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They’re Starting to Come Around on Rent Inflation
For a couple of years, I have been relentlessly defending my forward inflation forecasts against a sizeable group of people who looked at various high-frequency rent indicators and concluded that rents were going to be imminently in deflation. (For most of the last year many of those same people thought tariffs would be a large and immediate effect increasing inflation. Fortunately for them, being wrong on both counts, at least the errors offset somewhat.)
This battle began in early 2023, shortly after the publication of new indices by the Federal Reserve Bank of Cleveland, supported by a paper entitled “Disentangling Rent Index Differences: Data, Methods, and Scope” by Adams, Lowenstein, and Verbrugge. Those authors parsed the BLS rent microdata to separate out the new tenants, and created a “New Tenant Repeat Rent” (NTRR) Index that supposedly served as a leading indicator of what all rents were going to do. Naturally, NTRR had peaked early and was heading down sharply, which reinforced the observation from things like Zillow, Apartment list, etc that new rents in the aftermath of the post-eviction-moratorium catch-up were declining.[1]
The San Francisco Fed also published a piece in mid-2023, entitled “Where is Shelter Inflation Headed,” by Kmetz, Louis, and Mondragon. Don’t get me wrong, I love it when people try to create better models of inflation processes. But this was another one that made just terrible forecasts, because (as in the former case) it was put together by econometricians who didn’t understand the actual underlying process and thought they could just torture the truth out of the data. They included this wonderful (and subsequently damning, because the Internet remembers everything) chart.
Accompanying that chart was the helpful clarifying statement, in case you didn’t get the import: “Our baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024.”
In case you were curious, it didn’t turn negative; in mid-2024 it was a bit above 5%.
So back then is when I had to start defending a fairly simple premise: the behavior of landlords when they offer rents to new renters does not necessarily mirror what they offer to renewing renters. In fact, I could be even more strident – landlords could not offer lower rents to everyone, even if they offered them to new renters. That’s because a landlord needs to cover his costs or he won’t be a landlord for long. And in 2023, the costs for a landlord were still rising very rapidly – labor, energy, insurance, taxes, maintenance, and so on. My model – first presented in Enduring Investments’ Quarterly Inflation Outlook in August 2023 – suggested that rents were going to decelerate, but much more slowly than others were forecasting. I had them as low as 3% by mid-2024 before flattening out, and even that turned out to be too aggressive on the disinflation side.
By now, regular readers are familiar with this model and familiar with the fact that it still is calling for Rent of Primary Residence to hang around the current 3% level for quite a while yet. Want ‘em lower? Lower landlord costs.
But this article isn’t meant (only) to pat myself on the back. I also want to recognize when someone gets it right and the great inflation analysts at Barclays recently published an article entitled “Apples and oranges in the CPI basket: Why market rent gauges mislead on shelter,” by Millar, Sriram, Giannoni, and Johanson. It is marvelous article, and you have access to Barclays Live and care about this topic you should read it. While they don’t build a cost-plus model like I did, they got to many of the core reasons why looking at new-renter indices is bound to be misleading. My favorite charts from the piece are below (I also had these in my recent CPI report).
What my model does is tell you why that had to be the case: landlords can’t just lower rents on their whole renter base if their costs are increasing. The only exception to that would be if there had been significant overbuilding such that there was a surplus of apartments over the demand from renters. In some places, especially those currently experiencing a negative immigration shock, that may be the case (although those places happen to also be the ones experiencing large increases in insurance costs, so it’s not quite that easy). But nationwide, there is not a surfeit of apartments for rent. Ergo, no rent deflation. And it’s going to stay that way for a while.
One final note here, about the recent Trump announcement that the Administration desires less institutional ownership of single family homes and apartments. I say ‘desires,’ even though that isn’t how it was phrased, since there appears to be no obvious way that the Administration can force this. They are reportedly looking into whether antitrust regulations can be used to keep institutions from accumulating very large portfolios of shelter units, but this looks like (at best) a task for the legislature, not the executive. But let’s consider quickly what the effect would be if Trump got his way in this regard.[2] Institutions which own homes and apartments don’t hold them off the market. That would be terrible carry. They rent them, just as landlords do. If you forced institutions to divest single-family homes, it would simply move supply from the rental market to the owned-home market. That would probably drive home prices a little lower, relative to the prior baseline, but increase rent growth at the margin. This doesn’t seem productive!
