Rise Like a Rocket, Fall Like a Feather

Episode Summary

Executive Summary: The episode reviews the latest CPI and PPI reports, concluding inflation is still easing but remains sticky in shelter and some services. The hosts then broaden the discussion to why prices rarely fall back, emphasizing supply shortages, wage rigidity, and competitive dynamics. Finally, they assess how Trump-era policies—tariffs, immigration restrictions, tax cuts, and pressure on Fed independence—could lift inflation expectations and support a stronger dollar.

Main Topics: Latest CPI report and overall inflation trend (Priority: 5/5): October CPI rose 0.2% month over month and 2.6% year over year, matching expectations and reinforcing that inflation is generally moving lower, though still slightly above the Fed’s target. Sticky shelter inflation as the last mile problem (Priority: 5/5): Owners’ equivalent rent remains the biggest obstacle to reaching 2% inflation; shelter inflation is still running around 4.9% year over year and is the main reason core inflation remains elevated. Food, energy, and vehicle-related price dynamics (Priority: 4/5): Food inflation was mild in October, energy was neutral overall, used car prices firmed after a long decline, and auto insurance/repair inflation appears to be slowing after a sharp run-up. Why prices don’t fall back to pre-pandemic levels (Priority: 5/5): The hosts explain that many sectors face persistent input-cost increases, limited competition, wage stickiness, and supply shortages, so prices often stabilize at higher levels rather than reverse. Trump policy mix and inflation expectations (Priority: 5/5): Tariffs, deportations, deficit-financed tax cuts, and threats to Fed independence were framed as inflationary forces that have already helped push market inflation expectations higher. PPI and the PCE outlook (Priority: 3/5): Producer prices were also tame, but some PPI components feeding into the Fed’s preferred PCE measure suggest the PCE deflator could still run a bit hot near term. Mortgage-rate seasonality and buying advice (Priority: 2/5): The group discusses whether mortgage rates seasonally dip in winter; they conclude the effect exists but is small and should not drive homebuying decisions.

Key Arguments: Inflation is still trending in the right direction, but the pace of disinflation has slowed, making the final move to the Fed’s 2% target harder. Shelter inflation, especially owners’ equivalent rent, is the main remaining source of elevated CPI inflation. Used vehicle prices likely bottomed out, while auto insurance and repair costs may soon stop adding upward pressure. Food prices remain elevated not because of broad-based inflation alone, but due to idiosyncratic shocks, input-cost increases, and market power in some industries. Broad price declines are uncommon because businesses rarely cut wages, and service-sector prices are anchored by labor costs. Consumers have not forced broad price rollbacks because spending remains solid and households are less prone to aggressive price-shopping than in past inflationary periods. Trump’s policy agenda could raise inflation via import tariffs, labor-supply reductions from immigration limits, deficit-driven demand boosts, and pressure on the Fed’s independence. Rising inflation expectations may influence Fed decisions even before policy changes fully hit the real economy. A stronger dollar is a likely near-term side effect of U.S. tariff policy and relatively tighter U.S. policy versus abroad, which could modestly dampen inflation. Mortgage-rate seasonality exists, but it is too small to matter much compared with broader bond-market moves and housing affordability constraints.

Data Points: CPI month-over-month: 0.2% - October CPI increase, matching expectations CPI year-over-year: 2.6% - Headline inflation rate in October Energy contribution to CPI: Neutral - Energy prices ended the month near where they started after mid-month volatility Gasoline prices: -1.0% m/m - Offset some of the increase in electricity prices Electricity prices: +1.5% m/m - Rose on stronger demand concerns, including data centers Food at home (grocery CPI): +0.1% m/m; +1.1% y/y - Grocery inflation was mild in October Food prices in September: +0.4% m/m - Prior month drew attention because it was stronger than expected Shelter inflation / OER: +0.4% m/m; about 4.9% y/y - Main driver keeping CPI above target Shelter inflation expected a year earlier: 4.4% y/y expected vs. 4.9% actual - Forecast error cited as the main miss in inflation forecasting CPI excluding shelter: +1.3% y/y - Illustrates how low inflation is outside shelter Harmonized measure excluding OER: 1.9% y/y - Another measure showing inflation close to target when shelter is removed Used vehicles: +2.7% m/m - Two straight monthly increases after a long period of decline Vehicle insurance: -0.1% m/m; +14% y/y - Monthly decline after a long stretch of increases Vehicle repairs: +1.1% m/m - Still elevated but expected to slow Medical care services: +0.4% m/m; +3.8% y/y - Rising on a lag; BLS methodology changed to use claims data PPI month-over-month: +0.2% - Producer prices came in as expected Expected PCE deflator: +0.3% m/m - Based on CPI/PPI components, especially airfare and portfolio management Washing machines and dryers inflation: +4.4% y/y - Used as an example of tariff-sensitive goods Import prices excluding fuels: +2.3% y/y - Seen as a potential harbinger of tariff pressure Lumber price: $608.04 - Game statistic; referenced as an important commodity and tariff-sensitive input Earlier lumber price: $425 - Level in July before a recent jump Five-year breakeven inflation expectation: 2.42% - Market inflation expectation that rose after the election Prior inflation expectation level: 1.8% - Approximate level in September before Trump’s election victory became more likely

Pivotal Quotes: "The only difference between current inflation and the Fed's target is this still elevated growth in the cost of housing." — Mark Zandi: Summarizing why shelter inflation remains the main obstacle to reaching 2% inflation "Prices rise like a rocket and fall like a feather." — Mark Zandi: Explaining why many prices stay elevated after shocks rather than returning to prior levels "If investors are anticipating those policies, then the Fed has to react." — Mark Zandi: Discussing how higher inflation expectations tied to Trump policy could influence Fed rate decisions

Implications: Inflation is cooling but not fully solved. Shelter, services, and policy risk keep price pressures alive, while tariffs and labor-supply shocks could reaccelerate inflation and lift rates, the dollar, and costs in housing and food.