't change month to month. They have a 30-year fixed rate loan or a 15-year fixed rate loan, or they have no mortgage at all.

Mark Zandi:                      In fact, people don't realize this, but a lot of people don't have a mortgage. They're older. They paid down their mortgage. They never had... They paid with cash, whatever. So for them, the increase in consumer prices for housing services doesn't reflect an increase in their cash outlays, how much they have to spend each month, and therefore no impact on their ability to buy other stuff on their purchasing power, right? Is that right?

Cris deRitis:                       That's true. I guess I would explain that as just in some sense, there are different weights, right? The CPI is this general aggregate measure. There's actually no one that actually consumes... No household actually consumes the goods and services in the CPI index with the weights that are assigned. It's this aggregate. It's this aggregation. You could certainly have a different measure of inflation for the homeowner that owns their property outright than the renter. There's that aspect that all inflation is personalized, so the weights may differ, but I think there's also more a conceptual question in terms of what you're trying to measure.

Cris deRitis:                       The fact that you own your home, and you're not making an explicit payment every month, that doesn't mean that there's no value to the housing services that you have consumed that month. It depends on what we're trying to [crosstalk 01:04:30].

Mark Zandi:                      No. No. I hear you. It's just that we often... Ryan has this great statistic. For the typical American household, they have to shell out $496, is that right, per month, more-

Ryan Sweet:                      93.

Mark Zandi:                      ... $493 more a month in the month of June to buy the same goods and services that they bought last year because of the 9.1% CPI inflation. That isn't exactly true, right?

Ryan Sweet:                      [crosstalk 01:04:57] rent.

Mark Zandi:                      Because for the homeowners, they're not shelling out anymore than they did a year ago. In fact, Ryan, I think we might want to calculate that. That would be cool, actually.

Ryan Sweet:                      We can do that.

Mark Zandi:                      Because we use the CPI to calculate "real income." That's the purchasing power of the consumer, and we're probably overstating the hit to purchasing power from using the CPI because of the way we're measuring things on housing. Is that fair to say?

Cris deRitis:                       I think it depends. There's still an opportunity cost, right?

Mark Zandi:                      But it's not cash coming out of the bank, right?

Cris deRitis:                       No, it's not cash coming out of the bank, but you can generate all sorts of exam... So if a person owns their house, and sudden they move. All of a sudden, now they have a payment, right?

Mark Zandi:                      Of course. That's [crosstalk 01:05:51]. You make a good point. I just find that it's a really fascinating question, interesting. But actually, most importantly, what's going on? I mean, rents are... Market rents, forget about the CPI, market rents have been rising double digit year over year everywhere. Now, it's bleeding into the CPI measure, and adding to overall inflation. Why? What's going on, and where are we headed?

Cris deRitis:                       That's right. The impact of rising rents takes time or enters the CPI with a lag, because again, the survey that the BLS conducts is of all current rental properties given that leases typically are a year or more. Even though the rent on new properties or new leases may be increasing, it takes some time for that to bleed in to the prices that all households are facing. House prices have been rising. Through some research that I and others have conducted, it takes about five, six quarters for house price increases to translate into rental increases. We're in for sustained rental increases in the CPI for a while here, probably until this time next year.

Cris deRitis:                       This month, rental payments rose by 0.8%, so that's up from the 0.6% last month, so you still have the effects of the rises in housing prices and the amount of demand that's out there for rentals persisting. That is having an effect. I expect that to continue to contribute to CPI over the next year, probably adding a point, point and half each month.

Mark Zandi:                      Got it. So no reliefs there anytime in the near future. Certainly not by this time next year.

Cris deRitis:                       No. No. Even if we go into recession, again, because of the lags in the [inaudible 01:07:53].

Mark Zandi:                      Stop with that recession talk, please. I mean, come on [crosstalk 01:07:55].

Cris deRitis:                       Even the lags are going to continue to persist for a while.

