Will US inflation ever go below 3%?

Episode Summary

Executive Summary: The episode revisits the claim that inflation had been beaten, then argues the data now suggest a stubborn, sideways pattern rather than a clean return to 2%. Shelter and wages are easing, but services inflation and broad price inertia remain elevated. The hosts conclude the Fed is likely to stay on hold, with market expectations for cuts looking too optimistic and upside inflation risk still present.

Main Topics: Inflation has not returned decisively to target (Priority: 5/5): Rob and Aiden compare their September call that inflation was beaten with current data showing core inflation still stuck around the mid-3% range and not materially improved. Market reaction to the latest CPI report (Priority: 4/5): Despite headline inflation rising to 2.9% and core only edging down, markets rallied because the data were roughly in line with expectations rather than worse than feared. What is and is not driving inflation (Priority: 5/5): Shelter inflation and wage growth have cooled, but services remain sticky and broad inflation measures show the economy is moving sideways rather than back to 2%. Broader inflation measures confirm persistence (Priority: 5/5): The Cleveland Fed’s median CPI and 16% trimmed mean indicate that underlying inflation remains around 3% or higher, reinforcing the idea of persistent price pressure. Fed credibility, politics, and the 2% target (Priority: 4/5): The discussion questions whether 3% inflation is catastrophic, but emphasizes that the Fed’s 2% target matters for credibility, communication, and the risk of reigniting inflation if rate cuts come too soon. Outlook for Fed cuts in 2025 (Priority: 4/5): Both speakers lean skeptical about near-term rate cuts, arguing the labor market and demand remain strong and inflation may still have upside risk, especially with political uncertainty. Long and Short segment (Priority: 1/5): Aiden is short New Year’s resolutions and empty gyms/pools; Rob is long Ohio State to win the national championship.

Key Arguments: The earlier claim that inflation was beaten was premature; core inflation is essentially unchanged over the period discussed, showing the disinflation process stalled. The latest CPI report was welcomed because it met expectations after prior downside surprises in jobs and inflation, not because inflation meaningfully improved. Shelter inflation is no longer the main culprit, having fallen steadily since September and dropped sharply on an annualized basis last month. Wage growth has moderated and does not look like a wage-price spiral, but it remains too elevated to declare inflation fully contained. Services prices remain broadly sticky even as goods prices, including furniture and appliances, fall significantly. The Cleveland Fed’s median CPI and trimmed mean suggest the underlying inflation distribution is still clustered around roughly 3%, not 2%. A 2% target is politically and institutionally important, even if 2.5%-3% inflation may not be disastrous for households in the short run. The Fed risks a bad combination if it cuts rates to support jobs while inflation reaccelerates, creating a stagflation-like outcome. Market pricing for 2025 cuts may be too aggressive; the speakers think the Fed may cut zero times this year if inflation stays sideways.

Data Points: Core inflation (September referenced): Around 3.25% - Rob asks what core inflation was when the newsletter was written in September Core inflation (current): 3.25% - Aiden says core inflation is now still 3.25% Headline inflation: 2.9% - Latest report discussed; higher than expected but not enough to shock markets Reuters economist expectation for headline inflation: Around 2.9% - Markets got roughly what economists expected Shelter annualized inflation: 4.1% to 3.1% - Annualized shelter rate fell sharply last month Average hourly earnings growth: Below 4.376% - Measure of wage growth for production and non-supervisory private employees Wage growth level earlier in 2024: 4.376% - Referenced as higher in January of the prior year Cleveland Fed 16% trimmed mean: Around 3% - Underlying inflation measure described as flat Cleveland Fed median CPI: Closer to 4% - Underlying inflation measure still elevated and only slowly declining Fed inflation target: 2% - Benchmark repeatedly referenced as the official target Expected Fed cuts in 2025: 1 to 2 cuts - Market pricing mentioned as current expectation Likely timing of first cut: Around July - Market expectation for the first 25 bps cut Retail sales: Pretty muscular - Recent data point used to argue the economy remains hot

Pivotal Quotes: "Inflation is beaten and it does not look set to stage a comeback." — Unhedged newsletter / Aiden (quoted by Rob): Rob opens by reading the prior September assessment that is now being reconsidered "It's not that inflation is necessarily heating up because, as we saw with core, it came down a little bit. It's that it just is remaining in this two to three band and it seems to be jumping up and down." — Aiden Reiter: Aiden summarizes the central concern: inflation is sticky rather than surging or fully normalizing "I am of the pessimistic belief that the Fed will not cut this year." — Aiden Reiter: Aiden gives his forecast for 2025 Fed policy given persistent inflation

Implications: Listeners should expect a slower path to 2% inflation and fewer Fed rate cuts than markets price in. If growth stays strong, the Fed may stay on hold; if it cuts too soon, inflation could reaccelerate and complicate policy.