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Inflation After 100 Days
It is hard to believe that a third of the year is already past. Some people, of course, would say that it seems like a hundred years have passed in the first hundred days of Trump’s second term, but to me it seems like a blink.
Here’s a quick mark-to-market summary of where I think we stand with respect to inflation and the economy generally…after which I actually have another point for this column:
Uncertainty. That’s the watchword, of course. One place this shows up is in the huge spread between survey data and hard data. The survey data is tinted with fear of uncertainty, and is very negative (and likely influenced by the media deciding that Trump’s Administration signals the End of Days); the hard data is clearly softening but not dramatically so – and frankly, that was already under way in some ways since at least 2023 when the Unemployment Rate started heading slowly higher. In my view the softening of the hard data won’t ever get to be dramatic in this recession, and this will end up being more like a garden-variety recession we used to have pre-2000.
Inflation will be higher than it would otherwise be, because of tariffs, but lower than many people think because people greatly exaggerate the effect of tariffs. Tariffs only affect goods, and only significantly if they are goods facing inelastic demand. There will be some shortages in the near-term, and unlike during COVID when many of the shortages were caused by too much demand induced by money-drops to consumers, in this case it really will be supply constraints. Look out for things like ibuprofen, which is 90% sourced from China which makes it hard to completely switch supply to domestic suppliers. But these are short-run or in some case medium-run disruptions as supply chains shift. As domestic or lesser-tariffed countries replace the highly-tariffed suppliers, the supplies will respond and prices will come back down – not all the way to where they were, but it will feel like deflation in some cases because we mentally refer to the most-recent price, not to the year-ago price.
But either way, the tariffs are a jump-discontinuity, a one-time effect. The uncertainty, less so but that will fade (as an aside, and as I’ve noted previously, the high uncertainty had the effect in Q1 of causing money velocity to decline very slightly for the first time in a couple of years). By the end of the year, things will be much more settled and inflation will be stabilizing again…but the story continues to be that inflation will stabilize in the high 3s, low 4s, not at 2%. This probably means the Fed will not be easing much, although if there is a significant slowdown not caused from net trade – the Q1 drag was significantly from the surge in imports due to front-running tariffs – the Fed will ease even if inflation hasn’t come down. They’ll point to tariffs being transitory, although I sincerely doubt they will use that word! And they’ll be right, but they’ll also be wrong. Money supply growth is still too fast to accommodate 2% inflation especially in a deglobalizing world.
We’ll talk more about all of these things in columns here and in my podcasts over the next few months. But today I am still very preoccupied with getting USDi[1] launched, getting investors involved, talking to crypto ecosystem providers, etc. And I want to address one question I get routinely these days – not just about USDi, which exactly tracks CPI but adds nothing on top, but about the underlying investment strategy that I’ve been running/marketing for 3.5 years. The question is, “why should I buy something that returns CPI when inflation is at 3% and I can buy Tbills and earn 4.25%?” Here are two important pieces of the answer – and they’re just as important to investors who operate wholly in the traditional finance world as it is to people operating in the crypto world.
The first part of the answer is that while Tbills are above inflation now, that is not exactly guaranteed. In fact, for the last quarter-century it has been fairly unusual.
Sure, if you go back to the 1980s and early 1990s, when inflation was high and coming down and the Fed was following inflation down, you can find a lengthy period when Tbill rates were above inflation. Is the current period, with inflation where it is, comparable to the period when inflation was descending from double-digits and the FOMC was dominated by hawks? Do you think Trump will replace Chairman Powell and other Fed governors whose terms expire, with hawks? It doesn’t seem that way to me. I think it’s important to realize that is the bet you’re making, if you hold short cash instruments as an inflation hedge.
The second part of the answer is that holding a cash instrument does not protect you during an inflation spike because the Fed cannot respond fast enough, and a cash instrument in nominal space does not protect you from a dollar crisis. Almost nothing does, in fact, as stocks and bonds both do poorly in those cases as do ‘inflation hedge’ products based on equities or bonds. Here is a chart of the recent inflation spike. How well did your Tbills, or short-duration bonds (VTIP) or long-duration inflation bonds (TIP), keep up? Did they ever catch up?
To me, any allocation to low-risk securities that is meant to serve as a volatility buffer for a portfolio, but does not hold inflation beta, is completely missing the value of that beta in certain scenarios where very little else is helpful. When inflation spikes, stocks and bonds become correlated (down). You can (and should) add commodity allocations to your portfolio, but those consume part of your risk budget and push out the equities, hedge funds, private equity, and other higher risk asset classes. If you can get the inflation beta from a very low-risk part of your portfolio, you ought.
The foregoing is, transparently, partly self-serving. But the products I’ve been involved with developing have never been developed because they produce big fees or are easy to sell.[2] I’ve developed them because they’re useful to investors. And, parenthetically, I do think that the worker is worthy of his wages.