[1] I talked about NTRR in a July 2023 episode of my podcast: Ep.74: Inflation Folk Remedies
[2] Honestly, I don’t think he really means to do this. Some amount of what the President says – especially the impossible things – are intended for consumption by voters. I could be wrong on this. Mr. Trump does have a way of making things happen that didn’t seem possible initially, but in this case there’s probably not much he can do and anyway it wouldn’t have a big impact anyway.
Inflation Guy’s CPI Summary (December 2025)
Let’s start this month by remembering the absolute dumpster-fire that was last month’s CPI. The number for November was patently ridiculous on its face, and it took mere minutes to realize that the BLS was showing 2-month changes for what were essentially one-month changes:
“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.”
That in fact was what had happened. The BLS has clearly spelled-out procedures for what happens when they cannot collect a price. If they can collect the price for other similar items, they impute the data for the uncollected price by ‘adjacent cell imputation.’ Happens all the time, and has happened more since there have been fewer data collectors, and that has upset a lot of people…but it’s no big deal. What happens less often is that the BLS can collect no similar price, or they don’t have a statistically-significant sample; in that case the BLS procedures call for the prior price to be carried forward and then the price gets naturally corrected the next time it can be gathered. I’ll talk more about this in a week or two, but if the item was generally rising in price that unchanged estimate for monthly price change will be a little low in the first month and a little high in the second month. If the item was generally getting cheaper, you’ll be a little high and then a little low when you catch up. But that’s better than taking a wild unscientific guess.
But normally, that happens for tiny categories. In this case, since no prices were collected, the BLS realized that its procedures called for carryforward pricing. After the data were released, they were very transparent about the fact that this caused understatement in the CPI, and that while most categories will be corrected by normal sampling in a month or two, the rent and OER samples will take about six months to correct because of the way those samples use overlapping six-month survey panels. You don’t need to worry about the fine details here, but to realize that the October number is missing, the November number is garbage, and the year/year numbers won’t be “right” for a while.
Ergo, take everything in today’s number, and all the charts, with a grain of salt.
A little side note is that the BLS was able to collect some data for November, when there was historical data available, so some of the series are complete. And some series have a dash (“-“) for November. Bloomberg simply omits October for those series. The practical consequence is that this is a massive mess for anyone who has built spreadsheets based on fairly normal assumptions about data structure! And it will be for a while. Anyway, on to today’s number.
Over the last month, inflation markets have been little changed.
They’re actually even more unchanged than that looks like, because the apparent rise in short-term inflation expectations is a quirk of the fact that every day, the window covered by a 1-year swap rolls forward one day, and as it turns out the day that it loses on the front end is a day when the NSA CPI was declining sharply thanks to the garbage report we just mentioned. So, the new 1-year swap has less of that garbage dragging the y/y rate down, and so it rises slightly. The net result is that inflation expectations at the front end are not really rising.
The expectations for the December CPI were for +0.31% on the seasonally-adjusted headline, with +0.32% on Core. These are even more guessy guesses than normal, since economists had to figure which categories might jump back and by how much. The actual CPI came in at +0.307% (SA) on headline CPI, and +0.239% on Core CPI. We will ignore the y/y rates for now. If we take those numbers at face value, it would annualize to 2.9% on Core CPI and 3.75% on headline CPI. That doesn’t seem wildly off, with the obvious caveat that annualizing a one-month change is stupid. Sorry.
Now, the Median CPI is going to be a snap-back sort of month. I think. The median category appears to me to be one of the regional OERs, so the actual number will depend on the seasonal adjustment the Cleveland Fed applies to that subindex. And I don’t know what the Cleveland Fed did for their last data point so they may be jumping off differently than I did. But any way you slice it, we’re going to be around 0.30-0.35% for median.
This is right about where the trend was prior to September. A word on September: while it is convenient to think that September was the ‘last good data point’ we had before the shutdown, remember that month had an outlier Owners’ Equivalent Rent number (0.14%, vs a series of 0.28%-0.40% that happened in the year prior to that) that we expected to rebound in the next month. We never saw the rebound. Median CPI was also affected by that, and so the last truly normal number was August. The upshot of it is that there may be some continued deceleration in median CPI, but it isn’t clear at all.
Core goods as of this month were +1.42% y/y. They look to be leveling off a bit, and it may be that the bump from tariffs (which, contrary to economic theory but in keeping with the way it really works, got bled into prices over a period of time rather than all at once) is petering out. Too early to tell, and part of this leveling out is due to soft Used Cars data in this month’s release. Core Services, mostly housing, continues to decelerate but see all of the caveats about rents.
