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What is the Season for an Inflation-Proof Currency?
By now readers will be well aware of USDi, the cryptocurrency whose price represents how many of today’s dollars you would need to buy a December 2024 dollar. (The answer at the time of this writing, according to https://usdicoin.com, is $1.044755). That construction means that USDi is inflation-proof, since as the price level increases so does its price. It is a ‘real’ dollar, always buying what a December 2024 dollar bought.
Now, I have recently pointed out that since recent NSA CPI prints were extremely high, USDi is accruing at a 12.6% rate in May and will accrue at a 10.2% rate in June. Buying a cash instrument with those yields is a no-brainer of course, and they won’t be sustained – as the energy price spike passes, future USDi yields will decline to become more normal.
But that’s a tactical call – compare USDi’s current return to 1-month TBills and allocate to whichever is higher. It’s fairly uninteresting grade school math and, anyway, not something you’d want to do with the whole nut, if you’re managing a $200mm stable portfolio. The more interesting question is about the longer-term strategic call. If you’re going to hold cash in your portfolio in some amount, and want to make an educated guess about the next year or two rather than actively move money in and out at hedge fund speeds – what’s the right ‘season’ for that? In what sorts of economic environments would you prefer to invest in an inflation-proof dollar, rather than in a dollar paying some simple nominal no-credit-risk interest rate?
The answer may surprise you, because of the recency effect. I am showing this most-recent period first for two reasons. (1) It will sync very nicely with people’s short-term memories of the last couple of years, when short-term interest rates have been above inflation, and (2) if I only show charts where USDi wins, any analyst worth his salt will assume I am hiding the bad chart. [N.b. – USDi was first launched in April 2025. But, since it is explicitly linked to the CPI index, we can easily and with complete confidence project its price backwards to any time there was a CPI index. So in these charts, I have labeled the return of “USDi” even though USDi did not exist at the time. Ergo, they are all charts about what returns would have been had USDi existed.]
The last few years have been a tale of great success for money-market investors. The Fed raised rates aggressively (finally) in 2022 and 2023, so that when we start this chart the Fed funds target rate was 5.25% and y/y CPI was 3.4%. Even though the Fed has subsequently eased rates a bit (despite inflation’s stubborn refusal to play along and fall to 2%), it was only recently that these lines started to move in parallel again as y/y CPI is 3.8% and 3-month Tbills are at 3.66%. Over the last few years, you would have lost roughly 5% holding an inflation-proof currency instead of rolling 3-month Treasury bills.
But whoa, let’s not forget the prior before that!
Here we see one solid reason to prefer an inflation-proof dollar, in that it adjusts automatically regardless of whether the central bank believes inflation to be ‘transitory.’ Ouch, this was a tough period for holders of cash. People for a long time leading up to this were holding lots of cash because precautionary cash balances are an option on future opportunities. The cost of that option – the time decay – is inflation, as I mentioned in an early podcast Ep. 18: Cash is an Option Whose Cost is Inflation. Holding cash through this period was painful: the price index (USDi) rose 18.2% versus Tbills at 6.6%, but it was really worse than that because the price level was up nearly 15% before the Fed did anything.
Speaking of the Fed, why don’t we go back to the Global Financial Crisis?
In 2005-2006, with growth strong the Fed was hiking rates. In 2007, Fed funds leveled off at 5.25% before stuff started coming unglued in the subprime mortgage market – but it was ‘contained’ – and the Fed started cutting rates. By late 2007 interest rates were at 3% but inflation was still rising. Then the bottom fell out, home prices declined, and oil prices dropped from $147/bbl to about $33/bbl. While core inflation never got below 0.6% y/y, the price index itself fell about 5% thanks to oil, leading to a lengthy period of deflation. Oh, wait…no, I guess it didn’t. As you can see from the green line, prices kept marching slowly higher – long after the Fed had collapsed interest rates to zero and were shoveling dirt on Lehman.
No need to cover every single year. But here are a couple of segments from the post-GFC period (aka ‘financial repression from the central bank’).
Inflation was low in the early ‘teens. But interest rates were even lower. The Fed felt they had a license to keep rates low, because inflation was low, and didn’t feel a need to impose positive real returns at the short end of the risk curve.
The same was true later in the decade, where the Fed responded to a growing economy by raising interest rates a little bit but still keeping them below the rate of inflation.
These periods cover lots of different economic environments, and for the last 20 years or so inflation has outperformed interest rates over a wide variety of them: the GFC collapse. Extended periods of low inflation in a period of Fed financial repression. Normal growth with a dovish central bank. The only time that it has not outperformed short rates is in a period like December 2023-March 2026, after inflation has already spiked and the Fed is belatedly trying to fix the problem by being hawkish.