If you want to find out more about USDi, I urge you to visit the home page https://usdicoin.com, where you can see the current value of the coin increasing minute-by-minute with inflation. If you’re a denizen of the crypto world, then you might also be interested in joining the Telegram read-only group for the USDiCoin, available at https://t.me/USDi_Coin. That group is where we will make announcements about the coin, post the price of the coin periodically (at least daily; automation in process), post the monthly reports confirming the collateralization of the coin, announce new market-makers and markets…and also post some inflation-related charts, such as I used to do on Twitter on CPI morning, when Twitter allowed such automation. If you’re at all interested in inflation and/or the inflation-linked coin, hop on.
[1] If you don’t know what USDi is yet, read my prior article https://inflationguy.blog/2025/04/15/announcing-usdi-inflation-linked-cash/
[2] Understatement of the century.
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.
Inflation Guy’s CPI Summary (December 2024)
It is important – and I say it every year – to remember that when we are looking at economic data from December (and in many data series such as Employment, January as well) there are massive error bars around the numbers. The government doesn’t report error bars, but they should. Frankly, when it comes to Nonfarm Payrolls, I barely glance at the number because it just doesn’t mean very much.
The problem isn’t so dramatic in CPI at the headline index level, because the main sources of volatility in the index also happen to be the ones that provide all of the seasonal adjustments, so we tend to miss estimates roughly as often in December as in other months. As we go through the numbers today, however, you’ll notice a bunch of things swinging one way after swinging the opposite way last month. That’s the sort of thing that can easily be caused by the placement of Thanksgiving, so you can see reversals from November’s number to December’s. I am not saying that everything in the CPI report today is infected by that effect; just keep it in mind.
Now, while I say the ‘problem’ of seasonal volatility isn’t as bad in CPI at the headline level, recognize that December sees the most-severe seasonal adjustment to the headline figure. Here are the seasonal adjustment factors for 2023 (they don’t change much). A number below 1.0 means that the seasonally-adjusted headline number will be higher than the nonseasonally adjusted number, because the seasonal pattern ‘expects’ the weakness, and vice-versa. You can see that December is the month furthest from 1.0. What you can’t see from this chart is that if you want to get technical about it, December is also the only month for which we could really reject the null hypothesis that the adjustment factor is 1.0…in other words, the only month where we are really confident that the effect is to cause the NSA CPI to be lower than the average month. November, maybe.
As an aside, this is why April maturity TIPS tend to have higher yields than January maturities. The January TIPS mature to an index that is an average of October and November CPIs, while April TIPS mature to an index that is an average of January and February CPIs. So April TIPS always get an extra December CPI in them, and if there’s one month you don’t want, it’s December. So April TIPS have to have a slightly higher yield to entice people to hold them.
Right, that’s a big prelude discussion. Summing up: don’t get too excited either way with this number. More important is that the overall market has been selling off. 10-year breakevens have risen 14bps, and 10-year real yields have gone up 26bps. How much of this is because of a fear that inflation is turning, is unclear. But in December, the overall data was pretty close to expectations. Core inflation came in at +0.225% m/m, compared to expectations of +0.25%, which is less dramatic than it looked when rounded and it printed at 0.2% vs expectations of 0.3%. A small miss lower, and to be fair the best core number since July.
Headline was only 0.04% NSA…which gets adjusted to +0.39% when the seasonally-adjusted number is reported. See what I mean? So we look at the y/y numbers, which basically replaces last December with this December (thus neatly avoiding the seasonality issue). Y/Y headline CPI rose from 2.73% to 2.90%, and Y/Y core fell to 3.25% from 3.30%.
You may notice that none of those numbers looks like it’s at 2%. Nor is Median CPI, which was (my estimate) +0.31% m/m, the highest since September. If I’m right about that print then the y/y would drop to 3.86% from 3.89%.
So on the macro side, top-down, this does not look like the sort of data that the Fed was expecting when it started easing in September. Since in my opinion this has been eminently foreseeable for a long time when you looked at what was driving CPI, the conclusion must be either that the Fed is just incompetent when it comes to inflation forecasts, or it doesn’t care about inflation, or the rate cut had nothing to do with economics and was just a political gambit to get Harris elected. None of those answers is flattering. I suspect answers #1 and #3 are the main drivers of the most-recent policy error.
The good news in the inflation figures is that there’s no one major group that still looks alarming.
When we drill down to the monthly data this month…that’s where you see the seasonal volatility. For example:
- Used Cars was expected to be roughly flat. It was +1.2% after +2.0%.
- Rents rebounded; OER and Primary Rents were +0.31% after +0.23% and +0.21% respectively last month.
- Lodging Away from Home was -0.95% this month; it was +3.16% last month.
- Airfares were +3.93% this month; they were +0.37% last month.
- Car and truck rental +0.58% this month; -2.99% last month.
- Baby Food +0.42% this month; -0.12% last month.
