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Inflation Guy’s CPI Summary (November 2025)
What better way to end this crazy year than with an economic data point that we don’t know how to really interpret? Happy New Year!
Recall that, thanks to the government shutdown, the BLS released September CPI (by recalling workers to calculate the number based on data already collected) but didn’t do any of the normal price-collection procedures for the prices that are normally collected by hand. That’s far less than 100% of the index, but it’s a lot and so the October CPI was not released at all. Which brings us to today, and the November CPI – where the data was mostly collected somewhat normally. However, the calculation procedures had to be adjusted in ways we don’t really know about. You’d think that the way you do this is that you figure out the value that equates to the price level you just measured, and just say ‘hey, that’s a two-month change’ but it isn’t quite that easy. And some very smart people think this could bias the CPI lower for a few months. Whatever they end up doing, the lack of an October number is still going to mess up all the feeds (e.g. from Bloomberg) and all of the scripts and spreadsheets based on those feeds.
The BLS said in a FAQ yesterday that “November 2025 indexes were calculated by comparing November 2025 prices with October 2025 prices…BLS could not collect October 2025 reference period survey data, so survey data were carried forward to October 2025 from September 2025 in accordance with normal procedures.” In other words, November will basically be a 2-month change. (Or so we thought: see below).
Looking back to the last real data we got, in September: recall CPI was weaker than expected, but a big part of that was because of what looked like a one-off in OER. But the breadth of the basket that was accelerating was increasing, which was not a good sign. Normally the OER question would have been answered last month but…oh well.
Coming into the month…we at least have market data!
There was a big drop in short inflation swaps and breakevens this month. A lot of that is due to the steady drop in gasoline prices (see chart below), but some of it may be because sharp-penciled people anticipated that the BLS adjustment for October’s missed data is going to bias the number lower.
And boy, did it. This number is absolute garbage.
There are going to be two eras going forward: pre-shutdown inflation data and post-shutdown inflation data. Much like when there are large one-offs in the data, as in Japan years ago when there was an increase in the national sales tax rate, the year-over-year data for the next year are going to look artificially low. The BLS never adjusts the NSA data ex-post. If it’s wrong, it stays wrong. We can really hope that this doesn’t affect seasonal adjustments when the BLS calculates the new factors for next year, because that would mean next October’s CPI is going to be massively biased upwards.
Because what it looks like is that for many series the BLS didn’t calculate a two-month change based on the current price level – it looks like, especially for housing, they assumed October’s change was zero so that the two-month change reported for this month was actually a one-month change spread over two months. For example, even with the low Owners’ Equivalent Rent print in September, the y/y figure was 3.76%, so about 0.31% per month. The BLS tells us that the two-month change in OER was +0.27%. That looks more than a little suspicious to me.
Largely from that effect, core services inflation dropped from 3.5% y/y to 3.0% y/y in just two months. Riiiiight.
If in fact these two-month changes are all (or mostly) one-month changes, then the data makes a lot more sense. Either way, it’s hard to believe that the y/y change in Health Insurance dropped from 4.2% y/y to 0.57% y/y, thanks to a -2.86% decline in November from September. Yes, the Health Insurance category does not directly measure the cost of health insurance policies, and October is often when the new estimation from the BLS goes into effect, but a monthly -1.43% pre month decline for the next 12 months in Health Insurance is implausible.
Ergo, I’m not going to show most of my usual charts. This is garbage all the way down. Now, in my database instead of having a blank for October as the BLS does (for many but not all series. Seriously this is going to completely mess up any spreadsheet based on pulling data from Bloomberg), I am going to assume the price level adjusted smoothly over those two months – that is, I interpolated between September and November. That’s naïve, but it’s necessary to assume something and that’s better than assuming no change for October!
I have no idea what this will do to Median. If the Cleveland Fed follows the BLS lead, they’ll report a blank for October and a Median of something like 0.24% for the two-month period (that’s what I calculate), but it’s also garbage because garbage-in, garbage-out.
Really, this is a low point for inflation people and a low point honestly for Inflation Guy. I expected more from the BLS. I spend a lot of time defending these guys (heck, I just wrote a column on “Why Hedonic Adjustment in the CPI Shouldn’t Tick You Off”) because the staff involved in calculating the CPI are solid non-partisan professionals (aka pointy-head types) who really are trying to get as close to the ‘right’ answer as actual data allows. I can’t say that’s true in this case. Now, maybe when we get more data we will discover that the economy has abruptly shifted into something like price stability on the way to outright deflation, and it just happened to have a major inflection in October when no one was looking. But to me, it just looks like bad data.
Policymakers still gotta make policy, even if garbage data is all they have. But the correct response to not knowing what’s happening is not to assume you know what’s really happening and act accordingly – the right approach to extremely wide error bars is to do nothing. The correct approach for the Fed is to do nothing until they have another 3-6 months of data and can start getting some confidence about current trends again. That’s not the world we live in. In this world, the Fed will recognize that the inflation data is squirrelly so their behavioral response will be to ignore it and in the policy context that means that they’ll make policy for a while here based solely on the labor market. Get ready for much more market volatility around the Payrolls report again! To me, that looks like it’s likely to be an ease in two of the next three meetings, before the FOMC needs to recognize that the new inflation data is still showing 3-4% inflation. It’s possible that the Committee could take a pause while they wait for the incoming Fed Chair in May. But the inflation data will not be an impediment to an ease, and will no longer be a strong argument for holding the line if growth data looks weak.
I may be being overgenerous here. It’s also possible this will reinforce the FOMC members’ priors since many of them were utterly convinced that inflation was going to drop significantly due to housing. This, in the presence of bad data, would be a pure error. But the result is the same: an easier Fed than is healthy for the monetary system right now.
There are lots of reasons to think that yields further out the curve will stay stable or rise. But yields at the short end should probably reflect easier money going forward.
Sorry I couldn’t be more help. Here’s looking forward to 2026!
Inflation Guy’s CPI Summary (September 2025)
Well, it seems like it’s been a while since the last CPI update! Thanks to the government shutdown, it has been since this data is a week and a half later than it was scheduled to be. The importance of the CPI release is obvious, but it was reinforced by the fact it’s the only one the government is calling people back to release. It isn’t that we don’t have reasonably-accurate alternative ways to measure price pressures, though – it’s because unlike Payrolls and most other government releases that are important touchpoints for economists, the CPI is an important legal touchpoint for contracts, bonds, and legal obligations of the federal government. In this case, September’s data is a crucial number needed to calculate COLA adjustments for Social Security for next year. If this had been October’s data? I’m not sure they call back workers to release it. But that’s next month’s problem.
Speaking of next month’s problem: the government shutdown did not affect data gathering for this month’s number; they had to recall the people to collate the data and publish it but not the collectors. So the quality of the data should be fine. The data-quality question is much murkier when we look forward to next month, but since much less of the data collection is done by guys with clipboards these days, it might not be as bad as you think. Still, that will be the concern for the October CPI released next month. Like I said: next month’s problem!
Heading into the release, consensus was for +0.37% on headline CPI (SA) and +0.29% on core. I have to admit that I was confiding to people that this seemed sporty because the prior month had seen a surprising acceleration in rents that could be reversed, indications are that Used Cars would be a drag, and Food at Home also looked soft (I was right on 2 out of 3 – Food at Home was an add). That told us going in that if we were going to get to +0.29% core, either I had to be wrong on most of that or core goods ex-used cars was going to have to be pretty strong. Tariffs definitely are helping to push that narrow group of the consumption basket higher. But is that enough? Let’s see.
The backdrop going into the data was that rates have been generally softening, and the inflation swaps curve has been steepening (lessening its inversion, with near-term inflation pricing dropping more than longer-term inflation expectations). That’s consistent with a return to normalcy…but it’s really happening because energy prices have dropped quite a bit until the last couple of weeks, and that has a more immediate impact on the front of the inflation curve. The mean reversion time for energy prices is something like 15 months, so by the time you’ve gotten a few years out the curve today’s lower gasoline prices shouldn’t much affect your expectations of inflation forwards. But it affects inflation spot, which propagates through the forwards.
Actual print: SA CPI +0.31%; SA Core +0.227%. Softer than expected, and it took only a moment to see that a big part of that was due to a sharp deceleration in Owners’ Equivalent Rent (see chart). Some of that was the give-back I expected, but it was more than that and so we should put this in the back of our minds for next month – we’re probably due a reversal in the other direction over the next month or two.
Interestingly, even with the miss the Core CPI time series doesn’t look terribly weak. I mean, +0.227%, repeated for a year, still gives you 2.7% core CPI. And we won’t get downside drags from cars and housing every month.
Interesting jump in apparel this month. It’s a small category and always volatile, but since we also import almost all of our apparel it’s one place I look for tariff effects. But note the y/y numbers are still very low and in fact decelerated with this jump, implying last year’s bump in September was even larger. That’s a seasonally-adjusted figure, but I wonder if the problem here is that seasonal adjustment is failing us. Maybe pre-holiday mark-ups (from which we can show great discounts in a month!) are happening earlier. In any event it’s only 2.5% of the CPI so probably not worth too much computational cycles.