And yes, rents went back to doing what they had been doing. Primary Rents were +0.26% m/m, and Owners’ Equivalent Rent was +0.31% m/m. So, yeah: that dip in OER in September was a mirage, and we’re still running at 3-4% in rents although the one-month BLS blip makes it appear that we’re still decelerating. I am not sure that’s really true.
Speaking of rents, Barclays put out a great piece earlier this week. It’s called “Apples and oranges in the CPI basket: Why market rent gauges mislead on shelter,” and if you have access to it you should read it. If you do not have access to it, you can just read my articles from the last few years. Seriously, though – it’s a very good piece and I’ll talk about it more in a week or so. But here are two of my favorite exhibits from their writeup.
Since 90% or so of rents are continuing rents, and all of the high-frequency rent indicators are recording new rents…can you see why there’s a problem?
That’s why a few years ago I migrated my model for rents to be based on a bottom-up estimate of what landlord costs were doing. Here is that model with the updated Primary Rents.
Normally, the Enduring Model has more lead time, but since part of it relies on PPI data that haven’t been released since September (and which is coming out tomorrow), the look forward is shorter than normal. Still, it says the same thing I’m saying above and approximately what Barclays is now saying – 3% on rents is about where it should be. It is not likely to decline sharply from here. And that means that getting CPI to 2% is going to depend on a collapse in goods prices or core services ex-rents, neither of which I see happening soon.
Although I should point out that core services ex-rents, aka Supercore, has been looking better of late.
As with everything else, we need to wait and see how this evolves once we get a few more months of decent data. I expect core services ex-rents to continue to decelerate a little, but that’s mainly because of Health Insurance (which fell -1.1% last month, and because of the way the Health Insurance estimate changes only once per year and gets smeared over 12 months this should work out to a drag of about 1bp/month on Core CPI). Outside of Health Insurance, the downward pressure on core services ex-rents is lessening.
And really, that’s the summary of the number: some of the effects from bad stuff (e.g. tariffs, which were never as big a deal as people treated them) are wearing off but some of the positive trends (e.g. the deceleration in rents) have also mostly run their course. The Enduring Investments Inflation Diffusion Index shows that there’s a bit of an upward trend in the distribution of accelerations/decelerations.
All of which points to the same thing I’ve been saying for a while, and that’s that once the spike was over we knew inflation would drop but it was likely to settle in the high 3s/low 4s (since amended to mid-to-high 3s). The tailwinds on inflation have turned into headwinds, so monetary policy overall needs to be tighter than it otherwise would be. The Fed doesn’t see it that way yet, and new additions to the Board of Governors are definitely more likely to be dovish than hawkish. Not only that, the federal government is also adding liquidity…or will be, if the President convinces Fannie Mae and Freddie Mac to buy $200bln in mortgages. A Federal Reserve which appreciated the inflation risks would be preparing to drain away that liquidity, no matter what it was going to do on interest rates. There’s no sign of that.
As a result: I think it’s reasonable to expect dovish outcomes from the Fed from here, although Chairman Powell will doubtless try to stick it in the eye of the President (and the American people get caught in the crossfire) before his term is up. That differs from the Fed of the last 30 years only in degree. They are going to be too loose, and there’s a good risk that inflation heads higher from here (not to 9%, mind you, but getting the sign right will matter).
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!
Why Hedonic Adjustment in the CPI Shouldn’t Tick You Off
I’ve worked in the inflation field for about a quarter-century (depending on how you want to count it), and I can tell you that if you really want to start a food fight at an investment conference, mention the term ‘hedonic adjustment’ as it relates to the Consumer Price Index. Thanks to substantial counter-programming by people who want you to prefer their narrative on inflation and their inflation index, people who tend to hold to the “the government is making it up” narrative about inflation like to quote hedonic adjustment as one element of proof.
The first problem with this is that people seem to think that CPI is supposed to measure how their actual cash costs change every year. It isn’t. If you look at the price of anything, it represents a trade offered by the supplier of value for value: if you give me X dollars, I will give you the widget that paints your house in 6 hours. If you don’t think that widget is worth X dollars, then you don’t buy the widget.