- Medicinal Drugs +0.08% this month; -0.10% last month.
- Doctors’ Services was lower, +0.06% vs +0.28% in November; but Hospital Services were higher at +0.23% compared to 0.00%.
A few broader observations. Core Goods and Core Services both continue to move back towards zero: goods from underneath and services from above. CPI for Used Cars is still -3.4% y/y, and I’d expect it to slowly recover from the spike and reversal stemming from COVID. But we now have an extra factor, and that’s the devastating California wildfires. There are two things you see burned out in every picture. Vehicles, for one. Used and New car inflation is going to turn higher, and maybe quite a bit, going forward as people in California need to replace their wheels. Over the medium term, the dollar’s strength would help keep core goods inflation tame and even slightly negative, but thanks to the wildfires we are likely to see core goods back above zero shortly.
And the other thing you see burned out, of course, are houses. Primary Rents have been slowly converging with our model, but rents are going to get goosed in California immediately and that effect will be smeared out because of local laws against ‘price gouging’ that prevent landlords from hiking their rents immediately to the equilibrium level implied by lots more demand and lots less supply. So they’ll hike, but it will take longer. This is mainly a California effect, naturally, but it will be large enough to affect the national numbers.
Incidentally, you’ll also see these in Lodging Away from Home inflation not just in California but in the entire western US. And maybe further, since remote work makes it possible to temporarily relocate almost anywhere. Federal support of the displaced will ensure that is not a 1-month effect. So in shelter, January and February (and beyond) numbers are going to be a lot more important than today’s release.
I am sure that will be used later to argue that “this inflation in 2025 is all due to the wildfires,” but we should remember that inflation in 2024 was (at best) leveling out and possibly hooking higher again. Broad core inflation ex-shelter has now risen four months in a row. It isn’t alarming, at 2.12%, but it isn’t just shelter keeping inflation above target and the story in early 2025 won’t be ‘all about shelter and cars.’ Supercore is also improving, but it isn’t going to pull the overall CPI down to target if Shelter doesn’t keep decelerating and as Core Goods goes back positive.
Supercore is indeed looking better, but we still have wages rising at 4.3% y/y. Remember that wages and supercore are modestly cointegrated. Or, in English, supercore is where wage-driven inflation tends to live. Wage growth needs to soften a lot more in order to get supercore back to target-like levels.
Again, all of this is December and in January we have had a massive natural disaster that will affect inflation data as soon as next month – and for months going forward. This will obfuscate the fact that the Fed already made a second policy error (after the COVID-era error of adding too much liquidity and not pulling it back quickly enough), dropping rates prematurely and letting money growth re-accelerate (M2 y/y is at 3.7%, but annualizing at 4.7% over the last 6 months and 5.8% over the last quarter ended in November). The bottom line is that the December inflation data is just not very important. What happens next…and what is already happening…is the story that will drive inflation and markets in 2025.
(Admin note: I missed doing the CPI Report podcast last month but it will post this month again! In roughly an hour, I suspect).
Inflation Guy’s CPI Summary (November 2024)
(Administrative Note: There will be no podcast today.)
Last month’s CPI had set up an uncomfortable situation for the FOMC, where too-high inflation was colliding with a Fed that had launched too soon into ease mode – for what appears to be mostly political reasons although there is some mild weakness in economic growth. Preemptively attacking slightly soft growth, in a time of frothy markets and CPI that is sticky at a too-high level, might still turn out to be a clever policy move…but that’s a narrow window.
So the Fed would like to see softer CPI, which validates their professed confidence that it is returning to quiescence like an obedient puppy that has been scolded by the wise people in the Eccles building. Wouldn’t we all like that?
There is some cover provided by inflation markets. Before today’s number, here are the most-recent prints taken from the CPI ‘fixings’ market, showing that the market is pricing year-over-year headline inflation to be at 2.14% by April’s print (in May), before rebounding as those quirky low prints from earlier this year are pushed out of the average.
But is that all there is? If headline can only get to 2.1%, briefly, despite soft energy markets, then can the Fed really be very optimistic that core (in the mid-3s) and median (in the low 4s) will show inflation fully tamed? It’s hard to believe. So the Fed has a lot at stake here and needs inflation to keep decelerating. Not just on a y/y basis; the m/m numbers need to start looking better. We have had three straight uncomfortably high core CPI readings in a row after the it-now-seems-like-an-aberration-low blip earlier in the year, and four straight median CPI figures. Consensus before today’s report was for 0.26% on the seasonally-adjusted headline figure and 0.28% on core. Neither of those is what the Fed is really looking for. Worse, they didn’t even get that.
These are not alarmingly high, 0.31% when the market was looking for 0.26% or 0.28%, but keep in mind that our recent benchmark for alarm has been a bit skewed by a period of time when the forecasters were missing by 0.1% and 0.2% on a regular basis! It’s a modest miss. But it’s a modest miss on the wrong side.
