CPI and the AI Trade — Bloomberg Surveillance

PodcastBloomberg SurveillanceEric WinogradOct 14

The discussion weighs an inflation outlook shaped by fading supply shocks, persistent uncertainty, and competing interpretations of tariffs, shelter costs, wages, and consumer demand. Eric Winograd sees inflation settling between 2% and 2.5%, while other speakers debate whether current pressures reflect lasting structural change or a series of temporary shocks. The episode also examines Latin America's political and trade shifts, semiconductor constraints and AI investment, and market signals including rising long-term yields, concentrated equity exposure, and a rotation toward AI software.

Inflation Monetary Policy Interest Rates Semiconductors Artificial Intelligence Emerging Markets

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Key Takeaways

Ted Mortensen says restricting AI development could disadvantage the U.S. defense industry versus China, while substantial AI spending is entering defense budgets. That investment is unfolding alongside what another guest describes as historic semiconductor demand and unprecedented supply constraints: GPUs and raw semiconductors are up 15% to 20%, memory prices have risen by triple digits, and even an old GPU is gaining value despite not being used.

The guest sees a structural, though unproven, rightward political shift across Latin America that could encourage more business-friendly government approaches. Brazil’s commodity tailwinds and political optimism have already been reflected in asset prices, but the guest says fiscal reform and execution remain necessary; in Chile, strong fiscal fundamentals coexist with difficulty enacting reforms and implementation risk.

The guest says Mexico has become the U.S.’s main trading partner, surpassing China and Canada, with trade rising over the past decade despite policy noise and the NAFTA-to-USMCA renegotiation. He also points to productive export-oriented sectors and safe cities as evidence that organized crime concerns do not capture the full range of Mexico’s economic activity.

Eric Winograd expects inflation to settle around 2% to 2.5%, but September CPI—up 0.6% month over month and 3.7% year over year, with core CPI up 0.3% monthly—kept an October Fed hike in play, though December remained his base case. He also says rising one-year inflation expectations could give the Fed pause if they continue climbing, while warning that an escalating or persistent war in Iran would be an unpredictable supply shock.

GEO-POLITICS

AI Defense Spending — Ted Mortensen argues that restricting AI development would disadvantage the U.S. defense industry relative to China. He says substantial AI spending is entering new defense budgets.

“The genie is out of the bottle. And if we would ever restrict AI development, we're putting our defense industry complex at a huge disadvantage versus China…”—

Latin America's Shift — The guest says elections across Latin America have shifted right and argues the change is structural, not cyclical, while acknowledging that this remains to be seen. He says the shift has affected investor sentiment and could lead to more business-friendly government policies.

“Definitely. The political pendulum, Tom, has changed from left to right in most of the region…”—

Brazil's Fiscal Challenge — The guest says high commodity prices are a tailwind for Brazil, but the country still faces a fiscal challenge. He says Bolsonaro is strongly supported and favored to win, with a more right-leaning Congress, but major fiscal reform remains necessary. Asset prices already reflect optimism about the economic team; after the IBOVESPA's gains, further progress depends on execution and implementation.

“So Brazil has a great opportunity in front. I mean, there are many tailwinds, commodity prices are high, but there's the fiscal challenge that you just highlighted…”—

TECHNOLOGY

Chip Demand and Costs — The guest describes semiconductor demand as historic and the demand-supply imbalance as unprecedented, citing reports from ASML, Samsung, and Micron. He says GPU and raw semiconductor prices are up 15% to 20%, while memory prices have risen by triple digits.

“The demand is historic. I mean, you look at ASML's report, look at Samsung's report, look at Micron's report.”—

ECONOMY

Inflation and Shocks — Eric Winograd expects inflation to run between 2% and 2.5%, above the pre-pandemic range of 1.5% to 2%; he says 3% is too high. He expects supply shocks to fade in coming months but warns that shocks from exogenous events, including a persistent or escalating war in Iran, cannot be forecast reliably.

