Short and medium term inflation, interest rates, and the overstretched consumer

 

 - by New Deal democrat

The deluge of data resumes tomorrow with housing permits and starts, industrial production, and durable goods orders. In the meantime, let me make a few “big picture” observations of the economy, and in particular, the short and longer term trends in inflation and interest rates.

1. Short term inflation

A very big outlier in observations of inflation in the past several months has been Truflation, which updates is US CPI calculation daily, presumably based on masses of prices posted online from commercial sites. In the past two months, its measure of YoY inflation has declined precipitously, from 2.66% in mid-December to as low as 0.68% last week:

This has met with open skepticism in some quarters, fueled in part by Truflation’s unfortunate hire of T—-p crony E.J. Antoni just as the big decline started to occur. So this is very much an acid test of the site’s credibility.

According to Truflation, the median time lag between their observations and when the changes show up in the official CPI has historically been roughly two months:

Here is their post-pandemic view:

If their information is accurate, there should be a big decline in YoY CPI no later than in the report for March. And the only way that happens is if there are widespread actual price reductions.

It’s at least within the range of possibility that could happen.

In the first place, official CPI less shelter has paced the Truflation numbers in 2025:

Note that, similarly to Truflation, YoY CPI excluding shelter decelerated sharply from 2.2% to 1.4% between January and April 2025, then gradually increased through the remainder of the year through September 2025, peaking at 2.7% before declining to 2.0% in January. A similar decline through March would take it down to about 1.5%.

And FWIW, there are anecdotal reports of price cuts, particularly for staple food items. In my own neck of the woods, I have seen the price of store brand sodas, which doubled from $0.67 to $1.33 during the pandemic, cut back in the past few weeks to $1.00.

We will see. I’ll keep track of this over the next several months.

2. Longer term inflation

As I have noted many times since the pandemic, house price indexes have a multi-decade record of leading the official CPI measure for shelter costs by roughly 12-18 months. Here is the most recent comparison:

Over the past two years, the FHFA Index has declined from a YoY high of 7% to a low of 1.7% in October. Similarly, the Case Shiller national index has declined YoY from 6.6% to 1.4%. And the house price indexes typically are more volatile than the official CPI shelter index, suggesting it could decline to under 1% over the next 18 months. Beyond that, the median price for existing homes increased only 0.3% YoY through January. The median prices for new single family homes, meanwhile, have actually declined by an average of roughly -2.5% YoY for the past 3 years.

While the relationship isn’t perfect (note, for example, that while YoY price changes in the repeat sales indexes measured roughly 1.5% during mors ot hte 1990’s, CPI for shelter remained in the 3%-3.5% range), the likelihood is that shelter prices in the CPI will not accelerate YoY for the next 12 -18 months, and may very well decline under 2%, making the Fed’s official “target” more attainable (depending on other costs, such as the volatile price of gas, of course).

If, in the face of tariff increases being passed on to consumers, there are signs that inflation might moderate, that is almost certainly due to weakness in consumer spending, at least by the lower 80% of the income distribution. In other words, inflation might be moderating for the same reason it does during recessions: consumers simply cannot afford price increases.

3. Interest rates

A stagflationary scenario is likely playing out in interest rates as well.

The below graphs all compare Treasury rates for the 10 and 30 year durations (orange and gold) with the Fed funds rate (black) and mortgage rates (blue, minus 2% for easier visual comparison).

During the 1980s through 2019, when the Fed lowered interest rates, US Treasury interest rates and mortgage rates followed, albeit not with the same intensity:

But the post-pandemic comparison is more problematic:

Not only have the 10 year bond and mortgage rates not gone down in lockstep with Fed rate cuts, but they haven’t followed the last several rate cuts at all. And the 30 year bond has not followed at all. Interest rates on 30 year Treasurys are just as high now as they were when the Fed funds rate was at its peak 1.75% higher than it is now.

This is reminiscent of the stagflationary 1970s, shown below:

In the 1970s, both the 10 year Treasury and mortgage rates barely responded to Fed rate cuts. This was because bond traders well understood that the underlying inflation dynamics over the medium term were poor.

It is hard to escape the implication that bond traders have similarly responded to the US fiscal situation, as typified by the Big Bad Budget Bust-out Bill last year, as portending the necessity of higher interest rates in order to persuade bondholders to purchase US Treasurys. And that will bleed into longer term consumer rates as well.