Core goods continued to rebound slowly back towards 0%, now -0.6% y/y, while core services slowed further to 4.6% from 4.8%.
The rise in core goods was driven significantly by a second monthly jump in used car prices, +2.72% m/m after +1.99% last month. The lengthy mean reversion of used car inflation is over. That was one big factor keeping core goods prices submerged, and without it (New Car prices were +0.58% m/m also, for what it’s worth) core goods should go back to roughly flat or slightly positive. The strength in the dollar would normally keep core goods from getting too out of hand, but of course if you believe Trump’s tariff threats – and even if you don’t, but figure it implies more nearshoring – then you should expect Core Goods to be positive going forward. Core services has a lot to do with rents, which this month were much lower than last month’s change (0.23% m/m vs 0.40% last month on OER; 0.21% on Primary rents vs 0.30%). The deceleration here continues…although remember that last year we had been promised healthy deflation in rents this year. Never got even close to that.
Now, there is some good news here. Some of the overall miss this month can be traced to a 3.16% m/m rise in Lodging Away from Home. This means that Core Services ex-Shelter (“Supercore”) had a healthy deceleration and that’s good because that’s the sticky stuff. It’s still far too high, though.
Similarly, the more-well-behaved measure of Median CPI was up only 0.255% m/m (my estimate), which brings y/y Median to about 4.04% y/y (was 4.08%). This looks a little better? Anyway the lowest m/m since June!
I don’t want to make too much of this…the fact that Lodging Away from Home was a significant part of the miss doesn’t make this a great number. Nor does the continued deceleration in rents. 0.255% for twelve months would still leave Median CPI over 3%. And the major groups look alarmingly normal without four of the categories above target and four of them below target.
And I guess that leads us to our conclusion. I had said last month that I thought the Fed would find a reason to hold rates steady at this upcoming meeting, rather than continuing to cut. But markets don’t believe that, and market pricing implies a good chance of a further 25bps cut at this month’s meeting. To be fair, Fed speakers have been seeming to guide markets in that direction with expressions of concern about the weakening labor market. But I think there’s something worse than investors starting to be concerned that the Federal Reserve makes policy moves on the basis at least partly of political ideology. After all, that’s at best an every-four-years thing. What would be worse would be for investors to believe that the FOMC is content with inflation above 3%, and willing to focus on employment if there’s even a hint of weakness there. That’s the wrong approach, because employment is cyclical while inflation isn’t. While I don’t believe that ‘inflation expectations anchoring’ is a real thing we should be concerned about, ‘Fed credibility’ is. While inflation was decelerating, the Committee could, with some hand-waving, pretend that it was addressing both inflation and growth and merely getting ahead of the recession. If inflation is hooking higher again, that story will be harder and harder to sustain.
I don’t know that core or median are yet hooking higher. But they’re no longer placidly declining. My guess is that the Fed will pause the rate-cutting campaign shortly, but stop the balance-sheet runoff, and try to play both sides of the net. The game is getting much harder from here.
Inflation Guy’s CPI Summary (October 2024)
I said two months ago that I didn’t think the Fed should ease, but they would anyway. And they did, by cutting overnight rates 50bps. Then last month I said “Getting rates back to neutral, around 4% or so, is not a bad idea as long as quantitative tightening continues. It isn’t the best idea, but it’s not a disaster. But this raises the stakes for the next FOMC meeting… I suspect 25bps is the only choice they can make which will make almost everybody equally unhappy. There’s more data to come before that meeting, but the FOMC’s path has narrowed considerably as inflation remains sticky.” And the Fed, on cue, cut rates 25bps.
But the Fed is getting into an uncomfortable position now, because inflation looks like it has leveled off. As I have said for a while it likely would.
We will get to that. First let’s look at the number.
The economists’ consensus has been drifting higher in recent days, as data on used cars was suggesting that component would be an add in October. Consensus going in was for +0.21% headline (SA) and +0.28% on core. The actual numbers were +0.24%/+0.28%, so pretty close to the consensus with y/y headline inflation at 2.58% and y/y core at 3.30%. It doesn’t seem to me, though, that the chart of core CPI for the last year is particularly soothing. More and more it appears that May-June-July were the outliers, and we are hanging out around 0.3% per month on core inflation.
Also, my early estimate for median inflation is 0.296% m/m, leaving y/y basically unchanged at 4.09%.
Used Cars was indeed high, at +2.7% m/m. But the real problem with Used Cars isn’t this month. The real problem is that for two and a half years Used Cars has provided steady disinflation as the COVID spike (caused because new cars were not being produced as quickly thanks to supply chain problems, but the deluge of money meant that people had lots to spend and wanted cars dammit) ebbed…but that game appears to be about over.