Core goods inflation rose slightly to +1.54% y/y, and core services declined to 3.47% y/y. The latter is mostly and maybe entirely due to housing, which is a core service. The former is interesting because Used Cars/Trucks was -0.41% m/m. That was expected, but it means that other core goods were more buoyant.
So here are OER and Primary Rents. 3.76% y/y (only +0.13% m/m) and 3.4% y/y (only +0.2% m/m). You can’t really tell a lot about the miss today from this chart – I showed the m/m series earlier, and the bottom line is that this continues to level out. I think the flattening is going to be more dramatic over the next 3-6 months but we’ll see. Lodging Away from Home rose again, +1.3% m/m, and is now flat y/y.
At this point, I’m thinking: with rents a downside surprise and Used Cars a downside surprise, this isn’t that bad a miss. In other words, if you’d told me we were going to get those numbers from rents and cars I would have thought core would be a lot weaker than +0.23% m/m.
Earlier I showed the last 12 Core CPIs. My guess at Median looks better, but that’s mostly because the median category is West Urban OER and even split up, an aberration in OER – and that’s what I think this is – is enough to sway Median CPI. It also means my estimate of median, +0.213% m/m, might be off because the Cleveland Fed separately estimates the seasonals for the regional OERs and so I have to guess at that part. My guess will take y/y Median CPI to 3.5% from 3.6%. And the Fed is easing. Hmm.
Here are the four-pieces charts. Food and Energy +2.99% y/y. Core Commodities +1.54%. Core Services less Rent of Shelter (Supercore) +3.37%. Rent of Shelter +3.53%. These are the four pieces that add up to CPI. None of them looks terrible except for Core Goods, and there’s limited upside to that – and it has a short period, so in a year it’s likely to be lower. I do think that going forward, core goods remains positive instead of the steady deflation it was in for decades, but not big positive. However, you need it to be negative if you want inflation at 2%, unless you get core-services-ex-rents a lot lower (but that’s highly wage-driven, and reversing illegal immigration helps support that piece somewhat) or rent of shelter a lot lower. The latter is certainly receding but it’s not going to go a lot lower.
I don’t usually spend a lot of time talking about energy, because that’s a hedgeable piece (largely – gasoline is a big part of energy and that’s easy to hedge with a little lag; electricity is harder). This month, Energy was +0.12% NSA. But next month, we’ll see a decent drag because of the sharp drop in gasoline over the last few weeks. That’s a little early compared to the usual seasonal, and it may mean we get the usual December drop in gasoline in October CPI.
Except…that I think the White House has teased that we might not get October CPI at all, just skip it, because of the difficulty gathering data. If that is true, the fallback mechanisms will kick in. See my piece on what that means, here, but the bigger point is that you wouldn’t get my scintillating commentary. I guess again that’s not this month’s problem.
Now, I have to show this almost by habit, and because the economists expecting housing deflation will be dancing in the streets. Take pictures, and show them again next year. They never learn. Housing inflation is slowing but there is no sign rents are going to come anywhere near deflation. Except maybe on a weighted basis if Mamdani gets elected Mayor of New York City and freezes rents. But then we’ll have to start looking rents ex-NYC.
How disinflationary a period are we in? Wellllll…of the item categories in the median CPI calculation, there were zero core categories that decelerated faster than 10% annualized over the last month (-0.833% or faster). On the plus side, there were Personal Care Services (+11.9% m/m annualized), Footwear (+12.0%), Motor Vehicle Fees (+14.2%), Tenants’ and Household Insurance (+15.2%), Lodging Away from Home (+17.5%), Miscellaneous Personal Goods (+17.9%), Men’s and Boys’ Apparel (+19.3%), and Public Transportation (+21.5%). These are small categories for the most part – but not all import goods and interesting in that the tails are all to the upside. That’s not the way a disinflationary economy usually looks, although I don’t want to overstate the importance of a single month!
Here’s the observation about long tails compressed into a single number, the Enduring Investments’ Inflation Diffusion Index. It’s signaling upward pressure.
Below is a chart of the overall distribution. The two big spikes in the middle are mainly rents and OER. But take those away and you can see there’s not a lot of categories in the 1-3% range, and a decent weight in the 5-6% range. This doesn’t really look like a price system settling back down placidly to 2%.
Now, the stock market clearly loves this, which makes sense. The Fed is going to ease, probably twice more this year. But that was already baked into the cake in my mind, because the Fed no longer targets 2% inflation. Remember that in the most-recent change to the 5-year operating framework the Fed, in Chairman Powell’s words, “…returned to a framework of flexible inflation targeting and eliminated the ‘makeup’ strategy.” I talk more about that here: https://inflationguy.blog/2025/09/02/the-fate-of-fait-was-fated/ Ergo, the Fed doesn’t really care if we get to 2%. They’d prefer to not see inflation head higher, but they can spin a story to themselves that even though median inflation is in the mid-to-high 3s, “the process of inflation anchoring is underway” or somesuch nonsense. As long as it’s not hitting them in the face that inflation is going up, they’ll keep relying on their models that say it should be going down. N.b., those are the same models that said inflation shouldn’t have gone up that much to begin with, and should have been transitory, but we all know “Ph.D.” stands for “Pile it higher and Deeper.”
Eventually, inflation going up probably will hit them in the face. But that’s such a 2026 problem.
Inflation Guy’s CPI Summary (August 2025)
Before I begin talking about today’s CPI, a quick word about the 24th anniversary of the terrorist attacks of 9/11. As someone who worked 1 block from the Towers, I can tell you it’s a day I will never forget and filled with images I can never erase. But I also remember that in the weeks that followed, the country was unified in a way I’d never seen. Rudy Giuliani was “America’s Mayor” for his courage and steady hand during the disaster and in the period that followed. When I traveled to the Midwest, menus were filled with ‘Freedom Fries’ and strangers asked with concern about my family and friends when they heard I was from New York. It seems crazy to me that only 24 years removed from that, the country is divided in a way I’ve never seen. Everyone said “we will never forget.” And then they forgot.
But I do not forget. I give prayers and thanks for the brave first responders I saw that day and for the families of those who didn’t return. And you should too.
All of which makes the monthly CPI report seem very small. In truth, it is small all of a sudden. From being one of the most-important releases for a couple of years because of the Fed’s assumed reaction function, it has abruptly been pushed to the back. This is partly because of the weak Employment data and the massive downward revisions to the prior data but that point is reinforced by the Fed’s recent adjustment to the inflation targeting framework, in which they removed any imperative to make up for periods of high inflation by engineering lower inflation so that the reaction function is basically one way. (See my writeup on this at https://inflationguy.blog/2025/09/02/the-fate-of-fait-was-fated/.) I guess there’s an ironic parallelism here. After the inflationary 1970s and the pain of bringing inflation back down, the Fed said “we will never forget.” And then they forgot.
But I do not forget. And neither should you. An investor’s nominal returns are irrelevant (except to the IRS). What matters is real returns, and a period of higher and less-stable inflation has historically resulted in lower asset prices since the most important indicator of future returns over normal investing horizons is starting price. If markets need to adjust to higher inflation to give higher nominal returns, the easiest way to do that is to lower the starting price. So whether the Fed cares, we should.
And with that – we came into today with real yields having fallen some 20bps this month, but with inflation expectations having not declined much at all. Obviously, that’s the market’s reaction to the presumed tilt of the Fed.
The CPI report was slightly above expectations, which were already somewhat higher than in prior months. So when people tell you this was a ‘small miss higher,’ that’s mainly because economists adjusted their expectations, not because the number was similar to prior months. Month/month headline inflation (seasonally adjusted) was +0.382% (expectations were +0.33%), with core at +0.346% (expectations were +0.31%). Markets have not reacted poorly to this figure, but I wonder if core had been slightly higher and rounded to +0.4% if we’d have seen more introspection.
But as I said, this is a ‘small miss’ but that does not mean it was a small number. Indeed, with the exception of the jump in January associated with tariff noise, this is the highest core figure in 17 months.
There were a number of upside categories, but one of them was not Medical Care. Some people had been looking for a move higher here, and Doctor’s Services rose a bit, but Medicinal Drugs fell -0.372% m/m and is now down year/year. That surprises me, but there are a lot of pressures on the drug industry right now and it is going to take a while to see how it shakes out.
Core goods prices continued to accelerate. On a y/y basis, core goods are +1.54%. With the exception of the COVID spike, this is the highest level of core goods inflation since 2012. Some of that is definitely due to tariffs, and that will trickle in for a while. But the long-wave concern is that deglobalization/re-onshoring of production means that it will be very hard to get core goods inflation back to the persistent mild deflation we had enjoyed for a very long time. And without that, it is very hard to get core inflation to 2%, especially if core services (+3.59% y/y) stops improving as the chart sort of hints it might.
One surprise you will hear a lot about is Owners Equivalent Rent, which was +0.38% m/m. Primary Rents were +0.30% m/m. Both of those are higher than the recent figures, but this looks like some residual seasonal-adjustment issues to me. The y/y for both continues to decline, albeit at a slowing rate, which means that the number we dropped off from last year was higher than the upside surprise of today.
