Core CPI Inflation Looks Contained. It’s A Mirage Ignoring Services

Let’s discuss goods and services. The latter is 63.4 percent of the CPI.

No Good Reason to Hike?

Hooray!

Let’s ignore food, gasoline, rent, medical care services, food, home prices, property taxes, and insurance because the price of home furnishings is falling.

And if we do that, the Fed allegedly has no reason to hike.

Core Services Percent Change Year-Over-Year Detail

Core Services Percent Change Y/Y

• Core Services up 3 months to 3.38 percent

• Medical Care Services 3.56 percent

• Rent 2.92 percent and now rising

• Owners’ Equivalent Rent 3.32 percent

Food, property taxes, homeowners’ insurance? You tell me.

If no one can afford any of those, they cut back on things like household furnishings.

And don’t look now but Trump is hell bent on another round of idiotic tariffs hikes bound to increase prices.

I have yet to write this up but expect to get to it shortly. The best we can hope for is the court throws them out.

Spotlight Tariffs

It’s Transitory

Best Case for No Hikes

The best and only case for no hikes is that Trump’s economic policy and war-mongering stupidity is going to quickly cause a recession and stock market collapse triggering so much demand destruction that prices inflation steadies.

I do not rule that out. It’s my base case eventually.

But the bond market sure does not see that view now. And if the bond market does not believe that, why should I (or anyone else)?

Meanwhile, grasping at goods inflation as a case for no hikes, while ignoring far more important services is economic silliness.

I was surprised by this post on X. Someone else sees it.

The ongoing problem is Congress and the Fed will step in again to stop the downturn. Neither will fix anything.

It would take severe asset price deflation to put a lasting dent on demand.

Five Measures of Inflation

CPI and PCE Year-Over-Year Percent Change

All of the key inflation measures are well above the Fed’s target and rising.

Please note Consumer Price Index CPI Highest in Over Three Years, Another Disaster

Over the last 12 months, the CPI increased 4.2 percent the most since April 2023.

The Iran-Trump deal will take pressure off strait-related prices, especially oil, but it will not do anything for services, deficit spending, or new Tariffs.

For more discussion of the deal, please see Iran Confirms Deal! Trump Says Congratulations to All, Strait Open

If rent, OER, and medical care services are turning up, don’t expect to see more than temporary relief from gasoline prices, now falling.

Do expect more tariff inflation unless it sufficiently kills jobs and demand. Also expect more military spending and higher budget deficits.