The overall picture is that of an overstretched US consumer, unable to absorb price increases, and driving recessionary-type price concessions from sellers, with little prospect of longer term relief as interest rates are unforgiving. 

Real aggregate nonsupervisory payrolls remain relentlessly positive

 

 - by New Deal democrat

Today is Presidents’ Day, so there are no official economic data releases; and there will be no significant releases tomorrow either, before a torrent of both timely and delayed data from Wednesday through Friday, including GDP for Q4.

In the meantime, because of the January updates for employment and inflation last week, one of my important series for forecasting purposes can be updated as well: real aggregate nonsupervisory payrolls.

To recap, this series represents the total amount of paychecks in the economy for all workers except bosses, adjusted for inflation. It is noteworthy not just because the data goes back 60 years, but because it make real world sense: if ordinary working families have less money to spend in real terms, they are likely to cut back spending, and that retrenching brings about a recession.

First, here is the entire historical series. Note it is presented in log scale, so that later data does not obliterate earlier data:

With the exception of the COVID lockdown recession, the series has almost always turned down shortly before a recession has begun; or at very least turned flat.

Here is the same data presented in a YoY fashion:

With the exception of the 2002 “double-dip,” real aggregate nonsupervisory payrolls turning negative YoY has been a perfect indicator of recession, and remaining positive has been a perfect indicator of expansion; and further has typically turned negative within 2 months of the data of onset.

Now here is the post-pandemic look at the absolute series:

The trend has been almost relentlessly higher.

And here is the YoY look:

Again we see that it has never been negative, indeed has never shown less than 1% growth during this entire period. 

The one caveat is that because of the poor “shelter” kludge during the government shutdown, which suggested that rent and owners’ equivalent rent had only grown by 0.1% during those two months (vs. their typical 2025 average of 0.3%), the YoY total change should probably be between 0.2% and 0.4% lower, and that problem will persist through next October.

But even so, real aggregate nonsupervisory payrolls are sending an important signal that, despite virtually nonexistent job growth, wage growth has been strong enough to continue to power consumer spending, which in turn is negativing the onset of any recession in the next few months.

Weekly Indicators for February 9 - 13 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

There were no significant changes in the past week. In particular, despite the massive downward revisions to employment showing almost no new jobs were added to the economy last year, the best real-time measures of consumer spending, including such discretionary things as dining out at restaurants, continue not just to be positive, but are becoming even *more* positive in the past few months.

As usual, clicking over and reading will not just bring you up to the virtual moment as to the state of the economy, but reward me a little bit for my efforts in collecting and organizing the data for you.

Disinflating shelter prices and deflating gas prices work wonders for January CPI

 

 - by New Deal democrat

Over the last several years one of my big themes for consumer inflation had been how shelter and gas prices were pulling in opposite directions. After June 2022 gas prices sharply declined, while rents continued to increase just as sharply. By the end of 2024, shelter costs were seriously disinflating (i.e., rising, but at a gradually lower pace), while gas prices were stable or slightly increasing.

Well, today for perhaps the first time since the pandemic, both pulled strongly in the same - beneficial - directions. Beginning in late December, gas prices fell below $3/gallon for the first time since the pandemic. Meanwhile as I wrote on Monday, I expected the disinflation in shelter costs in the CPI to continue - and this morning it did. The result was YoY headline CPI coming in at 2.4%, the lowest except for one month since the pandemic, and core CPI coming in at 2.5%, which was the absolute lowest since the pandemic.

 As an aside, caution is still warranted, however, because the October-November kludge in shelter prices is still present in the YoY calculations, which will probably lower those comparisons by roughly -0.2% through next October.

As per my usual practice for the past several years, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which was only up 2.0%:

The good news is that all three of these measures have decreased sharply since Sempteber. This is a significant disinflationary pulse.

