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Is the economy headed for disinflation or stagflation?

April consumer price index (CPI) data was released on Wednesday and met expectations with a 3.4% year-on-year increase. The core CPI was also in line with estimates year-on-year, indicating a possible moderation in inflation.

EY Chief Economist Gregory Daco and Peter Tchir, Head of Macro Strategy at Academy Securities, join The Morning Brief to discuss the CPI data and its potential impact on the overall market.

Daco points out that a disinflationary trend is strengthening: “I think that this latest retail sales report, while not alarming, shows that consumers are paying a little more attention over the course of the summer and into the fall “Inflation has plateaued, but nonetheless the underlying disinflationary forces are still very much at play.”

Tchir claims that this report could signal the economy’s entry into “stagflation” territory: “The only final wrinkle that can be thrown into this whole equation is that you start to see some commodity inflation. Everyone talks about copper (HG=F) and things like that.” . Are you not running the risk of stagflation? And I think we can no longer exclude them, especially after we introduced some new tariffs yesterday.

For more expert insights and the latest market activity, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video transcript

In addition, consumer prices rose by 3/10 percent in April, as expected, and futures rose accordingly.

And to learn more about the latest inflation data, we speak to Gregory Daco, chief economist at EY, and Peter Chur, head of macro strategy at Academy Securities.

It’s nice to have you both here with us.

I just want to know my wife’s reaction, Greg, I’ll start with you.

Well, I think overall inflation is heading in the right direction.

We found this one to be softer than expected.

The heading “CP I Print Core” was as expected.

If you look at the underlying inflation dynamics, it still points to that inflation.

It’s a little slower than we expected at the beginning of the year.

But that momentum is still there.

They still see the fundamentals of slower consumer spending growth adding to disinflationary pressures.

And I think this recent retail sales report, while not alarming, shows that consumers are taking a closer look.

This is generally disinflationary.

I think this inflation dynamic will continue and will likely reach a plateau in inflation over the summer and into the fall.

The story goes on

But nonetheless the lying, inflationary forces are still there.

Peter, what do you think the future response is currently?

After this pressure that we have received on CP I and retail sales, we are certainly seeing an increase here.

But what do you think this tells us about how concerned investors are about this possible reacceleration in inflation and the fact that this report may actually start to allay some of those concerns?

Yes, I actually think we’re going to enter a very confusing period where people have been hoping for signs of disinflation.

We’re doing it right.

We’re seeing the economy slow a little bit and so far we’ve been pleased that on the bond side, which makes sense so far, stocks have also gone up as bond yields come down.

I think that’s going to change soon as people start to come to terms with the economic reality, where a lot of economic data is getting weaker.

I like to look at the city’s Economic Surprise index, it’s down sharply and data after data is weaker, such as retail sales.

So I think some of today’s rally in bond yields is due to that rather than CP I, and that it could prove to be a mistake after that as stocks realize that we may have bounced back from no landing to bumpy landing .

What does that tell us then?

Then Peter explained what this action could look like in the next trading days.

So I think bond yields will stay about where they are.

Maybe they go a little deeper.

Maybe they’ll start crawling higher.

We’ve had this 430 to 450 range for the last week or two.

And it’s worked pretty well for 10 years.

So I think that’s leveling off, I think stocks are going through this, you know, rally that we’re experiencing right now.

Then people look around, who will buy it for me, who will buy it next?

Then they worry about NVIDIA’s revenue.

And I think you can see the stock prices fluctuate a little bit.

Getting started with NVIDIA won’t be difficult.

But I think you’re seeing that slow down as people question the state of the economy, and the only final sticking point you can throw into this whole equation is that you’re starting to see some commodity inflation, or?

Everyone talks about copper and things like that.

Are you at risk of stagflation?

This isn’t my base case and I would have dismissed it completely about a month ago.

I don’t think we can ignore this any longer, especially after introducing some new tariffs yesterday.

You know, Greg, I’m not going to ask for your comments on NVIDIA.

Uh, if you want to talk about general AI, which I know we’ve had before.

You are more than welcome.

However, I ask you this question. One of the big questions we ask in this report is whether this would be a report that ultimately changes the Fed’s mind one way or another by September, which is still the earliest case for which we see a cut in December could see.

Does this change your calculations enormously?

Well, I think it impacts how markets view the Fed’s response function.

And unfortunately that’s been pretty exaggerated in the last few months, we’ve seen that really all the data has been over-analyzed in terms of the underlying inflation trend in the labor market.

I think Peter is right when he describes the downside risks to the economy. The economy is slowing, the labor market is slowing, job growth is weakening, which is putting downward pressure on household income and causing them to take a closer look at their purchases. These generally tend to be disinflationary energy prices.

That being said, we continue to see disinflationary forces in the form of slower final demand.

With regard to reduced markups.

We saw that in yesterday’s PP I data, in terms of the moderate wage growth and the continued moderate impact of rental inflation on CP, I combine all the elements that would lead you to believe that the Fed will start easing in the coming months monetary policy will begin when this happens.


It’s not that clear yet, because the Fed and Fed policymakers are a little more concerned about the risk of inflation accelerating again, as Peter pointed out.

But we continue to believe that these inflationary forces are at play and given some softening in the labor market, I still think a rate cut in July is possible in such an environment.

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