Are We In A New Inflation Regime?

[MUSIC] This is StreetSignals, a weekly conversation about markets and macro brought to you by State Street Markets. I'm your host Tim Graph, head of macro strategy for Europe. Each week we talk about the latest insights from our award-winning research, as well as the current thinking from our strategists, traders, business leaders, clients, and other experts from financial markets. If you listen to us and like what you're hearing, please subscribe, leave us a good review. Get in touch, it all helps us to improve what we offer. With that, here's what's on our minds this week. [MUSIC] After the most recent shot to energy markets, inflation is front and center once again as a key risk for policymakers and for markets. The closure of the straight-of-war moves complicates the successful but somewhat sluggish return of inflation back to target in many economies. And the impact it will have in both the short and long run is still very much up for debate. And so that's where it's handy to be able to fall back on our work with price stats and its co-founder, Albert Tokavalio. For those unfamiliar with that work, price stats scraped daily retail price data from dozens of countries around the world. As a means of giving policymakers, economists, and macro observers a faster moving compliment to the official measure of inflation. Jay Powell himself has been on record as looking at this. And Albert to join us this week to discuss recent trends in prices and the broader topics of inflation regimes and price behavior. It's also a chance for us to promote his appearances at a series of research events we're hosting across Asia, North America, and Europe in the coming weeks. More on that at the end. But for now, enjoy the discussion. >> Hi, Tim. >> Hello, my friend. How are you? >> Good, and you? >> All right, end of the week. So very good. >> Right. >> Want to play week? >> Yeah, very volatile, very good, and then maybe not so good. >> I'll see. >> Well, Albert, it's great to see you. I mentioned in the introduction, we've got a bunch of research events that you'd be speaking at soon. I have seen your presentation for that. We're going to hit on a few things from that. There will be some overlap, but really, I don't want to cannibalize those presentations. So this is a bit more, maybe, of a general conversation to start with. And so I wanted to spend a few minutes at first on things you won't probably be covering. And you know, you've been on the podcast many times. We've talked about tariffs, energy price shocks, the supply chain disruptions during the pandemic. We will talk about this current energy price shock that we're experiencing, but just to start off with, thinking about the work you've done the last kind of six or seven years. Do you have a strong sense or opinion on whether the inflation regime more generally remains just structurally higher than what we saw prior to the pandemic? >> I think we're doing the podcast again. So to answer your question, not necessarily higher. I do think the inflation regime is more sensitive to shocks, which makes it more volatile. So my sense is that firms are adjusting prices more frequently, post-pandemic. That means that the shocks that we see, like the energy shock or the tariff shocks, it gets reflected faster at the retail level. And that's, I think, something that is fundamentally different. It has been changed over time. I actually wrote about this in 2018 paper. I wrote for the FITS, a Jackson Hole conference. So even before the pandemic, we were noticing these trends of more flexibility in the system. And I think COVID and the pandemic in the US and also in other countries exacerbated these trends. So firms learned how to adjust prices more frequently. They're now using technologies that allow them to monitor their costs better and make decisions faster. All these issues have contributed to a more sensitive inflation environment and more volatile. It's interesting when you look at the price that's data about this. For example, price that has these weighted global index for 27 countries. And having inflation picking around 7% in 2022, it came down quite quickly to 3%. In 2025, and if you look at the latest numbers, it's back up there at 5%, within just a month or so. So there's a lot of volatility in this new system we are experiencing. And I think that's where we should focus on. Do you think there's the psychology, I guess, has maybe changed as well? I'll talk first about retailers, particularly whether they anticipate price changes more effectively. Not so much that they obviously can pass them on more easily as you alluded to. But do they anticipate changes a bit better? Do they change pricing strategies based upon more of the macro outlook than they might have say in years past? I don't know if I would call it necessarily psychology, but it's definitely a matter of attention. People are paying attention when you move into an environment that is more volatile and tends to generate spikes in inflation. People will pay more attention. It's a well-known historical trend that we've seen it before in many countries that normally suffer high inflation. When it matters, let's say when these shocks are large and they tend to matter, people will pay attention. I think that's the key difference that we're experiencing now. In addition to the fact that the technology