Rents are on schedule.
We also saw another jump from airfares, +5.87% m/m, and Lodging Away from Home (+2.92% m/m) finally rebounded after months of weakness. Used cars were +1.04% m/m, and new cars +0.28%. When you look at all of the pieces, it adds up to Median CPI being almost the same as last month: my early guess is +0.276% m/m.
Turn that picture any way you want to. I don’t see a downtrend.
When we break down inflation into the four main pieces, none of them is in deflation and none seems to be an overt drag or pulling everything else up. Food and Energy is +2.16% y/y. Core goods is +1.54% y/y. Core services less rents (aka Supercore, chart below) is +3.56% y/y. And Rent of Shelter is +3.61%. How do you want to get inflation to 2% from those pieces?
Long-time readers will know this does not surprise me. Median CPI will be around 3.6% y/y again. That’s where we are. We overshot my ‘high 3s, low 4s’ target to the downside a bit, but we’re back up in the mid-to-high 3s. I’ll take that as a win.
I want to share the money supply chart. On an annualized basis, we’re near 6% y/y over the last six months. That is back to pre-COVID levels, and is too fast in this environment. You can’t get 2% inflation with deglobalization and sour demographics if you’re running the monetary playbook from when you had globalization and positive or neutral demographics.
And finally, we now know USDi’s price through the end of October.
So what does all of this mean for policy? Well, see what I said above about inflation targeting and the change of the Fed’s operating framework. The most important things to the FOMC right now are, in order:
- Employment
- Politics, and jockeying for position to be named next Fed Chair
- Internal modeling about tariffs, inflation expectations, rents, etc.
- Actual inflation numbers, like CPI
35th or so in importance is “the quantity of money,” if it’s on the list at all. You can probably glean from my list that I think the Fed is likely to ease. Let me make clear that I do not think that a wise Fed chair would even consider easing with median inflation steadying around 3.6%, and a 50bps cut would be laughable. However, this is not a wise Fed chairman, and this one is going to ease. In my gut, I think the Fed will cut 25bps but with several dissents for 50bps. I would not be shocked with a 50bps ease even though it is completely boneheaded to do it with inflation still running hot with no clear path for it to decline to what used to be the target.
But that’s the point I suppose. Is there even a target, if the Fed doesn’t mind missing it?
One final announcement. If you’re an investor in cryptocurrencies (in particular, stable or flatcoins) and have a Telegram account, consider joining the read-only USDi_Coin room https://t.me/USDi_Coin where the USDi Coin price is updated every four hours or so…and where many of these charts are also posted shortly after CPI just as I used to do on Twitter.
Inflation Guy’s CPI Summary (July 2025)
The inflation story and the employment story are about the only things rippling the still summer waters these days, it seems. The weak employment data in the most-recent report got equity investors very excited since every analyst worth his or her salt believes that lower rates are good for the companies he/she covers, but those companies will surely be able to avoid losing business in an economic slowdown. And, to be fair, because the goods and services sectors in the US (and global) economy are out-of-sync, any recession is likely to be fairly shallow (and being out-of-sync is probably why the recession has been so delayed – different sectors are having recessions at different times. I discussed this in last week’s podcast, Ep. 147: Out of Sync).
But the fly in the ointment would be if inflation heads higher, wouldn’t it?
Well, maybe not so much. In normal times, probably. But in today’s world there is a nice, built-in excuse for any inflation uptick: it’s the tariff effect! It is amazing how focused on tariffs everybody has been, when they forecast/analyze the CPI report. The core goods sector of the economy is about one-fifth of total consumption. Tariffs will (and finally are) driving this higher, but that story will eventually pass. Core goods will not be what keeps inflation high or sends it higher in 2026. But you know why everyone wants to focus on it? Because if you can blame the inflation uptick on tariffs, then you can argue that rate cuts still make sense. More on that later, but when you look at the monthly changes in real yields and inflation expectations you can see what is happening: yields are down, inflation expectations basically unchanged, over the last month. The best of all worlds!
Which brings us to today’s report. The consensus expectations were for +0.23% on headline CPI (seasonally-adjusted), +0.29% on core, pushing the y/y figures higher for both of them as we drop off soft data from last summer. The actual prints were +0.197% on headline (yay!) and +0.322% on core (boo!). That was the highest m/m core inflation figure since January, and the first time since then that core has been higher than consensus expectations. It also was the highest m/m core number, other than January’s tariff-related spike, since March 2024.
The category breakdown was interesting for a change because the top culprits were Medical Care, Recreation, and Other.
To be fair, housing would have contributed more except for another drop in Lodging Away from Home. Seasonally-adjusted prices for lodging away from home have now fallen 7.3% since January. I have been working on the assumption that this is a deportations story, or possibly a tourism story (I don’t really think ‘foreigners aren’t visiting the US because they hate Trump’ is really happening but in some quarters that’s the story they’re selling). But if you look at this chart and notice the times that hotel prices declined meaningfully, there’s an argument that it’s a recession story. Or that it could be, if it continues to slide.
Primary rents accelerated slightly m/m, +0.26% vs 0.23% last month, but Owners’ Equivalent Rent decelerated to +0.28% vs 0.30%. Both are playing to form, but it’s worth keeping an eye on Primary Rents here. Deportations as an inflation story would show up in Lodging Away from Home but it also could show up eventually in rents – but a recession wouldn’t be expected have any meaningful impact on rents. So how those two series behave might give us a clue. Or maybe not; perhaps I’m trying to read too much into this.
Core goods accelerated again. The bounce was totally expected, but now that we are over +1% (+1.17% y/y) we are clearly seeing some of the impact of tariffs. Core services is more interesting, though. Even with rents decelerating and Lodging Away from Home dropping again, Core services ticked higher.
Indeed, lumping core services and core goods together, but taking out shelter, and we can see that the underlying core dynamic looks like it had been bottoming anyway and might be heading higher.
A large jump in airfares (+4.04% m/m) is partly to blame this month…but in March airfares were -5.3% m/m and the worst since 2021 while today’s number was the highest since 2022. Since COVID, airfares have just been really unstable, or the seasonals have been unstable, or both. I am not worrying too much about this jump.
Airline fares are 0.9% of CPI, but this volatility has added to the overall volatility of the CPI. And before you say ‘this is a consequence of resource constraints at the BLS!’ you should realize that airfares are not collected by people with clipboards but by web scrapers. However this is yet another reminder that Median CPI is a better way to look the overall trend, so as not to be distracted by little categories. My early guess at Median this month is +0.276%, a bit better than last month. But there is nothing here that looks to me like a moderating trend to lower inflation.
In fact, median y/y ought to tick higher again this month to about 3.65%. It is stabilizing in the high-3s. The next few monthly figures to drop off will be 0.3s, so I don’t think we will see median y/y head back to the 4% level. But having said that, there is one development that bears watching.
Core services less rent-of-shelter, aka “Supercore”, rose +0.48% m/m. If higher tariffs and deportations lead to more domestic employment and higher wages – which they should, but it isn’t yet really in the data as employment looked weak and the Wage Growth Tracker ticked down to +4.1% y/y this month – then this part is what will keep inflation uncomfortably high even if rents continue to decline (I don’t see them declining lots further than this) and goods inflation eventually declines after the tariff effect passes through. That isn’t today’s story. But it might be a 2026 story. Stay tuned. At the tails of the distribution this month we had greater than -10% annualized monthly inflation from three non-core categories while greater than +10% from eight non-core categories – including motor vehicle parts and equipment and miscellaneous personal goods, which are tariff stories, but also tenants and household insurance, miscellaneous personal services, public transportation, and motor vehicle maintenance and repair. Those are all service stories. As is this one, although it’s also a goods story indirectly (I explain further in the Q3 Quarterly Inflation Outlook, due out tomorrow – subscribe at https://inflationguy.blog/shop).
Overall, the underlying trend is the same: we’re settling in the high-3s for median inflation. Last month, I said that unless the economy starts to soften more seriously there just isn’t a good argument right now for rate cuts and the optics of rising year/year inflation would make it more challenging for the FOMC to consider an ease. That is still true. If Fed credibility matters to inflation, then inflation should start heading up because we are clearly getting more doves. If tariffs matter, inflation should be heading up because the tariffs are now showing and will be an effect for a while. If money growth matters, inflation should be heading up because M2 growth is back to +4.5% and accelerating.
But the core question is whether the Fed cares about inflation right now. Listening to their public statements, it doesn’t appear they do. One might argue that they are just supremely confident that if the Unemployment Rate heads higher, inflation will head lower so they have some room to move. To be honest, “supremely confident” and “Fed official” are not phrases that should appear in the same paragraph except sardonically. Nevertheless, the Fed is likely to ease soon, and likely multiple times before the end of the year.
And they’re worried that President Trump is going to hurt Fed credibility! That’s a little like the streetwalker who is afraid that this skirt is going to make her look cheap. Honey, that ship has sailed.