Mark Zandi:                      Here's what I want to do, because this is already have been... It's been a very informative podcast, but it's getting a little long in the tooth. I mean, I'm not sure people can, because we're going into the DNA here on some things. Let's do this. I want to eat... I want you Chris, you Ryan, and then I will give a forecast for top line CPI inflation. We're at 9.1 In June. What are we going to be in December of this year? What are we going to be in December of 2023, and when are we going to get back to the Fed's inflation target, which is we've talked about is 2.5% top part of the range for the CPI?

Mark Zandi:                      Then after we're done that, let's go play the game. The game... Here, I'm going to mix it up a little bit, because we got a lot of folks on the call. I'm going pick on... Does everyone have a statistic? Do you all, guys, everyone have a statistic? I think we might use Mike's already. I'm not sure, but I might call on you, and see if you got a statistic for the game. Is that okay?

Ryan Sweet:                      That's fine.

Mark Zandi:                      You up for it? I know you're up for it, Ryan. You [inaudible 01:08:56].

Ryan Sweet:                      I'm always up for it.

Mark Zandi:                      All right.

Ryan Sweet:                      It's the highlight of my week.

Mark Zandi:                      I see Chris is like, "Deer's in the headlights." Are you okay playing the game, Chris?

Cris deRitis:                       Oh yeah. Oh yeah. I'm trying to come up with-

Mark Zandi:                      Not you. The other Chris. You, I know. The other Chris. Can you play the game, or are you not prepared?

Chris Lafakis:                    No, I can play the game. It's just that-

Mark Zandi:                      Fine.

Chris Lafakis:                    We're going to play the game. Then we weren't going to play the game, and now we're going to play the game.

Mark Zandi:                      I know. Well, I changed my mind. I'm allowed to do that. Mixing it up a little bit. All right, Ryan, what is the forecast for top line CPI inflation here? What do you think?

Ryan Sweet:                      End of this year, we'll be close to 6%, and then December of 2023, this is under the assumption. No recession.

Mark Zandi:                      No recession.

Ryan Sweet:                      No recession. We'll be down to 3%.

Mark Zandi:                      Three. When do we get back to the Fed's target, 2.5%?

Ryan Sweet:                      First half of 2024.

Mark Zandi:                      First half, that's fair enough. That's a little bit ambiguous, but we'll go with it, first half of 2024.

Ryan Sweet:                      All right, March 13th at 4:00 PM.

Mark Zandi:                      That's much better. Very good.

Ryan Sweet:                      All right. There you go.

Mark Zandi:                      So, 9.1 in June of this year, six, December of 2022, three, December of 2023, and March, we're back to 2.5%.

Ryan Sweet:                      Correct.

Mark Zandi:                      Cris.

Cris deRitis:                       This is uncanny, 6% end of the year was my prediction as well, and then I had 2.75% for end of December.

Ryan Sweet:                      Two decimals.

Mark Zandi:                      That is quite precise.

Ryan Sweet:                      That's a lot of confidence.

Cris deRitis:                       [crosstalk 01:10:46].

Ryan Sweet:                      You said I had. I mean, you have a forecast written down.

Cris deRitis:                       No. That's what I wrote down.

Mark Zandi:                      Oh, you wrote it down.

Cris deRitis:                       I wrote it down.

Mark Zandi:                      Then when do we get back to 2.5 then?

Cris deRitis:                       I like March. I put down April, but...

Mark Zandi:                      Oh, you put down April.

Cris deRitis:                       On that time period.

Mark Zandi:                      Man. Well-

Cris deRitis:                       We're in sync.

Mark Zandi:                      Mine is actually a little higher, seven percent-ish December of this year. 3.5% by the end of 2023. We don't get to 2.5 until May of 2024. But having said that, it feels like we could see a period of actual decline, and then it comes back up again or something because of the swings and enterprises are related. Well, we're all roughly the same, and we're all going to be wrong, it feels like probably. Hopefully not. That's the baseline outlook though. Very good. One thing we didn't talk about, and I don't know that we have time to really belabor it, but the other reason I feel reasonably confident that inflation's going to get back down in that kind of trajectory is inflation expectations, what people think inflation's going to be in the future.