has facilitated a huge amount of lower costs, let's say, for making decisions, for finding out information and making those strikes changes. It's both technology and attention, I think, are leading to this environment. Would you say the same thing about the consumer itself? It grabs attention everywhere. I'm just curious. Especially, I think there's some data you've looked at in the past with respect to volumes. You know, retailers or sellers, I know during the pandemic, really went for this price over volume strategy where they just felt that the demand's going to be there no matter the price and so they can take advantage of the situation. It feels like, and I think the commentary in earnings calls has changed such that they've moved away from that. Is that down to you think to consumer patterns changing as well? Yes, the consumer also reacts and changes its focus and attention as well. You live in a low inflation environment, you don't think about these things very often. But talk to anyone that comes from a country like mine, like Argentina, when inflation is high, we're always thinking about it. In attention as a consumer, you're looking for options. Many of the interesting patterns we have detected during the pandemic in terms of inflation in the quality, for example, have a lot to do with consumer reactions. We have seen people shifting some of their demand to lower price goods, which has led to what I term, cheap inflation. This idea that cheaper goods are having more inflation than premium varieties when you get hit by shocks like this. It's because the consumers get a sudden shock that reduces their real incomeiness in essence and they have to figure out how to adapt and that attention that they put leads to behaviors that have an implication on many, not just on inflation itself, but also on many patterns and behaviors that are internally internalized by the firms. It's an environment where unfortunately I'll say it's kind of unproductive because when you have to think about how you protect yourself for inflation, you spend less time figuring out other things that might be more important for the economy. Hopefully, we will never get to the point that inflation becomes like normally easing countries like Argentina. I am very optimistic that, for example, some of the transverse seeing lately will improve soon. But again, I think it's an issue of attention and how important it is to be in touch with what's happening, both at the consumer level and also at the firm level. Yeah, actually, there's a side bar I want to go down that since you mentioned Argentina. I mean, the emerging markets generally, and I think Argentina probably fits this bill as well, more specifically, have come out of the pandemic with a lot more inflation-fighting credibility, or at least their inflation responses in this most recent episode have been more uniform relative to each other, but then also relative to developed markets. And I'm just wondering if thinking about inflation regimes, if you've observed something similar in the work you're doing that EM inflation is maybe a little bit less challenging due to the credibility that's been built up, or if again, has nothing really changed part of the pandemic with respect to those economies. You know, what has really changed is what is happening in developed countries. We were not used to worrying too much about inflation in developed countries, and now all the attention is here. So it looks like developing countries have less of a problem. But in fact, I think the Iran shock will have, in the long run, more problems for developing countries in terms of inflation than what it has for developed economies. And the reason I mention that is because developing countries are more likely to get hit by a ripple effect on food, on fertility or cell costs, and their consumption baskets are more effective, being a weight for those categories. So there are some developing countries that could suffer more and for longer than developed economies. And that's just me, you know, big picture, I think it's just that it's not that their developing countries are necessarily better off. It's just that the developed economies have done so much worse in terms of inflation lately. that it feels that way. I want to park those thoughts on the current environment for a moment and just a few more questions about, especially about price stats itself. It has been this alternative data measure that we relied on and worked with you on for about, I think, close to 15 years now. And alternative data just more broadly, both during the pandemic, but also during the shutdown got a lot more attention and price stats itself was array, cited in a press conference by Jay Powell. Can you talk a little bit about your experience working with the public data agencies and how they're adapting and using measures like price stats? Well, both central banks and also statistical agencies, I think they're increasingly using online and private sector price data and other sources of data. Mostly as benchmarks, they like the fact that they tend to anticipate what will happen with the future indicators. So kind of early indicators and sometimes simply as a way to validate their views. I think the next step will be for them, particularly the statistical agencies to more systematically integrate high frequency data into their measurements. That has been happening