Real-time inflation trends: Is the inflation shock finally over?

Alberto Cavallo: Thank you so much Lee for raising the expectations there. So I'm going to be, presenting today, our latest results from the work that we've been doing with the price stats indicators for quite a while. I'm going to ask this question and show you some results. We are definitely in a process of global disinflation, but are we back to normal now? How many times have you heard that question being asked in the last couple of years? Many, many times, I imagine. Certainly I have, and you have people telling you stories both on one side or the other. The advantage we have here at State Street is that we've been producing these indicators, the price that's indicators for over 15 years, quite a long time. We can give you some insights from what this data is doing, and I can do some research to understand what is happening with inflation trends. So it's been a long time. I like to think we've been here 15 years because we are quite good at delivering some results to you. So I'm going to try to do that again today. And the way I'm going to do it is start by telling you what's not normal first. Okay. So if you look at our global inflation index, that's the one where we aggregate all this information we produce at the country level into a global picture. Clearly we are not back to normal. These are this is the annualized annualized annual rate of global inflation rose quite dramatically.

Alberto Cavallo: It started falling around the middle of 2022. And we're still at a level that is higher than what it was before. So in that sense, we're not back to normal. But there are things that are in are quite positive. Okay. First, let me point out to these two charts that show you the food and fuel inflation rates, that price that computes for different kinds of aggregates. I put there the US, the eurozone and the emerging markets. These again are annual rates. And if we you remember from my previous presentations maybe a year ago or a little while before that, this was actually very concerning. Not just initially the rise of fuel, but also the patterns we were seeing in food. On nearly every dimension that you see in this graph, we are doing better. Food inflation has fallen first in emerging markets. And then quite quickly, as you can see in these charts, on a on the US and the eurozone with a bit of a lag. But they are back to levels that are pretty normal by historical standards. Fuel also had this spike and has improved dramatically. And these two, by the way, these two dimensions, food and fuel, are one of the main drivers of this global disinflation cycle. The only thing that is perhaps a bit worrisome to keep an eye on is what is happening with M fuel inflation. So it is rising and it is above the average levels we had seen before.

Alberto Cavallo: Part of it could be catching up through some delays and lags that it normally has to the trends that we had seen in more developed markets. But overall the story on food and fuel is actually quite good. Now, if you look across the board in all the countries where we produce these indicators, the story that is emerging is one of divergence. The stories are becoming more country specific. So I want to illustrate that with this chart that shows you the range of annual inflation rates that we have historically produced and measured in the last 15 years. The red dots tell you where we are today, and those little red bars tell you the average. As you can see there, there are diverging stories. Countries have come down from their peaks. Some of them are still above average. I'm going to point I'm highlighting here, some in Europe in particular, and I'll give you more details in a second. Others are quite on average. That's for example the US in this chart and others are below average, for example, China perhaps being the most dramatic one. So I'm going to tell you and interpret this data and tell you stories about four regions of world countries. that that rise is from our data and from the analysis we do with the research on inflation trends. So let me start with the US. It's clearly been a bumpy, disinflation process. You can see it here in the monthly inflation rate, both in our index and in the CPI.

Alberto Cavallo: The numbers were looking much better at the end of last year. And then we suddenly saw that increase in monthly rates at the beginning of this year in our index and also in the CPI. Good news. If you're looking very closely at these numbers, these monthly rates are actually coming down. They started coming down in our data around the end of the beginning of April, and then we have already started to see it as well in the CPI. But this is, you know, a very short term focus. Perhaps the most important question is what is happening with the true trend of inflation? Okay. Particularly if you're a central banker trying to decide what to do on rates, are these bumps materially changing the trend of inflation? And to look at the trend of inflation? I've always argued that instead of looking at the annual or monthly rates. Which has various drawbacks. It's much better to actually look at the price index, the price level, and think about the slope of the price index. So you're looking actually here. The blue line is the price. That's index since January of 2021. Think of it as the price level. And then the slope is the trajectory at which the price level is rising over time. That is in a sense the trend, the direction that the central banks should be looking at. Looking at these trends is actually much better than looking for this specific question at the annual or even monthly rates, because it's not affected with the problems of base effects or price level jumps that may impact these changes, change calculations that we do naturally with rates.

