Apollo Chief Economist Torsten Slok Talks Energy Shock, Inflation
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Bloomberg Audio Studios. Podcasts, radio, news. We're pleased to welcome Torsten Slocke. He is chief economist at Apollo for this macro conversation. And Torsten, you heard what Mike was saying about inflation expectations, and we see that in some measures. What are you thinking about inflation expectations? Because there's market-based measures. There's also survey-based measures. It's not really time to worry until everything points in the same direction, right?
Well, and the key issue is that, of course, headline inflation is showing signs of higher inflation. That makes total sense because headline inflation also consists of food and, of course, importantly, energy. Core inflation expectations, we don't quite know yet what they are doing.
What are the current inflation expectations and their implications?
But what we do know is that when you look at various other sentiment indicators, including today we've got consumer confidence also starting to go down. If you look at the daily indicators for consumer sentiment from Morning Consult, it's also going down for low-income consumers. middle income, and high income households. But the key issue at this point is that if you look at the actual spending, the daily data for how many people travel on airplanes is still good. The weekly data for Redbook same-store retail sales, meaning what was sales in stores last week relative to the same week a year ago, is actually also still very strong, and what you're also seeing, even hotel demand on a weekly basis from Star, is also very strong.
Both RevPi is strong, the daily rate is strong, the occupancy rate is strong. So there's a very different divergence between what are consumers saying relative to what are they actually doing. So at this point, the duration of the shock has simply not been long enough to actually create that demand destruction that we all worry so much about.
Right, and in fact, if you look at longer-term inflation expectations, and you see that within University of Michigan sentiment survey today, those are well-anchored.
Absolutely. So both on a market basis and a survey basis, long-term inflation expectations are very, very stable and have not shown any signs of going up. In fact, some of them have actually started to go down. So exactly, the Fed would mainly worry about our markets getting worried about inflation becoming out of control. Maybe yes in the next year. We can call that transitory, temporary, whatever we want to call it. But it's very clear the market is saying this is absolutely something that's only here for a very limited time. And then we will go back and have inflation expectations at the longer run, more stable level.
Now, the one difference here between the Wall Street folks and the Fed folks is perhaps the inflation indicators they're looking at. CPI has been going down and it'll obviously on a headline basis go up. But PCE, even without oil, has been rising. And that's the index that they follow. When you listen to Fed folks, they're not talking about rate increases yet, but have they pretty much wiped out the idea of any rate cuts this year? Because the Bloomberg survey today showed economists think we're going to see a rise in inflation, but we're still going to see two cuts before the end of the year.
Absolutely. and what was also very interesting in the ECFC Go Bloomberg survey was that the probability of recession actually went up from 25% to 30%. So we're almost looking at more bifurcated distribution where either you worry a lot about inflation being higher and potentially above three now for a very extended period, meaning at least the next several quarters, Or alternatively, people are beginning to worry about that maybe there is a harder landing that is also potentially an outcome. So that distribution tells you exactly what the problem is for the Fed. Namely, they worry on the one hand about inflation being high, but they also worry about if the labor market begins to deteriorate, including, of course, also if AI puts upward pressure on unemployment.
How is the energy shock affecting consumer sentiment?
And all those factors are, of course, the challenges for the Fed, namely how much should they put a weight on inflation relative to how much weight should they put on the risk that the labor market might begin to deteriorate over the next several months.
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