One final announcement. If you’re an investor in cryptocurrencies (in particular, stable coins) and have a Telegram account, consider joining the read-only USDi_Coin room https://t.me/USDi_Coin where the USDi Coin price is updated every four hours or so…and where many of these charts are also posted shortly after CPI just as I used to do on Twitter.
Inflation Guy’s CPI Summary (June 2025)
If you squint, can you see an effect of the deportations of illegal aliens in today’s CPI report?
I don’t want to encourage anyone to obsess over every jot and tittle of the report. That’s almost always a fraught exercise. But there were at least a couple of things in the data this month which could indicate both inflationary and disinflationary effects of the deportation campaign. A serious part of my brain is saying ‘come on, there just haven’t been many deportations in the context of the population of illegals, how can we see an effect?’ And that instinct is probably right.
Before we get into today’s release let’s remember that there is one important context to keep in mind and that is that unless there are major surprises to the downside, core and headline inflation are going to be accelerating for most of the rest of the year on a year-over-year basis. I discussed this in a short podcast last week, Ep. 145: Beware the Coming Inflation Bounce. So we need to keep in mind as we think about markets and policy that the optics are going to look worse for a while here.
That is, unless we get numbers like we did in the May CPI, which was a major miss due mostly to very soft figures on rent inflation. Last month, Primary rents were +0.213% m/m and Owner’s Equivalent Rent (OER) was +0.275%. Rents are decelerating but not that fast, but if they did then a 2% target on inflation becomes at least possible. It’s not yet possible.
The consensus for today’s number was +0.26% on headline and +0.25% on core. Right in the middle of 0.2% or 0.3% rounded prints. What happened is that we got one that ticked up and one that ticked down. Actual CPI was +0.287% on headline, and +0.228% on core inflation. That caused the year/year headline number to print +2.7%, up from 2.4% last month (and higher than 2.6% expected), and y/y core to be 2.9% (vs 2.8% last month, and as-expected). The usual suspects trumpeted ‘another miss softer on core CPI! Rate cut on tap for September!’ But what is the real story?
The real story is not nearly that encouraging. As we will see, there are quite a few signs that the core miss was an aberration. Not a bad one, but deceiving.
Here is my guess at Median CPI.
The median category is likely the West Urban OER subcategory, which means that the actual median will depend on where that seasonal adjustment comes down. But two of the four OER subcategories are higher than that, so I doubt my guess is wildly off (when it isn’t one of those subcomponents, I nail the median but because they split up OER, sub-seasonals matter). So median should be around 0.30%, or 3.6% annualized. Median CPI has rounded to 3.5% y/y since February and it’ll be there again. That looks like progress has stopped. The chart below doesn’t include today’s figure but to illustrate that we’re seeing a flattening out of progress.
Now, this is what we would expect if tariffs were starting to affect prices generally, is that median would accelerate a little bit but core not necessarily. However, tariffs aren’t going to affect prices generally. They’re going to affect core goods primarily. So what is going on here?
One clue is that there was only one category this month that had an annualized monthly change of less than -10%. Normally there are a handful of categories on the tail (for example, there were 8 categories – in the way we slice them up for calculating Median CPI – where the annualized monthly rise was greater than +10%). This one category was Lodging Away from Home. Month/month was -2.9%, and year-over-year changes in hotel prices are at -2.5%: near the lowest levels since the sharp declines during COVID.
That may be where we squint and see a positive (lower inflation) effect of the deportations. We should expect that mass deportations should cause a relief on upward pressure on certain goods and services that happened when 8mm+ new residents arrived over 4 years. Folks love to focus on the wage effects as being inflationary (more on that in a moment) but they forget that you’re removing a bunch of consumers and while not 100% of illegal aliens work, 100% of them consume. And one of the things they consume is shelter. To be sure, we haven’t had anything remotely like ‘mass’ deportations yet. But releasing some of the hotels that were being paid for by cities to house migrants is one place that it’s totally understandable we should see a positive effect. The effect on home prices will come later.
While some pressure may continue to come off of shelter inflation, there’s this disturbing trend in Tenants and Household Insurance – and that’s before State Farm announced a 27.2% increase for Illinois. Yuck!
To be balanced on the deportation issue, let me point out something that comes up in the ‘four pieces charts’. Piece 1 is Food and Energy; Piece 2 is Core Goods; Piece 3 is Core Services less Rent of Shelter aka Supercore; Piece 4 is Rent of Shelter.
First, notice that core goods continues to trend positive – finally. Y/Y core goods went to +0.7% from +0.3%, despite continued softness in autos. The auto softness will not last forever; some of it is likely due to front-running tariffs. But more interestingly, note the small but measurable hook higher in Supercore. That’s where wages show up most strongly, so if deportations are causing better wages, we would expect that. So is this a deportations effect at the margin? I doubt it. As I said before, deportations are no where near “mass” yet so I’d be surprised to see an effect there. But watch this space.
So how excited are we about the core surprise lower?
The answer is not at all. Core goods is trending positive and while I don’t expect a massive tariff effect I am pretty sure it won’t be negative. Core services is going to have some upward pressure if deportations turn out to make a difference at all. Eventually, the effect on shelter and on other goods and services demand will be disinflationary but timing-wise that’s going to be after the tariff effect. And in the meantime, monetary aggregates are accelerating again in the US and Europe.
Is the story, then, that core inflation is going to continue to surprise to the downside? Well, when you look at the broader picture, at not only which prices are rising and falling but how broadly it’s happening, the news is not all unicorns and rainbows. Here is a chart of the weight of the CPI basket that is inflating at faster than 4% y/y.
That has improved, but I can’t help but notice that it is not even vaguely in the vicinity of pre-COVID. How can we get overall inflation to 2% if nearly half of the basket is inflating faster than 4%? Well, you’d need core goods to be really soft, and that part is done.
We can see that also in the Enduring Investments Inflation Diffusion Index (EIIDI), which has been sub-zero for a while but this month, jumped to positive.
These tell the same story – this month we could get all excited about the core miss…except that outside of Lodging Away from Home, the story isn’t so happy.
From a policy standpoint, there is just no reason to drop rates below neutral and we’re pretty close to neutral right now. Here’s something to think about (but the Fed won’t think about this because they don’t pay attention to money). Abstract from tariffs for a moment – tariffs are never a reason to maintain higher rates, because they are a one-off. But let’s suppose you believed that mass deportations would push up inflation and wages. The argument for a central banker would be that fewer workers in the economy implies a smaller economy, and a smaller economy needs less money. Therefore, while tight Fed policy can’t affect tariffs, they could affect prices that are rising because of deportations.
Again, let me clarify that I don’t think deportations are doing anything yet, and I think they’re as likely to push prices down in shelter and some core goods as they are to push wages and prices higher in services. I’m just saying that if you think deportations are inflationary, there is a monetary policy response that makes sense and it isn’t easy money.
So unless the economy starts to soften more seriously, there just isn’t a good argument right now for rate cuts. And now that the y/y numbers are heading higher because of base effects at least, the optics are going to be worse for the Fed to consider an ease. There is always an ‘unless’, and here the ‘unless’ is ‘unless Powell resigns and is replaced with an uber-dove.’ I can’t imagine that Powell wants to be the first Fed chairman ever to resign in disgrace, and no one can force him out, but stranger things have happened. However, I can’t handicap politics. I’m only handicapping inflation.
And, by the way, if you think that inflation itself is a handicap, consider the USDi coin! Here is a chart of the value of the coin by day. The red dot is where we are.
One final announcement. If you’re an investor in cryptocurrencies (in particular, stable coins) and have a Telegram account, consider joining the read-only USDi_Coin room https://t.me/USDi_Coin where the USDi Coin price is updated every four hours or so…and where these charts are also posted shortly after CPI just as I used to do on Twitter.
Inflation Guy’s CPI Summary (May 2025)
Well, this was an odd one to sort out.
Going into the CPI announcement this morning, the economist consensus was for +0.17% (seasonally adjusted) on headline CPI m/m and +0.28% on core. Market changes this month have been very contained, partly because of the usual summer doldrums kicking in and partly (most likely) because of the degree of uncertainty surrounding all of the chaotic policy changes that have taken place in 2025. The effects of these changes (and more to come!) are still making their way through the system.
This is a calm surface over a roiling ocean. Economists continue to debate (and their analysis, to me, seems in many cases to be colored by the political lens they are looking through) about the impact that the current tariff structure will have, about the effect of future tariff changes – and what those will be, about the impact of the Most-Favored-Nation policy on pharmaceutical pricing and availability, about the effect the deportation of illegals (and self-deportations) will have on housing (rent inflation softer, but how much?) and labor supply (wages upward, but how much?) and Lodging Away from Home.
Actually, I’m overstating that a little bit. Most classically-trained economists mostly agree about how horrible this will all be, because tariffs bad. My own estimates have tariffs pushing inflation a little higher in the near-term, but not terribly. I also think that mass deportations would be very disinflationary because of the effect on rents but it is looking less and less like ‘mass deportations’ means tens or hundreds of thousands, not millions, and that effect likely won’t be huge.
