The problem of sticky inflation resides with housing, Fed’s Goolsbee says

The Bureau of Labor Statistics reported today that the April consumer price index clocked in at 3.4% year over year and rose 0.3% from March, a lower rate than in the previous month. While that annual reading is still well above the Federal Reserve’s 2% target rate, could it be a sign that inflation is back on track to meet the Fed’s goal?

To get some insight into where the data suggests inflation is heading, “Marketplace” host Kai Ryssdal spoke with Austan Goolsbee, president of the Federal Reserve Bank of Chicago and a former chair of the White House Council of Economic Advisers under President Barack Obama. He pointed out that the housing market hasn’t softened the way other sectors have, and it’s contributed to the stubborn inflation data we’ve seen this year.

The following is an edited transcript of their conversation.

Kai Ryssdal: So we got the [consumer price index] this morning. Let me ask you to return to your data dog roots, which is that thing that you like to do, sniffing around the data. What are you sniffing around this time?

Austan Goolsbee: Well, some improvement from last time, pretty much what we expected, but still higher than we were running for the second half of last year. So there’s still room for improvement. But if you take the long view over the last year, year and a half, inflation is way down from its peak, and I’m hoping that we’re still on that path, with some bumps. 

Ryssdal: All right. I’m gonna get to “bumpy” in a minute. But let me torture the data dog metaphor here for a second. You know, dogs like to sniff and sniff and sniff and sniff before they mark their territory, right? OK. The Fed’s been sniffing around for a long time. And at some point, you guys have to mark your territory, right? You keep saying we need more good data. And you know, eventually you’re the boy who cried wolf. 

Goolsbee: Yes. Look, the last seven months of 2023, we were at or even below the 2% inflation target. And it was looking quite, quite promising. We hit a bump in January, and it’s come down from there in the months that have followed, but it hasn’t come down enough that I think we, as you imply, that the first rule of the data dogs is know when to walk and know when to sniff. And that was a let’s-keep-sniffing moment. Because I think we basically just need to get clarity. Is that a sign that the economy is overheating? Or is that just a bump in the road on what is an otherwise pretty steady decline of the inflation rate at least? And so I don’t, it’s not a walking moment yet. I think we still need more.

Ryssdal: All right. Let me ask you specifically about bump and bumpy. You know, you’ve said it a couple of times. [Fed] Chair [Jerome] Powell says it all the time. [Treasury] Secretary [Janet] Yellen said it last week when I was talking to her. And I guess I want to know what y’all mean when you say “bumpy.” I remember when it was actually [Bloomberg journalist] David Gura asked Chair Powell, “What does ‘transitory’ mean?” And he said what he meant by transitory and we all went, “Oh, my God, that’s what he means.” Do you guys, when you say “bumpy,” do you mean it’s just noise? Or is it like a really big speed bump that kind of jars the car and makes everybody’s tea shake? 

Goolsbee: Well, you know that I’m forbidden — I don’t speak for anybody else but me.

Ryssdal: Absolutely.

Goolsbee: When I say bumpy, I’m hoping that it’s not teeth rattling in the size of the bump. And I do think it’s helpful to kind of break out the inflation into the components. There’s the services, there’s the housing, there’s the goods. And in ‘23, we had what has to be one of the best years of inflation falling that we’ve had in a very long time, which is inflation got cut more than in half, and there wasn’t a recession. And normally there is. And if you broke out the components, goods went from something very high inflation down to its pre-COVID trend of slight deflation. Services were, they had come down from their peaks that were still higher than pre-COVID, but making progress. And the puzzle, as we talked about before, was and remains why housing inflation has not come down more. Well, what happened in this bump, goods prices went up a bit, services prices went way up for a month and then have come back down. But we continue to grapple with this bit about the inflation and figuring out what’s the nature of that speed bump is still going to depend on what happens with housing.

Ryssdal: Well keep going on that, right, because it has been extremely slow to come down. It is arguably skewing the whole conversation because it’s so — “sticky” is a loaded word — but it’s so persistent. What do you do if housing doesn’t get to where it needs to be?