But widgets change. If the same vendor offers the same widget, but thanks to improvements now will paint your house in 3 hours, and now costs Y dollars, you the buyer have the same evaluation to make except now it’s the value of a 3-hour paint job versus Y dollars instead of 6-hours versus X dollars. If you want to see how the trade changed, then you can’t just compare Y versus X. You have to compare the other side of the trade also. Or, to put it another way, the difference in price (Y-X) isn’t just due to the fact that the dollar is worth less now than it was, so that even the old version of the paint-widget would cost X’, but also because it’s a better widget. You the consumer see the price going up from X to Y, but that consists of inflation X’-X, plus quality improvement of Y-X’.
There are no two ways of looking at that. If you want to measure the change in cash outlays, just count your cash outlays. But if you’re trying to measure the change in the cost of living, then you need to try to hold the standard of living constant between measurements.
So any inflation measurement needs to account for the fact that widgets change, or it will perpetually exaggerate inflation.
Most of those adjustments are pretty straightforward. If your candy bar got 20% smaller, it’s easy to account for the additional inflation that implies. In fact most of these quality adjustments are called “quality adjustments.” It becomes a ”hedonic” adjustment when the widget has a lot of different elements that give it value. Think of a car, where having better fuel efficiency is valuable but so is an improvement in the dashboard entertainment system. When the price of the car changes, it’s much harder to figure out how much of that due to inflation (paying more to get the same stuff, X-X’ in the example above) and how much is due to the change in the components of the vehicle. Enter the econometrician, who applies fancy mathematics that you may be unsurprised to learn is called a ”hedonic regression.”
Now, just about 100% of the CPI basket is subject to quality adjustment when necessary. As I said, quality adjustment is necessary. But only a small fraction of the basket is adjusted using hedonic regression.
But it’s not even as bad as that. You hear a lot of grumbling about how “hedonic adjustment says the price of a computer is falling even though it’s staying the same or going up, so obviously inflation is really higher than the government says it is.” But you almost never hear anyone complain about hedonic adjustment to shelter. The BLS, you see, adjusts for the fact that the housing stock gets older, so that if you pay the same rent from year 1 to year 2 it actually works out to be inflation because you’re getting a slightly older apartment. The real kicker? The upward hedonic adjustment to shelter inflation comes very close to balancing the downward hedonic adjustment to computers and microwaves and things. In other words, if you outlawed hedonic adjustment it wouldn’t really change the CPI hardly at all. A 2006 paper by Johnson, Reed, and Stewart found that the “net effect of hedonics from 1999 onward…is estimated to be less than 1-hundredth of 1 percent per year, specifically +0.005 percent.”[1]
So honestly, the bottom line is that people yell about hedonic adjustment for the same reason they yell at referees. They have to yell at something when they don’t like the outcome!
Is hedonic adjustment “right?” That is, does it correctly determine how much of a price change is due to inflation and how much is due to quality changes? I can say with great certainty that it is not exactly right. It’s an estimate. Virtually every financial model is an estimate. The Black-Scholes option pricing model isn’t right either – in fact, we know that the Black-Scholes model isn’t just wrong, but it’s wrong in some very systematic ways. And yet, people continue to use Black-Scholes, because we understand the ways in which it’s not right and can adjust for it.[2]
Hedonic adjustment is also not “right.” But it’s a fair approach, and if you want to adjust the CPI by removing the downward hedonic adjustments while keeping the upward hedonic adjustments (to shelter) then you can make that adjustment mentally by just adding about +0.10% per annum to the CPI. Either way…it shouldn’t tick you off.
[1] Johnson, D.S., S.B. Reed, and K.J. Stewart. 2006. “Price Measurement in the United States: a Decade After the Boskin Report.” Monthly Labor Review (May): 10–19.
[2] One big way is that since actual market movements aren’t distributed normally, and the Black-Scholes model assumes they are, the price of options that are far out-of-the-money are systematically low. Or they would be, if we didn’t adjust for this known problem by applying a volatility smile to price out-of-the-money options.
Mamdani’s Effect on the CPI
Surprising no one, and yet shocking many, avowed socialist Zohran Mamdani won the election yesterday to become Mayor of the largest city in the United States.[1]
Probably the main reason for Mamdani’s victory is that he pursued the tried-and-true method of giving out free stuff, and a whole generation of Americans who have systematically been poorly educated in history and economics said “that sounds awesome.” So, now we will see whether socialism will work for the first time ever.
