Chris Phelan Talks October CPI, Oil Prices

Chris Phelan · White House Council of Economic Advisers

Hot October CPI reflects lagged pass-through of higher oil prices, which should reverse as oil falls.

Phelan concedes the October CPI report came in hot and calls it 'not a good number.' He attributes it to a lagged chain: higher oil prices feed into gas and diesel prices, and then into goods and services that depend on those fuels. He says month-to-month moves should not be overread, but acknowledges three consecutive months of core inflation above target. He expects the pattern to reverse once oil prices decline.

“What I think is going on is when oil prices go up with a lag, gas and diesel prices go up and then with another lag stuff that depends on gas and diesel goes up.”at 2:14

Chris Phelan · White House Council of Economic Advisers

Brent down 24% in November; if sustained, energy-driven inflation should reverse in coming months.

Brent crude has fallen 24% so far in November. Phelan argues that if this holds, the inflation that came through higher oil prices, via gas and diesel and then goods that depend on them, will run in reverse. Things that depend on oil and gas should come down, followed by things that depend on diesel and gas in the coming months. The view is conditional on the decline being sustained.

“The silver lining is that so far in November, Brent crude is down 24%. And so assuming that stays, we'll basically see this in reverse. Things that depend, you know, oil and gas should come down.”at 2:36

Chris Phelan · White House Council of Economic Advisers

A 50 basis point Fed hike is premature; the core inflation data does not yet justify it.

Phelan says that, following the 'whites of their eyes' doctrine, the Fed should wait for clear evidence before acting. Monthly moves are noisy and should not be overinterpreted, though core inflation has been above target for three months. He argues the Fed needs to react to inflation, but not overreact. In his view, a 50 basis point increase at the next meeting is not yet warranted, although he sees a case for a smaller move.

“Personally, I've always followed the revolutionary war doctrine of don't shoot until you see the whites of their eyes. The whites of their eyes yet for a 50 basis point increase, as far as I'm concerned, isn't there yet.”at 4:23