very, very slowly, but I get a sense that it may accelerate particularly because the technologies are also becoming easier with AI and other developments to incorporate now. So I think we are at that, perhaps at an inflection point here where we will see more of these more advanced measurement technologies being incorporating. And that would be a great thing because obviously the official CPI is the important indicator, but it has all these lags and these fixed collection structures in the data that makes it less useful when you get big shocks like the one we are experiencing right now. So if you look at the price stats, monthly measure of inflation in the US, we saw it spike very quickly to about 1.5 last month. The CPI came in at 1%, and I think it hasn't really shown the full extent of the increase, but by the time those numbers come up, you're going to see the new numbers at price stats which have actually shown that it's already coming down. So in moments like this, if you are a policy maker, you really want to have a complimentary high frequency indicator. And I think statistical agencies and central banks are realizing this is their important next step. And I'm sure they'll eventually get there. Yeah, I mean, one of the things we've always talked to clients about, and I'm sure the work you've done over the years has highlighted, is some of those anticipatory effects. And I'm curious because that is for our clients especially, not only the daily nature of the data, but the fact that it does tend to lead the trends in sort of shop prices, the official measures as well, the officially captured prices. And I was thinking again, very holistically over the last 10 or so years, 15 years that we've been working with the data to the wag or lead relationships change a lot in your experience. So not really, not the lag itself. The only data has always tended to anticipate a bit the moments in official indices. And it's partly because they're delays in the data collection and publication of official data. Part of it is also that online, changing some prices online may be cheaper than doing the enough line. In general, many of these companies we monitor, these retailers tend to have this uniform pricing policies, line and offline. And that has always been the case actually since we started 15 years ago. But it has happened though, is that more and more data, more information has been published online over time. So the lag has not gotten shorter, but the difference perhaps, sometimes within the basket that can be included in the online data and the offline data has merged because the markets are becoming more integrated, more information is available online. So that's the biggest change I would say over time, which is good news because it also helps statistical agencies realize that basically up to now nearly 90% of the goods in the basket are available. I'm talking only about goods, there are always services and and enhancing particular that are excluded from the baskets. But I would say that's the biggest change there. The kind of integration of online and offline has allowed more information to be available online and can be replicated with that kind of aid. Yeah, and thinking about how it's evolved geographically, I mean, you look at the US series, it looks fantastic. Like a CPI X shelter measure, overlaid on the price status is a really, really strong fit. So, geographies or economies specifically have made the greatest improvements, do you think, in data collection, as well as where can we measure more effectively in countries that maybe five, six years ago it just wasn't as possible. Yeah, so usually developing countries where the online markets have become larger, we tend to see more, more goods, you know, China in particular, we've been producing a Chinese index for almost, I think, 14, 14 years. But initially we couldn't get the whole basket of the CPI, so we started with a food and then gradually started adding other sectors. So in general, developing countries are becoming more well-covered, although there are still some locations where this is still very hard to do. And price that's also is interested in markets that obviously attract the attention of investors and also even there may be some countries that are interesting, but not for investors in those cases, there hasn't been much, much covers. But the data is there, the availability to do this is there and I think it's becoming more of a norm these days to try to leverage the high frequency nature of these data. So, one last question about policymakers statistical agencies. You talked about their adaptation and using complementary data for their process, but also that they might start embracing the methodologies a bit more. In terms of what you see in your work and your consulting with them, is it a similar kind of scraping methodology as price stats or are there other techniques that might be of interest to people in terms of how data is collected that are starting to find a lot of favor? So, there always been alternative data sets that they've considered coming from different sources, you know, scanner data sets, for example, that get collected by supermarkets, but they tend to have some limitations in terms of the sectors that can be covered. They're also administrating data sets that they've tried to use. My sense is that they're becoming more open to using all kinds