This is an inflation blog, so I want to review briefly the effects of price controls on inflation – and indirectly, on inflation instruments. It’s interesting because we actually have some direct and recent experience with what were effectively price controls: the Biden Administration’s ‘eviction moratorium’ during COVID, that prevented landlords from tossing out renters who weren’t paying their rent. Really, it’s a pretty amazing thing that says a lot about Americans that the vast majority of renters continued to pay rent anyway.[2] An ancillary effect, though, was that landlords had no leverage to raise rents and therefore, rents stopped going up. Unsurprisingly (and here is where the lesson should have been learned), when the eviction moratorium was lifted rents re-accelerated. In the chart below, note how in 2021 effective rents declined while asking rents went up – but the red line eventually rebounded and exceeded the prior trend.
I actually haven’t looked at that chart in a little while. It’s fascinating to me that ‘asking rents’ (which come from the Census department) have maintained their divergence from ‘effective rents’ (sourced from Reis Inc). I wonder if some of that is the effect of the LA wildfires. In any case, not today’s article. The point is that the effective price controls on rents did have an effect on measured rents, but it didn’t change the economics and eventually prices caught up.
Back in 2022, I produced an excellent podcast episode entitled Ep. 37: Bad Idea of the Year – Wage and Price Controls. In it, I discussed some of the trial balloons that had been floated by the Administration and some of the really bad economics that was being used to support the idea. This is a part of the transcript (from Turboscribe.ai), and I still love the analogy:
“But the basics of how it works are very simple to visualize. Price is a teeter-totter, okay? It’s a seesaw. On one side of the seesaw sits all of the buyers. On the other side sits all of the sellers. If there are lots more buyers jumping onto one side, then the teeter-totter drops on that side, and the fulcrum, in order to make everything balance, the fulcrum has to move. And if you move the fulcrum, then you can get that to balance even with more buyers and fewer sellers.
It just means that the fulcrum, which is price, has to move in one direction. If then people, those buyers drop off, then the fulcrum moves back the other direction. If more sellers jump onto the teeter-totter, the fulcrum moves the other direction as well.
So it’s a simple way to visualize it…and yes, there are all kinds of complexities in the real world. There’s behavioral, there’s stickiness that happens, but that’s the fundamental theory of price, is what I’ve just given you, is that price is the fulcrum that balances the buyers and sellers.
So what price controls say is that, well, we don’t like where this balanced. We have too many buyers, not enough sellers, and the fulcrum has moved way over to one side and we don’t think it should be there. So we’re going to take the fulcrum and we’re going to move it to where we like it. And guess what happens? There’s no balance. All of a sudden, if you move the fulcrum away, then all of a sudden, the side with all the buyers goes down and goes thunk on the ground. There’s no balance.
“How do you then balance it? If you say that the fulcrum has to be in this location, how do you balance the teeter-totter? Well, you have to take buyers away. And you take buyers away by making a shortage. And so those buyers can’t buy anything. And then voila. So if you force the price, then the quantity has to change. And if you let both things happen, then it will magically go and balance. If it’s truly a free market and there’s good information and all that stuff.
“So does this solve the problem to push the fulcrum to one side and say, oh, there’s no inflation and to make it balanced, we shove everybody off the teeter-totter by creating a shortage? It doesn’t solve the problem. And furthermore, the people that you’ve pushed off the teeter-totter who can’t get access to the thing anymore are pretty upset. They should be upset because before they had a way to get what they wanted and what they were willing to pay for. And now they can’t because you’ve shoved them off the teeter-totter. You’ve created a shortage.”
That was a public service announcement, just to remind you why price controls don’t work. That doesn’t mean they aren’t really good politics, especially if you can leave the removal of the controls to the next guy who ‘causes’ the inflation when they come off. And it’s the politics, not the economics, that leads to this dumb idea being tried over and over despite a roughly 0% record of success.[3]
Because can price controls affect price indices? You betcha. If you make it illegal to move prices, then at least official prices will not move. So let’s consider the potential impact of Mamdani freezing rents and grocery prices, for example.
New York City is about 7% of the CPI sample. Technically, it’s New York-Newark-Jersey City but we know most of that is NYC. In the New York consumption basket, Rent of Primary Residence is about 11%, 28% is Owners’ Equivalent Rent, and 8% is Food at Home. So, if rents and grocery prices were frozen, about 19% of the NY CPI would go to zero month/month right away (at least officially – the best tomatoes will be sold on the black market for a premium of course and the best catch of the day will be sold in NJ…[4]) And since OER is based on a survey of primary rents, eventually 47% or so of the NY CPI basket will go to zero price change. I’m ignoring the quality adjustments in the housing stock, which have the effect of increasing OER inflation slightly.[5]
The effect of this on the national CPI: if 47% of the NY basket goes from, say, 4% inflation to 0%, and NY is 7% of the national CPI, then the really-rough effect on the US CPI would be 47% x -4% x 7% = -13bps per year. Obviously that’s extremely rough, but I’m just aiming for an order of magnitude calculation. 13bps is small, but noticeable. Probably not tradeable.
