Three indicators about the latest inflation numbers, from sticky prices to bonds : The Indicator from Planet Money The economy cooled off a bit, but inflation is still really, really high. But, not all goods and services respond the same to a high inflation environment. Today on the show, we're talking about sticky prices, bonds, and that old chestnut, transitory inflation.

Three inflation indicators

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Hey, you guys. Do you hear that?




Hmm (ph)?

WONG: Crickets, crickets - that is the sigh of relief coming from the Federal Reserve, our central bank. The latest inflation numbers, the CPI, came out earlier this week, and prices cooled off a bit.

HIRSCH: Yeah, that's maybe why I didn't hear the noise because it must be a really teeny, teeny sigh because inflation is still really, really high at 8.5% from a year earlier.

WONG: (Laughter).

MA: Maybe a squeak - is that the sound a Fed makes?

HIRSCH: No, this is the sound a Fed makes - wah wah wah wah wah wah wah (ph) - like this...

WONG: That's what I was going to - I was going to do the Peanuts adult sound, like (imitating the Peanuts adult sound).

HIRSCH: The Peanuts adult sound - that is the sound.


HIRSCH: That's not fair. We love the Fed.

MA: How about another sound for Indicators of the Week?


WONG: Ooh (ph), zippy. I'm Wailin Wong.

HIRSCH: And I'm Paddy Hirsch.

MA: And I'm (beatboxing) Adrian Ma. For Indicators of the Week, what we're going to do is dig into the latest inflation numbers.

WONG: Including, what are sticky prices, and what are inflation expectations?

HIRSCH: Sticky prices - we promise it's not going to get too messy.

WONG: We can't make a promise like that.

HIRSCH: I can make a promise like that. That's coming up after the break.


WONG: Before we get to sticky prices and inflation expectations, I'm here to talk about transitory prices.

HIRSCH: Woah, what?


MA: This is a word that I don't think I've heard in a while because it's been kind of discredited, no?

WONG: Yeah. I mean, I can already sense listeners recoiling when they hear this term because if you think back to last year, the Fed kept on describing inflation as transitory. They said, you know, it's - they're supply chain bottlenecks; they're going to get resolved.

MA: Transitory - so, like, some of these higher prices are just passing through town.

HIRSCH: Like, in transit, baby.

WONG: Yeah. And it's like a houseguest that stays too long. I mean, people were like, these prices don't feel transitory; they feel like they're just going to be here forever. And so by November, Fed Chair Jerome Powell was saying it was time to retire this term.

HIRSCH: So what is this? Wailin Wong resuscitating phrases, bringing them back from the dead against Jerome Powell's wishes?

WONG: Yes. Necromancy is a dark art, much like predicting inflation.


MA: (Laughter).

WONG: But, you know, yes, transitory - this term got a very bad rap. But, you know, what the Fed meant was that they didn't think inflation was permanent - or certain kinds of inflation was permanent. And in this latest CPI report for July, there were some categories of things where the price has, like, gotten sky high during the pandemic, and now they look like they're finally coming down. So here is a lightning round of transitory inflation indicators.

HIRSCH: I'm ready. I'm ready.

WONG: OK - rental cars down 9 1/2% in July from June, hotel prices down 3%, airfares down 8%.

MA: OK. But that's, like, after a huge spike in prices over the last year, right?

WONG: Yes. I mean, these are declines from, like, huge, huge run ups. So, you know, the rental car industry, you might remember, was using terms like rental car apocalypse to describe...

HIRSCH: Apocalypse.

WONG: ...What was going on. And if you've rented a car recently, like I have, you are probably still paying way more than you did before the pandemic. But, you know, if prices for rental cars and hotel rooms and airline tickets keep falling, this could be a sign that some of those pandemic pressures are finally working their way out of the system. These houseguests are finally gone.

HIRSCH: Well, this sounds OK. I mean, some prices falling, but some prices are not falling. Some prices are staying right where they are. And there's a phrase for this, right, Adrian?

MA: That's right. The phrase is sticky prices.

HIRSCH: Sticky prices.

MA: Basically meaning prices that do not respond very quickly to changes in economic conditions. So the prices would not be as volatile as they would be for a lot of the services that you mentioned, Wailin. And so where we often see sticky prices, where we've seen them in recent months, is for booze - you know, alcoholic beverages - and medical care, the cost of hospitals. But where I really think is the prime example of a category of spending with sticky prices is rent.

HIRSCH: Not the musical.