Meanwhile, the Fed is keeping rates slightly above neutral but money supply growth has re-accelerated to a level that’s not likely to be consistent with inflation at 2%. Underlying trend median inflation is running about 3.5% or so, and is unlikely to fall a lot further given the current configuration of fiscal and monetary policy.
Let’s get into the data, then. The actual CPI was +0.08% (SA) on headline and +0.13% on core. That’s a significant miss, especially on core.
Core inflation has recently been missing low on a fairly regular basis, although most of the misses have been small. Median inflation in most cases hasn’t been confirming those misses, because they’ve generally been one-offs that don’t really wiggle median too much. It’s still a positive sign if the ‘tails’ are to the downside so that core CPI is below median CPI, but Median tells us not to get too excited. This month, though, Median also showed an effect. My estimate is that Median CPI will be the lowest since last July, at +0.25% m/m. It’s still difficult to see a major disinflationary trend here.
There’s more uncertainty than usual around my Median guess, but let’s take it as a given for now.
You don’t have to look too far to see one of the major culprits for the miss this month. Primary Rents were up +0.21% m/m, which is a lot slower than they had been running at.
Owners’ Equivalent Rent was also soft, and between those two surprises it’s probably roughly 5bps of the Core CPI miss. Let’s be clear – rents are not collapsing and indeed, we’ve just converged with our model.
Let’s be clear: if you are in the camp that we’re going to get back to 2%, you need this to not be an aberration. You need shelter inflation to continue to decelerate. But as you can see from the chart of month/month primary rents above, sharp movements in rents tend to be reversed in subsequent months. This looks a lot to me like last July’s surprise, which was reversed in August. We will see. But ex-shelter, year/year Core CPI rose, to 1.87% from 1.78%.
What is interesting to me as I write this, looking at some of the other commentary, is that folks don’t seem to be focusing on this. Of course it’s all tariffs, all the time, and everyone is scratching their heads over why we are seeing price declines in some of the categories where you’d expect the tariffs to help. Key example (and significant example) is autos, where the CPI for Used Cars and Trucks was -0.54% m/m after a similar decline last month, and New Cars were down -0.29% m/m. If there is one place that economists were certain we would see tariff-induced inflation, it was in autos. Not so much, at least yet. This might be because the lags are longer than we expect in a just-in-time manufacturing world, or it might be because demand elasticity is bigger than people thought.
But even with autos, Core Goods inflation accelerated to +0.3% y/y from +0.1% last month.
Remember, above I said that core goods ex-shelter had accelerated. I don’t want to fall into the trap of taking out all of the things that go down, to make the insightful conclusion that everything else went up – but that acceleration in core goods included the weighty autos contribution to the downside so you can tell that there are indeed upward pressures. Just not in the big things.
One place we saw increases was in Tenants’ and Household Insurance, which rose 0.84% last month, and in Motor Vehicle Insurance, which rose 0.68%. That helped keep core services inflation at +3.6% y/y, even with the slowdown in housing. On the other hand, Airfares suffered a third straight significant decline, -2.74% m/m. And while we are surprised to see auto prices decline, given the tariffs, we are also surprised to see Medicinal Drugs prices increase, given Trump’s new “Most Favored Nation” policy. Pharma prices were +0.54% m/m (although the y/y increase slackened some and is only +0.35% y/y). Core Services less Rent of Shelter (aka “Supercore”) is down to 3.11% y/y, and that’s good news even if it’s still quite a bit higher than it was pre-COVID. The trend is your friend, and this is a good trend for now.
As with the market itself, then, we’re seeing a lot of movement in both directions; it’s just all canceling out into a relatively tame increase in the overall CPI basket. That’s not likely to be the ultimate outcome. The last four year/year increases in Median CPI (assuming I’m vaguely right about the m/m, and we’ll know that in an hour or two) have been 3.53%, 3.48%, 3.46%, and 3.44%. That does not give the impression of a series that is in a hurry to get down to 2.25%-2.5%, which would be roughly consistent with sustainable core CPI around 2%. Again, you need to get shelter prices to really decelerate significantly further.
Now, even if that does happen, it isn’t going to keep y/y measures on a steady deceleration track for the next year. While we haven’t seen a major impact from tariffs yet, and my view is that it won’t be a huge impact in any case except for particular items, I am pretty sure we will see something and median and core inflation will see acceleration over the balance of this year and into next year. Thereafter, it depends on what happens with policy in the interim. On that score, while the current numbers still give the Fed no good reason to ease it also should pretty much remove any notion that monetary policy is about to get tighter. M2 growth is back to 4.4% y/y, and 6.4% annualized over the last quarter. That’s back to what was normal when we were experiencing the tailwinds of globalization and positive demographics. It is too fast now that those are headwinds.
But as I said, that’s the story for later this year and it could change. In the meantime, we keep waiting for the tariff effect. If three months from now we still haven’t seen an effect, then things will get very interesting.
One final announcement. If you’re an investor in cryptocurrencies (in particular, stable coins) and have a Telegram account, consider joining the read-only USDi_Coin room https://t.me/USDi_Coin where the USDi Coin price is updated every four hours or so…and where these charts are also posted shortly after CPI just as I used to do on Twitter before they changed the API to make auto-tweeting charts very difficult.
Inflation Guy’s CPI Summary (April 2025)
Before the CPI analysis, I always try to give some context for where we are in the ‘story’ about the evolution of inflation right now. It’s really difficult to do that, though, because of all of the massive policy changes that are happening – and often in opposite directions with respect to the effect on inflation. Here is the Baker, Bloom & Davis Economic Policy Uncertainty Index, which is derived by scraping news sources. Even strong supporters of President Trump’s have to admit that his Administration has been a whirlwind on economic policy (for many of them, of course, that’s a feature and not a bug).
Here goes, anyway. Remember that last month, core CPI crashed but Median CPI actually accelerated. This kept us from actively celebrating the great inflation news; we knew that the good news was concentrated in a few one offs. In particular, Airfares (-5.3% for March), Lodging Away from Home (-3.5%), Used Cars (-0.69%), Car and Truck Rental (-2.66%), and Medicinal Drugs (-1.30%). But, as Median showed last month, there was really no reason to think that inflation was behind us…even before any effect from tariffs.
Speaking of tariffs, prior to this month we hadn’t really expected to see any effect yet and most economists thought that we shouldn’t see that much impact in the April figures either since the big tariffs on everyone went into place early in that month. However, remember that Mexico, Canada, and China had all faced escalating tariffs prior to April, so if there is going to be an impact we should expect to see something soon. I don’t expect a lot in most categories, but some impact in a few. It will be hard to discern how much of any monthly price change is tariffs, of course. We will look at Apparel, where demand elasticity in the short run is not terribly low. Broadly, though, remember that demand elasticity and foreign content percentage are both important…and foreign content in most goods is pretty low. I’d also look to Medicinal Drugs, since a lot of APIs are China-sourced and the demand for many drugs is pretty inelastic in the short-run, but I didn’t expect a lot of impact there (pharma companies will have had inventories), and going forward it will be muddied by Trump’s announcement of the Most-Favored-Nation policy in pharmaceuticals.
Speaking of that announcement, this month’s review of changes in inflation swap levels is seriously polluted because that announcement combined with the 90-day pause on China tariffs caused a massive crash in 1-year inflation expectations.
Despite the drop in tariff rates on China (for now), remember average tariffs remain the highest since the Great Depression (ominous music)! Of course, back then the US was a significant net exporter, so reciprocal tariffs were a bigger problem. Imports were only about 2-3% of GDP.
(Chart above is from https://www.stlouisfed.org/on-the-economy/2019/may/historical-u-s-trade-deficits)
(Chart above is from https://www.stlouisfed.org/on-the-economy/2020/march/evolution-total-trade-us)
There you go. That’s the context. Now onto the number.
CPI for April was expected to be +0.25%, and +0.27% on Core. The actual prints were 0.221% and 0.237%, respectively, so a mild surprise lower (although it turned the +0.3%/+0.3% rounded expectations to +0.2%/+0.2%, looking more dramatic a surprise than it actually was). Core is right about where it has been for the last 6 and 12 months (0.244% and 0.229% average, respectively) with the big January spike and the March plunge basically offsetting each other.
Amazingly, of the eight major subgroups only Housing, Medical Care, and “Other” increased on a m/m basis. What is especially surprising in that light is that Apparel – where the tariff canary in the coal mine lives – was down on the month.
Core goods continues to hook higher, now at +0.13% y/y. Remember, this is before any tariff effect has really been felt. In my mind, this is more the underlying ‘deglobalization’ effect: as I’ve said for a while, the deep deflation in core goods that we saw was a partial retracement of the COVID spike and we should expect going forward to see a small positive inflation in goods. Core services is decelerating nicely, and it will need to continue to do that if we’re ever going to see downward pressure in median inflation from where we are now.
Speaking of Median CPI, my early estimate is +0.308% m/m, putting the y/y at 3.43%. That’s about where we’ve been, and where we’re likely to be going forward.
