January CPI: ‘Disinflation is the theme,’ economist says

Wells Fargo Chief Corporate Economist Tendayi Kapfidze joins Yahoo Finance Live to discuss January CPI report data, disinflation, Fed rate hikes, discretionary spending, and the outlook for the economy.

Video Transcript

JULIE HYMAN: Well, year-over-year US inflation cooled slightly in January, down from 6.5% in December to 6.4%. However, last month, inflation month-over-month rose by about 0.5%, accelerating from 0.1%. It was driven up by shelter costs. Here to break this all down is Tendayi Kapfidze.

He is Wells Fargo Chief Corporate Economist. And it is a pleasure to welcome you back in-studio. It's been a while, Tendayi. It's great to see you.

TENDAYI KAPFIDZE: Yeah, good to be back.

JULIE HYMAN: So how should we be thinking about today's CPI report? We know that the Bureau of Labor statistics change the weighting within CPI, so shelter now makes up more of it.

TENDAYI KAPFIDZE: Yeah.

JULIE HYMAN: But, I mean, how concerned should we be?

TENDAYI KAPFIDZE: I think the interesting thing with shelter having a higher weight is that this month, it contributed about half of the increase in the CPI. And we know from kind of private industry rent measures that shelter has been declining for about five or six months, right? Because of the BLS methodology, they kind of operate on a bit of a lag.

So you can be pretty certain that shelter is going to be decelerating throughout this year. So that's a positive, I think, in terms of the outlook for inflation.

BRIAN SOZZI: Are you on board with this notion that we will continue to see just steady disinflation in this economy?

TENDAYI KAPFIDZE: Yeah, I think disinflation is the theme, right? I think the question is, what's the speed of that disinflation? How quickly can you get to a point where the Fed is comfortable that they have inflation under control? So that's kind of the outstanding question.

But I think, certainly, disinflation is the theme, especially, again, with rents being half of this month's inflation. And we know from private data that rents are trending down.

BRAD SMITH: And so with that in mind, for consumers who are trying to maximize their wages, even as disinflation is something that they might start to expect, then where might that spending start to shift into other categories, especially as discretionary spending has basically come off the table for a lot of households right now?

TENDAYI KAPFIDZE: Yeah. I think the theme that we've been seeing over the past year will probably continue this year, right, where there's, like, less spending on goods, more spending on services. Some of the good news in this report, right, was that airline inflation was down, right? So travel, and vacation, and those type of things, maybe we're seeing some easing of price pressures in those areas.

But yeah, it's all about services spending. People bought a lot of stuff during the pandemic. Maybe people don't need to buy stuff so much and they're more focused on experiences.

JULIE HYMAN: Yeah. We've been seeing some data to that effect too. We talked to a William Blair analyst earlier in the show who talked about that people are spending-- a lot of people are spending as much, if not more, to go out as they did pre-pandemic. So if we're looking specifically at non-shelter services inflation, which we know the Fed has been paying attention to, what should we read into it as to what the Fed is going to do with interest rates?

TENDAYI KAPFIDZE: Yeah. So I think the good news, again, in this report was that we saw a deceleration in non-shelter services inflation. It's still probably too high, right, for the Fed to be comfortable with. So once again, it's about the pace of the decline in inflation here. And I think that's what the Fed is going to be watching closely as they consider monetary policy going forward.

BRIAN SOZZI: When do you see the Fed pivoting on policy?

TENDAYI KAPFIDZE: By pivot, do you mean pausing or do you mean cutting?

BRIAN SOZZI: Pausing. Pausing.

TENDAYI KAPFIDZE: Well, you know, I think, certainly, of course, in March, they're going to have another hike. I think May is questionable, right? Right after we got that really hot jobs report in January, we saw that the market kind of put May odds at, like, 73% for another hike in May. I would question that a bit.

We get three more jobs reports between now and the May meeting. And we know that the January jobs number had a number of special factors-- you know, seasonal adjustment changes, you know, benchmark revisions, et cetera-- that I think that number was a little bit murky. And if you look before January, we had five straight months of decelerating job growth. So I think what you want to watch for in February, March, and April jobs is, do those confirm the January hot number or do those confirm the decelerating trend that we saw before January? And then I think that's going to be the deciding factor for the May meeting.

I think with CPI, if we start to see this rent kind of play out over the next couple of months, maybe we get some deceleration there. So I don't think May is a lock in terms of a hike. I think it's in question and it's going to be data-dependent as the Fed often likes to keep telling us.

BRAD SMITH: What do you believe is going to be the Fed's way of determining that after they kind of initiate that pause, even, or at least the deceleration in the amount or the breadth of rate hikes that they have been doing in that policy, how will they look to some of those trends to say, OK, we're out of the woods or we won't see another spike in inflation in the near future?

TENDAYI KAPFIDZE: You know, I think if you continue to see deceleration-- again, I think once you start to get a 2 handle on inflation, I think you get more comfortable, right? The Fed obviously won't come out and say that they're shifting away from the 2% target. But I think once you start to see a 2 handle, maybe you can be a little bit more comfortable.

And then you kind of balance the mandate a little bit more in terms of not focusing so much on inflation, you can keep an eye on the labor market. It's pretty hard right now, it's not going to be hot forever, right? At some point, the labor market is going to become a concern.

JULIE HYMAN: So let's come back around to a question about recession, and soft landing, et cetera, right? Because the narrative keeps sort of shifting and the consensus keeps shifting. Where are you on that question right now?

TENDAYI KAPFIDZE: Yeah, so I think you can get a contraction right without a recession. We saw that early last year where we had two negative quarters of GDP, but the labor market was still really hot, right? So I think there's been a lot of distortion in the economy from COVID and from the monetary policy changes that happened during COVID and afterwards that a lot of the correlations and relationships that we're used to watching in the economic data, some of those have changed, right?

So I think what you can get is you can get pockets of weakness in the economy at different times that aren't necessarily coordinated or concurrent in the way that you see in a recession. So for example, the really interest rate-sensitive sectors of the economy are already in recession, right-- for example, housing, right, which reacts very strongly and very quickly to interest rate hikes. But other sectors of the economy are going really pretty hot. So it's a mixed bag. I don't know that you will get the traditional recession call in the cycle, but certainly we'll get kind of weaknesses in different parts of the economy at different times.

BRIAN SOZZI: Great insight as always-- Tendayi Kapfidze, Wells Fargo Chief Corporate Economist. Good to see you. Thanks for coming in.

TENDAYI KAPFIDZE: Appreciate it. Thanks, guys.