Inflation Blues

Episode Summary

Executive Summary: The episode focused on a hot January inflation report and the growing case that inflation may stay stickier than the Fed wants. CPI was well above expectations, driven by used cars, food, and some goods, while PPI and healthcare components were softer and more encouraging for the PCE deflator. The hosts also debated tariffs, inflation expectations, weaker labor supply, and slowing productivity as risks to disinflation.

Main Topics: January CPI came in hot (Priority: 5/5): The January Consumer Price Index rose 0.5% m/m, above the 0.3% expected, lifting year-over-year CPI to 3.0% and marking the strongest monthly increase since August 2023. Measurement issues and residual seasonality (Priority: 4/5): The group discussed whether seasonal adjustment and post-pandemic residual seasonality distorted January inflation readings, but concluded the report was still genuinely bad even after adjusting for these effects. Key upside surprises in components (Priority: 5/5): Used vehicles, food at home, and energy were stronger than expected, with eggs and broader grocery inflation standing out. Auto insurance also reaccelerated, while shelter and medical care were more favorable. PPI and PCE offer some relief (Priority: 4/5): Thursday’s PPI data showed softer healthcare-related prices, supporting a more benign outlook for the Fed’s preferred PCE inflation measure even though headline producer prices were still strong. Tariffs and inflation expectations (Priority: 5/5): The hosts argued that broad-based and reciprocal tariffs could raise prices, alter purchasing behavior, and lift inflation expectations, making a return to 2% harder than before. Growth, labor supply, and productivity risks (Priority: 4/5): Slowing immigration and potentially softer productivity growth could reduce the economy’s potential growth rate, creating more inflation pressure even if demand cools. Fed outlook and policy uncertainty (Priority: 4/5): The panel questioned whether the Fed can still reach its 2% target soon, and whether rate cuts in 2025 may be fewer than previously expected, though they did not formally change the forecast on-air.

Key Arguments: The January CPI was a clear downside to the inflation outlook because both the headline number and several underlying components came in stronger than expected. Seasonal adjustment may explain part of the January spike, but not enough to change the bottom-line assessment that inflation data were still too hot. Used-car prices may reflect anticipatory buying ahead of tariffs and changing dealer behavior, suggesting tariff effects may already be feeding into prices. Food inflation is broad-based, not just an egg story, although avian flu is a major driver of the egg surge. PPI healthcare declines matter because they feed into the PCE deflator, which is the Fed’s preferred inflation gauge. Broad, reciprocal tariffs are likely to be more inflationary than the first Trump-era tariffs because expectations are more fragile and the policy scope is wider. Slowing immigration and cooling productivity reduce supply-side growth, which can keep inflation elevated even without strong demand. The risks to the Fed’s 2% target are increasingly tilted upward, and the number of expected rate cuts may need to fall.

Data Points: Headline CPI m/m: 0.5% - January increase, above the 0.3% consensus forecast Headline CPI y/y: 3.0% - Rose from 2.9% in December Fastest monthly CPI increase: Since August 2023 - January headline CPI was the strongest monthly rise in that period Used vehicle prices: 2.0% to 2.2% m/m - One of the largest upside surprises in January CPI Egg prices: 15.2% m/m; 53% y/y - Major driver of food inflation amid avian flu outbreaks Food at home inflation: 1.9% y/y - Still mild overall but reaccelerating from near-flat readings Medical care services CPI: Flat m/m; 2.7% y/y - Healthcare inflation appears to be rolling over Motor vehicle insurance: 2.0% m/m; nearly 12% y/y - Auto insurance reaccelerated and remained a major service-side pressure PPI headline: 0.4% m/m - Still strong, but healthcare subcomponents were soft 10-year Treasury yield: -10 bps - Yield fell after PPI as markets focused on softer healthcare components PCE headline forecast: 0.3% m/m; 2.4% y/y - Expected next Fed-preferred inflation release PCE core forecast: 0.3% m/m; 2.6% y/y - Expected to decline year over year from 2.8% NFIB uncertainty index: 100 - January reading; third highest ever in the series NFIB uncertainty index prior readings: 86 in December - Jumped sharply in January after policy/tariff uncertainty Copper price: $4.77 - Discussed as a signal of strong global growth and commodity strength

Pivotal Quotes: "In a word, bad." — Matt Collier: His immediate characterization of the January CPI report "It’s a light brown shade of bad." — Matt Collier: His humorous description of the report after allowing for some seasonal-adjustment caveats "There’s a lot of cross currents here and obviously a boatload of uncertainty." — Mark Sandey: On tariffs, inflation expectations, and the difficulty of forecasting the path of inflation

Implications: Inflation may stay above target longer than hoped, especially if tariffs broaden and expectations rise. That raises the risk of fewer Fed cuts, stickier goods inflation, and more volatile pricing behavior across industries.