Looking at some of those one-off categories from last month, Airfares fell another -2.83% m/m after that -5.3% prior decline. Some of that is jet fuel, some is tourism I suspect. Lodging Away from Home went flat (-0.1% m/m) from -3.54% prior. I think we’ll see continued downward pressure in that category, as hotels in some big cities are gradually emptied of illegal migrants and get added back to the stock of available rooms, but March’s drop was just too big. Used Cars’ decline (-0.53%) surprised some people, because the private surveys showed that prices advanced last month, but the seasonal assumption was a decent hurdle this month that wasn’t cleared. However, if you were worried about how the spike in car parts tariffs would cause car prices to spike…because that’s what the news was hyperventilating about…you needn’t have. New Car prices were also slightly down, -0.01% compared to +0.1% last month.
As for shelter, it continues to flatten out, with Primary Rents 3.98% y/y and OER at 4.31% y/y. Actually, Primary Rents were flat on a y/y basis compared to the prior month, and have basically converged with our model, which is around 3.7%. From here we should expect very slow deceleration, but rents should stay above 3.25% or so on a y/y basis.
Supercore is looking great. This is about the best news in the report, because if Shelter is just about tapped out and Core Goods is trending just above zero we’d need Core Services to continue to dive.
That’s the good news. The bad news is that the spread of median wages over median prices has returned to its long-run average, which means that it will be hard to see additional sharp declines here…it isn’t going to come from squeezing wages further.
Outright, the Atlanta Fed Wage Growth Tracker – the best measure of wages in my opinion – is at 4.3% y/y. That’s right where it was in November. It’s going to be very hard to squeeze services prices lower if wages don’t decelerate further.
Finally, let’s circle back to pharmaceuticals. I’m going to point you again to my article from 2020, which is the first time that the President mooted the idea of a Most-Favored-Nation clause affecting the pharmaceutical industry. https://inflationguy.blog/2020/08/25/drug-prices-and-most-favored-nation-clauses-considerations/ The upshot is that even if the MFN policy takes place exactly as the President states, retail drug prices are unlikely to decrease anything like as much as he has said. In fact, there could even be some circumstances in which drug prices rise because companies stop selling in foreign countries at levels lower than in the US (because they face a more-elastic demand there) but which contribute to the total profit of the drug company. There may be others in which the drug company stops selling the drug at all in the US. Furthermore, drug prices overall have only risen 7% since pre-COVID, compared to 23% for core prices generally (the black line in the chart below is the overall CPI for Medicinal Drugs; the blue is the core CPI price level – both normalized to December 2019).
By the way, if I was concerned about importing APIs from China and wanted the US to start producing more of them, I don’t think I’d be trying to crush end-product prices and reduce the incentive to spin up production of the APIs. So there will be a lot of exceptions to the MFN policy, and you can tell from the performance of pharma companies yesterday after the news (big up with the market, not down!) that investors don’t expect any important impact on the bottom lines of pharmaceutical companies. I agree. I think Medicinal Drugs going forward will probably decline a bit for some celebrated cases, but not in a big way that pushes CPI lower significantly.
The big conclusion here is that inflation continues to run at about 3.5% or so (Median), and there is no sign of a significant further deceleration to come. As long-time readers know, this has been my theme for a couple of years, that we will end up in the ‘high 3s, low 4s’ on median inflation, because the overall backdrop of deglobalization and demographics argue for a higher floor. If the Fed keeps money growth very low, my opinion could change (and I’d already amend my target to ‘mid to high 3s’ as the mode), but I am not very optimistic on that.
However, I also don’t think there is anything about the inflation picture that argues the Fed has a lot of room to drop rates significantly. I said last month “The right answer to uncertainty from a policymaker perspective is to increase the hurdle for taking action. The right answer is to make no changes to policy. I am not confident that the Federal Reserve will correctly separate the ‘price of risk’ effect from the ‘economic growth’ effect. They are correct to note that tariffs by themselves are not inflationary in that they are one-off effects. If they believe that, and they think there’s a big recession coming, they’ll cut rates. That would be a mistake, especially given the uncertainty.” I still think that’s the case. At the moment, there is no reason to cut rates any further than the ‘let’s help Biden’ cuts did, except to appease the President and I see little urgency from this Fed to do that. I wouldn’t expect any big moves from the Committee, any time soon.
One final announcement. If you’re an investor in cryptocurrencies (in particular, stable coins) and have a Telegram account, consider joining the read-only USDi_Coin room https://t.me/USDi_Coin where the USDi Coin price is updated every four hours or so…and where these charts are also posted shortly after CPI just as I used to do on Twitter before they changed the API to make auto-tweeting charts very difficult.
Inflation Guy’s CPI Summary (March 2025)
Before we get started on today’s CPI, let me add a few wise words from an old market observer:
- The stock market is not the economy. The stock market is the (private real economy) times (price per unit of the private real economy). When the stock market goes down, sometimes it’s because the real economy is contracting, and sometimes it’s because the price people are willing to pay to own a piece of that is declining. Often, it’s both. Furthermore, the first part of that equation is really (real economic performance) times (capital share vs labor share vs government share) The tariffs will affect corporate earnings, especially for multinationals, and in the short term for domestic firms that single-source from a foreign source. But the effect on the economy will not be dramatic, even though we will see a technical recession because of the huge swings in the trade balance in Q1 and Q2 as imports surged ahead of the tariffs. So the main thing we are seeing in equities is a multiple effect. Stocks were way overpriced, and some of that is unwinding. Bottom line: if a bear market in equities causes you serious angst or damages your long-term financial goals, you’re too long equities. If a bear market in equities causes you serious damage to your short-term financial goals, you’re too long equities. It’s okay. A bear market does not mean we are headed for a depression.
- The amount of complaining about how the Administration didn’t consult Wall Street or think about how their actions would affect big equity holders and firms is amazing and the complainers are missing the point. That isn’t a bug of the policy, and most of the country doesn’t see it as a bug. It’s the main feature. Because if you consult those guys they all would have said “yeah, go get China with a 2% tariff and of course don’t touch anyone else.” These are the same guys who freaked out when Trump slapped tariffs on China in his first term…which were obviously in retrospect way too small to matter. The experts and Wall Street mainly want to make sure no one rocks the boat. But rocking the effect here isn’t a side effect. It’s the main point.
I have a third observation, but it’s inflation-related with all the rest so I will save it for the end. Let’s get into today’s number.
Heading into the number, the general consensus was that core CPI would be generally in the range it has been, around 0.25% or so, and headline would be soft due mainly to energy that was weaker than the seasonal adjustment accounts for. This month’s CPI, though, is a sidelight in the same way that the FOMC minutes are a sidelight when something really big happens subsequent to the last meeting: it isn’t March inflation we are interested in but rather inflation over the next 3-6 months as tariffs go into effect and begin to bite. The inflation swaps curve is sharply inverted, and has gotten increasingly so over the last year, as short inflation expectations (1y, 2y, 3y) have been rising while the long end of the curve has actually come down a bit.
Actually, long-term inflation expectations have been pretty steady, even in the recent market volatility, which is one way that you know that (a) this is a market-price event and not an economy event and (b) there aren’t big liquidity issues out there like we had in the GFC. 10-year inflation breakevens have been between 2.20% and 2.30% over the last week despite the record-breaking series of large equity swings. Anyway, back to CPI.
Some people thought we might see a little hint of the first tariffs in this data. Welp, we didn’t. Headline CPI actually declined – prices fell on average (but wait for it) – by -0.05% m/m and headline inflation is only 2.41% over the last year. More surprising was that core inflation crashed lower, and was only +0.06% m/m to bring the y/y down to 2.81%. That was far below expectations.
Unfortunately, it’s here I have to tell you to hold your horses. Because when we estimate Median CPI, we don’t get even a whisper of the same effect. In fact, my early estimate has m/m median inflation the highest it has been in about a year. (This month, several regional housing subcategories are clustering around the median so my estimate of +0.35% is subject to being off by a few basis points depending on how the official seasonal adjustment affects the actual m/m increases in those subgroups, but it will not be far from +0.35%).
The fact that median doesn’t really show any of the deceleration that core does tells us that this is different from the deceleration last May/June/July, when rents had a brief but temporary lull. In March, Owners’ Equivalent Rent was +0.40% m/m, and Primary Rents +0.33% – both of which are faster than last month’s +0.28%/+0.28%. The y/y numbers are still declining but at a decelerating rate. Still right on schedule, and still zero sign of deflation in housing. Sorry!
If rents accelerated last month, how did we get a big dip in core but nothing in median? That tells you that we must have gotten large moves in low-weight categories. Which is exactly what happened.