But here is something that’s interesting and potentially tradeable. New York City is about 30% of the Case-Shiller 10-City Home Price Index. Let’s suppose that home prices in New York over the next year drop, say, 10%.[6] That move would cause the nationwide Case-Shiller (10-city) index to drop 3%, or to rise 3% less than it otherwise would. Here’s what is interesting. The chart below shows the February 2027 NYC Metro Case-Shiller futures contract, which trades on the CME (and settles to the index for December 2026, which is released in February 2027).
There has been exactly zero price effect of the Mamdani victory. To be sure, open interest in the NYC contract – in all of the Case-Shiller contracts, for that matter – is extremely low but there is an active market-maker and the current price as I write this is 344.40 bid/351.60 offer. The last print of the S&P Cotality Case-Shiller New York Home Price NSA Index, for August 2025, was 334.08. On the bid side, then, the market is paying 3.1% higher prices than the current index. That seems sporty to me. Why would home prices rise if rents are frozen? Why would they rise if people are leaving the city?
As always, my musings here are not trade recommendations; do your own research. Disclosure: I do not currently have a position either long or short in any housing futures contract, nor does any account or fund that I or Enduring Investments manages, nor do I currently have plans to initiate any position.
[1] New York, at least for now.
[2] At the time, we worried about what would happen with the CPI since a renter paying zero rent is not skipped but the rent goes into the calculation as a zero. So you could in theory have had 10% of the basket going to zero, which would have destroyed the inflation market.
[3] If you listen to the episode: I also love my thermometer analogy.
[4] Also, though rents will stop rising the quality of the apartments will deteriorate since landlords will skimp on maintenance. Mamdani has a plan for that, though – he has said the city will order maintenance to be done and if it isn’t, the city will seize the property. Just in case there was any question who really owns any property that you can’t pick up and transport elsewhere.
[5] N.b. – the increase in the CPI nationally from the owned-housing quality adjustment almost exactly cancels the decrease from quality/hedonic adjustments in other parts of the CPI. Yet another reason that the whining about hedonic adjustment being used to ‘manipulate CPI lower’ makes no sense.
[6] You can easily make a case for a much steeper drop if the city increases property taxes to make up for declining income tax collections, not to mention if the exodus from the city looks anything like the 9% of the population who claim they’d move if Mamdani won, or if the finance industry continues to relocate to Dallas and Miami.
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.
The Fault, Dear Brutus, is in R*
I want to say something briefly about the “neutral rate of interest,” which has recently become grist for financial television because of new Trump-appointed Fed Governor Stephen Miran’s speech a couple of days ago in which he opined that the neutral rate of interest is much lower than the Fed believes it is, and that therefore the Fed funds target should be more like 2%-2.25% right now instead of 4.25%.
Cue the usual media clowns screaming that this is evidence of how Trump appointees do not properly respect the academic work of their presumed betters.
If that was all this is, then I would wholeheartedly support Miran’s suggestion. Most of the academic work in monetary finance is just plain wrong, or worse it’s the wrong answer to the wrong question being asked. And that’s what we have here. Anyone who thinks that Miran is an economic-denialist should read the speech. It is mostly a well-reasoned argument about all the reasons that the neutral rate may be lower now than it has been in the past. And I applaud him when he comments “I don’t want to imply more precision than I think it possible in economics.” Indeed, if we were to be honest about the degree of precision with which we measure the economy in real time and the precision of the models (even assuming they’re parameterized properly, which is questionable), the Fed would almost never be able to decisively reject the null hypothesis that nothing important has changed and therefore no rate change is required!
I can’t say that I agree with Miran’s argument though. Not because it’s wrong, but because it’s completely irrelevant.
Sometimes I think that geeks with their models is just another form of ‘boys with their toys.’ And that is what is happening here. The “neutral rate of interest” is a concept that is cousin to NAIRU, the non-accelerating-inflation rate of unemployment. The neutral rate, often called ‘r-star’ r* (which is your clue that we’re arguing about models), is the theoretical interest rate that represents perfect balance, where the economy will neither tend to generate inflation, nor tend to generate unemployment. Like I said, it’s just like NAIRU which is a level of unemployment below which inflation accelerates. And they have something else in common: they are totally unobservable.