Mark Zandi:                      That's key actually to where we're headed in here going forward. At least in the measures of inflation expectations that come out of the bond market, they seem to come right back into the Fed's target if you look out a little further. Here's the other thing. I just want to... Maybe I'll just throw it out there just related to expectations, get any feedback that you have. My sense is that... This is just talking to people. Obviously, I've seen a... I remember you guys don't remember the high inflation of the '70s and '80s. I remember that, because that it was my formative years in school when I was learning economics.

Mark Zandi:                      Back then, the psychology was, as I recall... This is my family psychology. We need to buy it now, because if we don't buy it now, it's going to cost us more in three months and six months. We would actually buy forward because we were fearful that we would have to pay more just a few months later. That's not the psychology, I think, people have today that, "I'm not going to buy now, because I think it's going to be priced lower in the future." Take a vehicle. Most people aren't going to buy a vehicle, I don't think, if they don't have to today, right, Mike? Because I think most people think they're going to... because it doesn't make sense that used vehicle prices are high as they are. Would you agree with that?

Mike Brisson:                    Not exactly.

Mark Zandi:                      Oh really?

Mike Brisson:                    I think people don't think prices are going to come down right away, and if you need a car right now, you need a car. But if I have a time, I'm not going to buy it now if I need it next year.

Mark Zandi:                      All right. Cris and Ryan, do you have generally the same view on inflation expectations and how they...

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      All right.

Ryan Sweet:                      I mean, the only thing where people are buying now, even with prices, is housing. That's the only area.

Mark Zandi:                      Even there, I don't-

Cris deRitis:                       Well, that's changing.

Mark Zandi:                      That's changing fast.

Ryan Sweet:                      Well, because of mortgage, but not around us in Philadelphia.

Mark Zandi:                      I think it... Well, I think the smart money's already decided to go on the sidelines. The investors, they...

Cris deRitis:                       I think the new homes definitely.

Mark Zandi:                      Oh, new homes. Absolutely.

Ryan Sweet:                      Oh, new.

Cris deRitis:                       [crosstalk 01:14:26].

Mark Zandi:                      The builders are discounting very aggressively already. All right. Very good. Let's play the game. The game is we each come up with a statistic. The best statistic is one. The rest of us try to figure that out through questioning and deductive reasoning and cajoling the person with the statistic. Best statistic is one that is not so easy, that we all get it too quickly, not so hard that we never get it. Obviously, it's related to the topic at hand, which has been inflation. That would be a bonus. With that, let me start with Ryan, because Ryan's the maven at this, and I'll let him lead the way. Go ahead. Give us your numbers.

Ryan Sweet:                      Minus 61%.

Mark Zandi:                      I know what that is.

Ryan Sweet:                      There is no way. No.

Mark Zandi:                      I do indeed know what that is.

Ryan Sweet:                      Oh wait, did you have another presentation with [inaudible 01:15:19]?

Mark Zandi:                      I know what that is. I want-

Ryan Sweet:                      What is it?

Mark Zandi:                      I want multiple cowbells when I tell you what that is, multiple, multiple. I want you each to get out of your cowbell right now.

Ryan Sweet:                      Now, I'm looking up some commodity price that... I got to [crosstalk 01:15:31].

Mark Zandi:                      I want a cowbell ring.

Ryan Sweet:                      I hear it.

Mark Zandi:                      Cris, where's your cowbell, man?

Cris deRitis:                       All right. All right.

Mark Zandi:                      Are you ready? Ring it for me. Ring it. I didn't get the answer yet. I'm so confident in this. My 61, that is the percent of small businesses say the economy's not going... It's going to suck six months from now. Should I use that word? That was a bad word.

Ryan Sweet:                      No, it's fine.

Mark Zandi:                      It's fine.

