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Fixing supply chain problems won’t ‘necessarily get rid of’ inflation: Economist

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JP Morgan Chief U.S. Economist Mike Feroli joins Yahoo Finance Live to discuss inflation, Fed tightening, supply chain concerns, and the outlook for the economy.

Video Transcript

BRAD SMITH: Welcome back, everyone. Inflation rose again in April. Consumer prices, that CPI index, it increased by 8.3% from a year ago, higher than expected and still sitting near 40-year highs. Joining us now with more, we've got JPMorgan chief US economist, Mike Feroli. Mike, good to have you here with us. Help us break down the numbers from your perspective. And particularly, I wonder how much of the inflation that we have seen-- a lot goes into the prices-- how much can be resolvable through what we've heard on the supply chain front as well.

MIKE FEROLI: So I think part of the issue with today's number is that you saw the strength not only in the headline number, but really, the core number. The Ex. Food and Energy number was up 6/10. And in particular, you had some really strong gains once again in rental inflation measures. So that's not necessarily a supply chain issue that I would expect to be resolved anytime soon. I think that's more a matter of just the underlying strength of the economy, the strength of wages. This looks like a more of an entrenched inflation problem.

Now, you do continue to see some special factors. For example, airfares were up something like 18% on the month, not on a year ago basis, just sequentially on the month. A lot of that is the pent-up demand for COVID related things. And you just continue to see some strong gains in new vehicle prices. That's probably partly a supply chain issue, but again, where you're seeing just a lot of breadth in terms of the price increases. So I don't think resolving a few supply chain problems is going to necessarily get rid of all the inflation like we saw-- of the type we saw today.

JULIE HYMAN: Hey, Mike, it's Julie here. So what I've been trying then to wrap my head around is the effectiveness and the timeline of the Fed raising rates. In other words, the Fed just raised rates 50 basis points. It's going to presumably continue to do so, at least the next meeting, if not next two meetings. When does that-- how does that help with airfares? It doesn't help with food, I guess, but with other of these fundamental factors we're talking about. And when does it start to help?

MIKE FEROLI: So, look, Fed actions happen through a variety of channels, right? It's not just-- I mean, one thing is going to be higher, mortgage rates. That should cool some of the demand for housing. Housing prices have been obviously running very hot. The stronger dollar should help relieve some price pressures through cheaper imports. So there's a variety of channels by which Fed rate hikes should cool overall demand, right? And so there's certainly supply chain issues. But prices are determined by the intersection of supply and demand. And so cooling off aggregate demand overall should help.

You know, when I think is a tougher question. There's a famous saying that monetary policy affects the economy with long and variable lags, which is sort of a way of saying sometime in the future. We don't know exactly how long. But I think in the second half of the year, we should begin to see some of the impacts of higher interest rates on economic activity. And then as economic activity cools with some lag, we should expect to see prices cool off. But I think expecting impacts within a month or two is probably going to be a little-- asking a little bit too much for the effectiveness of monetary policy.

BRIAN SOZZI: Mike, is the US economy already in a mild recession?

MIKE FEROLI: I don't think so. We saw just last week that as recently as April, we were adding 400,000-- over 400,000 jobs. And that's less than a-- data that's less than a month old. And it looks like momentum remains pretty strong. Certainly, the weekly jobless claims data suggests that the labor market remains pretty healthy. So I don't think we are in a recession. Again, also some of the high frequencies, things we look at suggest consumer spending remains pretty robust. So I think right now, it feels like we're pretty far from a recession. At least, most of the data we're looking at remains pretty vigorous.

JULIE HYMAN: So, Mike, on that point, I'm always interested in sort of disconnects, right? And it feels like we have a fundamental disconnect right now between the economic growth that we are still seeing, the market reactions, consumer sentiment, et cetera, that there's these sort of disconnections in reality, sentiment, et cetera. I mean, when does that, though, affect each other enough that it pushes and crimps growth to a higher degree?

MIKE FEROLI: Right. So I think some of the market signs that are flashing yellow with respect to future inflation risks relate to the fact that the market understands that the Fed is going to be raised. As you pointed out earlier, it's going to be raising rates aggressively, probably for a couple more meetings at least in the future. And then after that happens, the impact of that on the economy, which may be felt late this year or sometime in the next year, does kind of raise a recession risk when you kind of look out at least to next year.

And I think some of the market pricing, whether it's in credit markets or interest rate markets, indicates a bit of concern about a recession for next year. I don't think you're seeing that same concern reflected in markets about recession very imminently. I think if recession were imminent, people probably wouldn't expect the Fed to keep raising rates into a recession.

Now I think one of the other disconnects you mentioned is with respect to consumer sentiment. And I think it really depends on which consumer sentiment gauge you look at because some sentiment gauges asked a lot more about labor market conditions. Those remain pretty buoyant.

The ones that reflect more financial conditions and spending conditions and sensitivity to prices, those are the ones that are very depressed because people, while they're upbeat about the labor market, they're very disturbed by the prices they're having to pay. So I think that accounts for some of the disconnect you're seeing in the various consumer sentiment measures.

JULIE HYMAN: Mike, it's good to see you. Michael Feroli is JPMorgan chief US economist. Appreciate your take on what's going on with inflation in the economy right now. Thank you.