Now, lots of things are unobservable. For example, gravity is unobservable. Yet we have a very precise estimate of the gravitational constant[1] because we can make lots of really precise measurements and work it out. Economists would love for you to think that what they’re doing with r* is similar to calibrating our estimate of the gravitational constant. It’s not remotely similar, for (at least) two enormous reasons:
- Measuring the gravitational constant is only possible because we know (as much as anything can be known) what the formula is that we are calibrating. Fg=Gm1m2/r2. So all we have to do is measure the masses, measure the distance between the centers of gravity, and infer the force from something else.[2] Then we can back into G, the gravitational constant. Here’s the thing. The theory of how interest rates affect inflation and growth, despite being ensconced in literally-weighty economics tomes, is just a theory. Actually, several different theories. And, by the way, a theory with a terrible record of actually working. To calibrate r*, the hand-waving that is being done is ‘assume that interest rates affect the economy through a James and Bartles equilibrium…’ or something like that. It is an assumption that we shouldn’t accept. And if we don’t accept it, calibrating r* is just masturbation via mathematics.[3]
- With the gravitational constant, every subsequent measurement and experiment confirms the original measurement. Every use of the model and the constant in real life, say by sending a spacecraft slingshotting around Jupiter to visit Pluto, works with ridiculous precision. On the other hand, r* has approximately a zero percent success rate in forecasting actual outcomes with anything like useful precision, and every person who measures r* gets something totally different. And r* – if it is even a real thing, which I don’t think it is – evidently moves all the time, and no one knows how. Which is Miran’s point, but the upshot is really that monetary economists should stop pretending that they know what they’re doing.
In short, we are arguing about an unmeasurable mental construct that has no useful track record of success, and we are using that mental construct to argue about whether policy rates should be at 2% or 4%. Actually, even worse, Miran says that the market rate he looks at is the 5y, 5y forward real interest rate extracted from TIPS. The Fed has nothing to do with that rate. But if that’s what he is looking at why are we arguing about overnight rates?
I should say that if there is such a thing as a ‘neutral rate’ that neither stimulates nor dampens output and inflation, I would prefer to get there by first principles. It makes sense to me that the neutral long-term real rate should be something like the long-run real growth rate of the economy. And if that’s true, then Miran is probably at least directionally accurate because as our working population levels off and shrinks, the economy’s natural growth rate declines (unless productivity conveniently surges) since output is just the product of the number of hours worked times the output per hour. But I can’t imagine that the economy ‘cares’ (if I may anthropomorphize the economy) about a 1% change in the long-run real or nominal interest rate, at least on any time scale that a monetary policymaker can operate at.
The best answer here is that whether Miran is right or not, the Fed should just pick a level of interest rates…I’m good with 3-4% at the short end…and then change its meeting schedule to once every other year.
[1] Which may in fact not be constant, but that’s a topic for someone else’s blog.
[2] In the first experiment to measure gravity, which yours truly replicated for a science fair project in high school, Henry Cavendish in 1797 figured the force in this equation by measuring the torsion force exerted by the string from which his two-mass barbell was suspended, with one of those masses attracted to another nearby mass.
[3] Yeah, I said it.
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.
An Update/Reminder on Rent Inflation
A subscriber to our Quarterly Inflation Outlook (you can subscribe here) wrote to me recently and asked about a research piece put out by a major sell-side investment house that discussed how private rental indices (such as Zillow) and the Fed’s NTRR (“New Tenant Rent Index”, as defined in a paper by the Cleveland Fed’s Randall Verbrugge a couple of years ago called “Disentangling Rent Index Differences: Data, Methods, and Scope”) were indicating that a decline in rent inflation was on the way. I felt like it was time for an update on this topic, since it has been a little while since the exact same arguments made the rounds a few years ago.
I even had a podcast (Ep. 74: Inflation Folk Remedies) in July 2023 in which I discussed (among other things) the NTRR issue. So the deceleration of Zillow and the other private rent indices, the NTRR which was forecasting sharply negative rent growth (before revisions!), the supply of new rental units – all of those are arguments from 2023!
Here are rents. The black line is the actual CPI for Primary Rents, y/y. In July of 2023, it was at 8%. You may notice that it never went negative in 2023 or 2024, and isn’t showing any signs of going negative in 2025.