Ryan Sweet:                      All right.

Mark Zandi:                      Am I right, Mr. Sweet?

Ryan Sweet:                      You're right. There we go.

Mark Zandi:                      There we go. There we go. Very good. Jesse, what do you think of that? Are you impressed by that, or what? Does that make you think any better towards me?

Ryan Sweet:                      Don't do it, Jesse. Don't feed into it.

Jesse Rogers:                    I don't know. I'm thinking.

Ryan Sweet:                      Mark's Zoom box is going to have to get bigger and bigger.

Jesse Rogers:                    I'm thinking least of the cowbell now. I mean, you got it on the first try, and it was barely a ring. I mean, do you have an-

Ryan Sweet:                      I'm doing it for over a year.

Jesse Rogers:                    Do you have an air hoard and post production we can add? I was like, "pew, pew, pew" for Mark getting that on the first try.

Mark Zandi:                      I'm all for that. Very good. I love Jesse. I really love Jesse.

Ryan Sweet:                      Did you look at this?

Jesse Rogers:                    Is there-

Ryan Sweet:                      Historically, when it's minus 20%, we're in a recession. It's minus 61%.

Mark Zandi:                      Far away record low, right?

Ryan Sweet:                      By far. So if you look at [crosstalk 01:16:49] around-

Mark Zandi:                      There's a magnitude.

Ryan Sweet:                      ... the great recession early 1990s or early 2000s, 1990s, this thing is by far... They're very, very pessimistic. I mean, you make the point all the time that a recession's a loss of faith.

Mark Zandi:                      Loss of faith. Of course, we do know that sentiment, it's... Correct me if I'm wrong, but that small business survey tends to be very conservative, Republican dominated response.

Ryan Sweet:                      Particularly that question, you're exactly right. We've looked at it. At least historically when there's a Democrat in your office, it understates economic activity. When there's a Republican, their expectations overstate future economic activity. But if you... I was working on this. If you adjust it, it's still beyond that 20% threshold. Businesses are pretty pessimistic, and you may start to see signs of that showing up in jobless claims in industrial production.

Mark Zandi:                      All right, Mr. Lafakis, you're up. What's your statistic?

Chris Lafakis:                    Hey, my statistic is 12 million.

Mark Zandi:                      12 million.

Ryan Sweet:                      Energy related?

Chris Lafakis:                    Energy related, yes. Barrels.

Ryan Sweet:                      Barrels.

Chris Lafakis:                    You're getting close, so the unit is million barrels per day.

Mark Zandi:                      12 million barrels per day. Interesting.

Ryan Sweet:                      European related?

Chris Lafakis:                    No. It's a U.S.-related statistic.

Mark Zandi:                      Is that what's in inventory.

Chris Lafakis:                    It's not inventory.

Mark Zandi:                      Is it... It's not related to oil inventories.

Chris Lafakis:                    It's not an inventory, bigger but...

Mark Zandi:                      Oh, that was pretty evasive.

Chris Lafakis:                    It is oil related.

Mark Zandi:                      It's oil related, but not related to oil inventories.

Chris Lafakis:                    Correct.

Mark Zandi:                      Correct. 12 million barrels a day, but we consume 19 million barrels a day or a little over 19 and a half million barrels a day. Is that-

Ryan Sweet:                      Is this what's left in the SPR?

Mark Zandi:                      No, it's a lot more than that.

Chris Lafakis:                    No. No. That's about 600 million barrels.

Mark Zandi:                      600 million, that's a lot of barrels.

Ryan Sweet:                      Per day?

Chris Lafakis:                    No. No. Not barrels per day.

Ryan Sweet:                      I'm wondering if you adjusted it.

Mark Zandi:                      I know they're pulling out one million barrels a day from the SPR, because that's what the refiners can actually process. That's interesting. 12 million barrels a day, is it related to demand in some way?

Chris Lafakis:                    Not really. It's production.

Mark Zandi:                      No. All right. Yes.