Alberto Cavallo: Okay. It also gives us a flexible time frame for analysis. We can look at these trends and understand whether they've been there for just a few weeks, months or even longer. Okay. And then we can statistically test and detect when there's been a structural break in these in these slopes. Okay. That's a part of the work I've been doing with this paper called Detecting Turning Points in Inflation. It's a new way of using the price data to answer the questions about the inflation regimes or the trends. Now, if I were to apply this statistical text to the aggregate index of price stats, you would see that during this time period, there's only one significant break that happened in in June, July of 2022, okay. Shortly after the fed started raising rates. That's in a big sense the the big stories. But often when we detect these breaks, the question for us becomes, are these relevant enough? Have they changed the trajectory? Now there's two ways of determining that. One is just looking at the long time period like I'm doing in this chart. I can tell you how persistent this trend has been. And that's great for economists who are looking back in trying to understand the long run dynamics, but not so useful for central bankers or policymakers who need more real time information, and also for investors who want to understand better whether any structural break that happens at one point in time is really meaningful or not.

Alberto Cavallo: And for that, we use a different approach. We actually detect these breaks, not just on the aggregate, but we're going to look for breaks in information about breaks in the disaggregated data. We can build indicators of the broadness of these breaks and detect them in real time. So just to illustrate this, instead of running this structural break test on the slope on the aggregate index, we can run it in all the disaggregated sectors. Just to motivate that methodology, let me just zoom in a bit on what has happened in the last year. This is actually the same chart as before, just zooming in in the last 12 months. And you can actually see there there's been several times where in the aggregate index you detect a change in the slope. One happened in October of last year, another one in January of this year. And by the way, we may be experiencing one again right now, which is not yet reflected in the CPI, but I'm pretty sure we will see a similar trend. So you may ask, is this meaningful or not? You know, how much do we need to zoom in? How do we know if the inflation regime has changed? So the answer to that actually comes from looking at all the subsectors in the data and running these same structural break tests in each one of them.

Alberto Cavallo: I'm just illustrating here with a few graphs. Think of this as individual subsector indices. And then these vertical lines show you when a break happened. And we can see if it's an acceleration or a deceleration okay. We can use this information to build an indicator of how broad based these breaks are. And if they're really broad based, if we find that most of the basket of the CPI seems to be accelerating or decelerating, we call that a turning point in the inflation trend. Okay, different from just a single break in a series. This is more about the breadth broadness of these of these changes. So if we do that for the US and look back at what happened in the last few years, we actually detect a single moment when the majority of the basket was decelerating, that if you look at this chart, the green line shows you the share of weights of the CPI basket that have detected a negative break. So a slowdown in inflation in the previous 12 months and in the red line is the opposite. That's the one for an acceleration for more inflation. So the moment in time when there was a turning point, as I've actually shown already in the past in this same conference, happened in late 2022, in October, November of last year.

Alberto Cavallo: There are clearly two periods here, one that was inflationary during 2022. And since then we've been on this disinflationary. Disinflationary trend and disinflationary regime. Okay. There's been a little bit of noise around October of last year, as you can see there in the series. But the disinflation recovered and continued until today. So these are good news for the US. Looking at just these disaggregated trends data you can also see them and I'll show you in the next few charts for the other countries. A simpler version of this graph, which I call the break diffusion index, which is essentially putting together the information of positive and negative breaks, and also sectors that haven't changed. Okay. But it's essentially the same information in a more condensed way. And when you see this number go above 50, that means there's upward pressure in the basket of the CPI. When you see it below it's a disinflationary pressure. So where are we today? We're still in disinflationary period. Although there may might be some indication that that is coming to an end. We're definitely not above it okay. If we run these breaks. By the way let me point out not just focusing on the last 12 months, but look, taking longer time periods and allowing for each sector to break multiple times, both on the positives and the negatives, we can actually detect in real time moments when there might be a bump in inflation. Okay, not necessarily a turning point, but certainly more sectors turning upward and downward is an indication of that and actually gives us an anticipation.

