[SIMONE DEL ROSARIO]

Inflation came in as expected in November, but that also means that inflation is climbing. Consumer prices in November rose 2.7% on an annual basis. That’s up from October’s 2.6% rate, and the second straight month that we’ve seen inflation climbing.
I want to bring in Milton Ezrati. He’s the chief economist at vested Milton, as we’re digesting the numbers this morning, what is sticking out to you?

[MILTON EZRATI]

Well, what struck me was less it came in expected slight uptick. But what struck me as I looked at the month to month numbers, the jump from October to November, and that accelerated, so that if you take an annual rate for what happened in that month, we’re talking about 3.6% overall inflation, a little more for food at home, which is important politically, although it’s less urgent than it was a month ago. Politically, the so that that’s worrisome, and I think that’s going to affect our friends at the Federal Reserve.

[SIMONE DEL ROSARIO]

I was looking specifically at the food as I first got these numbers, as we are seeing those upticks. Grocery is up point 5% on the month in November. Compare that to October, when it only rose point 1% you know, that would be one of the first places that people see their prices rising, right? That’s

[MILTON EZRATI]

certainly the most politically sensitive. The most socially sensitive area, I think the Fed is they, they’ve already signaled that they’re they’re not quite sure the inflation is as well behaved as everyone would like, and isn’t. And and I think these numbers tell us that inflation just doesn’t go away that easily, and that will be a major factor as they meet later this month. I

[SIMONE DEL ROSARIO]

call it the thorn in, you know, the Federal Reserve side. It’s the shelter prices. They’ve been so high and driving so much of inflation for years now. That said the shelter Index increased 4.7% sounds high when you’re looking at trying to get get that 2% target in general, but it’s the smallest 12 month increase since February of 2022. Is there light at the end of the tunnel when it comes to shelter prices?

[MILTON EZRATI]

Unfortunately, I don’t see it. We are not building fast enough. This is a fundamental problem. It’s really almost in addition to the inflation issue. I know it’s impossible to disentangle it from the index, but it is in addition to the inflation issue. The United States has a housing shortage, particularly in the large cities. There’s been a lot of migratory movement, and that is driving up housing prices in areas of the country that 10 years ago had no such problems. So this is this is fundamental, and there is very little light at the end of the tunnel until we increase building and unfortunately, there are certain rent laws in big cities that prevent that. And of course, the mortgage rates are still way up, and that’s preventing people from moving and buying

[SIMONE DEL ROSARIO]

Well, speaking of mortgage rates, what affects that indirectly is the Federal Reserve’s rate decisions. What is the Federal Reserve supposed to do with this inflation report? We’ve got a decision coming on December 18 as to whether they cut rates. The markets to this point have thought that are in our betting that they’re going to cut by 25 basis points, but you have inflation climbing for the second straight month. We had a pretty strong jobs report coming in above expectations, more than 200,000 jobs added. Of course, that was a rebound from what had happened in the month prior. But do they do they question whether they cut rates at this point in December?

[MILTON EZRATI]

Well, I think they do, and I would say that the market, the market expectation that we’re going to have a cut is a little bit of confusion between one’s hopes and one’s expectations. Everyone wants them to cut rates because that drives up asset prices, excuse me, and that’s what the market likes. But the Fed has already signaled two things that they know the economy is stronger than it was when they gave us the dramatic half point cut back in September. And so they say there’s less urgency to cut rates because the economy seems to be doing well and the inflation is ticking up. So I don’t know what the Fed’s going to do. Unfortunately, they don’t confide in me, but if I was sitting at the table with them, I would say, why don’t we pause this a month? And I think there will be several people doing that. I don’t know if that will carry the day, but I think the Fed would be wise, from an inflation expectations point of view, to pause at this point, and that will disappoint the market. Yeah,

[SIMONE DEL ROSARIO]

I’m so curious about how the market is behaving and perceiving this data, I know that it came in as expected. That doesn’t mean inflation is going in the right direction, but from yesterday to today, when we when we ended the day yesterday, the probability of a rate cut was 89% now that the new. Inflation numbers are out, the probability of a rate cut is 98% I mean, the market is really penciling this and or pending it in. They are sure that that rate cut is coming, whereas, you know, I What we’re seeing in inflation is that it is going in the wrong direction. And how long is the Fed going to let this happen while still easing monetary policy?

[MILTON EZRATI]

You’re on point. The Fed has said, effectively Powell in almost direct language, although the Fed never speaks in direct language, he said, in almost direct language, we’re counting on the on the the effectively lagged effects of what we’ve done to bring inflation not just down, and it’s going in the wrong direction, as you point out, but to bring it in below 2% which is what the Fed wants, and everything they’re getting for the last couple of three months is that that’s not going to happen quite as easily or as naturally as they think. Indeed, as you point out, it’s going in the wrong direction. That certainly is going to stay their hand, and I would say what I would describe the market’s intense expectations of a rate cut is really an urgent hope of a rate cut. It’ll

[SIMONE DEL ROSARIO]

be interesting to see how this plays out. I’ll be very curious to hear Jerome Powell’s comments when they make that rate decision, if it is, in fact, a rate cut, why they believe that it’s, you know, worth continuing to go down this path. Next year, we’re going to be getting a lot of economic changes in this country. We have a new administration coming in is promising tariffs and other economic changes. Do you expect that to impact inflation at all? Actually,

[MILTON EZRATI]

I think it will more more than inflation. It will affect inflation expectations. Trump is talking about tax cuts. He’s talking about no tax on tips is a minor factor. No tax on Social Security is a big factor. He’s talking about that that is going to increase the deficit. Now he may argue and with some justice, that in the long run, this will help, but in the short run, it’s going to mean bigger deficits in the budget, and it’s going to be more pressure on the Fed to monetize those deficits, which the Fed has trouble resisting, especially when it’s under pressure from an active White House. That’s a euphemism. So I think that the market’s going to see inflation, not inflationary pressure, the of the kind we had back in 2021 but it’s going to see more more reason to fear inflation than it would have otherwise. And does

[SIMONE DEL ROSARIO]

that mean higher rates for longer it means that

[MILTON EZRATI]

the Fed’s going to have more trouble justifying the cuts, and if the Fed gives us the cuts, there are going to be a lot of economists, both in the administration and outside it, saying this is feedings a future inflation. You’re giving away the get the ground you gained with your active anti inflation policy after 2022

[SIMONE DEL ROSARIO]

let’s, let’s put it in a hypothetical of a 3% inflation or so. Is that the trade off? Is it a fair trade off for more growth?

[MILTON EZRATI]

That’s a political question. I would say it might be. The trouble with a 3% inflation now is that it turns to four if you if you push the needle too hard, and so for the moment, you could say, All right, we brought it down great deal from where it was in 2021 22 where 3% isn’t that bad. I can see a lot of arguments at the Fed and in various decision making bodies in the White House and elsewhere in the government to that effect. But in the long run, if you don’t bring it down. If you don’t act with discipline, which the Fed has shown of Since 2022 if you don’t act with discipline, you’re going to have more inflation. And that is the great danger of this. And on top of that is the danger that people in the marketplace will start to expect the inflation, which becomes a self fulfilling prophecy.

[SIMONE DEL ROSARIO]

Yeah. Well, you look the Federal Reserve yet has yet to hang that mission accomplished banner on inflation. I know they want to do that, and they were careful not to call it that. As we were getting closer, it’s going the wrong direction. Now, we’ll have to see how they react in a little over a week. Thank you so much. Milton is ready. We really appreciate it. Chief Economist at vested, thank you.