- 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.