Alberto Cavallo: If you look at these numbers right here, I'm showing you both for headline and core. The red is an acceleration in the green is a deceleration that already by November we were detecting some of these trends accelerating okay. That eventually fed into the numbers that we end up seeing in the rates at the beginning of the year. And by February, many of these were actually starting to decelerate. And the data, the rates take a while to actually show this reflected. So in this bump itself has gone away in the US data. And overall the picture looks much better. If we if we also focused on seasonal adjustments. When we seasonally adjust each one of these individual series and build the indicators, there's even more evidence of this inflation happening in the headline sectors. And if we focus on core, there's evidence still of significant disinflation. So the story for the US is certainly has been bumpy. But the trend is still disinflationary today. And that is in fact reflected not just on this turning point analysis, but also if you simply look at our annual inflation index that we produce at price, that you would have seen these rising and falling, and in fact, the US is back to pre-pandemic levels in our data. Now, you may be thinking the CPI is not like that and you would be right.

Alberto Cavallo: The US CPI inflation rate has also risen and fallen quite dramatically, but it is still above pre-pandemic levels. Now, let me point out the difference that we still see in the CPI is coming 100% from shelter. That's the sector that is still putting upward pressure. If you go to the BLS website and look, in fact, for the all item CPI less shelter, it is now at 2.2%. So the story of the US, why it's still higher in the CPI is exclusively coming from shelter, and we can discuss that in a second. But overall I consider this a quite successful disinflation story. Now why is the fed concerned? Well certainly shelter you know, they have this promise of a target and shelter has not come down and they're bound to that number. They might also be concerned because people, though, are still appear to be quite dissatisfied with the story about inflation. It's actually not fine too hard in the newspapers or in the media information about this. Many of you are probably still feeling this, this sense that the inflation is not yet over. and at least has heard many people in America in ways that have not yet fully adjusted. So I'm giving you a couple of examples here. The New York Times and Wall Street Journal both explaining that consumers are still mad about inflation. This has impact on policy makers. So we started doing some research to try to understand why.

Alberto Cavallo: Why if the actual numbers have improved so much, why are people still mad about inflation? So I'm actually going to ask you that question. Why do you think US consumers are still mad about inflation? You can actually input your answer in a few words and then we'll start seeing what the, the the results are. And then I'll walk you through some research that helps us understand better the the process. And as I said, I do think this is an important question for the fed to consider. If people were under the impression that inflation, the inflation issue, is over, many policymakers would not worry so much about the actual number and the effect of shelters. Okay, so we have wages, the cost of living, not rock. The aggregate price levels. Let's savings. Yeah. Confusion. There's could be a lot of confusion. The cost of McDonald's. That's I guess your could either be referring to a particular basket that people may have or this may be a more international issue. All right. Good. So as you can see there's a lot of divergence. That's the first thing that I can take away from these numbers. But many of you have pointed out to wages. So let's go back to my presentation and I'll make a point about that. In fact, if you talk to economists, some common explanations for this revolve around the fact that perhaps some categories are more salient to people. This may be the McDonald's point you were making.

Alberto Cavallo: Some things that some some items are iconic, some categories are iconic. And if we see those rising, that's what people focus on. Now that could be food, it could be gas, could be rents. But the truth is, many of those have actually come down. As I showed you at the beginning, food and gas in particular. Other explanations are that people just focus on increases rather than decreases. You know, they look at numbers and we calculate an average for the inflation, but they just narrow it down on on the increases themselves. Those increases are actually becoming lower. So that may not necessarily fully explain it. Some people compare price levels with those before the pandemic. And this is related to the real numbers and the nominal numbers. It is true some people will simply say, I'll go to the supermarket and I'm spending $300 when I used to spend 200, and that certainly could have an impact. Now, interestingly, you think about it, that's an argument where the sort of like a monetary illusion where we usually use it to explain why people are not mad about inflation because we say they focus just on the nominal wages and not on prices. Here we will be doing it the other way around for some reason. Think of people are just thinking about their prices and not the wages which have also come. Going up and help bring those real numbers back up. So wages, which you pointed out is clearly important.