MA: No, not the musical. But no, I'm talking about, you know, like, leasing an apartment. So when you lease an apartment, a lot of times, you know, it's for a term of multiple months, often a year at a time. And so your rent is not going to change from month to month. And that is what makes rental prices sticky. And that is why, you know, when they say overall inflation over the last year has been 8.5%, it's only been 6.3% for rental prices. And that's my indicator for this week - 6.3%.

HIRSCH: OK. So, you know, I get the idea of the term sticky, but it doesn't really seem to fit here when you think about how rents have actually continued to rise in recent months.

MA: Yeah, yeah. I mean, it's totally true. Like, sticky is kind of a relative term, and it really describes the period when rent is locked in. But when a lease comes up for renewal, that's when the prices become unstuck, and you can see big hikes in rent. And this is, like, a trend that we have been seeing all across the country - rents really on the rise. And, you know, on a national level, when you look at it over time, it kind of seems like rents only go in one direction, right? When you look at the CPI's rental index last month compared to a decade ago, it is 40% higher.


WONG: Oh, my gosh.

MA: One thing I would also add is that maybe we haven't seen the worst of it yet.

WONG: What?

HIRSCH: Great.

MA: And the reason I say that is because the CPI's rental index is - you know, it's what they call a lagging indicator. It tells us kind of where prices have been going up until this point, but it doesn't tell us where they're going to be going in the future. And September is just around the corner. We're in this period of the year where leases are turning over. It's sort of a peak season for that. And so we're going to see more prices become unstuck, getting stuck at that new higher price. But those haven't registered in the CPI index yet, and so we won't really know how high they've gotten until next month.

HIRSCH: Wow, there's a lot of ups and a lot of downs, which means, to me, a lot of uncertainty. And of course, we know what uncertainty does to the markets. It messes with the market's emotions. So I think it's time for me to put my therapist's cap on and ask us, how do we all feel about this?

WONG: Well, how do you feel about this, Paddy?

HIRSCH: Actually, I'm going to outsource this to the Federal Reserve of New York first.

WONG: They don't have enough to do.

HIRSCH: They haven't got enough to do. And they actually polled consumers who said they think inflation will run at 6.2% this year and an average of 3.2% over the next three years, which is a lot lower than what it is right now.

MA: That's a kind of rosy prediction.

HIRSCH: It really is a very rosy prediction, especially compared to the bond market - that is the people who lend money to corporations and the government by buying their debt. These people are feeling a little better about things but no way as good as consumers or, for that matter, stock investors who jacked the market up this week on the news. And you can divine the bond market's emotions by looking at the spread between the two-year and the 10-year Treasury securities. That spread has narrowed recently, but it's still cheaper to lend money short term than it is to lend it long term. And of course, we all know what that means.

WONG: The yield curve is still inverted - well, at least the 2/10 yield curve, anyway.

HIRSCH: The yield curve is still inverted. This means, of course, that borrowers are still nervous about the short term, and they want to be compensated for short-term risks, including inflation. And this is a signal that bond investors, the debt investors, are a long way from being convinced that this lovely news that we got about inflation is a turning point for anything about inflation or otherwise.

MA: Such a bummer, man.

WONG: Bond market doesn't care about your feelings.

HIRSCH: No, we're still on feelings. And the people whose feelings we really want to know about, of course, are the 12 voting members of the Federal Open Market Committee, or the Fed, if you prefer. As we all know, the Fed has been hiking interest rates recently to take the heat out of the economy - the aim, of course, being to bring inflation down and loosen the labor market up. Well, inflation may be a tad lower, but it's still way above the 2% target rates. And the job market is still super tight - 3.5% unemployment is much, much lower than the 4.1% that Chair Powell said he'd like to see back in June.

WONG: I guess that means he's still going hiking.

HIRSCH: He's still going hiking - plenty of time. All Fed members are lacing up their boots, and they're breaking out the foul-weather gear because they feel that conditions, while they may have eased a little bit, are likely to remain pretty dicey for a while. And how do we know that they feel this way? Because they tell us. Even the most optimistic members of the board are saying it's far too early to declare victory on inflation. They're saying we're going to see, at the very least, a half-point increase in the base rate in September, quite probably three-quarters of a point. The pessimists on the board, meanwhile, are advocating for a lot more than that. So when it comes to the Fed, we can expect a lot more of the same for quite some time.


WONG: This episode was produced by senior producer Viet Le with engineering help from Maggie Luthar. Kathryn Yang checked the facts. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.




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