Jose Torres, senior economist at Interactive Brokers joined Cheddar News to discuss the slowing CPI increase seen in December.

Consumer Price Index Rises 6.5 Percent Year-Over-Year

All right. Thanks baker. Now the december consumer price index as we discussed before, it was up 6.5% year over year after rising 7.1% in november. The so called core CPI I which excludes volatile energy and food prices was up 5.7% after 6% rise a month earlier The economist projection was a 5.7% increase. So kind of coming in line there and showing a cooling and inflation as well. Now joining us now to discuss all of this is Jose Torres senior economist at interactive brokers as a thanks so much for joining us. Welcome to the show. What's your reaction to this December? CPI I data isn't what you expected? Good morning Chloe. Thanks for having me. Well, it certainly was what I expected now I think the market is focusing on the overall inflation which dropped 0.1% driven by gasoline prices coming down as well as new and used car prices. But what the market isn't focusing on right now is the fact that core inflation actually accel accelerated from November to December. And that's the category that the Fed pays most attention to. So I think on balance decent report. But core inflation accelerating is a problem for the Fed. The Fed is really focused on the labor market. The labor market is currently out of balance, you have about 1.7 job openings for every unemployed person and that's keeping pressure on employers and corporate to continue increasing wages after the pandemic. We've seen a labor shortage due to a long list of reasons, including a lot of retirements as well as long haul covid like you guys were talking about earlier. Um, So I think overall puts pressure on the Fed. Corporate are going to continue hiring people because they have elevated margins relative to history. So they rather position and be well staffed for the next cycle. And I think it's good news for Main Street rather than Wall Street because folks are still going to have um folks, folks are still going to have opportunities to continue working and increasing wages while Wall Street will have to deal with contracting margins. Yeah, Jose. And you know, as I was saying before, you know, the markets are reading this positively, but at this point to your point, we have continued to hear hawkish sentiment out of the Fed suggesting that they're going to stick to their guns. To me, these, these rate hikes in spite of whatever the market is reading into these numbers. So what's your outlook? What do you think the Fed is going to do and how do you think the Fed is going to be reading this data? Well, Chloe, I think the Fed is going to maintain its restrictive position and right now you have a battle between the market and the Fed. The market doesn't believe the Fed, the market doesn't believe that the Fed has to resolve to push rates above 5% and keep them there like their commentary implies. Um I believe that the Fed is going to do that because during 2020 and 2021, the pandemic excesses made it very difficult for the Fed to read economic conditions. So I think the Fed is going to go high and stay high. Chair Powell continues to say that price stability is the bedrock of our economy without price stability. We don't have good labor markets, we don't have a strong economy, we don't have um prosperity. Uh And I tend to agree with him and I think that he is him and the committee are going to stay restrictive and I think it's gonna be problematic for markets from a fundamental, from a fundamental perspective earnings are coming are going to have to come off the boil margins are going to contract they are at historically high levels. And then also from a technical perspective, you have an smp right now, that's right at the 200 day moving average and the 12.5 month downward trend line from january 2022. So I think right now markets are vulnerable and this is a head fake Now, Jose quickly here, we saw an increase in consumer spending this holiday season in spite of inflation obviously with coming volatility and what experts are saying will be a recession, what's your outlook for 2023? Unfortunately, I think we are going to have a recession because there's too many headwinds. What has higher interest rates already done? Well, they've really weakened real estate and manufacturing significantly. That's about 30% of the economy. And now we're starting to hear layoffs from Areas that over hired like tech and financials, right? So that's another five or 10% more. So let's say 40% of the economy is significantly weakened and we have the consumer continuing to spend on services, but they're also running up credit card bills. So I think we're gonna have a slowdown in 2023. Jose. Thank you so much for your time. That's Jose Torres, senior economist at interactive brokers.