Alberto Cavallo: And we have to compare how much wages have risen relative to prices and measure real wages. And it is true for many people those real wages may not have fully adjusted. But if you follow the results that many economies are pointing out, particularly people who want to support the white House and the white House team as well, many of them are actually pointing out that if you measure real wages, they've actually gone up and they've caught up for many groups, particularly low income groups that received a lot of support, stimulus, fiscal stimulus during the pandemic. So there's something strange going on here. So we started doing this research to understand if there were any forms of hidden inflation. So I'll tell you one that we've discovered. It happens. It's not measured by the BLS or any statistical agencies because it happens within categories of goods. And just to illustrate, this is from a paper called Price Discounts and Deflation. During the inflation surge, we used price stats data to try to differentiate between cheap and expensive varieties. So imagine you go to the supermarket, you go to an aisle of eggs. You will actually find a tremendous amount of variety. Some things are very simple eggs. And then you'll have the ones that are pasture raised grade A I don't know what that means, but certainly that must have raised the cost, or at least I tend to, you know, associate it with a higher cost.

Alberto Cavallo: So which variety would you buy if you're trying to get away from inflation? Well, many of you or many of us, many particular people who are financially constrained more than us, of course, or low income people would actually buy the cheapest variety, which you you can actually calculate that if you observe the price per unit, which we do at price stats, when we collect this information, we can actually measure it. You can see that the small print right there, that's the price per egg that allows us to identify these in this particular example as the cheapest variety, the one that low income households will buy, the one that you would buy if you're trying to get away from inflation. So we split them up within categories and we measure their inflation rates. And this is actually what happened during the pandemic. Pretty much no difference in the price level. You're actually seeing price levels here over time. So think as the y axis is the accumulated inflation during this time period there was nothing happening really. No no big difference until 2021. And then we start seeing these two get apart. The red line is the price level of the cheapest varieties. So as people moved into these varieties, their demand increased, prices started rising faster. And over the course of these three years, we actually see 10% accumulated more inflation in the cheapest varieties. That's 50% more or 1.5 times more inflation in the cheaper varieties relative to the premium ones.

Alberto Cavallo: Now what does this do? This actually shrinking the difference between the cheap and expensive products. So if you go to the supermarkets now, the cheaper varieties are relatively more expensive, relative to preminot just to the past, but even to other varieties that you see in the supermarket in that particular day. And by the way, these inflation differences is smallest in the US at 9%. It rises to even 23% in some European countries. So the situation is actually much worse in other countries as well. And just to be clear, this is a double impact on welfare for consumers because they're switching to lower quality goods or at least perceived lower quality. These are cheaper varieties, and they also get end up getting higher inflation from consuming those goods. And no wonder then people with for these and other reasons are still quite upset. And that limits the ability of policymakers to make a change. I'll tell you the second story, because I introduced already Europe, I wanted to tell you what's happening in Europe in our data. I've always been a bit more concerned about Europe when I look at our numbers, because inflation there on an annual basis has been more persistent than in the US. Okay. And it's still the case today. This is the annual inflation rate. You can see it coming down from its peak but it remains around 3%. This again excludes shelter.

Alberto Cavallo: It excludes some utilities that had these big spikes in the European data and have come down. But it does suggest more worrisome levels of inflation. If I apply the structural break analysis, particularly to some core goods in the in some European countries right now, we do find evidence of upward pressure happening. And I've been highlighting this for the last few months. The official numbers start to show stronger inflation recently. The situation seems worse in the UK, in Germany a little bit milder in France, and we are having actually. Some countries within Europe that do not show these trends. Why might this be happening? It could be wage pressure. It could be slow effects of the green transition. It could be a delayed effect of the energy shocks. But certainly my impression is that Europe is not as good in terms of inflation as many policy makers there seem to believe. So I would be a bit more cautious. Let me give you another example of how the structural break analysis gives different views. This is Japan and first I'm going to show you the actual indices, the index that you're looking at here. The orange one is the one at price stats. This is the annual inflation rate in Japan. It started rising quite quickly in our data and then stabilized between 2 and 3%. It has been in that range for quite a while already. The CPI rose as well. The central bank got concerned. It fell down a bit.

