Overview:
Today, we got the January Consumer Price Index (CPI) report which showed an overall increase of 2.4% for the last year. That’s flat compared to last month and consistent with expectations. The monthly change was 0.3% also consistent with the estimate. The Core CPI which excludes food and energy was up 2.5%, flat with January and consistent with expectations. The Core change was up 0.2% vs last month and also in line with estimates. (It was a good month for the forecasters.) These numbers remain well above the 2% target and have been so since 2021, but were also down from 4Q ‘25 prints. The equity indexes yawned and are down small as I write this. Let’s go through the details:
Schrodinger’s inflation. Is the line pointing down, or is it too high?
Powell keeps saying the current fed funds rate is “restrictive”, but the real rate is < 2%.
Food:
Food inflation came in at 3.1% and continuing to rise from previous reports. Food at home was up 2.4% which isn’t awful, but also represents an increase from recent months. Food away from home was up 3.9%, an increase that gets worse when considering much more aggressive tipping expectations.
We continue to note that both the rate of increase and price levels for food purchases are creating problems in many homes. Simply stated, even if food prices stop rising, the current level remains too high for many families. Using buy now pay later for groceries has become common. This category continues to create stress for consumers. (Copied from prior months because household finances don’t change that much from month to month and this is still an issue.)
Energy:
Energy was up just 0.5% y/y, but a large 0.6% vs last month. Gasoline was down 5.6% vs last year and prices at the pump were at a multi-year low, fulfilling one of President Trump’s big campaign promises. Fuel oil was up 6.2% y/y and up 11.1% vs January. I believe this was due to the big storms that hit the country and the Northeast in particular early in the year. Many analysts projected improvement from Venezuela, but it’s going to take some time and tens of billions of dollars of investment to see increased production from there. Electricity is up 4.8% y/y which strikes me as a relatively low number given the increased demand from price-insensitive data centers.
Thank you for reading the above section. Recent events in Iran and the Strait of Hormuz in particular have made February’s numbers irrelevant. Oil prices are up big in March due to the war. Every time there’s a rumor that Iran has hit a vessel in the Strait or will drop mines, oil prices spike. Every time President Trump says the war will be quick, or the G7 talks about releasing reserves, oil prices plummet. One thing that’s kept oil from rising more has been the ability of Gulf countries to re-route more oil than early estimates had anticipated.
I don’t have a prediction for how long this conflict will last. I’ve seen some people claiming the President will have this wrapped up in days and others who are predicting endless quagmire. I don’t know the outcome and simply note that both sides get a vote regarding how long hostilities will last. In the meantime, expect the March CPI to show much higher energy prices. The DKI portfolio is well-positioned for this outcome.
Vehicles:
New vehicle pricing was up just 0.5% y/y. Consumers have pushed back on the huge price increases from earlier this decade. Prices are still high, but are no longer rising much. As we’ve pointed out in previous CPI analysis, the higher new car prices had pushed more people into the used market where prices had been consistently higher, but were down 3.2% in February vs last year. Expensive auto loan delinquencies remain a concern.
That plateau is looking permanent despite a good month for auto prices.
Services:
Services prices were up 2.9%. This has been a consistently sticky part of the CPI. Much of the increase has been caused by higher wages and there’s been a lot of debate about the employment numbers. Huge decreases in government positions weigh on the aggregate numbers. There were also big revisions due to the birth/death model and hopefully, given the new leadership at the BLS, we’ll see fewer of these “kitchen sink” revisions. The early returns indicate that President Trump is succeeding in improving the way the Bureau of Labor Statistics compiles data and hopefully, we see smaller revisions in the future.
I’ve also read convincing reports that a huge number of “available” jobs are not real and are just data-gathering efforts by companies which waste the time and energy of job seekers. Many of us would like to see this behavior punished until it ceases.
Shelter (a fancy word for housing) costs were up 3.0% (again). This was yet again the largest reason for this month’s CPI increase. This line item is highly market-specific. While prices for consumer electronics like phones and televisions tend to be the same nationwide, housing price trends depend on location. Some markets have continued to weaken while others remain strong or are even rising. Last month, I spoke with a top real estate broker in the SE United States who told me he’s getting deals done at continued high prices. Much of the Northeast remains strong as well. (This section unchanged as the national real estate market is relatively unchanged.)
Housing prices continue to rise. I’m not sure lower mortgage rates help this.
Conclusion:
Despite all the predictions of catastrophe from fiat economists relating to the Trump tariffs, disaster simply hasn’t happened. We were warned the tariffs would lead to massive inflation. That then got altered to a big one-time increase in the price level which would then be stable. Then, there were threats that tariffs would lead to decreased trade and a worldwide recession. None of that has happened. Some fiat economists have reasonably said that it might take a while for the higher tariff prices to work through complicated supply chains, but we’re past the point when this would have happened. If they were more honest, they’d start issuing public mea-culpas. I left this section unchanged from previous months because I’ve yet to see a fiat economist admit their error.
The Supreme Court has declared the tariffs unconstitutional. The White House responded by declaring an across-the-board tariff citing different law. At this point, I don’t think the key issue is whether we have tariffs or not; but rather, the constant uncertainty. The whole point of the tariffs was to encourage companies to build manufacturing facilities in the US. That’s great, but without an ability to predict costs based on the legality and consistency of any tariff deals, it’s hard for companies to commit large amounts of capital. It would be preferable to have this done through Congress because that would be a path to consistency and certainty. It’s also politically unfeasible.
This chart shows why most Americans are experiencing more financial distress.
We’re going to see an increase in inflation (at least for March) due to higher energy prices. Regardless of that, the CPI remains too high and is consistently understated. While I think the Fed and the White House would like to see a cut in the fed funds rate, expect them to pause at the current level. I continue to believe that the primary cause of inflation is Congressional overspending and there’s nothing the Fed can do to change that. Expect continued debasement of the dollar. While some think we’ll have AI-related deflation, that hasn’t happened yet. If it were to happen, expect massive government spending programs and a restart of the Fed money-printer. At $38T in on-balance sheet debt, Washington DC isn’t going to stomach deflation that makes the outstanding debt more valuable.
IR@DeepKnowledgeInvesting.com if you have any questions.
Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use. The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so.
The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write.
Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose.
In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report.
