We had a 10-year drought of observable interest rates. I remember it all too well. But it's very timely, is the 4% number for this morning's discussion. Oxman, as a keen observer of business cycles and as the co-author of Beating the Business Cycle, how to predict it and profit from turning points in the economy. The same Lachman is a student of the rate of inflation and has developed with his colleagues at ECRI an indicator that is telling a story that I think neither, well, only one of the political candidates, this coming presidential candidate, welcomes. So the other wants no part of it. But Lakshman, good morning to you. And tell us, please, in headline form, whether according to your careful and well-documented work, the rate of inflation is more likely to surprise on the upside or the downside.

Good morning, Jim, and thank you for having me. To answer your question, according to our analysis of the inflation cycle, quite different from cycles in growth, the not so good news is that inflation is still simmering. We've certainly had a come down in the pace of inflation, but it's just not subsiding as quickly as I think many have hoped. You know, I would like to

preface this discussion with the observation that economic science has not yet solved the mystery of the basic cause of inflation. I mean, we have, Evan, we have, let's see, we have inflation is always and everywhere a monetary phenomenon. That's Milton Friedman. And that's something that the Fed chair, Jerome Powell, said it was important to unlearn. This is about the year 2001, 2021. And then we have a competing theory by John H. Cochran, formerly of the University of Chicago, now out at Stanford, who says that inflation, he says this way, not quite so dogmatically, but inflation is always and everywhere, in so many words, a fiscal phenomenon, right? And then we have a theory popular at the Fed a couple years ago, I'm not sure if it's still so popular, but the inflation is always and everywhere a phenomenon of expectations. And, you know, it's almost, it's almost as if the physicists were still arguing about whether there is such a thing as a law of gravity. Why can't the stewards of this most rigorous social science with so many mathematical appendices and so many learned papers, why is there no helpful and usable consensus concerning the cause of this phenomenon, let alone its diagnosis and cure?

That's a deep, deep question.

Okay, never mind. Never mind that.

So where's the CPI going? They're pretty automatic and married to these theories and things like that, which they just don't hold water, as you know. But

wait, we can't slide by that so quick. Theories, that's the hallmark of science, right? Yeah. Okay, it's a social science, like a social

disease. Social science. Yeah, social disease. Well, you've got these economists, the economists are burdened with this physics envy, as you alluded to, where they want to make a model that'll tell you everything. And as you and all the listeners know, fear and greed are alive and well, and they're tough to model when they get going in these markets. Now, what we're doing, it's kind of like what's old is new. What we're doing is an idea that's not new. We're executing it, I think, better and better. it's monitoring cycles monitoring patterns that show up at cycle turns our premise is that there's a cycle in a free market oriented economy where fear and greed is let loose uh people overdo it and they underdo it and it it helps along with mistakes. They compound and you get feedback loops and things swing up and down. And so our leading indicators of inflation are trying to pick up on, hey, what's the direction likely to be in front of us? Not what did CPI do yesterday, but what's the direction likely to be in front of us in the future inflation gauge, having duly nailed the upturn in 2020 and the downturn in 2022? It nailed it, even though everybody was confounded, as you said. Right now, having come down, it's flattened out. It stopped falling. And for quite a while, it's been going sideways to edging up. And when I'm thinking about your question at the beginning of the talk here, yeah, the surprises are more apt to be to the upside, especially if everybody thinks inflation is going down towards the Fed's target, and it's going to hang out there. Inflation doesn't act that way.

Yeah. Lakshman,

you said that inflation is still on the simmer. And to Jim's point, there've been a lot of theories about what causes inflation, whether it's monetarism, but right now the Fed is still shrinking its balance sheet and broad money aggregates, depending on which one you look at are flat to slightly down.

Well, they've turned up. Yeah. They have. According to Graham's interest rate, they've turned up. Well,

so they've turned up. We've had, we do have fiscal profligacy. I think deficits around six to 7% of GDP. We do have confusion. I think the NFIB's survey in terms of economic certainty came out to the most uncertain ever for small businesses. What's driving this kind of still simmering under the headline inflation?

Well, I think really big picture, there's no hard landing. That's one factor. We have a slowdown without a hard landing. The other factor is that globally, inflation cycles are kind of bottoming and edging to the upside. And we are still part of the globe. So we are swimming in that larger ocean. When we look at inside the U.S. economy, look, the manufacturing sector is a tiny bit soft here. It may soften up a bit, but the rest of it in aggregate is doing fine. The services are holding up. Construction is on a tear. And even though the low energy prices over the summer kind of flattered the headline numbers, the core numbers are downright sticky, if not ticking up. And no one wants to talk about that. And so right now, you know, you could open the paper and you see that there's something happening in the Middle East and there's something happening in Florida and all of these things might disrupt the price of oil, which has been flattering things for a while. So I'm, you know, not going to be blind that inflation could tick to the upside more than people expect in the coming months and maybe even quarters. And that's not necessarily on the game plan for most people right now.

Well, the bond market perhaps is picking up on some of what you see. You know, there are all these notions that if you identify one plausible source of inflation, you have solved the mystery. For example, many people focus on price of oil. Price of oil is the most important commodity, and as long as it's under control, so will inflation be. This gets back to the question of all these competing theories. There's another notion that demographics are a kind of dispositive. But before we settled in for our talk today, Evan checked his, one of his favorite documents was the historical statistics of the United States, right? You take that. Yeah.

From colonial times to 1976, I think it's a, yeah. It's

funny to see Evan walking around with us under his arm. It's like, it's

two volumes. So it's like one under each arm.

Yeah. Going back to class at the university of Chicago. But, um, I said, Evan, uh, you know, uh, tell me what, what happened, uh, this is apropos of demographics. What happened to American population between 1880 and 1900?

Um, it went up about 50%. I don't have the number exactly in front of me, but population went from basically 50 million to about 76 million, I think.

Yeah. Okay. 50%. Okay. 51%. And Evan, over the same period, what happened to consumer prices?

It went down about 14%.

Right. So last year and the other day, we were noodling over this very question here at Grants. And it occurred to me that back in 1967, 1968, 1969, when the great inflation of the 70s was getting up ahead of steam, that many people were surprised by its surfacing because in American history until that point, there had never been a serious protracted inflation except in a time of a GDP-scale war. And Vietnam in 1967 was certainly a thing, especially for the people involved in it, but it was not really that GDP-scale conflict. And defense spending, you know, peaked late in the 60s and declined throughout the 70s. So defense spending, so that was a change in the patterns of American history that until the time there had been really such a thing as peacetime inflation. So here we are. What's the year, Evan, 2024 still? Last

I checked, yeah.

Okay.