Alberto Cavallo: And now the story is becoming interesting because in fact, in our data we are detecting a mildly deflationary trend. Sorry disinflationary trend happening with inflation with the with prices in Japan. Okay. Contrary to the concerns that the Bank of Japan is showing. Okay. There are worries is that inflation may get out of control and they're starting to talk about potentially raising rates. My fear is that our data is pointing actually in the other direction. If I run the structural break analysis for Japan, the same type of charts I was showing you before, we can actually detect the turning point happening in July 23rd. That's when the more disinflationary trends started to appear and we're still in disinflationary territory. In the case of Japan, whether you look at the split between increases and decreases, the diffusion index or the one that allows for multiple breaks, there are more trends that are slowing down rather than increasing. My fear is this could turn into what I call with my students. I tell them it's potentially a Britney Spears moment for the Bank of Japan, where they raise rates and say, oops, I did it again. I'm I'm making the economy tank. No. So certainly I would be cautious if I were Japan. Okay. And let me end with a good story. This is the story about China. This is again the annual inflation rate in China of our index, which turned negative. It started having deflation in our data already in May of 23.

Alberto Cavallo: Okay. And then it had some wiggles but remained in deflation all along. Since that time the CPI has shown that trend. And you know, news about the disinflation became more widespread. Lately we've been seeing this recover. And you can actually see in the annual index for the first time, it has become positive. We still see positive inflation there, starting in in May of this year. But the trends actually the change in the trend actually happened earlier already by January. And if we do the structural break analysis, in that case, we are seeing a solid increase in the number of subsectors that are having this acceleration. Whether you look at again at the different versions of these indices, they all suggest there are significant broad based increases in inflation in China, which may be suggesting a recovery of the economy, which is good news for China in that sense. So to summarize, our indicators are showing that global inflation has fallen and the stories are becoming more country specific, in particular the US. I've been always quite optimistic and I am still today that we're mostly back to normal. We find no broad based turning point in the price level trends. Since the disinflation started in late 2022, there's still actually significant pressure of this inflation. If you look at seasonally adjusted headline or if you focus in core. Shelter explains why the CPI is still higher in levels. But this is an index that reacts with lags.

Alberto Cavallo: And I'm not particularly concerned about its dynamics moving forward. but it certainly will affect the the target number that the fed wants to reach. So it's important for for them to keep an eye on it. And I also think policy is being constrained by this hidden, forms of inflation that have affected the mood, the political mood in particular. So if you're a policy maker, these things are actually important. This the context in which you're applying your policies matter. These are things not captured by official statistics and helps explain some of the persistent discontent and political pressures, but it doesn't change the actual dynamics of the aggregate numbers. That is what the Fed's target is all about. Okay. And finally, I applied the structural breaks analysis to give you insights into these stories. Some of them are positive or negatives. Whether inflation is going up or down depends on this case, the positive ones. Just to be clear, the US is on a disinflation. The trajectory China seems to be getting out of deflation, which is a good sign for its economy. And the more worrisome ones are the ones for Europe, where inflation is inflationary. Pressures seem to be picking up and still a bit persistent, and perhaps in Japan, for the exact opposite reason, where we still some some find some disinflationary pressures. Thank you very much. And I'm happy to take any questions you may have.

Lee Ferridge: Thank you. Alberto. Fascinating as ever. a bunch of questions here on the app. Can we put the, the QR up again for people on Slido for questions if they didn't get it last time? Um. Thank you. first one, how long does it take to identify that statistical break? How much evidence do you need to to say. Definitely been one. Yeah.

Alberto Cavallo: So one of the reasons this technique has not been applied in the past to KPIs is that with KPIs you need several prints. You need several numbers to actually detect the trend with the price. That's indicators that doesn't happen. We have them on a real time basis. So within if the if the break is strong enough, within 2 or 3 weeks, we can actually be pretty certain there's been a break. So when we run the algorithms, just to be clear, we do not include in the calculation the last 15 days just to give us a buffer, but usually within three weeks we can detect that breaks quite, quite quickly. And I should be clear you can find some of the same breaks if you look back with CPI data. We just simply cannot do it in real time. That's the advantage.