As per my comment above, shelter inflation (blue) continued to decelerate YoY, down to a 3.0% increase, with both rent and owners’ equivalent rent increasing only 0.2% for the month. On a YoY basis, rent (gold) was up 2.8% and Owner’s Equivalent Rent (red) up 3.3%, the lowest increase for both since late 2021:

As usual let’s compare that with the YoY% changes in the repeat home sales indexes, which lead by about 12-18 months (/2.5 for scale), to CPI for shelter (blue). YoY home price increases are near or at multi-year lows, each at roughly 1.5%, and shelter inflation has followed (and yesterday we found out that the median price for existing homes had increased only 0.3%). The graph below includes several years before Covid to show its 3.2%-3.6% range during that time:

Not only has shelter inflation declined to back to its pre-pandemic YoY range, it is now *below* that range. Needless to say, this is not only good news, but because of the leading/lagging relationship of house prices to shelter inflation, as I wrote Monday we can expect even further deceleration in the shelter component of inflation during this year.

Another bright spot, as I wrote above, is that gas prices declined -3.2% for the month, resulting in a -7.5% YoY decline, which is welcome news to consumers:

Energy prices as a whole declined -1.5%.

Let’s take a look at a few other areas of interest.

First, new car prices (red) continue to be largely unchanged, flat for the month and up only 0.1% YoY, while used car prices (blue)declined another -1.8%. On a YoY basis new cars are up only 0.2%, and used car prices are *down* -2.0%. The graph below shows the post-pandemic trend by norming both series to 100 as of just before the pandemic:

Both new and used car prices have been basically flat for the past three years. Above I also show average hourly wages for nonsupervisory workers (gold) to show that in real terms, car prices are actually *lower* than just before the pandemic (interest rates for car loans are another issue!).

Every month I check the detailed breakout for “problem children,” I.e., sectors that have increased in price by 4% or more YoY. This month it once again included several minor irritants including non-alcoholic beverages (something that has been very apparent at grocery stores) and tobacco. Another big irritant is hospital services, now up 6.0% YoY. 

Another recent problem child for inflation had been transportation services (blue), mainly vehicle parts and repairs as well as insurance. Of these, only repairs and maintenance (red) are still problematic, as while they only rose 0.1% in January following a -1.3% decline in December, they remain higher YoY by 4.9%:

Electricity prices, which have become a significant problem, likely a side effect of the building of massive data centers for AI generation, declined -0.1% in January, but on a YoY basis are up 6.3%, the highest increase since 2008 except for the shutdown kludge and the immediate post-pandemic inflation. Additionally, piped utility gas increased another 1.0% in January, and is up 9.8% YoY:

As I wrote in the last few months, the electricity issue has already created a backlash, and I expect that backlash to intensify.

In conclusion, this was a tame consumer inflation report, driven by disinflating shelter costs and declining energy costs, although I would continue to treat the YoY headline and core numbers with caution, since they both remain affected (probably by about -0.2%)  by the situation with shutdown shelter kludge. Last month I concluded that “More likely YoY inflation is roughly steady in the 3% range, above the Fed’s target and with employment growth dead in the water.” This month it declined from that range, which would suggest that the weak labor market may also be having an effect. Whether this CPI decline in inflation continues, or is a passing artifact of the sharp recent decline in gas prices, remains to be seen.

Leading sector benchmark job revisions were almost all seriously negative

 

 - by New Deal democrat

Before I get to the main point at hand, let me make a quick note about this morning’s existing home sales report for January: it was more of the same. Sales remained within the sideways range they have been in for nearly the past three years; prices were nearly flat YoY, up only 0.3%; and inventory was above its post-pandemic levels but well below pre-pandemic levels. 

But on to the main course. I have seen a surprising amount of commentary on the Seeking Alpha investment site that yesterday’s jobs gain of 131,000 for January means that employment is on the upswing, completely neglecting that one month does not make a trend, that revisions have been relentlessly downward, and that January is perhaps the most difficult month for the BLS to accomplish seasonal adjustments — in January there were 2,649,000 layoffs! It’s just that the adjustment mechanism expected even more.

By far more important for the trend, and in particular the trend for the leading indicators within the jobs report, were the revisions to the past 12+ months of data. And as we saw from the headline adjustment, it was very large and very bad. So let’s start there, and then go through the most important leading sectors and metrics.

The total adjustment over the relevant data was nearly a -1,000,000 jobs. For the year 2025, the adjustment was just over -400,000, causing a previous 584,000 gain to turn into only a 181,000 gain, for an average of only 15,000 jobs added per month:

Even worse, for the eight months from April through the end of the year, a grand total of only *12,000* jobs were added, and no that’s not a typo. That’s 1,500 jobs per month! That’s about as close to recessionary as you can get without actually being in one (that we know of, at this point).