So if you want to get inflation lower from here, it’s going to be a challenge to get it from core goods, which was steady y/y at -1% this month but only because Apparel had a large decline. Core goods is likely to head back to small deflation or small inflation (with the dollar’s recent strength, small deflation is the better guess), but higher from here. We have known this for a while. The heavy lifting is going to have to come from shelter, or supercore, going forward.
So as for shelter…OER was +0.33% m/m in September but +0.40% m/m in October. Primary Rents were +0.28% last month and +0.30% this month. The y/y disinflation is continuing, but still no sign of the hard deflation we were promised.
The good news here for 2025 is that if Trump’s plan for mass deportations happens, and if “mass” means millions, then some of the pressure on shelter that developed over the last few years as ten million additional heads needed roofs over them will abate. Then maybe we can get shelter inflation lower. There is a modest additional “if” part, though, and that is “if landlord costs can stop increasing.” Our bottom-up landlord-cost-driven model has primary rents eventually converging just south of 4%. Better, but still not great.
So that leaves supercore, which unfortunately ticked higher this month.
The problem there also remains the same. Stop me if you’ve heard this one, but wages are moving only slowly downward, and supercore is where the wage/price feedback is the strongest. The red line below is Bloomberg’s calculation of supercore and the other line is the Atlanta Fed wage growth tracker. And the problem is that median wages don’t tend to move drastically differently than median inflation, which as we have discussed is proving sticky.
If core goods is no longer declining, and shelter isn’t doing the heavy lifting of deflation, and if core-services-ex-shelter (supercore) is leveling off…then gosh, that looks a lot like high-3s-low-4s village.
As an aside: I have been saying ‘high 3s, low 4s’ would be where inflation settles in…and I’ve been saying that for a couple of years. Even I am a little amazed that I haven’t had to tweak that forecast much, other than to allow that we might briefly dip below that if housing followed the dip-and-bounce that our model had. I don’t want to put on false humility, because I was saying that inflation would stay sticky and too high long before anyone else was saying that, and I had the correct reasons and I think I’ve guided readers and clients well. But getting the landing spot right, that far in advance, also clearly involved some luck. I am saying that partly to keep the Fates on my side. But you should also know that someday, it might turn out that ‘high 3s, low 4s’ needs to be adjusted. And I’ll still consider this a pretty good call!
The Fed’s actions can clearly affect that eventual equilibrium level, but it doesn’t look like they are yet taking this seriously. The game isn’t over and there will be more CPI reports and more after that. But for now, this looks like a policy error – or worse, a blatant attempt to influence the election – and unless something unexpected happens with prices it looks like the Fed is going to have to choose between the right policy move (which means continuing tight policy) that appears to be political, or continuing to loosen policy so as to not appear to be political, and temporarily surrendering on inflation. I suspect that the FOMC will vote to keep rates steady at the next meeting.
By the way, if you care about the crypto space at all and haven’t read my column on stablecoins, you should, and you should be sure to circulate it. The column is here.
Inflation Guy’s CPI Summary (September 2024)
I already have my title for today’s CPI Report podcast (you can find all of my podcasts at https://inflationguy.podbean.com/ ). I’m going to call it ‘Inflation Peek-a-Boo.’ With today’s number being definitely on the ‘boo’ part of things.
First, a review: last month, August’s report missed higher. But the miss was mostly due to the quirky jump in Owners’ Equivalent Rent. Outside of that, CPI had been okay – not great, but moving in the right direction. The Fed eased 50bps anyway (at the time I said the miss in CPI wouldn’t deter that), setting up what will be the headlines for the next week now. Because of the strength in the Employment report, some people were already questioning whether the Federal Reserve made a policy error in starting to move rates back towards neutral so quickly. But as long as inflation was heading back to their target, neutral would still make sense even if the jobs market wasn’t weakening (as it still looks like it is, outside of government spending). The questions now get a little more pointed because today’s CPI miss higher was not due to a one-off.
The consensus of economists coming into today was for a +0.10% rise in the seasonally-adjusted CPI. Now, energy this month was expected to be about a -0.17% drag on the number (it turned out to be 13bps rather than 17bps), so this low m/m print was scheduled to be mostly due to last month’s slide in energy prices. Still, decent optics especially with the last CPI we’ll see before the election. Economists saw +0.24% m/m on core. The actual figures were +0.18% m/m on headline CPI and +0.31% m/m on core CPI. This is unfortunate, because the y/y Core CPI number rose, instead of being flat, to +3.26% y/y. Moreover, the overall shape of the monthlies…well…see for yourself.
We have to be careful about the cognitive bias that makes us see stories and trends where there aren’t any, which is why it’s so very important to not focus on one month’s number. Or two. But if you look at this chart, it sure looks like the outlier might not be August and September, but May and June. Doesn’t it?
Ditto that for the Median CPI (last point estimated by me at +0.33% m/m).