Lee Ferridge: Perfect. that QR code is up there if anyone didn't get it before. If you want to ask a question, there's the QR code. how comfortable are you that housing inflation will start the disinflation trend the way the fed expects it to and hasn't over the last 12 months? And we keep hearing it's going to happen, right. The house prices are going back up. Now. How confident are you that we're going to see this shelter disinflation we keep hearing about. Right.

Alberto Cavallo: So the way I think about it is clearly shelter is an important sector. We have some indications in more real time from renewed rents that the pressure has subsided in the market. I don't see any reasons why inflation in shelters should remain high moving forward. And we know from the construction of the indices that this is a lagging indicator that tends to come down. So I don't know how quickly it will come down. I don't think nobody really, really knows. But my expectation is that it will. No. Why does it matter? It matters for the fed, certainly because they're bound to a number. They say we are focused on a core and the core target is 2%. So when shelter is included in that calculation remains high, you're at three. You cannot make a policy decision of lowering rates so easily. So I do think it matters and it will delay the reaction of policymakers. But if you ask me about the the dynamics of inflation, I don't think it materially changes the picture. We are in a clear disinflationary trend, barring no or hopefully no new developments that may have to do more with energy or food, which are usually the big drivers of periods of acceleration or deceleration of inflation.

Lee Ferridge: Okay. is the labour market structurally different in Europe and possibly creates a greater challenge for the ECB relative to your expectations for the fed? So, you know, we've got virtually zero growth in Europe. And yet you're showing you're more concerned about inflation pressures in Europe than in the US where we're growing at 3%. Right.

Alberto Cavallo: So so part of the explanation, like I said, particularly in France and Germany, could be due to wage negotiations. And we can think of the labor market as being some of the drivers of that. Now, there's been we've been in a process of wages catching up with with inflation, not a spiral of wage. And prices, like many people predicted as a spiral happens when you try to anticipate what the increase in the inflation rate will be. So you ask for a wage increase that is above what you've actually experienced, and that can make it spiral out of control. We have the different story here. I think it's a story of catching up and that catch up may be stronger when you have a labor market that depends more on negotiated rent wages, like it happens in Europe. So certainly it's part of the story, but I have no actual data to to prove that is the the source of this spike that we see. So that's why I said I think there are several indicators here. What worries me about Europe, I should say, is that much of the decline that we've seen in things that are not in our index, like utilities, gas prices due to base effects, because they went up a lot before maybe actually hiring, hiding these trends that we do capture with our data in are more worrisome. So I'm just trying not to highlight to you, but also to policymakers in Europe about this sort of upward pressure as well.

Lee Ferridge: Okay. going back to shelter. Yes. It's a big thing. price starts does not include shelter. Why not? And does this impact the conclusions you draw?

Alberto Cavallo: Yes. So no, I actually see it as an advantage that we do not include shelter because you can see the differences. You know, it's like looking under the hood and not being affected by the shelter indicators. Why don't we include it? It has to do with the fact that the measurement of shelter depends a lot on assumptions you make about where you're going to sample houses, what subset to use, how you're going to treat some things. And there is it's impossible to match the methodology done by the BLS with online data. So we've never actually incorporated shelter into our index. But you can look historically at the shelter index in the in the US, it's not an index that necessarily moves too much from month to month. So you can actually have good predictions using forecasting techniques and lagged CPI data about the levels of trends now. So that can be used to complement our index. But I actually, like I said, see it as an advantage not having shelter in I think the BLS shelter index is is well constructed by the way. A lot of people complain about that, but you can compare it to our indicators to get a better sense of where those pressures are coming from.

Lee Ferridge: going back to the structural breaks, what is the average length of time between structural breaks? So when how long they last till we get a new one.