Goolsbee: Well, there’s two parts of the housing equation. One is just a mechanical, that the way we compute housing in our inflation measures is a kind of slower-moving average of the market rent in the housing sector, and the market rents came way down, at least the inflation, not the price level, but the inflation rate came way down. And so we’ve just been waiting month after month for that to happen in the slow-moving official series. And then it’s come down a bit, it just hasn’t come down as much as we thought. If that doesn’t happen, then we’ve got to figure out why it didn’t happen, because it clearly would be more than just the mechanical thing. It could be when you have low rates for a long time, followed by a big increase in the rates, it creates strange dynamics in the housing market that everybody can say that you’ve been in your house, and you thought about moving to a bigger place, but you’re like, “I got a [3% to 5%] mortgage, and mortgage rates are now 8%. So I’m gonna just stay in this house for a long time.” That pulling back of the supply of existing housing because of the mortgage lock-in, I do think there’s some complexity that makes this moment a little different from a regular moment. 

Ryssdal: If housing price levels don’t come down, can inflation get down to 2% like you guys need it to do?

Goolsbee: The inflation rate has to come down. Price level I don’t think is going to come down. It would be hard for me to see that we could get to the 2% overall target unless house prices, inflation comes down substantially from where it is right now. Now, I’m still both optimistic and my read of the evidence is that that is going to happen. You see in the CPI numbers today there is some decrease on the housing side. If that continues, that’s great. If that doesn’t continue, then we got to go in deeper to try to figure out what is happening. 

Ryssdal: Last thing, and then I’ll let you go. And it’s about communication and what the Federal Reserve is saying, and what everybody — by which I mean markets and analysts and business and economic media — are understanding you to say. End of year, Chair Powell and many other Fed speakers were hinting that there was gonna be no small number of rate cuts this year — three, maybe, maybe four, people were saying. And now, clearly, that’s not going to happen. And I guess I wondered, did we all misread each other? Did the chairman sort of get out over his skis too far? Did all the rest of you as well? What do you think?

Goolsbee: The FOMC [Federal Open Market Committee] puts out a Summary of Economic Projections, which is not debated among the committee. It’s just each individual gives their opinion, and what do they think will be the appropriate rate and what will be the conditions over the next year, the year after, the year after that. At the end of last year, the SEP said that they, the median, thought there would be three cuts in this year. The market immediately concluded that must mean seven. As they had press conferences, they said, “Well, if it’s not seven, then it’s going to be four.” Then it was two. Then they thought it was zero. And if you look at the SEP and the statements that come out of the committee, it looks like it moved from three to two or a very slow-moving type process. And the market is on a timetable that is kind of not the monetary policy timetable. The day trader’s market-watching timetable is a daily, “Up! No, it’s down! Oh, they must have been seven! No, they’ve been three!” And the actual statements from the members of the committee have been pretty steady. So, with no offense to anyone, it seems like the people that are over-indexing are not coming from the SEP, it’s coming from the market. It’s being impatient with the signal.

Ryssdal: SEP, another word for that is the “dot plot,” for those familiar. Last thing — this is really the last thing, and then I’ll let you go. I did an event with Chair Powell in San Francisco, I don’t know, like six weeks ago, and basically he said you guys pay — you guys, business and economic media — pay way too much attention to every jot and tittle that comes out of the Federal Reserve. You agree with that?

Goolsbee: Probably. Our perspective is always, “Whoa, whoa, settle down.” There wasn’t as much information content as what you’re concluding. I’m from the old school, which is, to me, it’s a sign of success if the market moves, it moves from the data, not from the statements of Fed officials. Because if the big moves are when new information comes out, that’s a sign that the world understands the reaction function of the Fed. And so I’ve tried to be as clear as I can. “Here’s how I’m reacting. Here’s what I’m looking at. And here’s what I’m sniffing.” And right now, it’s heavily on the inflation side. If we keep rates this restrictive for too long, we’re going to have to also be thinking about the other side of the mandate, which is employment, but so far it’s still very much inflation.