So let’s turn to the leading sectors, starting with manufacturing. There a -166,000 decline through December since Mary 2024 turned into a -251,000 decline, before its very slight 5,000 increase in January:

Next, here is construction. There, a slightly increasing trend throughout the year that added 14,000 jobs turned into a declining trend through October that ended up with a net -1,000 decline for the year:

But even the rebound since October disappear when we look at the even more significant residential construction sector. There, an increase through March followed by a slightly declining trend thereafter, resulting in a -1,400 decline for the year turned into a nearly relentless decline since March 2024 that ended with a -12,900 decline during 2025:

The entire rebound in construction was because of nonresidential building construction (and asociated specialty trades, not shown below):

Through October of last year revisions added 3,700 jobs, and then 12,000 more since.

For the goods producing sector as a whole, the -90,000 decline from its April peak through December turned into a nearly relentless-184,000 decline from a peak in July 2024 through last October, before increasing 49,000 since (again, all due to nonresidential building construction and associated specialty trades):

In short, *all* of the leading employment sectors of the economy declined during 2025. The only significant leading indicator in employment that remained postive was the average workweek in manufacturing, but even that did not improve:

Finally, let’s turn to aggregate nonsupervisory payrolls. We won’t know what the “real” number was for January until we get tomorrow’s CPI report, but since there was a nominal 0.8% gain last month, it is likely the “real” number will be positive as well. Here the revisions subtracted roughly -1% from the previous trend, but retained an almost identical positive trajectory:

Decomposing the metric, revisions indicated a -0.6% decline compared with the previous index for aggregate hours worked:

But the previous vintage showed a 0.7% gain for the year, which was reduced to 0.4%, but still a gain.

This further compensated for by a 0.2% increase in average hourly earnings over the year ending in December:

In other words, while the absolute number for aggregate payrolls was revised downward, the upward *trend* remained intact. That, along with the intract trend of increased average weekly hours in manufacturing, were the sole leading positives that came out of the benchmark revisions. All of the others were negative.

This feeds into the dominant “K-shaped economy” narrative which I believe is correct: the AI data center boom has led to a stock market boom, which - aside from being a likely source of the increase in nonresidential construction employment - has been feeding a “wealth effect” increase in spending by the top 10%-20% of consumers.

Unresolved post-pandemic seasonality likely continues in jobless claims

 

 - by New Deal democrat

Unresolved post-pandemic seasonality likely continues to rear its head. This is a probable explanation for yesterday’s strong monthly gain in employment, and it appears to be behind the trend in this morning’s jobless claims report as well. 

Later this morning as promised yesterday I will discuss at some length the nature and implications of the revisions to the last 12+ months’ employment data in yesterday’s jobs report. But first, let’s take our usual look at weekly jobless claims. 

Last week initial claims declined -5,000 to 227,000, while the four week moving average increased 7,000 to 219,500. With their typical one week delay, continuing claims rose 21,000 to 1.862 million. The below graph shows the last three years to highlight the post-pandemic seasonality issue:

In case it isn’t apparent immediately, for the last three years claims have risen from lows at the beginning of each year towards midyear, and then declined during the second half of the year. That appears to be happening again this year so far.

Which is yet another reason that I pay more attention to the YoY changes in this data. So measured, initial claims were higher by 4.5%, the four week average higher by 1.0%, and continuing claims by 1.3%:

This is the second week in a row that the data has been higher YoY, after a steady stream of lower YoY readings that began last July. It’s too soon to know if this is the beginning of a change in the trend or not, but it at least merits further attention. At the same time, unless readings go higher YoY by over 10%, it does not suggest economic contraction ahead.

Finally, particularly in view of yesterday’s -0.1% decline in the unemployment rate, let’s update the graph of comparison of that with initial and continuing claims, as to which there is a 60 year history of the latter leading the former:

The decline in claims that occurred all last autumn did indeed show up in the decline in the unemployment rate, with the important caveat that the annual revisions in the Household Survey data which gives rise to that rate were delayed until next month, so the numbers might change a little.