CPI of 3.4% was in line with expectations and a small decrease vs last month’s 3.5%. The monthly change was 0.1% and as usual, was driven by shelter which accounted for two-thirds of the rise.
Core CPI of 2.5% was also in line with estimates and slightly below last month’s 2.6%. The monthly change of 0.2% was consistent with estimates of 0.2% and above last month’s 0.0%. The huge difference this month between CPI and Core is due to energy which was not a surprise.
Food was up 3.0% and a more reasonable 0.1% for the month. I’ve been saying forever that this category has been understated and we’re seeing increases. Note that some fertilizer isn’t coming through the Strait of Hormuz and food depends on fuel for tractors and transportation. This is a geopolitical and energy-related increase. Some of the distance between food at home (supermarket shopping) and food away from home (restaurants) has collapsed. It’s still more expensive to eat out, so it will be interesting to see if people start to eat at home more often. On a personal note, I’m currently in Guatemala. On a dollar basis, it was cheaper for me to have a full sushi dinner in Tokyo with tea, beer, and ice cream than to get a burrito and cerveza in Antigua. As much as Americans are correctly and reasonably upset about constantly rising food prices, it’s much worse if you live in Japan and are paying in yen. Still, I’m shocked at the food prices in Guatemala.
Energy up 14.7% but down 1.5% vs last month. Gas up 24.6% but down 2.9% vs last month. Fuel oil up 39.1% but down 1.7% vs last month. This is (again) the whole CPI report here. Decreases in energy costs vs last month are the reason for the small reduction in the July CPI. We know the reason. I have said all along that I don’t expect a quick solution to the situation in Iran. I believe the key issue is that there isn’t overlap between acceptable end conditions for the Iranian Mullahs and President Trump making any ceasefire temporary. This was a point I made on June 25th in a (non-paywalled) article titled “A Personal Note” and reiterated a week later in another article titled “Are Oil Prices Really that High”. Many expected oil prices to rise more, but restraint from China and reserve releases from both the US and China have alleviated some pressure. These are by definition temporary measures. Oil producers have also succeeded in bypassing the Strait with more oil volume than previously thought possible and are currently working on new infrastructure which would reduce Iran’s control over oil supplies permanently. The reason oil hasn’t fallen further is refining capacity remains limited and crack spreads are high. (A crack spread is the cost of turning crude oil into a usable refined product.) As before, DKI owns assets that benefit from inflation and we have a substantial energy portfolio.
New vehicle prices were up 0.1% for the month and up just 0.5% vs last year. Used vehicle prices were up 0.4% vs last month and down 1.9% vs last year. That’s a plus although it could indicate that consumers are tapped out and holding off on buying a new (used) car.
Shelter (housing) up 3.2% and up 0.1% for the month. This remains a high and increasing category accounting for much of the CPI increase both this month and for the past half decade. I’ve been reading reports for years about oversupplied markets with predictions for crashing housing prices. While this analysis comes from people I respect who do high-quality work, they haven’t been correct about the national market yet.
The market is up on strong AI demand at Super Micro Computer and CoreWeave. Suppliers like Nvidia, Taiwan Semiconductor, Intel, Advanced Micro Devices, and ARM holdings are up as analysts revise demand expectations. The market is also up right now on falling expectations for a Fed rate hike next month. I disagree with this policy prescription.
First, a 3.4% increase is far too high. Please check out the chart below. A 3.4% inflation rate means that over a typical 40 year working career, the government is stealing about 75% of the value of your money. Second, I don’t believe the CPI is accurate. At a minimum, the massive increases in shelter costs are understated due to the substitution of actual housing prices for something called Owners Equivalent Rent. This OER calculation asks homeowners to estimate the rent they’d receive for their home and is constantly understated. The actual increase in prices experienced by the average American is greater than 3.4%.
I’ve made this point before, but it’s important to recognize that the real inflation rate isn’t a government estimate of prices in an imaginary basket. The real inflation rate is the expansion of the money supply. The St. Louis Fed shows that M2 is up 5.5% from June of 2025 to June of 2026. While I think the Fed should act to address a far-too-high inflation rate, there’s not much Warsh and the Fed can do. Congressional overspending is driving inflation and they’re acting with the assistance of the US Treasury and the Federal Reserve. A 25bp or 50bp shift in the overnight rate won’t have any effect on 5-year borrowing rates which are used to price corporate debt and 10-year rates which are used to price mortgages.
There’s a lot of market volatility around monthly expectations for the next Fed move. If you look behind the curtain, the long-term trend is obvious and unstoppable. DKI isn’t trading short-term Fed betting. We’re positioned for higher long-term inflation. Right now, watching the Fed is like sports for people in finance. It’s entertaining, but doesn’t involve real changes in your life.
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