Inflation Data Provides Mixed Signals, Tariffs Loom Large in Coming Months
The latest Consumer Price Index (CPI) data has painted a mixed picture of inflation, with core CPI falling sharply while median CPI remains relatively unchanged. The data also shows that the tariffs imposed by the Administration are already starting to take effect, particularly in categories such as medicinal drugs and used cars.
Core CPI Falls Sharply
The core CPI numbers released last week showed a sharp decline from the previous month’s values, with core inflation falling to 2.81% from 3.06%. This drop was largely driven by declines in categories such as core goods, where prices fell by -0.09% on a month-over-month (m/m) basis.
Median CPI Provides a Different Perspective
However, the median CPI numbers tell a different story. Median inflation rose to +0.35% m/m this month, a rate higher than any time in about a year. This suggests that the deceleration seen in core CPI is not being driven by changes in housing costs, which are still showing signs of accelerating despite the recent dips.
Low-Weight Categories Drive Core Decline
The median CPI number was largely unaffected by the sharp declines seen in categories such as medicinal drugs (-1.30% m/m) and used cars and trucks (-0.69% m/m). This tells us that these drops are not being driven by changes in housing costs, but rather by large moves in low-weight categories.
Supercore Looks Strong
The supercore index, which looks at the service sector prices excluding rent of proprietors’ real estate, paint a more positive picture. The index fell -0.24% m/m this month, the sharpest decline since COVID-19 pandemic. However, it’s essential to note that the three spikes on the m/m Supercore chart below were all March and April numbers.
Uncertainty Ahead
While the data provides mixed signals about inflation, there is no doubt that uncertainty ahead from tariffs will continue to impact businesses and consumers alike. The imposition of broad tariffs and significant tariffs on Chinese goods will likely lead to a sharp increase in Core CPI in the coming months.
A Bear Market in Equities is Different from a Depression
It’s essential to separate the effects of a bear market in equities from those of a recession or depression. A bear market can provide an opportunity for long-term investors to buy undervalued assets, but it is not a sign that a larger economic downturn.
Rocking the Boat and Its Main Goal
The main goal of the Administration’s tariffs policy was not to gain approval from Wall Street experts or corporate CEOs but rather to protect American workers. While some may complain about the impact on big equity holders and firms, most Americans will see it as a vital step towards a more balanced economy.
Tariffs Have a Small Impact Overall
Tariffs imposed by the Administration mainly affect core goods, which account for just 19.4% of the overall consumption basket. This means that while tariffs have significant implications in specific categories, their overall effect on prices remains mild.
Policy Uncertainty and Its Effects
Policymakers should consider the impact of economic policy uncertainty (EPU) on monetary velocity. EPU causes consumers to save more, leading to downward pressure on spending. The Administration’s tariff policy has likely increased EPU, which will impact businesses across various sectors.
Fed Policy During Times of Uncertainty
In times of uncertainty, policymakers must separate the ‘price of risk’ effect from the economic growth effect. They should ignore short-term concerns about job growth and instead focus on long-term prosperity and inflation measures. The Federal Reserve would be wise to hold rates steady for at least six months.
The Economy Will Overcome Uncertainty
While uncertainty may cause some CEOs to delay decisions, it will not last indefinitely. As we continue producing more domestic consumption needs, the economy will overcome this uncertainty. In fact, once 10% broad tariffs and large tariffs on Chinese goods kick into effect, Core CPI may surprise investors with a dramatic increase.