of data. It's usually important for statistical agencies to control the data collection themselves. So, they don't like to rely on others collecting the data for them. And I think there are valid reasons for that, no? So once they can manage to incorporate internally some of these skills at data collection, I think we will see faster progress happening. And like I said at the beginning, AI is certainly going to facilitate that process in the next few years. We're going to do some current events now. And again, for people listening, I can't stress this enough, we're only going to scratch the surface here. The things we're going to talk about will also probably change between now and when Alberto will be presenting at our research events to clients the next few weeks. So for those who are able, there's still plenty of time to register for those events in the Americas and Europe. But so let's talk about then, Alberto, the current trends in price stats. And I'm thinking here especially about the energy price shock. Are you alluded to this before about the rapid nature of pass through? You mentioned it in the context of the US, but is it a more general sense of rapid pass through of energy prices to headline inflation? Yeah, so the Iran case can be compared to what happened at the Ukraine war as well when we were monitoring these very closely. And let me just say, from just a fuel perspective and fuel impact on Hitler inflation, this one has been a worse episode. So fuel prices in many countries rose more than what we saw in the Ukraine period and they did so faster than that. But I also say that some of that has subsided in the last few weeks. Another piece of good news is that we have not seen much of an effect yet in other categories, particularly on food. If you compare this to the Ukraine war, at that time we had the direct impact of the war on gas prices, on fuel prices. But we had also started to see a pass through quite quickly on food and that's in part because a 30-large their prices were going up. In the case of Ukraine, the shock was understood more as also as a shock that would affect grain production. We are not seeing that now interestingly yet, but one of the points I want to make is that for now Iran seems to be a fuel inflation story by itself and the pastor is limited to other sectors perhaps because some price hitters and firms are thinking this is a short term or temporary type of event on the Ukraine war and that are being. But it is a different scenario. Interestingly, fuel has had more of an impact, food has had less of an impact. Overall, if you look at the behavior of the indices on the aggregate, they look quite similar between Ukraine and the Iran shock in the aggregate for now. But it's a good sign. that we are still not seeing much by stirring through other categories. Is that the case for more granular data? And here I'm not thinking about the headline food prices, but you mentioned fertilizer and other inputs into the food production process, I guess. Do we have any good way of capturing that? And is that sort of second order effect? First of all, is it something you're looking for? And is it something you're seeing any evidence of not food, but the inputs into food, I guess? Yeah, so we are looking into it. You know, you can think of the oil shock potentially having a direct effect through fuel. That's what's very clear in the data so far. And then indirectly, it could affect, for example, food, be a fertilizer effect, then prices going up for fertilizers, which is in the production of fertilizers, you need fossil fuels. But that is not something we are yet seeing across the board at least. There might be a couple of countries in the data where we are seeing more inflation, but overall, there's not much happening. There's a third channel, which would be transportation, affecting the distribution of all kinds of goods. And that could end up having an impact on things that are more like core goods in the CPI. But for that to happen, I expect there should be the perception that we're going to be in these for more than just a couple of months. This will be a persistent increase in transportation costs. It's not there yet, in part because it might be harder to detect. It hasn't been that much time for us to see. But I do think the perception is that potentially the world will be over by the time those would have started to matter. One other question on energy prices. It's sort of been a conspiracy theory of mine that when you get energy price shocks, retail gas prices have asymmetry to them. Or sort of downward price rigidity as in the fall in energy prices does not translate as quickly or to the same degree that a similarly sized rise in energy prices vis-a-vis retail gas prices would be. Is there any evidence of that that you see? You mentioned energy prices are starting to come off with the price of oil lower and retail prices are starting to reflect that. Is there an actual downward price rigidity for energy, do you think, or can you see that in data? No, usually not for energy gas prices go up and down and they fall out closely. Oil prices are very flexible type of pricing and it's reacting to supply in demand quite a lot. In fact, I'll tell you I wrote a paper on Canadian tariffs complimenting the work I had done in the US. And the interesting thing about tariffs in Canada is that they were imposed and