MOOSPEAK: FEB14.2025
OPINION-- INFLATION WEEK
Consumer price inflation (CPI) sped up in January, as core items (excluding food and energy prices) climbed 3.3% over the past 12 months, slightly above expectations. Total CPI (+3.3%) was also hotter y-o-y than December. On a monthly basis, the CPI rose 0.5%, hotter than forecasted (+0.3%) as did core CPI (actual +0.4% vs. consensus +0.3%).
The Producer Price Index (PPI) remains sticky as well. Core items (excluding food and energy prices) climbed 3.6% over the past 12 months, while the overall index rose (+3.5%). PPI increased 0.4% on the month, twice the expected (+0.2%), and that followed a startling, upwardly revised +0.5% increase in December (from +0.2%). Core PPI increased 0.3% on the month.
Over 12 months, the January PPI readings may look improved over December, but the fact is revisions moved the December year-over-year readings for PPI and core PPI higher (versus the initial readings), so the lower read in January is from a higher base, meaning it is relative and not absolute. It’s the sort of BLS BS we’ve come to expect. Revising earlier data to make the latest headline more palatable.
Nor are the hotter consumer prices unexpected. After all, 2024 was an election year. The powers that be were giving away taxpayer money like there was no tomorrow. The Federal government ran a $2T deficit, a debt financed 10% bump to GDP. The Fed stopped raising rates mid-year and started cutting 18 weeks before the election— dropping the overnight rate by a full percent. The commodity index (CRB), i.e., the price of stuff, was up over 12% in 2024 and our Fed Check has been predicting higher interest rates (inflation) for over a month.
It almost seems like déjà vu all over again. When I started working for President Reagan, we had just gone through the highest US (and global) inflation ever under President Carter. (Lately we’ve had a reprise of record inflation under Biden.) Back then, Fed chair Paul Volcker, nominated by Carter in 1979, had gone a long way to curbing inflation, but hadn’t quite finished the job when Reagan replaced Carter in 1981. Although Volcker’s tight money policy, a.k.a., the “Volcker Shock”, was drastic (my 1979 adjustable-rate mortgage started at 11.75%), it brought inflation down. It also played a role in bringing down Carter, a fact not lost on Reagan.
Rather than ditch Volcker for an easier money replacement, however, Reagan reappointed Volcker and endured a two-year recession in his first term to beat inflation once and for all. Republicans lost 25 seats in the 1982 mid-term election, but the two-year non-inflationary economic recovery and tax cut that followed were the perfect set-up, getting Reagan re-elected in a walk in 1984 and his successor, George HW Bush in 1988.
Fed chairman Powell all but declared victory over inflation the day after the 2024 election, repeating it twice more since. Should it turn out, however, that the Fed still has unfinished work with respect to the Biden inflation, Trump has neither the luxury of a second term nor the luxury of losing more than three seats in the House in 2026 to Fed over-tightening. As a result, Trump has expressed a desire to see rates lowered. That may or may not be in his best interests.
It‘s too early to determine whether the rising inflation in this week’s CPI and PPI is going to worsen or not. Commodities are the early markers, and in the opening weeks of the Trump administration, there are two offsetting trends. First, energy prices are falling fast. The price of West Texas Intermediate crude has dropped 11% since Trump’s executive orders. That followed an 8% two-week run-up in January after Biden closed down offshore and Alaskan drilling. Energy prices fell on day one and after. That bodes well for overall inflation going forward. Secondly, some non-energy prices are higher since the inauguration, either due to supply disruptions (example: avian flu, eggs and poultry) or due to tariff fears in international markets bidding up futures prices (examples: coffee, copper).
In the end, all economic data is a lagging indicator. It can take six to nine months or longer for new policies to take hold and be reflected in government data. Spot and futures prices provide a real-time check based on current investor perceptions, but they do not always reflect longer term developments.