Alberto Cavallo: So that's actually determined by the algorithm in the data. you obviously have to parameterize the algorithm. But normally if the change is large enough it can. We as I said, can detect it quite quickly. The time between the breaks is, can vary tremendously. It could be just a matter of weeks if the changes in the trends are broad enough. But also let me be clear, what I find most useful of these is not looking at the breaks in the aggregate index. For example, if you just look at the aggregate break in the US index, either in our data or the CPI, you would find it happening in June of 2022, and the CPI would have shown that with just a couple of weeks. Now, that was not the turning point of inflation because that was mostly driven by fuel in the US. The turning point, the moment when most of the basket actually started having these deflationary trends happened in October, November of that year, which is what I can find with this analysis that looks at more disaggregated data. So that's, I think, an important thing to remember.

Lee Ferridge: Um. How confident are you on this one? I wanted to ask, given we have been in or just left a high inflation environment, does that mean inflation may be more responsive to shocks going forward? So we obviously had a very long period of very low inflation. Nothing seemed to budget. We've now had this this period of very high inflation. Do you think inflation volatility is going to go up from here. We're going to be more responsive to shocks.

Alberto Cavallo: That's a great question. I actually before this crisis had written a paper called the the other Amazon effect. It was an effect a that was looking at the flexibility of pricing decisions. And I was noticing that over the ten years before 2017, at that point, we had noticed retailers starting to use the pricing algorithms more frequently, which makes their pricing more flexible. And therefore, I used to warn that if we get a shock, we're going to see that reflected in pricing quite quickly. So even before the pandemic, we had that trend. There's a long term increase in the flexibility of pricing due to technological advances. But the pandemic also has changed, a the ways firms are doing pricing decisions. I have another paper called Large Shocks Travel Fast, which I mentioned briefly the last time I presented in this, conference. This is a paper we wrote for a for the ECB Cintra conference in June of 23. And what we showed there is that what I think many central bankers were not attuned to at that point in time was that the magnitude of the shock matters a lot for the pricing decisions of the firms. If you are in a low inflation environment where you get shocks that are not that big, you can delay your pricing decisions.

Alberto Cavallo: You can take them periodically, maybe once a month, maybe once every two months, and there's no pressure. But when the shock is large enough, not just because of Covid, but because it gets accumulated to tariffs to all sorts of shocks, we have experienced firms start making these pricing decisions very quickly, and that makes the pass through from the shock to retail prices much faster. That can increase volatility. And I think we're still in that environment. So much of the pressure has subsided. But if we were to get, for example, another energy shock, my prediction would be that the pass through would be quite quick. And it doesn't have to be energy. By the way, sorry that I'm taking so long. Also tariffs. There's a tariff effects here. that may start feeding in the not just for what the Biden administration is doing with the tariffs on, on China, but also potentially, we may see an increase in tariffs for future administrations. So the pass through rates of those effects might be faster because of this flexibility in pricing we're experiencing.

Lee Ferridge: So, um. Price that's clearly very closely tracks inflation of countries. What do you think would improve the accuracy of the indicator in both DM and M? What would you like to put into price. That's how could you improve it? You think? Where are you thinking of improving it?

Alberto Cavallo: Well, it depends on what we mean by what is our target. If the target is getting the actual number from the CPI, my recommendation is always to use our indicator in conjunction with others. So you can be the forecasting model that incorporates our data that incorporates lagged CPI and the sectors that we don't have. In fact, we are building that ourselves. We have a forecasting um tool that will share with our clients starting in the US, using that methodology. But essentially you can build your own forecast and combine our data if your interest is in knowing what the number will be of the CPI next month. What I tend to think our data is a good at, it has consistently been good at is anticipating these changes in inflation trends, and I think it has done always very good in some countries, obviously better than others. But when there's a large enough shock in the economy, you can pick that information up very quickly at the retailer level. And that's where we are collecting data every single day. So our work in my research with this trend breaks is trying to make that more statistically significant and easy to detect for many of our clients. But if you've been using our data over the years simply looking at these indices, you can detect some of these turning points quite easily. And I think on that front, which is what I consider the greatest advantage of the price stats, data, there's, there's a only minor improve