then they were removed on September of last year. So we could see this asymmetry in the case of tariffs and we don't find a significant asymmetry price is actually ended up falling back down to the levels they had before roughly at the same speed. And in general, these stories of asymmetry they can happen but it's usually because if you put yourselves in the shoes of the retailer, they might be suspecting that inflation is going to continue going up. So if you are in an positive inflation environment, you increase prices and then if you suddenly get at the climbing cost, you might be thinking, well, I can remove them, you know, drop them right now. But eventually I'll have to bring them back again so they may decide and not to not to do it. It's more common those asymmetries in countries that tend to have this positive inflation rates, these trends that are persistent and therefore retailers tend to try to account for that in their pricing. You know, if there's no sustained demand, if they don't think people, for example, have had increases in the nominal wages that justify now a higher price level, firms will drop them and it's not particularly for energy is not a very key asymmetry. Okay, good. I'm glad my conspiracy theory is wrong. That's very good. One last question about the current price environment with respect to this particular conflict. As you mentioned, core goods prices have not really responded yet. We have sector series data for the US, especially that reflects that to some degree, but there is one sector that stood out to me. And it's more just a very recent phenomenon and that was recreation and electronics products we can look at prices of that. And that does look a little bit stronger at the moment and was curious as to why that might be. I mean, I can come up with my own theories, but I was wondering if you had any thoughts on what what's driving that that could well be the these effects on transportation and energy production filtering in gradually, but it hasn't been particularly strong. Yeah, just say that's why I don't I wouldn't flag it and necessarily as a as a bit concerned right now, but certainly that's where some of these transportation effects could be filtering in. Of course, some people may think, well, this may actually have to do with some delayed past or from the times there were some sectors where there was some delays, but roughly by the beginning of this year, much of the pressure due to tariffs had already subsided. So if we start seeing more inflation and corgots, I would mostly think it's coming a sounding direct effect of the energy show. Yeah, that tariffs was exactly there was a sort of way of segue into the next section that was behind that question. I mean, there is also I think the notion of chip demand being so strong that the you know, there's maybe shortages and that that drives it up, but but tariffs actually you hit the nail on the head with kind of where I was thinking of going. And those effects of tariffs echoing through prices the headlines and there's more tariffs that were struck down by a trade quarter against today or yesterday. A lot of the IE per tariffs have already been struck down by the Supreme Court and I'm just wondering if you can characterize you mentioned a lot of the effects already now having passed through. If you can characterize whether obviously headlines can change and we have someone who likes using tariffs so that channel can always come back in some form or another, but just if you could characterize what prices look like with respect to tariffs and the work you've done. Yeah, so you can you can see some recent numbers we posted over a paper in the website of the HBS pricing lab. It's been updated until a couple of weeks ago. And if you look at the whole time series what was clear from the types effect is was that prices did react quite quickly to new we did get this upward pressure happening through much of 2025 and then around October. Things start to cool down the pricing disease sort of stabilise and lately they have recovered or more normal downward trend for this type of goods many electronics for example coming from from China. My sense is that that actually coincides pretty well with the moment where the Trump administration started announcing some trade deals and then we had these rumors that the Supreme Court was going to. And struck down the tariffs which eventually happens at the beginning of this year so there's a clear change in expectations happening at the end of 2025. Now what we do in the paper is we calculate how much of a tariff change we see at the border how much of a price change we see at the retail level we emphasize that this is what we call the. Past ruined percentage is being about a quarter of the tariff reflected at the retail level but that does not mean that there's you know if I tell you there's been a 25% pass through doesn't mean that there. A lot of of pressure still in the system because the end results may may not may never be 100% past or no and so we do we did some analysis in the paper and some new recent stuff we did was trying to specifically look at every dollar that the importer has paid how much of that. It has been seen at the retail level and for that you really need to understand the supply chain how much you know of the final cost of the good is imported goods versus just distribution and margins of for