Again, it could be a cognitive error but this sure looks like we’re pretty steady around 0.3%. If sustained, that would be in the ‘high 3s’, and it is time for my monthly reminder that I think median inflation will settle in the ‘high 3s, low 4s’ although it could dip into the low 3s first. (It’s looking more and more like the dip into the low 3s may not happen, as we get further along in the adjustment of rents.)
So where did this high miss come from? It wasn’t from OER and Primary Rents, which were back into their slowly-declining mode. OER was +0.33% m/m, and Primary Rents +0.28% m/m. Year over year, Primary Rents are down to +4.8% y/y. My model has them eventually ending up around 3.8%, after dipping lower. But they should be dipping right now, and they’re not. They may simply be converging on that 3.8%ish level.
But here’s an interesting chart. Remember how I have been saying for a long time that a good part of the overall deceleration in inflation had come from Core Goods, which would not continue to plumb new deflationary depths? This month, Core Goods was only -1.0% y/y, versus -1.9% y/y the last time we got these numbers.
Now, that doesn’t look wildly inflationary but if core goods inflation goes merely back to flat, then core services needs to do a lot more heavy lifting. Core Services did drop to 4.7% y/y from 4.9% y/y. But flat on core goods and 4.5% on core services wouldn’t get us back to the Fed’s target. Not even close.
In the core goods category, there were rises in Used Cars (+0.3% m/m) and New Cars and Trucks (+0.15% m/m), but nothing terribly out-of-the ordinary. Similarly, in core services there wasn’t much out-of-the ordinary. The problem is, ‘ordinary’ looks like it’s not at the Fed’s target. Medical Care Services were higher, with Doctor’s Services +0.9% m/m and Hospital Services +0.57% m/m. Airfares rose +3.16% after +3.86% last month. Motor vehicle insurance continues to rise, +1% m/m, with the only good news being that the y/y figure on insurance is now down to ‘only’ +16%. But +1% per month still is a rate above 12% per year – not too exciting.
Car and truck rental was also +1.2% m/m. So, in transportation outside of the cost of energy itself, it was a rough month (but that’s what happens, I guess, when you try and force people to buy electric cars when they don’t want them). But it wasn’t just transportation goods and services, either. This is the time of year when the jump in college tuitions happens. And it looks like the jump in tuitions this year is the largest since 2018. The seasonally-adjusted numbers will smooth this out, but that means tuition is going to be adding a little more over the next 12 months than it added over the last 12 months.
This is also somewhat surprising. Normally, when asset markets are going gangbusters we tend to see smaller increases in tuition because endowments are doing well and the financial model for colleges is basically (exogenous cost increases we don’t really try to control, minus endowment contributions or federal support, divided by number of students). If markets are doing well and college tuitions are still accelerating, it implies an increase in costs. My guess is that insurance is part of that, but so will be teachers’ salaries. Provision of education is ‘labor intensive,’ and wages continue to refuse to slip back down to the old levels. This is also the reason that Food-Away-From-Home was +0.34% m/m and continues to hang out around +4% per year.
And, as a result of wages refusing to moderate, ‘supercore’ (core services ex-shelter) also continues to refuse to slip back to the old levels.
The bottom line is that this number is not high because of any weird one-offs. In the same way that last month’s number was generally okay in a balanced way, outside of rents, this month’s number is generally less pleasant, in a balanced way. I don’t think we are at the start of another spike higher in prices. But we continue to aim for ‘high 3s, low 4s.’
And this will be an unfortunate story for the Fed as they will be peppered with questions about a potential policy error. I will repeat here what I said last month:
“To be clear, I personally do not think the FOMC should stop quantitative tightening and there’s no hurry to cut rates. The fight against inflation is not only unfinished, it won’t be finished for quite a while…and an ease now will just make it harder later. But that’s what I would do. What I am saying is that the Fed is not likely to change course on the basis of this number.” As expected, the Fed did cut rates 50bps. I am not sure this is necessarily a terrible policy error, although starting with 50bps now looks like an obvious mistake. Getting rates back to neutral, around 4% or so, is not a bad idea as long as quantitative tightening continues. It isn’t the best idea, but it’s not a disaster. But this raises the stakes for the next FOMC meeting. If the Fed skips the meeting, it will be a tacit admission that the first move was a mistake. If the Fed piles on another 50bps, it will show they are terrified about growth or simply don’t care about inflation. I suspect 25bps is the only choice they can make which will make almost everybody equally unhappy. There’s more data to come before that meeting, but the FOMC’s path has narrowed considerably as inflation remains sticky.
Inflation Guy’s CPI Summary (August 2024)
Let me start with the punch line, which I think will not be a very common take: this report does not stop the Fed from easing 50bps next week, and honestly doesn’t really even hurt the chances very much.
The inflation swaps market was pricing in 0.05% on an NSA basis, roughly 0.13% on a SA basis. Actually, that market was better offered, with traders either expecting a weaker number or wanting to hedge that possibility more than the chance of a stronger number. Economists gathered around a consensus of 0.16% for headline, and 0.20% on core CPI. The actual print was +0.19% m/m on CPI, and +0.28% on core CPI, bringing the y/y numbers to 2.59% and 3.27% respectively. It was the worst monthly core print since April, and the initial market response was predictably poor.