Medicinal Drugs, -1.30% m/m (last month, +0.18%)
Used Cars and Trucks, -0.69% (last month +0.88%)
Airfares, -5.27% m/m (last month -3.99%)
Lodging Away from Home, -3.54% (last month +0.18%)
Car and Truck Rental, -2.66% (last month -1.25%)
These are, sadly, most of the ‘usual suspects’ when it comes to surprises in either direction. When they all surprise in the same direction, it means we get a core number that is way off. And that, my friends, is why we look at Median CPI. Of this list, the Used Cars one is the only one that was actually a surprise in the sense that people nowadays pay attention to that subcomponent and the private surveys anticipated an increase. I’ve written previously about what I think is happening in Medicinal Drugs, and even had a podcast episode recently to discuss it (Ep. 137: Drug Prices and the Most-Favored-Nation Clause). This is not going to continue, with 100%+ tariffs on China, where most of our Active Pharmaceutical Ingredients come from. I do wonder whether the decline in airfares (more than would be expected from jetfuel prices) and lodging away from home could partly reflect a decline in tourism to the US – both the official kind and the unofficial ‘tourism’ that has been reversing recently with the help of INS – which means it won’t soon be reversed. Not sure on that.
The net effect of these big moves in small categories is that core goods has not yet turned positive (but it will, once the tariffs go into effect, although not by a huge amount) and core services dropped sharply to 3.7% y/y from 4.1% y/y.
Supercore looks great for the first time in a while. Month/month it fell -0.24%, the sharpest decline since COVID. And the y/y dropped towards 3% as if though it was going to miss the bus if it didn’t get there soon.
Before we all get excited, I’ll point out that the three spikes on the m/m Supercore chart below were all March and April numbers. I suspect that part of what we are seeing is due to the changing placement of Easter, along with Spring Break…and if so, those parts will be unwound in the next month or two.
That doesn’t explain the sharp fall in car and truck rental prices. That is a bit of a head scratcher.
There is a little bit of bad news here, but it is away from core. Food Away from Home (which is in supercore) was behaved at +0.36% m/m vs +0.39% m/m last month, but Food at Home was +0.49% seasonally-adjusted compared with +0.01% last month. It wasn’t just Eggs, which rose less than 2% last month at the retail level and are declining at the wholesale level. Milk, Cheese, and Meats/poultry/fish all saw meaningful increases. The proletariat (of which I am one) notices these things, so if we were weighting the index by salience instead of dollars spent they would get a heavy weight. Now, there’s a reason that we take out Food and Energy…the noise generally outweighs the signal. But take administrative note of the small but noticeable acceleration in food prices on a y/y basis.
Overall, even though this was the second pleasant Core CPI surprise in a row it was also the second Core CPI surprise that shouldn’t get you very excited. In both cases, the fact that Median CPI will not echo the deceleration tells you that this is happening in the small categories that tend to mean-revert. They didn’t mean-revert this month, but I suspect they will. Unfortunately, that will happen at the same time that 10% broad tariffs, and large tariffs on Chinese goods, are kicking into effect. We might have a whopper of a Core CPI coming up here in one of the next few months.
In the broader picture, inflation is settling in the mid-to-high 3s (measured by Median CPI), but there are clouds on the immediate horizon from tariffs. But as the stability in the longer-term inflation measures suggests, the market isn’t really yet concerned that another upswing is on the way. Tariffs are a one-off effect, and a reasonably small effect overall although significant in the specific categories where they are leveed. Remember, though, that core goods, where the tariffs mainly fall, is only 19.4% of the overall consumption basket.
The longer-term picture depends on how long the uncertainty lasts. As I have pointed out before, economic policy uncertainty – which is off the charts right now – manifests itself in downward pressure on monetary velocity. I expect that the uncertainty will largely be past us in 6 months, and in the meantime the upward pressure on prices from tariffs that shows up in core goods will probably dominate the downward pressure from policy uncertainty (which causes consumers to keep more precautionary savings, causing the velocity decline). Those effects will probably wear off at roughly the same time so that we will only notice it at the micro level.
Uncertainty also, obviously, lowers the price of risky assets (I’ve also written about this!), in a healthy way. But I am not one of those people who worries that uncertainty will have a large effect on the underlying economic activity. Yes, CEOs may delay making big plans for a month or two. But the uncertainty won’t last forever, and then they’ll make their plans. CEOs who can’t make decisions under at least mild uncertainty aren’t going to be CEOs very long. The domestic economy will be just fine, especially as we continue to produce more of our internal consumption needs, domestically.
And for the Fed? The right answer to uncertainty from a policymaker perspective is to increase the hurdle for taking action. The right answer is to make no changes to policy. I am not confident that the Federal Reserve will correctly separate the ‘price of risk’ effect from the ‘economic growth’ effect. They are correct to note that tariffs by themselves are not inflationary in that they are one-off effects. If they believe that, and they think there’s a big recession coming, they’ll cut rates. That would be a mistake, especially given the uncertainty.
Inflation Guy’s CPI Summary (February 2025)
Look, I know that traders sometimes think their job is to overreact. And media folks benefit from overreacting. And political strategists have been genetically bred to overreacting. But a bit of rational analysis here is probably worthwhile.
The obvious backdrop to the CPI release this morning is the somewhat-greater-than-usual volatility in the equity market,[1] and some concerns that the economy might finally get that recession that I and others have been expecting for so long – although don’t get too chippy on that, since the Q1 contraction would be mostly due to a surge in imports from front-running tariffs. The narrative has shifted back to the question of how soon the Fed might ease, even if inflation is still a little problem, since Unemployment has risen to the nosebleed level of 4.1% and stocks are in the crapper (technical term).
Geez folks, take a chill pill.
Similarly, don’t cue the trumpets just yet on inflation. The expectations coming into today’s figure were for +0.31% on headline CPI and +0.30% on core CPI. The actual prints were +0.22% and a delightful +0.23% on Core.
Sure, the chart shows this is definitely better than last month! And it’s even better than the average of the last two months (I’d said last month you probably should average between December and January figures). But…it’s also a little early to take a victory lap. Here is Median CPI (last point, as usual, is my estimate for today).
If it’s 0.29% m/m, as per my estimate, then we are at a 3.5% run rate. And that’s basically where we have been over the last six months. Oh, and while y/y Core CPI is down to 3.1%, it’s at 3.5% over the last three and the last six months. We are settling in at the mid-3s.
The culprits behind last month’s spike were used cars, health insurance, lodging away from home, pharmaceuticals, and hospital services. Of those, only Used Cars (+0.88% m/m) contributed very much to this month’s number. On the other hand, Airfares dropped -4% m/m. Here are the Major-8 categories.
The optimistic view is that there isn’t any one category that looks out of control on a y/y basis. That’s also the pessimistic view, because it speaks of a broad – if not particularly high – inflation that is still percolating out there. Core Goods this month was still -0.1% y/y, but Core Services dropped from 4.3% to 4.1% y/y. Pharmaceutical prices, which just had their largest monthly rise in history last month as drugmakers tried to get their licks in before the Trump Administration forces them to lower prices, rose only +0.18% m/m this month. Both Primary Rents and Owners’ Equivalent Rent were +0.281% m/m. These are also settling in, on schedule.
“Settling in” is what is happening in shelter. And that again is both good news and bad news. A lot of the forecasts we have seen over the last couple of years that called for inflation to steadily return to trend depended on the assumption that the rent declines we have seen for new rents in a few cities would become a broad-based trend in all of shelter. But it’s not, for two reasons. On the rental side, costs keep rising for landlords (that’s the basis for our model in the prior chart). And on the home purchase side, there’s just still a big deficit in homes available for sale.
While that could change – it seems to be changing in the Washington, DC area but the people leaving Washington still need homes elsewhere – if deportations pick up a lot, there is no sign yet that shelter is going to do the heavy lifting of getting inflation back to 2%. Neither is SuperCore, although this month it was +0.22% m/m and in general is looking a little better.
But none of this looks exciting. None of this looks like it’s going to be the start of a Fed victory lap on inflation. Even the Enduring Investments Inflation Diffusion Index looks like it’s settling in, and like all of the other stuff we have looked at, it’s settling in at a level higher than pre-COVID.
And while we’re talking about distributions, here’s another one I haven’t run in a while. This is the distribution of y/y changes by the lowest-level CPI components. The big spike in the middle is obviously housing. There is a cluster between 1% and 4%. But look at that big left tail. 20% of the basket is actually deflating, y/y.
What’s interesting about that column on the left is that it is a whole bunch of little things. Breakfast cereal. Pasta. “Other meats” (shudder). Potatoes. Tomatoes. Soups. Snacks. Window coverings. Dishes. Men’s shirts. Audio equipment. In other words, a whole lot of things that are so small, consumers don’t really notice them so much and so they don’t really affect their sense of inflation being high. But they notice eggs.
So this is good news…in that a lot of things are deflating…but also bad news is that a lot of these are things that tend to mean-revert. You’ll notice that some of the categories I just listed are core goods, which are still in deflation…but which are also the things which are going to rise in price when the tariffs start to hit. The largest single piece still in deflation is New Cars, at a 4.4% weight or so. Unfortunately, that’s not going to be in deflation when tariffs hit auto parts and slow the import of non-US vehicles.
So let’s wrap this up.
The conspiracy nuts will say that Trump cooked the numbers, because it was better-than-expected about something that was a campaign promise of his. But this is normal variation, and the bottom line is that the inflation figures look to be converging on 3.5% or so, before the effects of tariffs kick in. The near-term effects on inflation are definitely upwards. Peace in Israel and Ukraine, if it comes, may put a small damper on energy prices but the bigger effect there is US energy being unleashed again, which will take some time. But outside of the peace effect, there are few good near-term trends but also few really bad near-term trends other than the (relatively small) effect of tariffs. Inflation is settling in.