every dollar paid at the border for the three cents have been paid by consumers by March of this year that number had been a recent about 76 77 cents so much of the pressure had already disappeared the consumers are already seen and paid for most of the tariff at that point and that's why I think the pressure that was left was was was minimal there's a share that will be absorbed by firms anyway. So we've seen about a 6% absorption by the foreign exporters. So by the beginning of this this Iran war my sense was that the past from tariffs was already sort of complete. Got it well just again I don't want to get too much into what you're presenting don't want to give away the secrets of want people to come out and see you but can you give a quick overview of things maybe we haven't talked about today that you're going to be talking about in your presentations around the world in the coming weeks. So will be highlighting both the world what's happening with tariffs and the pressure that we saw there will be highlighting a lot of what what's happening with fuel prices we're working on better like the identification of the fuel pass through into other sectors like you were asking me before. So this is academic work I'm doing in collaboration with price that's in in essence you know we are leaving through this and the show has just started. But even if it stops right now the effects are likely to remain for many months so we'll keep an eye on it tried to measure it better and and tell people about what's going on that's that's going to be the focus. Fantastic well Alberto as always brilliant to talk to you we didn't scratch the surface really as as we noted though Alberto is doing something like a world. tour of his work. Starting with research events in Asia this week, next week he'll be back in North America and at our events in New York, Toronto and Boston at the end of May and beginning the June. And then, thankfully, I'll get to see him in London and also in Milan the second we could June. If you're interested in hearing more from Alberto, don't wait, contact your State Street representative as soon as you can. Some of these events are coming up very soon. He mentioned the Harvard Business School pricing lab. That's pricinglab.org. We can find a lot of his work. Our work with Alberto is always on our insights platform. You can always also go back and listen to all the old episodes of the podcast that Alberto and I have done. Safe travels to Alberto. See you really soon. Thank you so much. Thanks for listening to Street Signals. Clients can find this podcast and all of our research at our web portal insights. There you'll be able to find all of our latest thinking on markets where we leverage our deep experience in research on investor behavior, inflation, media sentiment and risk, all of which goes into building an award-winning strategy product. And again, if you like what you've heard, please subscribe wherever you get your podcasts and leave us a review. We'll see you next time. [Music] Information versus only is not a dentist, just a recommend and transaction investment or investment strategy. It does not constitute investment research in order to be comprehensive or intended to replace the exercise of an investor's own, careful independent review and judgment regarding any investment decision. This communication in the information herein does not constitute investment legal or tax advice and is not a solicitation to buy or sell securities or any financial instrument nor is it intended to constitute a binding contractual arrangement recommended by State Street of any kind. The information provided does not take into account any particular investment objectives, strategies, investment horizon or tax status. The views expressed herein are the views of State Street as of the date specified and are subject to change without notice based on market and other conditions. The information provided herein has been obtained from sources believed to be reliable at the time of publication. Nonetheless, we make no representations or assertions that the information is complete or accurate and you should not place any reliance on said information. State Street hereby describes any warranty and all liability, whether a rising in contract or otherwise, for any losses, liability, damages, expenses or costs either direct to indirect consequential special or punitive rising from or in connection with any use of this communication and or the information herein. State Street works affiliates made from time to time as principal or agent for its own account or for those of its clients, have positions in and/or actively trade in financial instruments or other products identical to or economically related to those discussed in this communication. State Street may have a commercial relationship with issues of financial instruments or other products discussed in this communication. This communication may contain information deemed to be forward looking statements. These statements are based on assumptions, analyses and expectations of State Street in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes appropriate under the circumstances. All information is subject to change without notice. This communication or any portion of your rub may not be redistributed without the prior in consent of State Street. Past performance is no guarantee of future results.