Inflation update

Markets are in correction territory, and the economy is flirting with a recession. There's a lot of concern about the impact of Trump's beloved tariffs, and the judicial system, with the help of a weakened Democrat Party, is trying its darnedest to stymie Trump's efforts to put the federal Leviathan on Ozempic. 

In any event, I detect no reason to worry about inflation. I do worry because emerging economic weakness stems from several sources: the fallout from DOGE cutbacks, the fallout from tariff wars, and the ongoing weakness in the housing market coupled with unsustainably high prices and mortgage rates. Another factor may be due to the uncertainty surrounding whether Trump's 2017 tax cuts will be extended prior to year end, when they are scheduled to revert to much higher levels. Worry about growth, not inflation.

Chart #1

Chart #1 compares the year over year change in the CPI index with the same change in the CPI index ex-shelter. It's important to note that the ex-shelter version of the CPI has increased by 2.3% or less for the past 22 months (since May 2023). Only shelter costs have kept the broader CPI from long ago meeting the Fed's objective. And their impact is almost certainly fading away. 

Chart #2

Chart #2 focuses narrowly on the rate of inflation in shelter costs. The one- and three-month annualized  rates of increase in shelter costs have been declining since mid-2023, and the decline looks set to continue. As it continues, and without any help from the Fed, the gap between the CPI and the CPI ex-shelter (Chart #1) will also decline, and eventually approach zero. We just need to be patient. The decline in shelter cost inflation has taken quite a few months longer than I expected, but nevertheless it is occurring. 

Chart #3

Today we learned that the Producer Price Index for Final Demand was unchanged in February, but is still up 3.2% over the past 12 months. Is this a problem? I've always paid more attention to the broader Producer Price Index for Finished Goods, and it has been quite well behaved, as Chart #3 demonstrates. Both the total and core versions are up only about 2% over the past year. More impressive, however, is that the PPI Finished Goods index has only increased by 1.3% since June 2022. That's an annualized rate of increase of only 0.04% over the span of 32 months. PPI inflation is on life support.

If we can make it to year end while avoiding a massive tax increase and runaway tariff wars, the long-term effects of Trump's (stupid) tariff wars and DOGE's cost- and regulation-cutting efforts should be very positive.