Inflation Rundown

Episode Summary

Executive Summary: The episode centers on a detailed review of July inflation and retail sales data, concluding that tariffs and restrictive immigration policy are now visibly pushing inflation higher while consumer spending is softening. The hosts argue the economy is moving toward stagflation: core prices are reaccelerating, producer margins are being squeezed and then passed through, and real consumer demand is flattening. Listener questions then broaden the discussion to policy risks, AI, housing, and concerns about deteriorating data quality at the BLS.

Main Topics: July CPI and core inflation reacceleration (Priority: 5/5): The team reviews a CPI report that matched forecasts but still showed core inflation rising faster, especially in goods categories likely exposed to tariffs. Shelter continues to cool, but core CPI firmed and year-over-year inflation drifted higher. PPI surprise and evidence of tariff pass-through (Priority: 5/5): Producer prices rose far more than expected, with notable increases in food, manufactured goods, and trade services margins, suggesting businesses are increasingly passing higher input costs through rather than absorbing them. Tariffs, immigration, and inflation mechanics (Priority: 5/5): The hosts debate how much of the inflation pickup is coming from tariffs and labor constraints tied to immigration policy, concluding the effects are real, staggered, and likely to intensify over the coming months. Retail sales and consumer slowdown (Priority: 4/5): Retail sales were helped by autos, but the broader trend shows weak underlying consumer momentum, with real spending flattening and several discretionary categories softening. BLS data quality and alternative indicators (Priority: 4/5): The conversation highlights rising imputation rates, staffing constraints at BLS, and the need for private or alternative data sources such as ADP and in-house pricing research if official data reliability worsens. Listener questions: structural risks, housing, AI, and institutions (Priority: 3/5): A long Q&A covers underappreciated economic risks, housing affordability and mortgage rates, the potential effects of AI on jobs, and broader concerns about institutional erosion and policy credibility.

Key Arguments: Core CPI accelerated to a stronger monthly pace, consistent with tariffs beginning to flow through to consumer prices. The market reaction to CPI looked too optimistic; 'unsurprising' inflation is not the same as good news when the direction is upward. Shelter inflation continues to cool, showing the lagged transmission from prior rent softness into CPI housing components. Used and new vehicle prices are likely to rise as tariffs become more fully embedded, especially around model-year changeovers. PPI details, especially trade services margins, suggest firms are no longer broadly absorbing tariff costs; they are protecting margins by passing costs along. Hotels and travel-related prices are weakening, signaling softer demand and providing only partial offset to goods-price inflation. Retail sales are still rising nominally, but annualized growth is much slower than last year and real spending appears flat or weak. The broad macro picture is increasingly stagflationary: inflation up, growth down, with tariffs and immigration policy as key fingerprints. Official data quality is becoming a concern because BLS staffing/funding constraints are pushing more imputed estimates and could reduce confidence in reported inflation figures. If labor market data from BLS were delayed or altered, the Fed and policymakers would likely rely more heavily on private datasets like ADP and other high-frequency indicators. AI is expected to raise productivity, but the hosts disagree on whether it will materially reduce net employment; all agree it will reshape job composition and hiring patterns.

Data Points: Headline CPI (monthly): 0.2% - July consumer price index increase, matching expectations. Headline CPI (y/y): 2.7% - July year-over-year CPI, unchanged in rounded terms but the highest since January. Core CPI (monthly): 0.3% - July core CPI increase, the strongest monthly pace since January. Core CPI (y/y): 3.1% - July core CPI year-over-year rate, up from 2.9%. Shelter inflation (3-month annualized): 2.7% - Recent trend showing housing inflation finally cooling into line with prior rent weakness. New vehicle CPI: 0.0% - July new vehicle prices were flat despite tariff concerns. Used vehicle CPI: 0.5% - July used vehicle prices increased modestly. Medical care services CPI: 0.7% - July increase in medical care services inflation. Hotel prices: -1.0% - July decline in hotel prices, following a 2.9% decline in the prior month. Hotel prices (y/y): Largest decline since 2010 excluding COVID - Used to illustrate soft travel demand and consumer pullback. PPI final demand (monthly): 0.9% - July producer price index, much stronger than consensus. PPI final demand (y/y): 3.3% - July year-over-year PPI, up from 2.4% in June. Food prices in PPI: Sharp increase - Vegetables specifically noted as up about 38-39%. Roasted coffee prices: 30% y/y - Producer prices for roasted coffee were highlighted as a major increase. Trade services margin in PPI: +2.0% - Proxy for wholesalers/retailers margins, suggesting costs are being passed through. Expected July headline PCE deflator: 0.19% (~0.2%) - Moody’s forecast for the Fed’s preferred inflation measure. Expected July core PCE deflator: 0.28% (~0.3%) - Forecast for core PCE, implying year-over-year inflation near 2.9%. Headline PCE deflator (y/y expected): 2.6% - Projected July annual rate. Core PCE deflator (y/y expected): 2.9% - Projected July annual rate, above the Fed’s 2% target. Retail sales (monthly): 0.5% - July total retail sales and food services growth. Retail sales ex autos and gas (monthly): 0.2% - July underlying retail sales growth after excluding volatile categories. Retail sales YTD annualized growth: 2.1% - Growth through the first seven months of 2025, about one-third of last year’s pace. Import prices ex-petroleum (YTD change): 0.25% - Used in the game to show foreign firms are not broadly absorbing tariffs via lower import prices. Imputed share of CPI items: 32% - July proportion of CPI based on imputation, down from 35% in June. Prior typical imputed share: 10%-12% - Historically normal level over the past decade.

Pivotal Quotes: "I think we're seeing staggered effects. I think the inventory drawdown... is ongoing but getting smaller and smaller every day." — Matt Collier: Explaining why tariff effects are not one-time jumps but gradual pass-through into prices. "I think that was a good synopsis. ... Inflation is uncomfortable. ... We're at 2.9% versus 2%... and the direction of travel is ... going up." — Mark Zandi: Bottom-line assessment of the inflation outlook and Fed target gap. "The biggest risk here I see is the Fed not having information. Timely information. They're going to make a decision. It's probably going to be faulty." — Chris Doriedas: On the danger of weakening BLS data production and its policy consequences.

Implications: Inflation risks are rising while consumer demand slows, raising stagflation concerns. Tariff pass-through appears to be arriving with lags, and weaker official data quality could complicate Fed policy and market interpretation.