CPI Prints In Line With No Significant Tariff Impact

CPI printed in line at .2% and CPI core at .3%.  The key drivers of CPI core were Airline fares up 4%, vehicle maintenance up 1% and used cars prices up .5% after three monthly declines. Apparel inflation was low at .1% with food flat and there was no indication of inflation pressures from tariffs.  Rents ticked up from .2% to .3% and year over year shelter continued to be misstated at 3.7% whereas market-based measures are close to zero Y/Y.  CPI-R (real time inflation using market prices) came in at 1.2% year over year and PCE-R is already at the Fed’s target of 2% (see https://www.infracapfunds.com/consumer-price-index-cpi-r).

The BLS needs to be reformed partly due to unreliable employment estimates but mostly due to its archaic calculation of shelter inflation. Specifically, it only updates the calculation every 6 months, and it uses renewing rents which dramatically lags market rents.   These two factors cause CPI to be lagged by approximately 2 years and have caused the Fed to always be behind the curve in both raising rates and cutting rates.  Finally, the BLS should used widely available data from internet service providers, as we do with CPI-R and PCE-R, instead of using unreliable surveys of a limited number of homes and apartments.

The key drivers of inflation are excessive money supply growth and oil prices.  Both of these leading indicators are down double digits Y/Y, which indicates we are headed for deflation on market based/real time measures of inflation.  The Fed needs to cut rates to avoid a recession as both construction and housing have already contracting year over year.  We forecast three rate cuts this year and expect the terminal rate of the Fed Funds to be 2.75%-3% which will be reached by year end 2026.  We forecast the 10-year treasury will decline to 3.75% -4.0% which is 100 over the Fed Funds rate, which is the 20-year average.