Inflation: The U.S. has ‘one or two more months’ of high prints, economist says

Tendayi Kapfidze, U.S. Bank chief economist, appears on Yahoo Finance Live to discuss a recent rise in inflation and rising prices for food, gasoline, and housing.

Video transcript

BRIAN SOZZI: It was another hot read on inflation today with the Consumer Price Index showing a startling 7% increase over the past 12 months. But will this prove to be the peak in inflationary pressures? Tendayi Kapfidze is the Chief Economist at US Bank and joins us now. Tendayi, nice to see you. It's been a while. I think the last time we actually saw you was in our studio some time back. So nice to see you today.

I think investors are trying to make sense-- trying to make sense of this inflation print. From where you stand, is this the worst it's going to get in terms of headline increases in inflation?

TENDAYI KAPFIDZE: I think we might have one or two more months of really high prints before we start on the downtrend. But our expectation is, by the end of the year, you know, we should be somewhere around the 3% level. So we should get a deceleration in inflation, you know, maybe starting in the second quarter and certainly in the second half of the year.

JULIE HYMAN: And Tendayi, it's Julie here. It's great to see you. So as we look at the components of inflation, right-- I was noting earlier that we saw food prices, particularly food at home-- the increase moderate a little bit. But I'm seeing a lot of attention being paid this morning to the so-called "owners' equivalent rent" number. In other words, that's where the BLS tries to figure out if people were renting out their houses, for how much would they rent them out. And that number, according to some folks, is lower than it should be. How do you think about the housing cost as part of inflation?

TENDAYI KAPFIDZE: Yeah. So it's interesting to me that some folks think it's lower than it should be. The OER is a really kind of interesting construct in that most things that are in the CPI actually have a cash flow associated with them-- people actually spending money paying those prices. OER is not one of those things. So if you're actually a homeowner, you know, your actual cash flow that you're paying is your mortgage, taxes, you know, maybe a condo fee or something like that.

And if you think about the mortgage, which is the largest component of that, most people have a fixed-rate mortgage, which means that cost never goes up. And then if you look at the past two years, where we've had these record refinancings, people have actually lowered their monthly cost of owning their house. So, you know, you could argue it the other way, and you would actually have data to argue the other way.

BRIAN SOZZI: So Tendayi, you're looking for inflation to decelerate. That's a good thing throughout this year. Within these components, what will get cheaper for consumers?

TENDAYI KAPFIDZE: Well, you know, once you have inflation-- right. Like for inflation to go away, things don't have to get cheaper. They just have to stop increasing.

I think the biggest candidates for stopping increasing certainly is cars-- used cars, new cars. If you look at last December-- you know, if you think of previous years in December, you'd have all those promotions. I think one of them was like, "December to remember." And there were all these offers that would happen in December as car dealers tried to hit their sales goals for the year. You didn't really see that last December, right? There's no discounts. There's no offers. You know, you're paying more than MSRP for cars, and a lot of that has to do with the supply issues.

We've started to see that ease a little bit. So we should get more new car production. Unfortunately, because of the lack of new cars, say, over the past two years, there's not going to be replenishment of the used car supply. But we should start to see an easing in both new and used car price increases, which will help these inflation numbers significantly.

JULIE HYMAN: Also may be helping the inflation numbers will be the Fed tightening. Right? At least that's the goal. What are you-- it seems like the consensus at this point is for three rate increases this year. What are you looking for, and do you think that's going to be an effective tool at bringing inflation down?

TENDAYI KAPFIDZE: So I think the interesting thing about the Fed is, you know, if you go back a few months ago, nobody was expecting them to have three rate increases in 2022. The Fed has reiterated many times that they're data-dependent. So the way that I think about it is, sure. If the data requires them to raise three times, they might do that. But if the data changes, then maybe they won't. And there's a lot of risk to the economy this year.

You know, we're going to have a fiscal drag. You're looking at Omicron right now. We don't know what's going to happen with, say, January-February jobs numbers. When the Fed meets in March, they might be looking at two really bad job numbers because of the disruptions from Omicron.

And as we go further out into the year, you know, we have this fiscal drag. The economy will be slowing, so they're going to be hiking into a slowing economy. We don't know what's going to happen with the virus as the year progresses. So I think there is some downside risk for the economy, and therefore, the three hikes are not necessarily in the bag.

BRIAN SOZZI: Tendayi, do you think-- just looking at what you were just saying about the slowdown. We have been hearing that from other economists, too, as well. I mean, do you think the economy is going to grow in the first quarter, in large part because of the pandemic?

TENDAYI KAPFIDZE: The first quarter is tough. You know, I think there's some real risk that we might have a weak quarter. I don't know necessarily that it would turn negative. If you think about the third quarter of last year, at the beginning of the quarter, most people were expecting growth around 6% or 7%. It came in around 2.3%. So, you know, that was about four or five percentage points lower than had been expected just at the beginning of the quarter.

So it's early days in January. We're having these Omicron disruptions. You know, still don't know quite the extent of it, but we're starting to see some high-frequency measures of activity show that it is having an effect in terms of things like restaurant bookings, you know, just number of people on the subway, for example, here in New York City.

So you know, I think Q1 is probably going to come in a little weaker than initial expectations. And I'll say, yeah. There might be some risks that you could actually get it weak enough that it might be negative, especially given the strength that we saw in the fourth quarter.

JULIE HYMAN: So I'm coming back to-- so this is an interesting portrait that you're painting here, that we could see weaker growth in the first quarter. We might not have three hikes coming from the Fed. I mean, that feels like-- it feels like people aren't necessarily positioned-- and I know you're focusing on the economy more than the markets. But it feels like people aren't necessarily positioned correctly for that kind of a scenario.

TENDAYI KAPFIDZE: Yeah. So you know, I'm not going to tell anybody how to position themselves. But the way that I'm thinking about it is, you know, we kind of have a base case expectation of what the economy is going to do. And every day, I'm asking myself, what's the risk to this expectation? And I think the last two years have really taught all of us that, you know, you really should approach these expectations with a lot of humility. A lot of things can change and change very rapidly. And, you know, you just have to look at the Fed itself to see how rapidly things change and the way that the Fed speakers are now addressing the economy versus just three or four months ago.

So in three or four months-- again, going forward-- I mean, who knows where we could be. So you know, I think-- yeah. The base case is that probably the economy is going to have another healthy year of growth. Probably we are going to get a number of Fed hikes, maybe some balance sheet tightening. But there's a lot of risk and uncertainty to that outlook, and that's kind of what I'm trying to emphasize.

BRIAN SOZZI: Tendayi Kapfidze, Chief Economist at US Bank, good to see you again. Looking forward to catching up again in the new year.

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