Chris Lafakis:                    It is production.

Ryan Sweet:                      I was about to say we're going to need to pull a lifeline here, and get Juan Pablo.

Mark Zandi:                      Right. I mean, that's actual crude that we're producing, 12 million. Oh, it's not the refined product. That includes... Refined product gets us up closer to... We had this conversation before I know.

Chris Lafakis:                    Yes.

Juan Fuentes:                   It's crude oil production.

Mark Zandi:                      Crude oil. Chris, correct me if I'm wrong, and Juan Pablo. The number of rigs continues to rise slowly, the number of rigs that are out there in the fracking field. Is that right?

Juan Fuentes:                   Yes. There was a very interesting statistic that I saw in the latest Dallas survey. 95% of oil executives say that they're facing shortages, like labor equipment. That's holding them down.

Mark Zandi:                      It's increasing, but actually, the trajectory looks a little slow, relatively slow for norms.

Juan Fuentes:                   It's very slow

Mark Zandi:                      Very slow. Good statistics.

Chris Lafakis:                    [inaudible 01:20:51] the barrier versus regulation?

Mike Brisson:                    I don't know. I could have picked the crack spread because, I think, it's very interesting. The diesel crack spread, it was over $100 per barrel of oil. Now, it's fallen to around 40 for diesel, which is significant and has implications for July inflation, but we already talked about that. I think what's interesting though, and the direction that I wanted to lead us down, is the idea of our U.S. producer is going to respond to the very strong price incentives they have. That 12 million barrels per day of production, that's in the weekend in July 8th.

Mike Brisson:                    That's up from only 11.8 million barrels per day at the end of last year in the weekend, in December 31st. So despite the rig count has progressively increased, the low hanging fruit in the shell patch has already been picked, and so you have to incrementally drill more to achieve the same level of production that you would've maybe four or five years ago. But I do think that we're reaching a point where U.S. oil production will start to respond in a meaningful way to the high price environment that we have.

Mark Zandi:                      Got it. Got it. Very helpful. Cris deRitis, what's your statistic?

Cris deRitis:                       I'm going with a fun one to lighten things up here, 199.2.

Mark Zandi:                      199.

Ryan Sweet:                      199.

Cris deRitis:                       Well, I'll make it even more direct, $199.20.

Mark Zandi:                      $199.20?

Cris deRitis:                       And 20 cents.

Ryan Sweet:                      All right.

Mark Zandi:                      Is that how much more a month people are spending on their gas bills than a year ago?

Cris deRitis:                       Nope. Nope.

Mark Zandi:                      Nope.

Ryan Sweet:                      Wow. That'd be a lot.

Mark Zandi:                      It's probably pretty close, right? I would think that's pretty close. Probably.

Ryan Sweet:                      Maybe.

Mark Zandi:                      Actually, I think it's $199.20.

Ryan Sweet:                      Is this related to your vacation?

Cris deRitis:                       These are always about me, so yes, so [crosstalk 01:22:58].

Mark Zandi:                      Is the increase in spending due to some form of inflation?

Cris deRitis:                       No. No. It's...

Mark Zandi:                      No?

Cris deRitis:                       No.

Mark Zandi:                      All right. Is it something to do with inflation and prices?

Cris deRitis:                       It's prices.

Mark Zandi:                      Prices, so what's worth $199.20?

Ryan Sweet:                      Cris's shirt.

Mark Zandi:                      Chris's what?

Ryan Sweet:                      His new shirt.

Mark Zandi:                      His new shirt. He wears those.

Cris deRitis:                       [inaudible 01:23:22].

Mark Zandi:                      I think I said Howdy Doody shirts, right? They're a Howdy Doody.

Ryan Sweet:                      All right, let me think.

Chris Lafakis:                    Is it a commodity price, Cris?

Cris deRitis:                       It is.

Mark Zandi:                      Oh.

Chris Lafakis:                    The coffee?