“We've argued that inflation is gonna be between two and two and a half percent. Remember, pre pandemic, it was running between one and a half and 2%…”—

Inflation Expectations — Winograd says one-year inflation expectations have risen in both the New York Fed and University of Michigan surveys, suggesting households and businesses may expect elevated inflation to last longer than initially thought. If that continues, he warns, it could give the Fed pause.

“There has been though over the past few months a march up in short term inflation expectations. The New York Fed survey of one year inflation expectations is marching higher…”—

Uneven Consumer Economy — Winograd says strong markets cushion higher prices for investors, while paycheck-dependent households have lost ground as real average hourly earnings turned negative. He describes two distinct consumer experiences and cites Mark Zandi's estimate that the top 10% of income earners account for more than 50% of consumption, helping lift aggregate figures.

“Yes and no. At an aggregate level, yes. But if you break it down, no…”—

MARKETS

Hard-Asset Thesis — Rosenberg's hard-asset discussion includes base metals, pipelines, and energy infrastructure. He frames their investment case around expected supply and demand, rather than primarily around interest rates.

“Well, over and beyond that, when I talk about hard assets, I'm also thinking about, commodities, principally, base metals, pipelines. So a lot of energy infrastructure…”—

Housing and Bonds — Rosenberg says residential property is not a good place to be right now and that his firm recently raised its bond allocation to 30%. Separately, the transcript reports that average existing-home prices fell 2.8% sequentially and declined in each of the prior three months.

“And in fact, I think residential property is not a good place to be in right now, but, you know, we just raised actually our allocation to bonds to 30%…”—

Yields and Fed Cuts — Bianco says that from 2024 to 2026, the Fed cut rates by 175 basis points in six meetings while the 10-year yield rose 130 basis points. He calls this the first extended rate-cutting cycle in 50 years to produce higher long-term rates and interprets it as a market signal that policy was too easy.

“Yeah. Are they behind the eight ball and need to raise rates six times?…”—

September CPI Outlook

Eric Winograd expected inflation to remain elevated but contained, with a medium-term path near 2% to 2.5%, while warning that supply shocks and rising short-term expectations could delay progress.

Hot CPI, Fed Timing

September CPI exceeded expectations on headline and core measures, lifting yields; Winograd said the report kept an October hike possible but left December as the more likely move.

Rosenberg’s Inflation Framework

David Rosenberg described inflation’s role in asset pricing and favored bonds and selected real assets, arguing that wages, money growth, and market-based expectations did not signal entrenched inflation.

Tariffs And Goods Inflation

Rosenberg and Jim Bianco disagreed about lasting goods-price pressure, weighing tariff pass-through, deglobalization, weak labor-market bargaining power, and the fading effects of successive shocks.

Fed Credibility And Housing

The guests debated whether the Fed should respond to the CPI surprise, with Rosenberg emphasizing lagging shelter measures and underlying disinflation while Bianco warned about policy credibility and political pressures.

Nominal Growth And Shocks

Bianco called higher rates more normal than the post-2010 period, while Rosenberg argued nominal GDP overstated economic strength and that inflation could ease if repeated external shocks subside.

Rents And Market Concentration

Rosenberg said US shelter calculations lag falling rents and home prices, and warned that market concentration, weak employment and income growth, and the AI divide point to significant imbalances.

October Rate-Hike Debate

Rob Sacken maintained that broad inflation and a stable consumer case supported further hikes, arguing that skipping October after hawkish signals could undermine Fed credibility and unsettle long yields.

China’s Export Resilience

Sacken said Chinese exporters adapted to US tariffs by expanding into other markets, though he said the economy would eventually need stronger domestic consumer spending.

AI Chips And Capacity

Ted Mortensen described historic semiconductor demand, tight GPU and memory supply, and financing constraints, while identifying free cash flow and a potential rotation from chip infrastructure toward AI software.

Latin America’s Political Shift

Ernesto Ravie described a regional shift toward business-friendly governments and discussed Brazil’s fiscal challenge, Mexico’s trade position, security concerns, and Chile’s difficulties implementing reforms.