Let’s back up even further. The chart below shows the annual return from rolling 3-month Treasury bills, compared with the inflation realized during that holding period, going back to 1969. [N.b. prior to 1983, the CPI’s shelter component incorporated home prices and mortgage rates, so that by construction CPI tended to be closer to interest rates.]
You can see, looking at the chart, that there are certainly periods when interest rates do outperform inflation. Not surprisingly, these include the epoch defined by Paul Volcker and the echo of Volcker maintained by his acolytes for years. Here are the annualized after-inflation returns of Tbills (approximately), by decade:
So in the inflationary 1970s and the disinflationary 2010s and so far since 2020, it paid to hold inflation (or it would have, if USDi had existed). I would argue that what those decades had in common was a Federal Reserve that leaned towards dovish. On the other hand, the 1980s and 1990s were a great time for bondholders – not to mention equityholders – as the Fed routinely held short rates above inflation and managed to squeeze inflation out of the system to lower rates. The 2000s were a period of transition between these two, and about a wash.
Therefore, in my opinion:
In order to bet against owning USDi in preference for Tbills or other credit-risk-free cash strategically rather than tactically, you need to believe one of the following:
- Kevin Warsh is the second coming of Paul Volcker, and he will tend to keep short-term interest rates above inflation. I do believe that Warsh is one of the more hawkish-by-construction Fed Chairs we have had in a while, but notably he is hawkish on the balance sheet and more dovish on rates themselves. So…this is difficult for me to believe. Inflation also started Volcker’s term quite high, so there was a long decline where rates could be lowered and still be above inflation. We aren’t in that situation right now.
- Or, you believe it’s a close call – maybe we are finally post-GFC-crisis and can return to the model of the 2000s – and you don’t care about the portfolio benefits of having a built-in hedge in your cash holdings. Because make no mistake, if it’s a coin flip on average then I want the Dec-2020 to Dec-2023 outcome where an inflation accident gives me a long-tail benefit rather than a long-tail cost!
The season for an inflation-proof currency is now.
Inflation Guy’s CPI Summary (April 2026)
Here we are again, on the monthly CPI roller-coaster. Consensus coming into the day was +0.60% m/m headline, +0.33% core, pushing the y/y numbers to 3.7% and 2.7% respectively. The headline print will obviously be flattered by energy prices again, but the core number may seem surprising since we have been running between 0.196% (last month) and 0.313% (last July) for the last year. Why so high? To be honest, the core forecast seems lowish to me: this is the month where the shelter rebound is to take place. As a reminder, the BLS methods from the missed month of CPI in October implied no change for shelter, and that’s clearly wrong; because of the way the sample rotates, we had to wait 6 months to get the correction. That day is today. The consensus of good inflation shops seems to be that the correction will be worth 0.14% on Core, which makes you wonder…0.33% minus 0.14% would be 0.19%, so essentially economists are expecting new lows in m/m core? Seems curious.
Last preliminary point – the market over the last month has generally impounded higher inflation expectations (far left, inflation swaps). The sharp decline in 1y CPI is an artifact of the fact that over the last 30 days or so, a lot of good carry rolled off the front. In fact, that makes the 2y look all the more remarkable. Nominal govvie rates are higher (right column), but that’s a good bit due to higher real interest rates (third column) more than inflation expectations. Which is interesting.
Now for the actual data and the rain of charts.
The actual print for CPI was +0.64%, with m/m core CPI of +0.376%. So the economists were low, and even the swaps market was low as NSA printed +0.85% m/m.
The jump, as I said, is partially a repayment for the very low Oct/Nov numbers last year (there was no October, so this chart divides the very low 2-month change in November). Figure if the run rate was +0.25% or so per month, we were a cumulative 40bps too low over those two months. Not all of that was given back today; much of it showed up in December and January. But that is the context for the big spike on the right-hand side. It’s not as bad on the (estimated) median chart. My guess is +0.33% m/m for Median, but that’s almost certainly off by a little since the median category is going to be one of the regional OERs.
Core Goods inflation dropped to +1.1% y/y this month, while Core Services rose to +3.3%. In September, before the shutdown, the numbers were +1.5% and +3.5% respectively, meaning that we have made some progress – but not as much as we need to – on core goods and very little progress on core services. Bottom line is, the improvement it appeared we were seeing in CPI over the last six months was basically an artifact of the shutdown.
Here are the rent charts, with a ditto mark for the prior comment. The jumps this month aren’t really a hook higher; they’re correcting the erroneous y/y numbers that the last 5 months showed. We have still made progress – back in September these numbers were 3.39% and 3.76% respectively. Just less than we thought. The m/m increase in Primary Rents was +0.55%, bringing the y/y to 2.79% from 2.56%; for Owners’ Equivalent Rent the numbers are +0.53%, taking it to 3.3% from 3.1%.