Cris deRitis:                       It is. You got it.

Mark Zandi:                      Oh, way to go, Chris Lafakis.

Cris deRitis:                       Very good.

Mark Zandi:                      Where's the cowbell?

Ryan Sweet:                      It's right here.

Mark Zandi:                      I thought that was pretty good. There you go. Explain that, Cris deRitis.

Cris deRitis:                       Coffee prices are actually falling. They're down 15%, so that bodes well for the future CPI print. Roasted coffee was actually up last month. So presumably, those lower coffee futures will bleed in. I thought that was useful.

Mark Zandi:                      Pretty cool. Very good.

Ryan Sweet:                      It looks like Cris is in such a good mood.

Mark Zandi:                      At least something's falling in price. There you go.

Ryan Sweet:                      That's why Chris is smiling. It's not his vacation. It's coffee prices are coming down.

Cris deRitis:                       I don't know about hazelnuts, but coffee [crosstalk 01:24:19].

Mike Brisson:                    Hazelnut espresso.

Mark Zandi:                      Hazelnut is always worth the price you pay. [inaudible 01:24:26] to say.

Chris Lafakis:                    I got a hazelnut latte right here.

Mark Zandi:                      There you go, Chris, [crosstalk 01:24:31].

Chris Lafakis:                    But my finished consumer price went up by 48%. I was just telling this guy before we started recording. All of a sudden, I was telling my wife how cheap it was compared to Starbucks. The next day, it went up 48%.

Mark Zandi:                      Oh geez. That's great. That's a good story. All right. We got to end this thing.

Ryan Sweet:                      Wait, you don't have one?

Mark Zandi:                      What's that? I do. I really, we... I mean, this is really... I don't... This has been going on for a while. I do want to say... I've got a good one, but I'll save it for next week. It'll still be relevant. Quickly, odds of recession, next 12 months, net 24. Cris deRitis, what are they? What's yours, and have they changed?

Cris deRitis:                       They have changed, 50 and 65.

Mark Zandi:                      Oh no. Oh no.

Ryan Sweet:                      Yours had to change.

Mark Zandi:                      Who's you?

Ryan Sweet:                      Yours.

Mark Zandi:                      Why? Because of the yield curve?

Ryan Sweet:                      Your favorite that you [inaudible 01:25:27].

Mark Zandi:                      No, I haven't changed yet. I'm not... No, not quite yet. I need another week. I'm at 40 and basically even odds.

Ryan Sweet:                      The yield curve is the most inverted-

Mark Zandi:                      So 40% next year, basically even odds, but you're right. I'm getting a little uncomfortable, because of the yield curve, but we'll come back to that next week. You, Ryan?

Ryan Sweet:                      Haven't changed. Well, 65.3. I'm nudging really, really close, getting closer.

Mark Zandi:                      Oh no. One year, 65, and you're actually lower over a two year, right?

Ryan Sweet:                      Yeah, because if it's going to happen, it's going to happen in the next 12 months.

Mark Zandi:                      That's interesting. We can... Cris, you missed it last week. We discussed that, but we'll definitely come back.

Cris deRitis:                       So, yours is incremental? I thought we were within 12, within 24.

Mark Zandi:                      Oh.

Ryan Sweet:                      I see what you're saying.

Cris deRitis:                       Maybe I have been doing everything wrong.

Mark Zandi:                      Oh no. [crosstalk 01:26:16]. Well actually, we'll have to define it more clearly next time.

Cris deRitis:                       Yes. Yes. Define terms.

Mark Zandi:                      Good point, actually a good point. We're going to call it a podcast. Again, Cris, what's your Twitter handle?

Cris deRitis:                       MiddleWayEcon.

Mark Zandi:                      What's yours, Ryan?

Cris deRitis:                       @Realtime_Econ.

Mark Zandi:                      Of course, mine's @Markzandi, @Markzandi. With that, we're going to call this a podcast. I hope you found some interesting value. We'll talk to you next week. Take care now.