The funny thing is, I don’t think the Fed cares. I think they’re satisfied enough with the progress on inflation, and they still think that recessions cause disinflation (they don’t) so that they feel they can focus on the growth part of the mandate, for now.
[1] Dubbed a ‘crash’, or ‘freefall’, or some other appellation by observers who can’t remember the last time we saw a 10% pullback. Which is only about 6% if you look at the equal-weight, or a 60-40 blend of stocks and bonds. If this warrants the “what do you say to Americans who now can’t retire because they’re seeing their retirement accounts collapsing” line, my answer would be “I would say those Americans probably shouldn’t have been invested in stocks at all if this causes them to delay retirement.”
Inflation Guy’s CPI Summary (January 2025)
We finished 2024 with a slightly soft reading, but we began 2025 with a hot reading. Now, my admonition last month about the volatility of December data applies also to January data, although less so in CPI than in some other indicators. However, averaging December and January is probably the right approach.
It still doesn’t look great even if you do that.
Let’s start with the market changes over the last month. You can tell from the table below that short inflation expectations as measured by the column on the far left have come up some, although not as much as you might have expected given all of the concern about tariffs. (For what it’s worth, in this table you can ignore the huge increase in 1-year breakevens – there really isn’t any such animal per se, and Bloomberg’s choice of bonds to use for the 1-year can change that a lot. Focus on the inflation swaps, which is a purer measure.)
The consensus estimates coming into today were for +0.30% on Core CPI and +0.29% on headline CPI. That represented an acceleration over the nice inflation data we saw in December (the best core inflation print since July!), but was expected to be attributable to one-offs such as wildfire effects. In fact, the number printed at an alarming +0.47% on headline and +0.45% on Core CPI, the worst since April of 2023. Here are the last 12 months.
But we are jaded these days because we’ve seen higher figures. Let’s back out a bit. Prior to COVID, we hadn’t seen a Core CPI number this high since 1992!
Okay, so some of these are one-off causes. And it is a January figure after all. Median CPI will be better. My calculation had it around 0.35%, but since the BLS changed weights for the new year in this report I am less confident in my estimate than usual. It should be close. And since last January was a big median print, that means the y/y median would drop to 3.66% or so on base effects. But there certainly doesn’t look to be any really marked improvement here.
Speaking of the reweighting of the CPI: this always sparks conspiracy theories even though the reweighting is very transparent. And the changes are pretty small year to year. Here are the changes from last January’s weights.
The BLS also announces categories that are being dropped or added or renamed. I never point those out because it’s really boring. At least, it is normally. This year, the BLS announced that the series for “Pet Food” has been renamed to “Pet Food and Treats.” Because who’s a good boy? That’s right, you’re a good boy.
Let’s look at some of the main culprits for the upside miss this month.
- Used Cars SA +2.19% m/m – We all expect some upward lift after the wildfires, but I am not sure this is due to that. New Cars CPI only rose +0.04%. But this is the highest m/m increase in Used Cars since 2023
A bigger concern with Used cars is the upward tilt in the overall price level. Remember that the spike during COVID (which happened thanks to the geyser of money that sprayed American consumers who had little else to buy, and few new cars being produced) was a big bellwether and/or driver (mathematically speaking) of the increase in core CPI post COVID. The unwinding of the spike in used cars pushed Core Goods inflation lower and lower, and dragged down Core CPI. But now it looks liked used car prices are again headed higher. This seems a good time to mention that M2 is also inflecting higher. The money supply is 40% bigger than at the end of 2019. Used car prices are only 32% higher. I think the deflation in used cars is over. (I’ve included M2 on this chart.)
AS a consequence of this, and despite apparel being -1.4% m/m (that’s one place tariffs could bite since we don’t produce any apparel in the US…on the other hand, there are lots of suppliers of apparel globally so absent a blanket tariff, we might not see a big effect), Core Goods CPI y/y went to -0.10% from -0.50%. As I’ve noted previously – ad nauseum, probably – to get inflation to 2% you need core goods inflation to stay negative, and pretty decently so. Core Services dipped to 4.3% y/y from 4.4% y/y, but obviously if that part is over 4%, and it’s the bigger part, you need Core Goods to stay flaccid.
- Health Insurance rose +0.74% NSA. Health insurance inflation jumps sometimes in January, so this is not something I’m worried about (plus, the health insurance number is really only calculated once a year and smeared out over the year). But it’s worth noting.
- Lodging Away from Home, +1.43% SA. Normally this is one of those categories that jumps around a lot and so we would expect a reversal next month, but with the wildfires in California I’d expect this to be buoyant for a while even if it is just the Western US being affected. But don’t forget that there are lots of people without homes still in North Carolina. On the other hand, if deportations ramp up a lot more than they currently are this is one place where pressure on prices could be relieved since many illegal aliens are housed in hotels at the expense of the local/state/federal government. That disinflationary effect, though, is months away at best, I think.
- Pharma had a huge month, rising 1.4% m/m SA. That’s the biggest monthly gain in decades. I suspect some of that is because pharmaceutical companies know that they are ‘on the X’ of President Trump’s ire after actively working against him in 2020. The President has recently been talking about how upset he is about US drug prices relative to the same drugs sold in other countries. This is a real threat – in his prior term, he talked about implementing a “Most Favored Nation” clause when it comes to pharmaceuticals (I wrote about it here: https://inflationguy.blog/2020/08/25/drug-prices-and-most-favored-nation-clauses-considerations/ ). So it strikes me as possible that pharmaceutical companies were raising prices in January partly so that they can cut them with great theatrics to show their ‘support’ for the President (and hold off most-favored-nation as long as possible). I do not expect to see this repeated next month, unless tariffs affect APIs (active pharmaceutical ingredients) in the near-term.
- Hospital Services were also high, at +0.95% m/m SA, but this is less unusual for that series which jumps around a lot like Lodging Away from Home. Still, that was the highest print since March.
On the good side – while Rent of Primary Residence was a little higher than last month (+0.35% vs +0.30%), OER was the same (+0.31%) and rents overall continue to decelerate. However, they are decelerating at a declining rate. It looks like the dip that I expected is never going to happen, as the growth rate of rents looks to be converging with our model in the high 3s. And it doesn’t need to be repeated, but I will anyway, that there is no sign of broad deflation in rents coming.
Food and energy were additive this month, although less than I expected. Food at home was +0.46% m/m, and I expected about double that. Eggs were +13.8% m/m (NSA), and +53% y/y, and are getting a lot of press. But that’s not an inflation thing, that’s a lack-of-chickens thing and egg prices will eventually come down (in, approximately, the time it takes a chicken to get to adulthood). Food away from home was relatively tame at +0.24%.
So what’s the big picture?
What we saw today was mostly the trend. I continue to think that the new ‘middle’ on Median CPI is the high 3%s, low 4%s area, with occasional forays above and below that level. Over the course of 2025, as tariffs are implemented, we are likely to see a slightly higher run rate. Tariffs are a one-off, and they aren’t a large effect unless applied in a blanket way to all imports. Remember (and review my recent blog https://inflationguy.blog/2025/01/29/trump-tactical-targeted-tariffs-a-reminder-of-the-impact-of-tariffs/ and podcast https://inflationguy.podbean.com/e/ep-131-how-tariffs-affect-you-three-things-you-maybe-didnt-know/ on the topic) that despite what some hyperventilating Congresspeople say, consumers do not usually pay the majority of a tariff except in narrow circumstances where demand for the good from that particular supplier is inelastic. If the Trump Administration imposes a blanket tariff of 20% on all imports, with no exceptions, it might cause an increase in inflation of 0.5%-1.0%. But that’s a one-time (level) effect unless tariffs keep being ramped higher, and the effect gets smaller the higher the tariff goes (a 1000% tariff will not raise prices any more than a 900% tariff, because at that point we aren’t importing anything). So, all else equal, we should expect slightly higher inflation in 2025 than we previously would have expected, and probably for the first part of 2026, but then the tariff effect will be over and the level of inflation we settle in at will be once again driven mainly by money growth.
On that score the news isn’t great, with M2 rising at a 5.8% annualized rate over the last quarter and 3.9% over the last year. 4% would get us to 1.5%-2% inflation in the long run, probably; 6% will get us into the high 3s, low 4s. Some think that if inflation ends up ratcheting a little higher, the Fed might raise interest rates again. But monetary policy has very little control over inflation that is caused by tariffs and it would make no sense to reverse course for that reason. This just accentuates how bad the box is that the Fed got itself into by making a nakedly political ease in the middle of last year. Tightening because of tariffs has no economic justification; it would look nakedly political again. I would be surprised if overnight rates went higher from here. Of course, I’d also be surprised to see them going lower especially since tariffs are also good for domestic economic growth.
So there will continue to be lots of economic volatility from here, but stasis appears to be high 3s, low 4s. Still.