My early estimate of Median CPI for the month is +0.26% m/m, bringing the y/y median to 4.16%. (Sharp-eyed readers will note that neither headline, nor core, nor median CPI are at the Fed’s target).
Interestingly…at least, if you’re the kind of square who finds the CPI interesting…the y/y changes in Core Goods (-1.9%) and Core Services (+4.9%) were steady. That’s the first time in a while we’ve seen that.
Wow, right? A rounded +0.3% on core CPI takes the Fed out or at least puts them on a 25bps cut, right? Well, not so fast. The monthly change in Owners Equivalent Rent immediately jumps out at you (at least, if you’re the kind of square who looks at these things deeply) as +0.495% m/m. That’s the largest m/m change since February, and it hasn’t been appreciably higher on a regular basis since early last year.
That looks a little quirky, especially following the recent dip. And it looks suspiciously like a one-month-lagged chart of the m/m changes in Primary rents, which dipped a few months ago before paying it back last month.
That looks to me like some weird seasonal wrinkle. The y/y shelter figures are still declining. But, if you look carefully, you can see that the rate of improvement is slowing. And maybe my math isn’t so good but it doesn’t look like these are converging on deflation.
The rents data are therefore both the good news and the bad news. The good news is that in this month’s CPI, it was a miss higher only because OER had the quirky jump. I’ll get into more of the number in just a second, after sharing the bad news: there is nothing in the trajectory of rents to suggest that the operating theory of many forecasters for a long time – that rents would soon be in deflation – is going to happen. Heck, as I keep pointing out the trajectory of rents is higher than my bottom-up rents model, which suggested we should be bottoming out around 2.4% y/y right about now. And my forecast was on the very high side of what people were saying.
But let’s get beyond rents. The ‘big sticky’ is always important to watch, but outside of rents things looked pretty good this month. There were some outliers on both sides (Lodging Away from Home +1.75% m/m, Airfares +3.9% m/m after 5 straight declines; Car/Truck Rental -1.5% and Used Cars -1% m/m), but core CPI ex-shelter declined to only +1.72% y/y. The list of monthly categories shows a long list of categories whose price fell m/m: jewelry, car/truck rental, used cars, energy services, miscellaneous personal goods, personal care products, household furnishings and operations, medical care commodities, medical care services, recreation, communication, and a few others. Not that we are headed for deflation, but look at this distribution of y/y price changes. I haven’t shown this for a few months.
Again, this doesn’t look like something that screams deflation, but the far right tails are all moving left. There’s still a cluster around 4-5%, which shouldn’t be surprising since Median CPI is at about 4.2%. Do also notice that there aren’t a lot of categories showing deflation on a y/y basis, but if you take out shelter from this you get something that looks more disinflationary: a mode around 4-5%, but tails to the downside. In inflationary periods, the tails stretch to the upside, and we had that for a while; but the signature of the overall distribution is encouraging.
The conclusion, as I said up top, is that if the Fed was leaning towards cutting rates 50bps next week this is not a number that should change their collective mind very much. Unless the Fed cares only about the top line numbers, this isn’t an alarming report. It isn’t the lovely deflationary print that bond bulls wanted, but that wasn’t really in the cards. We’re arguing over a couple of hundredths in the monthly core print, and that is entirely attributable – still – to shelter. In fact, there are signs of broadening disinflation. To be clear, I personally do not think the FOMC should stop quantitative tightening and there’s no hurry to cut rates. The fight against inflation is not only unfinished, it won’t be finished for quite a while…and an ease now will just make it harder later. But that’s what I would do. What I am saying is that the Fed is not likely to change course on the basis of this number.
The y/y figures for headline CPI are going to keep dropping for a few months here, partly on base effects and partly because energy prices are very weak. A perfectly reasonable trajectory for monetary policy (if you think that rates ought to at least be eased back to neutral in the 3-4% range) would be 25bps next week, and then larger cuts in a few months when the headline inflation number is lower and the unemployment rate is higher. The only problem with that approach is that an acceleration in the pace of easing later may look like concern, which is why some FOMC members favor getting out of the gate quickly. As I said, there’s nothing here that should stop that.
But median inflation is still headed for ‘high 3s, low 4s,’ with a potential dip into the low 3s before a reacceleration. The hard work on inflation is still ahead, and it is going to get harder now that we are in a recession.