Additionally, Lodging Away from Home rose 2.44% m/m. This category did not have the same problem that the Rents series did, or rather the correction happened previously – there is no 6-month rotating survey for Lodging Away from Home. Lots of shelter inflation this month!
Airfares were +2.82% m/m. That’s in services, but it’s significantly related to jet fuel of course. With this increase, airfares are now roughly in line with the increase in jet fuel. Of course, mergers of giant air carriers and the bankruptcy (Spirit Airlines) of regionals are both damaging to the competitive nature of airfares, so it remains to be seen how much that effects prices in the long run. It probably shifts higher and steepens the chart below somewhat.
Here are the Four Pieces charts. Food and Energy +8.03% y/y. Core Commodities +1.13% y/y. Core Services less Rent of Shelter +3.28% y/y. And Shelter +3.26% y/y. These four pieces, in descending order of volatility, add up to the CPI and they’re each between 1/5th and 1/3th of CPI. The one we tend to focus on, rightly because it incorporates the feedback loop of wages to prices, is the “Core Services less Rent of Shelter” one, aka Supercore, and it is not looking as positive these days. Indeed, none of these charts are doing what they need to do if we want to see 2%!
Here is median wages – the Atlanta Fed Wage Growth Tracker – vs Supercore. Median wages have increased the last couple of months. You can’t really call it a trend change yet. But, this is the feedback loop. If you want 2%, you really need wage growth to be about 3%. No real sign of that yet.
Here is another way to look at ex-shelter inflation. Above we saw core services ex shelter; the chart below is core (goods+services, not just services) ex-shelter. That line is in dark blue. Shelter inflation is in light blue. If you’re really optimistic about shelter coming down to below 2%, then you can argue the rest of core CPI is only a bit above 2% (about 2.6%). But historically, as you can see from the chart, you wanted most of core to be below 2% while shelter ran a bit above it, if you were going to be in a placid inflation environment. So that doesn’t look quite right yet. Plus…there’s no sign shelter is about to drop below 2%.
When I say ‘no sign shelter is about to drop below 2%, the chart below is what I mean. It had appeared that rent inflation was dipping below my model. But it turns out, the model wasn’t high at all – the dip was the artifact of the shutdown. So rent inflation is 2.8%, the model is at 2.8%, and the model a year from now is at 2.8%. That doesn’t seem like the right sort of trend. I seriously doubt rents are going to do the heavy lifting getting inflation down to 2%.
By the way, let’s not sleep on food prices. They were up 0.5% overall this month. This chart shows the level in the top panel (note that food doesn’t mean revert like energy does), and the rate of change down below. The 2024 dip was a rebound from the 2022 spike, but we’re crawling back up. Note that unlike energy in the CPI, the food category isn’t just a pass-through of commodity costs. Higher packaging, trucking, marketing, etc costs are more important long-term drivers than the cost of the commodity – and in Food Away from Home, obviously wages matters too. Food is just another category – a major one, to be sure – that doesn’t look like it is placidly dropping to 2%. Although, since it’s not a core category, the Fed could theoretically ignore it. It’s harder to look through food price increases than energy price increases, since as I said food price increases don’t typically mean-revert.
Now for the good news portion of our broadcast. The combination of Trump RX and the new “most favored nation” policy on drugs is having some effect on the CPI for “Medicinal Drugs” (which includes both prescription and non-prescription drugs). Prices are in fact declining. I would argue it isn’t super dramatic yet, but drug prices are coming down.
Put this all together and the Enduring Investments Inflation Diffusion Index rose again – reaching 44, which is the highest level it has ever seen other than the 2020-2022 spike.
With this April CPI, we now know the USDi coin’s price through the end of June. The current USDi price is 1.0394. By the end of June, the price will be 1.05488. That’s 1.49% over the next 49 days, so about 11% annualized.
Furthermore, inflation swaps for May’s CPI are suggesting another hottish NSA CPI of +0.55%, which would annualize to 6.6% if it happens. After that, energy correction (we hope) should weigh on CPI but for now, it looks like a hot summer for USDi. You can mint the coin at https://usdicoin.com/coin.
Wrapping this up, the read is actually pretty easy. Inflation is not just in energy, but right now is fairly wide as the diffusion index shows. Some of that is related to energy…the price of diesel fuel affects trucking costs, which affects other goods prices…and some of it is related to the fact that wage growth is no longer slowing. Any way you look at it, as I said the read is pretty easy: the Fed obviously isn’t going to be tightening into an oil shock. But there is nothing here that gives them cover to ease into an oil shock either. Warsh inherits a pickle.