Before I go any further, here is sufficient reason to ignore the NTRR, in addition to the other arguments I’ll make in a bit. Here is the chart of the NTRR from the 2023 paper.
And here is the updated NTRR from Bloomberg today. You will note that the 0% print in 2023Q1 from the 2023 paper has been revised up to around 4.5%. That’s even higher than the upper edge of the error range in the prior chart.
So forgive me if I don’t panic at the -2.2% current reading of the NTRR. Here’s the problem: the conviction among economists in 2023 (not just the Fed economists, but it was a general consensus at the time that rents were about to collapse) that the “stock” of rent inflation would eventually respond to the “flow” of new rents is just not how rents work. The new rents are not indicative of new conditions while the stock isn’t…those are two totally different populations.
There are people who turn over rents and move with some frequency, or who are moving now for one reason or another, and there is a stock of open units that landlords want to fill. But just because a landlord offers a low rent to fill his one open unit has nothing to do with his desire to cut rents on all of the units that aren’t turning over.
What is amazing is that the only reason this ever looked like it worked was because when both rates are very low, the noise outweighs the signal. So there’s no data for economists to really test the hypothesis on a period that matters because it’s similar to the current period of generally rising prices. But if economists just spoke to landlords, they would understand. That’s what I did, and the reason that in 2023 I switched my model from a top-down to a bottom-up (which is the dotted line in the first chart above…and that was not revised significantly). If costs are growing for landlords, they aren’t going to be cutting rents for their tenants even if they want to cut them for new tenants to fill a unit.
It should not be a surprise that the ‘faster’ NTRR has large error bars and large revisions. Essentially, the idea behind those indices is that they take the same rent data the BLS generates and squeeze out several different indices, some of which are “faster.” But basic information theory says you can’t get 3 bits of data from a pile that holds 1 bit, for free. What happens is those new indices are faster…but they have huge error bars that are huger the shorter the forecast length. Duh. Which means you can’t reject any null hypothesis about the near-term path. In the original paper they mention this and they show the data on the variance but they didn’t really explain it well. The short way to describe the problem is that you can’t get three pounds of crap out of a one pound bag. Period.
Now…having said all that I do entertain the possibility that rents could slow meaningfully further than here, even more than the mild softening that my model has. But my reasons for that are different:
- Rents in NYC will likely decline sharply if Mamdani wins, partly because jobs will absolutely flee the city but mainly because of his not-very-veiled-threat to seize property if they don’t. The smart landlords will dump their property at any price and get out, but some will try to ride out his term as Mayor. That’s unlikely to work but they’ll try. And NYC is a big part of the rent indices (by the way, one hedge for this is to sell the Shiller NYC property index, which futures trade (thinly, but they trade) on the CME. Combined with naturally slowing rent growth from some of the really hot but now getting overbuilt areas – like Miami – and you could get the overall indices to look better than the median would.
- (Offsetting this but probably nearer-term, LA rents will be buoyant for a while and maybe more sharply once the wildfires are further in the rear-view mirror so the claims of “profiteering” can be ignored. They bounced right after the fires destroyed a huge number of units but predictably people screamed at landlords so that stopped. But supply and demand, you know. There are fewer rental units in Los Angeles, and rents are going to go up faster as a result).
- If mass deportations really do turn into mass deportations, then what we are already seeing with Lodging Away from Home could become broader pressure on rents. The hotels were where the newest and biggest wave of illegal migrants were housed in the big cities. Elsewhere, they live in apartments and sometimes own homes when they have been here for a while. I can’t imagine the government will be able to deport more than say 1mm over the next year or two. That would be 2000-4000 per work day, and while the illegal immigrants generally walked in they generally have to be flown out. However, 1mm is still a big number and if enough other illegals ‘self-deported’ so that you’re talking about a million households then you’d have to consider a good chance of significant housing disinflation as the stock of rental units – currently just barely out of shortage – becomes a glut from the demand side.
But note that neither 1 nor 2 is currently something that you’d be able to detect with NTRR or Zillow or other rental indices. Maybe at the margin we could see deportations affecting rents in some of the ‘sanctuary cities’ where a lot of the deportations are concentrated, but I doubt it. Too soon.
In any event, my forecast for rents is not super-aggressive and I recognize there are mostly downside risks associated with those enumerated reasons. But right now? In the data? There is nothing that looks like it spells housing deflation.