Inflation Guy’s CPI Summary (July 2024)
It was only a few months ago (with the March CPI report in April) that I was talking about a ‘Potential Pony Situation’ in my podcast when, after an unsettling Core CPI, I pointed out that the Median CPI was much less disturbing. Trying to tell the story of the economy is about figuring out where the underlying trends are, and trying to figure out what you can ignore as ‘noise.’ Back then, it was clear that inflation was heading lower, but not as fast as people were saying, so the bad core CPI was off-putting. It messed up that story. But because we were focused on Median CPI, that month was not so unsettling and we focused (successfully I think) on the fact that inflation was decelerating…but not collapsing back to target imminently. Fast forward, and the story we are looking at coming into today’s CPI is that inflation is still declining, but people are probably getting a bit out over their skis in anticipating (again) a rapid collapse in inflation after a couple of weak CPI prints. Once again, that’s not the story the data is really telling, but deviations from that belief are likely to be painful.
For what it’s worth – I saw a lot of commentary this morning about how “PPI is encouraging,” or “PPI means this or that.” No one in the inflation trading community cares much about PPI. There are some elements of the PPI report that can help with some of the parts of other inflation reports, but the overall number has very little correlation (and no lead) with the CPI. You and I are exposed to CPI. The Fed looks at consumer prices. My best advice about PPI is to ignore it.
When CPI actually came out, it was a touch better than expected on the surface. Economists had been looking for +0.19% m/m on core, and got +0.155% on the actual number. What was fascinating to me was the market reaction. Equity futures appear to be completely flummoxed by an as-expected number, vacillating around unchanged 20 minutes later as I write this. I think this tells you something, actually – folks coming into today weren’t trading the actual number but rather planning to trade what other people thought about the number. Everyone thought everyone else knew what a higher-than-expected or lower-than-expected number would do. An as-expected print means you have to dig into the details, and equity guys don’t like details. They like big pictures. Thick lines. Crayons.
So let’s look at some pictures. Here are the last 12 core prints and the 8 major subcomponent pieces.
The first thing that jumped out at me was that core goods again plumbed new 20-year lows. Yes, that’s 20-year lows, as the following chart shows. -1.9% y/y.
Folks, I am still waiting for the turn and I say every month “surely, it can’t go lower than that.” So far, so wrong. The dollar is no longer strengthening in a straight line, and hasn’t been for a while. If anything, it’s weakening. Apparel this month was -0.45% m/m, and only 1.1% y/y. Apparel is almost entirely imported, and at some point a steady-to-lower dollar will mean that core goods heads back to flattish. (Also, keep in mind that both Presidential candidates have expressed pro-tariff positions, but that’s a 2025 story at the earliest).
Within Core Goods, we also saw Used Cars decline yet again. This month it was -2.3%. CPI had diverged a bit from the private surveys, but with this month has basically converged back to the number implied by Black Book. That doesn’t mean Used Car prices won’t decline further, but there’s no longer a reason to expect “bonus depreciation” going forward.
Now, in the first chart above note that Core Services dipped to 4.9%, the lowest it has been in a while also. Within core services, we saw Airfares decline again (-1.6% m/m after -5% last month), but the interesting thing is Hospital Services. The other parts of Medical Care, that is Physicians’ Services and Medicinal Drugs, were both in line with recent trends and on top of last month’s figures. Hospital Services plunged -1.1% m/m. The y/y is still pretty high at 6.1%, but if this number is prologue (I sort of doubt it) then this upward pressure will abate.
The fact that services dropped so hard helped to bring “SuperCore” down a little bit. It is still elevated, and frankly the trend doesn’t look wonderful. You want 50bps in September? You need more than this, pal.
Do you know what I haven’t mentioned yet? Shelter. Shelter is the biggest and stickiest piece, and the foreordained deceleration of shelter is part of the religion of everyone who thinks we will decline to 2% core inflation and remain there (which is basically where breakevens are these days). Bad news – this month, Primary Rents rose 0.49% m/m and OER rose 0.36%, compared to 0.26% and 0.28% last month. This is where it’s useful though to look at the y/y numbers. That big surprise in Primary Rents produced an unchanged y/y number and OER still decelerated to 5.30% from 5.45%. The wonder of base effects!
So let’s harken back to the beginning of this piece. In ‘A Potential Pony Situation,’ the Median CPI warned us to not get too worried about the surge in core because Median was pretty well-behaved. In the current circumstance, Median tells us to not get too excited by all of those people who will be talking about how low the 3-month average is (I guarantee that old chestnut will make a reappearance this month), because Median will be something like 0.268% (my early estimate). This will be the highest since April, if I am right.
The bottom line remains the same, and that is that inflation continues to decelerate but median is going to end up in the “high 3s, low 4s.” I keep thinking that we will dip below that for a little while when the base effects of shelter pass through, before reaccelerating to what I think is the new ‘normal’ level, but shelter is being persnickety and resistant to that deceleration. Either way, there is nothing here that would encourage the Fed to aggressively ease 50bps. Or, for that matter, to ease at all. If the Fed eases in September (which I expect, even though if I were a member of the Board I wouldn’t vote for one), it will be because its members fear recession and not because there is evidence that inflation is licked. That evidence is still elusive.
