Prices keep rising as 'the inflation genie' keeps getting loose: Economist

FWDBONDS Chief Economist Chris Rupkey joins Yahoo Finance Live to analyze the core PCE print from April and the workforce conditions amid inflation and debt limit talks.

Video Transcript

JULIE HYMAN: Let's talk more about inflation data here. Core PCE coming in hotter than expected. Up 0.4% in April compared to the expected 0.3%. As the Fed's preferred inflation gauge, this print will weigh heavily in the June meeting, as we were just discussing.

Joining us now, Chris Rupkey, FWDBONDS chief economist. Chris, thanks for being here. Inflation, it will not come down as fast as anybody would hope. And, in fact, we saw a reacceleration in April here. What's the Fed going to do?

CHRIS RUPKEY: Well, they really want this core PCE inflation consumer inflation to come down to about 3 and 1/2% by the end of the year, which means the monthly increases have to run 0.3% on average. And we didn't get it. We got 0.4% today. We do get a look at CPI before the Fed makes their next decision.

But the market in the days running up to today's report is already betting on a rate hike at one of the next two meetings to 5.5%. And a 5.5% Fed funds rate, the core inflation is 4.7. Our rates really restrictive at this level of even 5 and 1/2%. That's why you hear some people talking about, well, back in the '80s, they would have gotten interest rates much higher than inflation, which in today's terms would mean something like 6% or 7% for the Fed funds rate to slow the economy.

DIANE KING HALL: To your point, Chris, could you see us hitting 6% before the year is out?

CHRIS RUPKEY: Well, I think the Fed kind of knew this all the way along. They were secretly hoping that somehow inflation would come down. Don't forget Powell said himself that he was surprised how inflation moved from goods to services. And now, it's stuck in services. But that's what happens when you let the inflation genie out of the bottle. Prices just keep on going, unless you get interest rates to very, very restrictive levels.

And I think if they would have come out even six months ago and said, we need to push the Fed funds rate to 6% or 7%, obviously, people would have freaked out. So it's a gradual process. But if the Fed does pause, they fall further behind here. And they risk that they need to push interest rates to 6% or 7%.

At this point, I can only see a hard landing. And the hard landing to bring down inflation. And the hard landing is not going to happen without a significantly higher federal funds rate, unfortunately.

JULIE HYMAN: Chris, why isn't inflation coming down more? Is it still a supply issue? Is it just a demand Issue? What is going on?

CHRIS RUPKEY: I think this is what happens, once it gets out, again, I hate to use the inflation genie all the time, but once it keeps getting out, it moves from consumers back to businesses, consumers get more wages. Because they look back and see inflation, and they ask their bosses for a raised to match inflation. It just becomes so circular. It's very, very hard to break that. Don't forget in the '70s, they had campaigns from the President to whip inflation now and stuff like that.

It's just very hard in people. Sometimes, governments will lean on corporations and say, why are you raising prices? And corporations will say, well, my costs are going up or wages are going up. It becomes so circular. It's almost impossible to break it. This cycle of passing on price increases from one entity to another without a sharp slowdown in the economy, meaning, basically, a recession.

We don't really have any experience with inflation falling without a recession or a near recession miss, if you will, which means in the old days, it meant more joblessness, higher unemployment rate.

JULIE HYMAN: And I got to ask you one question that's a cloud hanging over everything right now. What is the risk that you see to the economy? Although, it looks like we will have a deal with regard to the debt ceiling deal or debt ceiling negotiations, I should say, right now.

CHRIS RUPKEY: We've seen this back in 2011. And it's nice to hear a debt deal's coming. But part of me just doesn't want to believe it. It's so complicated. If we get it through the House somehow with Democratic votes, you still need 60 votes in the Senate. Maybe it'll all go well. But part of the Congress thinks we have a spending crisis. And they're willing to risk a debt default to get spending down.

I have to admit total outlays are like what. $6.3 billion, $6.3 trillion expected this year. And they're arguing over like, $700 or $800 billion of non-discretionary fiscal outlays. Only 10% of the total outlays. So part of the electorate's going to be very angry about government spending. And it just seems like it's going to be very difficult here. They're going to push.

I did go back-- it wasn't widely known at the time. But, obviously, Washington officials would be remiss, if they didn't take a look at what to do, if there was a debt default. And they had put plans together back in August 2011. And I assume those plans are there, again, where they could prioritize budget outlays. They don't want to do it. But they would certainly roll over the debt that comes due.

And they would pay out all interest on Treasury securities. I think they'd have that plan in mind. Now, if they talk too loudly about that, that's just going to embolden the deficit hawks, the spending hawks on the other side of the aisle, the Republican side.

It's a mess out there. I think it's going to be quite bumpy here in the next couple of months.

JULIE HYMAN: Yeah. Janet Yellen certainly has been doing the opposite saying how dire it is going to be. So she definitely has not been talking up that emergency plan, if you will. Chris Rupkey, thank you so much for your perspective, FWDBONDS chief economist. Appreciate it. Have a great weekend.

CHRIS RUPKEY: You too.